IMF urges Australian government to cut red tape and act on tax reforms

The Albanese government has been urged to slash business red tape and lead a sweeping overhaul of federal and state taxes, with the International Monetary Fund warning without more change, Australian living standards will continue to stagnate.

In a short report on the state of the economy, the fund this morning backed the May budget’s overhaul of property taxes but said the government had to go much further while declaring that the nation’s poor productivity was the nation’s “key structural challenge”.

Every year the IMF reviews federal and state policies, key regulatory agencies and monetary policy settings, often talking to key economic and policy insiders.

The report, the full version of which won’t be completed until early next year, found that Australia had started this year from a position of economic resilience with strong jobs growth, robust business investment led by the tech sector and high public infrastructure spending.

But this had contributed to inflation pressures with the fund warning the Reserve Bank should lift rates if necessary. It also argued that if the economy slowed sharply, the bank may actually have to cut rates.

Its greater concern, however, was the nation’s poor productivity performance which was keeping a lid on living standards and making it more difficult for the economy to grow without adding to inflation.

“Reversing the productivity slowdown will be crucial to improving living standards and healthy public and private balance sheets,” it said.

The fund urged all governments to strengthen competition laws, reduce corporate red tape and embrace what it termed comprehensive tax reform that would boost the performance of businesses while broadening Australia’s export sector.

On its tax wishlist are getting states to replace stamp duties with land taxes, expanding the tax base with a broader and higher GST and reducing the budget’s reliance on income taxes.

“Further reforms to modernise and simplify the tax system would help support economic growth, equity, and fiscal sustainability,” it said.

“Further progress on smarter regulation, alongside addressing infrastructure bottlenecks and making the tax system more growth-friendly, would help boost productivity.”

The fund noted the budget’s changes to capital gains tax and negative gearing, saying they could reduce housing-related distortions, but urged the government to minimise compliance costs while watching carefully for their impact on private sector investment.

While backing the government’s overall housing agenda, it said more policy change was likely to be needed, particularly from the states and territories.

“Recent budget measures to support enabling infrastructure, build-to-rent housing, and social and affordable housing are welcome, and recent tax changes should reduce some demand-side distortions,” it said.

“A more ambitious and coordinated supply agenda is needed. Recent planning and zoning reforms across several states, including measures to support higher-density development, and improvements in approvals are encouraging.

“Further efforts are needed to advance infrastructure provision, improve productivity in the construction sector, and strengthen coordination with state and local governments to accelerate housing delivery.”

A growing concern is the level of debt held by the states and territories. Outside of Western Australia, all states are expected to increase gross debt over coming years.

Last week, S&P Global downgraded its credit rating for Queensland in part due to its run-up in debt to pay for the 2032 Olympics.

The IMF said while Australia’s overall debt was low compared to most other nations, the lift in debt and interest costs had to be addressed.

“Amidst rising spending and public debt, especially among states, gradual fiscal consolidation would rebuild buffers and support disinflation.”

“The ongoing efforts to restrain [federal] government spending, amidst strong private demand, would also support disinflation efforts by the RBA.”

A key feature of this year’s budget was a plan to sharply reduce spending growth on the National Disability Insurance Scheme. The IMF backed the NDIS plan but noted the difficulty in bedding down the planned changes.

“Implementation will be key. Durable gains will require sustained improvements in spending program governance, service delivery efficiency, and overall expenditure control, while preserving essential services,” it said.

Treasurer Jim Chalmers said the report backed the government’s management of the budget and economy during a period of high uncertainty and volatility.

“The IMF’s statement highlights Australia’s relative economic strengths and the importance of our ambitious reform agenda,” he said.

“It’s a timely endorsement of our economic strategy at a time of accelerating change and uncertainty in the global economy.”

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