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éthica capital
Jan 30, 2024
3
min read
Chloe Argyle
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IMF's Bold Recommendations for Australia: Tax Reform and Spending Cuts Amid Economic Concerns

Chloe Argyle
Director, ECM
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Picture; Reuters

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Australian economy akin to recession.

 

A survey conducted among 320 members of the Australian Industry Group, representing various sectors and both large and small employers, indicates their perception that Australia is heading into an economic phase reminiscent of the stagflation experienced in the 1970s.

 

This entails expectations of enduring inflation, an increase in unemployment rates, and subdued consumer demand, even if the country manages to avoid an official recession.

 

Australia's economic expansion amounted to a mere 0.2 percent during the quarter ending onSeptember 30 and registered a 2.1 percent growth over the preceding year, as reported by the Australian Bureau of Statistics in December through NationalAccounts data.

 

Business executives express that although the overall outlook is optimistic for revenue, employment, margins, investment, and technology, the projected growth is modest, with all indicators hovering at or near their lowest points in the past ten years.

 

The report also stated that the emphasis in investment endeavours will prioritise productivity rather than growth in 2024.

 

Business process enhancement and staff training take precedence on the list of investment priorities.

 

This year, leaders are placing significant importance on technology and innovation, either to achieve cost savings amidst inflation and increasing wages or to explore new markets in a decelerating economy, according to the survey.

 

IMF asksAustralian government to increase rates, decrease spending.

 

Following discussions with the Reserve Bank of Australia (RBA), the InternationalMonetary Fund (IMF) made a significant revelation, suggesting that interest rates should be increased even more to expedite the return of inflation to the target, aiming for a timeframe slightly beyond the RBA's projection of inflation dipping below 3 percent in late 2025.

 

The IMF intensified its advocacy for a "comprehensive tax reform" to address the issue of sluggish labour productivity growth.

 

As the year approached its end, a once unpredictable job market displayed indications of stabilising, witnessing a decline of 65,000 individuals in employment during December compared to the previous record highs.

 

Despite this shift, the unemployment rate remained unchanged at 3.9 percent, sustaining levels below the historically low 4 percent benchmark since March 2022, a period marked by the economic recovery from pandemic-induced lockdowns.

 

The decrease in employment figures for December 2023 is a result of a partial undoing of employers accelerating hiring in anticipation of the Black Friday-Cyber Monday retail sales weekend. This surge in hiring led to an unusually high number of117,000 additional people being employed in October and November.

 

Decrease in Government spending.

 

The IMF has strongly recommended that both federal and state governments take decisive measures, such as reducing expenditure, to assist the Reserve Bank of Australia (RBA) in expeditiously curbing inflation.

 

The IMF emphasised that the collective budgets of the governments are anticipated to experience a modest "loosening" in the fiscal years 2023-24 and 2024-25, coinciding with a period of elevated inflation and an economy operating beyond its capacity.

 

IMF also cautioned against the potential dangers associated with an early relaxation of monetary policy and increased government spending before effectively addressing inflation. The warning highlighted the vulnerability of heavily indebted households to economic pressures.

 

Higher for longer interest rates can result in triggering pockets of household distress in Australia, given most loans are variable rate mortgages. IMF has cautioned “inflation could risk accelerating wage growth, potentially igniting a wage-price spiral with high and destabilising inflation expectations”.

 

Essential re-forms for growth and equity.

 

Transitioning away from heavy reliance on personal income tax from the working-age population to generating additional revenue through less economically detrimental indirect taxes like GST would contribute positively to economic growth and foster fairness across generations.

 

Over the past few months, Mr. Albanese and Dr. Chalmers from IMF have increasingly supported the $20 billion annual stage three personal income tax cuts, which predominantly benefit high-income earners and are scheduled to take effect from July.

 

In the times of interest rate movements, equities tend to be sensitive to changes. Rising interest rates can increase borrowing costs for companies, potentially impacting profitability.

 

Different sectors react differently to changes in government policies. Defensive sectors may fare better than cyclical sectors during economic contractions.

Equity investments, particularly in well-established companies with strong fundamentals, may still be attractive for long-term investors who can weather short-term economic fluctuations.

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