A global financial agency has warned Australia that “stronger-than-expected” government spending and high immigration are fueling inflation and holding back interest rate cuts – and could mean more pain down the road.
The International Monetary Fund, the UN’s main financial agency, has released a report warning of excessive government spending and population growth, just months after Prime Minister Anthony Albanese heads to elections.
With unemployment still low at 3.9 percent, the Washington DC-based IMF warned that too much government spending was likely to prevent the Reserve Bank of Australia from cutting rates as borrowers around the world get relief.
Domestically, persistent labor market tightness, stronger than expected fiscal stimulus and lower spare capacity than currently estimated could contribute to slowing the disinflation process, potentially leading to higher interest rates that will last even longer, which would have a negative affects consumption and investment,” the IMF said. said.
The IMF’s December 2024 report on Australia also suggested the federal government needed to cut spending to help the RBA fight inflation, arguing it would not be able to cut interest rates until government spending was reduced.
“In this context, the current restrictive monetary stance is appropriate and should be supported by fiscal policy that avoids an expansionary stance and complements the disinflation objective of monetary policy,” the report said.
The IMF warned that the failure to reduce Australian inflation could lead to interest rate rises and major cuts in government spending.
“If disinflation comes to a halt, tighter monetary and fiscal policies may be necessary,” the report said.
The IMF has warned Australia that ‘stronger than expected’ government spending and high immigration are keeping inflation high and holding back interest rate cuts – and could mean more pain down the road (pictured is Sydney’s Pitt Street shopping centre)
The IMF also noted that while record high immigration had kept Australia from sliding into recession, the strongest population growth of any OECD country caused a housing shortage, leading to more government spending.
“A rise in immigration and robust public demand have averted a recession and paved the way for a narrow path to a soft landing,” the report said.
‘Labour markets have been resilient, with a gradual weakening retaining some gains from the post-pandemic period.
“However, inflationary pressures have persisted, with upside risks arising from the labor and housing markets, more expansionary than expected fiscal policies in future Commonwealth and state government budgets, and an uncertain external environment.”
The IMF’s warning on government spending came just weeks after Reserve Bank of Australia Governor Michele Bullock warned that “it’s not just the federal governments, it’s the state governments too” with transport infrastructure projects that are increasing inflation.
State and federal government spending now represents a record 28 percent of gross domestic product, and Victoria in particular has taken on even more debt to build Melbourne’s Suburban Rail Loop to accommodate the influx of overseas immigration.
A record 548,800 migrants moved to Australia by the end of 2023, with the majority moving to Sydney and Melbourne.
Although immigration has since fallen to 448,090 in the year to October, it is still significantly higher than the Treasury’s revised Mid-Year Economic and Fiscal Outlook forecast of 340,000 for 2024-2025.
The International Monetary Fund, the UN’s main financial agency, has released a report warning of excessive government spending and population growth, just months before Prime Minister Anthony Albanese heads to elections.
Australian borrowers missed out on interest rate cuts in 2024 as central banks in the United States, Britain and the European Union, among others, eased monetary policy.
The Reserve Bank of Australia’s 4.35 percent cash rate is also now significantly higher than the equivalent 3.35 percent cash rate in Canada and New Zealand’s 4.25 percent.
Financial markets and economists at the major banks do not expect the RBA to cut interest rates until May, when elections are due.
The minutes of the RBA’s December meeting showed that the next step was likely to be a cut, but the RBA still expressed concerns that inflation is still too high, while the underlying inflation rate of 3.5 percent is still well above the target of 2 to 3 percent.
The IMF also criticized Australia’s 50 percent capital gains tax credit that has been in place since 1999, meaning only $50,000 of a capital gain needs to be declared on an annual tax return if the price of an investment unit rises by $100,000.
“Tax reforms should focus on efficiency and fairness, reducing reliance on direct taxes and high capital costs, and phasing out tax breaks such as capital gains tax rebates,” the report said.
‘A comprehensive policy package is essential to tackle Australia’s affordability crisis, focusing on increasing the construction workforce, relaxing zoning regulations, promoting initiatives to boost the supply of new housing and re-evaluating property tax and stamp duty.”
Labor lost the 2019 election under former leader Bill Shorten with a plan to halve the capital gains tax credit from 50 percent to 25 percent and abolish negative tax breaks for future purchases of existing properties.
New South Wales’ former coalition government also lost the 2023 election after offering homebuyers the choice of paying an annual land tax instead of an upfront stamp duty, a policy that Labor scrapped after coming to power at state level.
While Labor has run two consecutive budget surpluses, the Mid-Year Economic and Fiscal Outlook predicts deficits from 2024-2025 as falling iron ore prices will reduce federal business tax revenues.
But Treasurer Jim Chalmers argued Labor had been “responsible” in controlling real spending growth.
“The real spending growth story has clearly been a responsible story,” he told podcaster Michelle Grattan last week.
“And that’s part of the story, it’s part of the reason we’ve had those two surpluses, part of the reason why the deficit this year is much smaller than was expected a few years ago is because we show that spending control we have found modest but meaningful tax changes, and we have also found a lot of savings, but this has been ignored.’
Despite a rise in government spending, Australia’s economy grew just 0.8 percent in the year to September – the weakest annual pace outside a pandemic since the 1991 recession, due to higher interest rates.