The International Monetary Fund has stated that increased government spending could provide an “additional stimulus” to the Australian economy, potentially leading the Reserve Bank to raise interest rates to ensure inflation continues to decline.
Despite Australia's economy being “resilient” and GDP growth expected to pick up, the IMF, in its 2024 assessment report released on Thursday, stressed that it is not yet the right time to lower official interest rates.
“The RBA’s decision to maintain its restrictive policy stance in the near-term is appropriate,” the IMF stated.
The IMF mission to Australia, headed by Lamin Leigh, noted that the 2024-25 federal budget is “projected to deliver a positive fiscal impulse” as it shifts from two surpluses to an anticipated deficit. The stage-three tax cuts and rebates were cited as factors contributing to increased demand, The Guardian reports.
“The mission’s analysis shows that while the cost-of-living support lowers the price level on a temporary basis, it may inject some additional stimulus into the broader economy,” the report said.
Furthermore, the IMF urged the need for a “comprehensive strategy” to alleviate housing pressures. This strategy includes “reevaluating property taxes,” with a focus on tax concessions for property investors.
“Tax breaks, including from capital gains tax discount and superannuation concessions, could be phased out to generate a more equitable and efficient tax system,” the IMF said.
In addition, the IMF’s Lamin Leigh said during a briefing that “all the policy levers need to come together” to ensure inflation stays on course to reach the Reserve Bank of Australia's target range of 2-3%.
“State and territory budgets have proven more expansionary than expected in the near term, incorporating further cost-of-living support and infrastructure spending,” the report added.
“Should disinflation stall, expenditure rationalisation at all levels of government could help lower aggregate demand and support a faster return of inflation to target.”
The Australian Bureau of Statistics reported last month that underlying inflation in the country decreased to 3.4% in August, down from 3.8% in July.