OECD joins Australian tax reform chorus

The Organisation for Economic Co-operation and Development (OECD) has called on the Australian government to significantly shift its fiscal policy focus to bolster the country’s productivity growth, housing affordability and energy transition.

According to the OECD in its recent economic survey of Australia, Australia “enjoyed” high living standards, which contrasted its weak growth and decline of real disposable income.

Despite signs the economy had begun to normalise, long-standing challenges of slow productivity growth, strained housing affordability, and high carbon emissions were still present and needed to be addressed.

“Competition has waned across the economy over the past two decades, as business dynamism has declined and market concentration and profit margins have risen,” the report said.

“With economic growth returning to potential and inflation expected to stabilise within the target range, fiscal policy should focus on steadily reducing the budget deficit while improving the efficiency of the tax system.”

In terms of its tax recommendations and findings within the recent survey, the OECD said Australia’s tax system relied heavily on labour taxes, and favourable tax treatment of housing and subsidy schemes added to increasing property prices.

One of the main angles explored within the report was the idea that fiscal policy needed to address long-term issues, as the general budget deficit had widened and was projected to increase further in 2025–26.

“The planned gradual fiscal adjustment should be implemented by raising spending efficiency and improving the functioning of the tax system,” the report said.

“While [the government deficit] has helped to support the economy during a period of weak private demand, fiscal adjustment will be needed to narrow the deficit to stabilise the debt ratio and to avoid boosting demand once the output gap is closed.”

“The government should implement the planned gradual fiscal adjustment for the coming years using a combination of measures to raise spending efficiency and improve the efficiency and fairness of the tax system.”

With this recommendation, the OECD attributed this to the fact that long-term pressures needed to be addressed to not only facilitate the country’s broader productivity growth but also the financial health of its citizens.

An increase in GST was also proposed based on the tax system heavily relying on labour taxes, rather than making use of more efficient consumption, property and environmental taxes.

“The tax system should be rebalanced away from labour taxes by raising goods and services tax rates and making greater use of property and environmental taxes, while easing the burden of income taxes,” OECD said.

“A system of regular reviews of spending efficiency and the tax system could build on existing ad hoc reviews.”

This economic survey on Australia’s fiscal position and tax system followed multiple calls and analyses already made by the OECD and industry professionals concerning changes to inheritance tax, CGT discounts, negative gearing, stamp duty, superannuation concession, environmental taxes, GST and corporate income tax.

These proposals were also previously echoed by the International Monetary Fund (IMF), to which Treasurer Jim Chalmers welcomed feedback on.

Similar to that of the OECD, the IMF urged the Australian government to consider “comprehensively reforming its tax system to help the mission towards boosting economic efficiency, productivity and intergenerational equity”.

In response to this, Chalmers said: “We know the best way to build on all the progress we’ve made is to make our economy more resilient and more productive. The Statement acknowledges the Government’s ambitious agenda across productivity, dynamism and competition.”

“We know the job is far from over because people are still under pressure. That’s why our economic plan is all about helping with the cost of living at the same time as we modernise Australia’s economy to boost living standards.”