The International Monetary Fund (IMF) is urging the Australian government to pursue serious tax reform and tighter spending, including re-prioritising infrastructure investment and cost-of-living rebates, to avoid a resurgence in inflation, weaker productivity and the risk of higher-for-longer interest rates.
In its latest assessment of the Australian economy, the Washington-based IMF forecasts a modest recovery, with growth rising from 1.2% in 2024 to 2.1% in 2025. It expects growth to “remain below its potential rate until 2026”, when it is projected to converge at 2.3%.
Treasurer vs the RBA
The IMF also recommended repealing the Treasurer’s power to override the Reserve Bank of Australia and warned that concerns about “hidden leverage” in the economy could re-emerge. But IMF mission chief for Australia Lamin Leigh said the priority for now should remain on taming inflation.
“Progress in reducing price pressures and bringing inflation back to target has been slower than expected,” Leigh said. “In this context, significant policy challenges remain in rebalancing the economy while navigating cyclical headwinds.
“The disinflation process may stall due to persistent services inflation, a stronger-than-expected fiscal impulse, or spillovers from global trade and supply chain disruptions; this may in turn raise prospects of higher-for-even-longer interest rates, with implications for consumption and investment.”
Concerning budgets
Leigh singled out state and territory budgets as a concern. “State and Territory budgets have proven more expansionary than expected in the near-term, incorporating further cost-of-living support and infrastructure spending,” he said, with the IMF specifically pointing to infrastructure programs and rebate measures.
The Reserve Bank has previously highlighted capacity constraints in the economy as a key risk for renewed inflationary pressure. Treasurer Jim Chalmers said the IMF’s report was an endorsement of Labor’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,” Dr Chalmers said. “The Statement acknowledges the Government’s ambitious agenda across productivity, dynamism and competition.”