So where is the economy going?...... Some commentary as we approach one year into the term of the new Australian government

22 February 2023

A few weeks ago, the International Monetary Fund (IMF) has warned that Australia’s economic outlook is on a narrow path to avoid recession. The IMF saw downside risks such as

• uncertainty regarding global growth,

• commodity prices and

• domestic developments surrounding

  • wages,

  • house prices and

  • tighter monetary conditions.

As a result, the IMF estimates Australian economic growth, which currently sits at 3.6%, to slow to 1.6% in 2023 before an eventual recovery to around 2.25% over the medium term.

As a comparison, the IMF released its forecast for China as the country emerges from a failed Covid Zero policy, with growth going from a weak 3% last year to more than 5%. According to Mark Thirlwell, chief economist at the Australian Institute of Company Directors, world growth was expected to be quite weak and a rebound in China would represent a positive upside, especially for China’s neighbours and trade partners, which should include Australia.

Notwithstanding the China story, the IMF has urged the Albanese government to embark on a range of unpalatable economic and tax reforms to pay for massive spending already factored into its budget such as

• the stage three income tax cuts which favour higher income earners; and

• NDIS funding which comes as the programs set at a $35 billion budget continue to balloon.

The IMF has also recommended broader tax reforms such as

• raising the goods and services tax and

• broadening the GST base,

• winding back the capital gains tax exemption when people sell the family home and

• ending State government stamp duties on property transactions.

It is always good to receive advice from those north of the equator, but does “one size economic policy, fit all.” The Australian Treasurer was welcoming the IMF’s initial backing of Australia’s path to economic recovery but has ruled out major income tax changes in the budget later this year.

“Our policy has not changed on the stage three tax cuts. Obviously, I’m aware and follow closely the constituency calling for those tax cuts to be rewritten or junked. Those calls have been around for some time and the IMF has made a contribution to that as well.”

However, the IMF is not the only source of calls for change. The report echoes what more than 100 leading economists, tax experts and the Australia Institute’s executive director Richard Denniss have been advising the Albanese Government that:

“The stage 3 tax cuts for high-income earners are inappropriate for an inflationary economy and unaffordable, given the revenue needed for essential services [such as] aged care, Medicare, early childhood education, housing and the NDIS."

Despite the mounting pressure, the government has blocked out these calls for change stating that whilst they take the advice onboard, there will be no changes to the stage three tax cuts and that they have other priorities in mind. The May 2023 budget sure will be an interesting read.

A big picture summary of the cuts and new spending previously announced in the Federal Budget on 25 October 2022 are listed as follows:

• § $4.7 billion to reduce the cost of childcare over the next four years, including increasing the maximum childcare subsidy rate from 85% to 90% for the first child in care, and a comprehensive review by the Productivity Commission into the childcare sector.

• § $2.5 billion to reform the aged care system over the next four years – including requiring all facilities to have a registered nurse onsite at all times and increasing care minutes.

• § $1.6 billion over the next four years to increase Australia’s foreign aid development program, including $900 million for the Pacific region and $470 million for Southeast Asia.

• § $935 million over four years to increase the permanent migration levels (which will result in a forecasted increase in payments of $487.2 million).

• § $531.6 million over the next four years to increase paid parental leave entitlements by two weeks each year until 2026, when it reaches 26 weeks.

• § $1.4 billion over the next four years in reversals to Coalition budget measures from 2016 onwards that delayed or cut welfare payments and visa programs.

• § $845.1 million to support the aged care sector after COVID-19, including $81 million to cover the costs associated with outbreaks that occurred through to the end of 2022, and an additional $759.9 million to continue supporting the states in their COVID response.

•   $350 million over five years from 2024-25 ($140m in the next four years) for 10,000 new affordable homes.

• § $262.6 million over the next four years to establish the National Anti-Corruption Commission – including $166.7m in savings from abolishing the existing commission and the Coalition’s proposed Commonwealth Integrity Commission.

• § $500.2 million for an additional 1,080 staff over the next four years to deliver government services, including 200 new Services Australia employees, 500 at Veteran’s Affairs and 380 at the National Disability Insurance Agency.

• $9.3 billion in cuts to previously announced Coalition infrastructure investments including commuter carparks and urban congestion fund – $2.6 billion of which will be redirected to Victoria for the Suburban Rail Loop, $2.1 billion for projects in QLD, $1.4 billion for NSW projects, and smaller amounts for other states.

•  $1.7 billion in cuts to dam infrastructure programs over the next four years, including the planned Hells Gates Dam project.

•  $3.6 billion in expected savings over the next four years due to reduced outsourcing of government labour, advertising, travel and legal consultancy costs.

•  $2.8 billion over four years to get large and multinational businesses to pay their tax (with an initial spend of $1.1 billion).

•  $746.9 million in cuts to climate change and energy initiatives announced in the March budget, including gas, carbon capture and storage pipeline projects – although much of this will be redirected to other climate initiatives.

•  $674.4 million in savings over four years from personal income tax compliance (costing $80.3 million to enforce).