The International Monetary Fund (IMF) has advised the Australian government to adopt a more restrictive fiscal policy to tackle inflation.
While acknowledging that cost-of-living support can temporarily lower prices, the IMF cautioned that it could also stimulate broader economic activity.
In its annual report on Australia’s economy, the IMF highlighted that the tax cuts introduced by the government may increase households’ disposable income but is wary about its larger outcomes.
“The move could potentially boost demand, but it remains unclear whether this will lead to increased spending or savings,” IMF noted in a statement on Oct. 2.
The Albanese Labor Government announced these tax cuts in February as part of its cost-of-living relief strategy, aiming to benefit 13.6 million Australians by allowing them to keep more of their earnings.
The IMF further pointed out that State and Territory budgets have been more expansionary than anticipated, with further cost-of-living support and infrastructure spending adding to the fiscal stimulus.
Despite sluggish growth, the latest GDP numbers indicate that government spending increased by 1.4 percent in the last quarter.
“The rise in June was due to continued strength in social benefits programmes for health services,” stated the GDP report from the Australian Bureau of Statistics in September.
“State and local expenditure also contributed to growth with a rise in employee expenses.”
The IMF further suggested that if disinflation does not progress as expected, streamlining government spending—particularly on infrastructure—could help reduce demand and support a faster return to the inflation target.
“Prioritising infrastructure projects that boost productivity and support the green transition would also help alleviate capacity constraints in the construction sector,” the report said.
RBA Praised for Restrictive Policy
While it had a few suggestions for the government, the IMF applauded the Reserve Bank of Australia (RBA) for keeping its tight monetary policy in place for now.“Inflation is still high, and there are new risks, so keeping interest rates up is crucial until inflation comes down to the target range,” it said.
“This is especially effective in Australia because many people have variable-rate mortgages, meaning higher rates quickly impact household spending.”
Despite considerable political pressure to cut interest rates, the RBA has maintained its stance.
On Sept. 24, the RBA announced its decision to leave the cash rate target unchanged at 4.35 percent, with the interest rate on Exchange Settlement balances remaining at 4.25 percent.
“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” the RBA said.
Growth Predictions for the Economy
The IMF expects a gradual recovery for Australia’s economy, with growth projected to pick up in the latter half of 2024.The economy is forecasted to grow by 1.2 percent in 2024 and reach 2.1 percent in 2025, driven by anticipated real wage growth that should boost private consumption alongside solid public demand.
While the impact of recent income tax cuts on household spending or savings remains uncertain, the IMF expects that a gradual easing of monetary policy from 2025 onwards will stimulate private demand.
Additionally, a rebound in dwelling construction, following the resolution of existing bottlenecks, will support growth.
However, growth is likely to remain below its potential rate until 2026, when it is predicted to reach approximately 2.3 percent.
Labor market conditions are also expected to soften, with a modest rise in the unemployment rate to around 4.5 percent.
Inflation Eases, Budget Surplus Achieved
Meanwhile, the IMF recognised the government’s efforts in achieving two budget surpluses.“The mission praises the Commonwealth Government for achieving a second consecutive budget surplus for FY2023/24, attributed to savings from a strong labour market and higher commodity prices while implementing cost-of-living relief measures,” the global institution said.
IMF also noted that inflation is easing from post-pandemic highs, with headline inflation falling to 3.8 percent in the second quarter of 2024, down from a peak of 7.8 percent in late 2022, largely due to restrictive monetary policy and reduced supply pressures.
By August, it dropped below 3 percent partly because of temporary electricity subsidies.
However, underlying price pressures persist, especially in areas like rents and new dwellings, with national house prices continuing to rise.
