Treasurer faces IMF call for comprehensive tax reform, cut on spending

In an economic blueprint, the International Monetary Fund (IMF) has urged the Australian government to consider comprehensively reforming its tax system to help the mission towards “boosting economic efficiency, productivity and intergenerational equity”.

The IMF outlined that while the neutral budget and fiscal stance in the near term was appropriate, changes would need to be made to further the economic growth and stabilisation.

“For example, an increase in indirect taxation, the reintroduction of a resource revenue tax, and removing income tax exemptions could offset lower corporate and labour taxes, thereby lowering the cost of capital and increasing incentives for investment and work,” the IMF said.

“Expenditure reforms should continue to target efficiency savings in growing cost areas, and protect productive infrastructure investment.”

It was also noted that Australia’s rising state and territory debt, driven by increased infrastructure, health and social protection spending and uneven commodity revenues, had caused “missed sub-national fiscal targets and widening disparities”.

Though the body called on the Treasurer to reform taxes, it was noted that this would be made easier if there was fiscal coordination across the various states and territories, as it would encourage equitable burden-sharing and efficient spending.

With the budget’s aim of sustainability, this recommendation was linked to the possibility of intensified structural spending pressures in the future, which would need to be balanced by “clearer fiscal anchors” to help safeguard fiscal sustainability.

The report also outlined the potential positive benefits of tax reform on the housing industry, as it was obvious that “concerted efforts across different levels of governments are needed to meet national housing targets and improve affordability”.

“As part of a comprehensive tax reform, a shift away from stamp duties to recurring property taxes at the state and territory government level can be considered to promote more efficient use of land and existing housing stock, and tax arrangements that affect housing demand and investment can be reviewed with potential savings redirected towards supporting new housing supply,” the IMF said.

“Together, these efforts to support the government’s agenda to boost housing supply can help reduce the need for the recent tightening of capital flow management measures that discriminate between residents and non-residents in the purchase of existing dwellings.”

Australia’s declining labour productivity was outlined to be somewhat “pronounced” in comparison to other advanced economies, and was acknowledged to have been addressed at August’s economic reform roundtable.

The IMF said that while this had been acknowledged and a commitment towards bettering it had been set through banning non-compete clauses for low- and middle-income workers, wage fixing arrangements and no-poach agreements, Treasury would need to make sure it maintained “momentum with clear implementation plans” for it to be bolstered.

“Australia benefits from strong institutions and macroeconomic stability, which together could create favourable conditions for attracting investments to drive the next wave of growth,” the report said.

“Going forward, focus should be on easing the overarching binding constraints including significant regulatory compliance costs, skills mismatch, and falling R&D expenditure.”

“Complex and overlapping regulations across government levels weigh on investment and business operations in multiple sectors, underscoring the need for streamlining and harmonisation.”

According to The Australian, Treasurer Jim Chalmers said the IMF report was an endorsement of the government’s economic management and reform agenda.

“We know the best way to build on all the progress we’ve made is to make our economy more resilient and more productive,” Chalmers said.

“The Statement acknowledges the Government’s ambitious agenda across productivity, dynamism and competition.”