IMF: Shake up tax to lift growth

 

Treasurer urged to close housing breaks, broaden GST High tax burden on income ‘Narrow path’ to avoid recession

The International Monetary Fund has urged Treasurer Jim Chalmers to wind back capital gains tax breaks for the family home and to broaden the GST, to pay for easing the tax burden on workers and increase the economy’s speed limit.

The local economy is tipped by the IMF to tread a ‘‘narrow path’’ to avoid recession but to expand at just 1.6 per cent this year, with unemployment forecast to edge up to 4 per cent because of rising interest rates and weaker consumer spending.

‘‘Tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth point to a significant deceleration in Australia,’’ the IMF executive board said in its annual review of Australia.

To assist the Reserve Bank reduce inflation, the fund encouraged the Treasurer to further show fiscal restraint in the May budget by banking all revenue upgrades from high commodity export prices to repair the budget deficit.

The fund said the government’s review of the $35 billion-a-year National Disability Insurance Scheme should consider introducing copayments or means testing to make it financially ‘‘sustainable’’ and avoid ‘‘crowding out’’ other worthy government spending.

The IMF endorsed Dr Chalmers’ plan to publish more detailed information about the distribution of tax breaks before the budget, noting it will be ‘‘helpful in identifying areas where the tax system can be further strengthened.’’

The detailed annual report on Australia’s economy and policy settings recommends reviewing tax exemptions and restricting the $60 billion of capital gains tax concessions on the sale of people’s main housing residence.

‘‘That’s a very costly tax exemption and benefits disproportionately the wealthy households,’’ Harald Finger, the IMF mission chief to Australia, told The Australian Financial Review. ‘‘It’s also more generous than what you see in many other advanced economies.

‘‘So reviewing that and doing away with, not fully, but to streamline that benefit and make it less generous, would be helpful in generating tax revenues and making the tax system fairer.’’

Mr Finger also recommended raising more money from the 10 per cent goods and services tax, which the fund warns will be ‘‘eroded’’ by exemptions for healthcare and an ageing population.

‘‘Australia, among the OECD countries, has a relatively high prevalence of direct taxes so income taxes and things of that nature, and a relatively low incidence of indirect taxes such as the GST,’’ Mr Finger said.

‘‘So some rebalancing of the tax mix would be useful to strengthen economic efficiency.’’

‘‘And at the state level we think a better system would be to transition out of stamp duties and into a broader land tax type system, which would make a more stable tax base for the states.’’

The Albanese government has ruled out increasing the GST and abandoned Labor’s 2019 election policy to wind back capital gains tax breaks for investment properties and shares.

Mr Finger said the stage three personal income tax cuts due in July 2024 favouring higher income earners moved in the right direction to address tax bracket creep, but the overall cost to the budget needed to be considered.

‘‘There would be time, if needed, to reassess the parameters to appropriately balance costs on the budget and benefits to the economy,’’ the IMF report said.

But with average personal tax rates poised to hit record levels by around 2030, the fund said inflation disproportionately hurts low-income earners and women due to bracket creep – a signal that some of the stage three tax cuts could be redirected to helps these cohorts.

‘‘Addressing bracket creep in PIT [Personal Income Tax] by raising the tax brackets periodically will limit distributional implications, including for low-income households and women.“

The IMF also suggested transforming the JobSeeker unemployment benefit into full-fledged, contribution-based unemployment insurance like almost all other advanced economies to provide a more generous safety net for the jobless.

The Albanese government has agreed to annually review the adequacy of benefits for the jobless and other welfare recipients, under a deal struck by independent Senator David Pocock to pass workplace relations legislation last year.

IMF recognises the Albanese government’s approach to managing the economy is responsible, makes key investments in growth and resilience, and begins the hard work of budget repair.

‘‘The independent assessment from the IMF backs our strategy to build a stronger, more inclusive and more resilient economy that can better withstand future shocks,’’ Dr Chalmers said.

Whether the IMF’s advice gains traction with Dr Chalmers remains to be seen. In his 6000-word essay for The Monthly, Dr Chalmers called into the question the economic policy prescriptions of the fund in the decade before the pandemic.

‘‘The ‘Washington Consensus’ became shorthand to describe recommendations and orthodoxies for developing countries urged by the World Bank – a reference to each institution’s proximity to the other in Washington,’’ he wrote.

‘‘Over time it became a caricature for ever more simplistic and uniform policy prescriptions for ‘‘more market, not less’’.

The IMF welcomed Labor’s new climate-mitigation targets, including the so-called safeguard mechanism to reduce industrial emissions of large companies.

‘‘If political economy constraints prevent the adoption of an economy-wide carbon price, alternative sectoral policies, with price signals where possible, can help reduce emissions.

‘‘In this context, planned reforms to the Safeguard Mechanism for industrial emissions are welcome.

‘‘Adding price signals in the energy and transport sectors, potentially in the form of feebates, can further incentivise emissions reduction.’’

It also backed the independent review of the RBA.

‘‘The review presents an opportunity to reaffirm the inflation targeting regime within a clearly focused mandate and revisit the RBA’s objectives, governance arrangements.

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