A matter of perspective

Although agreeing on a “soft landing” for the Australian economy, the IMF, Treasurer and RBA differ on the fine details, writes AICD chief economist Mark Thirlwell MAICD. 

The first quarter of 2023 delivered three different perspectives on the Australian economy — February’s Statement on Monetary Policy (SMP) presented the Reserve Bank’s latest assessment of the near- term macroeconomic outlook, the International Monetary Fund’s Article IV Consultation provided an economic health check from the perspective of the world’s leading international economic agency, and the Australian Treasurer gave us a big-picture view in his Capitalism After the Crises essay in The Monthly magazine.

So, what did we learn?

The least interesting, yet also the most pressing of the three, was the SMP. Least interesting, because the RBA’s views have already been well articulated. Most pressing, because it is the central bank’s efforts to navigate the twin risks of inflation and recession that are driving our near-term economic trajectory. According to February’s update, Martin Place expects to deliver a modest but sustained disinflation over the next two years, with the headline rate of CPI inflation projected to fall from 7.8 per cent in the December quarter of 2022 to 4.75 per cent by the corresponding quarter of this year, and from there to a still-above-target 3.25 per cent by end-2024.

This will be at the cost of an extended period of subpar economic activity. Real GDP growth is forecast to slow from an annual rate of 2.7 per cent in Q4:2022 to just 1.5 per cent in Q4:2023 and in Q4:2024. That also generates a moderate rise in the predicted unemployment rate, from 3.5 per cent to 3.75 per cent to 4.25 per cent over the same period. At the time of writing, the data still looked broadly consistent with this story, albeit perhaps trending somewhat softer than the RBA has projected.

Although less timely than the SMP, the Article IV assessment provided a broader overview of our economic circumstances. The headline judgement aligned with the RBA’s — Australia will achieve a soft landing “although risks are skewed significantly to the downside”. The IMF also endorsed the case for further monetary policy tightening alongside near-term budgetary restraint. In addition, the IMF also provides advice on several structural issues:

• After warning that the budget faces structural spending pressures that both threaten fiscal consolidation and squeeze other expenditure priorities, it suggests reviewing “existing, large spending programs and improving expenditure efficiency”. There is also a familiar call to improve the efficiency of the tax system via a rebalancing from direct to indirect taxes (offsetting any regressive impact via cash transfers to vulnerable households) by broadening the GST base and scaling back exemptions such as healthcare. The case for the states replacing stamp duty with recurring property taxes is another staple. On the stage 3 income tax cuts, Article IV says “there would be time, if needed, to reassess the parameters to appropriately balance costs on the budget and benefits to the economy”. The IMF also urges Canberra to consider a contributions- funded social unemployment insurance program, noting Australia is currently the only OECD member without one. And it proposes the (likely politically toxic) idea of restricting the capital gains tax exemption for the sale of main residences.
  

• The review of the RBA is “an opportunity to reaffirm the inflation-targeting regime within a clearly focused mandate and revisit... objectives, governance arrangements and decision-making processes”.
• In response to rising housing affordability pressures, the report recommends boosting housing supply and offering only “well- targeted support” for low-income households. 
• On skills shortages, it suggests there is scope to improve Australia’s migration system to attract skilled workers and for education reform to improve school outcomes. On the recent changes to the IR framework, the Article IV is again circumspect, noting only that “the impact is likely to depend on how the law’s provisions are interpreted and implemented”.
• After welcoming the new government’s climate mitigation policies, the IMF again recommends an economy-wide carbon price as “the most effective way to achieve emission reductions”. In the absence of such a “politically challenging” policy, it supports the planned transformation of the Safeguard Mechanism into a binding baseline-and-credit scheme, along with stepping up energy sector investment as part of the Rewiring the Nation program. It also recommends using price signals in the energy and transport sectors to further incentivise lower emissions.

Tips from the Treasurer

Treasurer Jim Chalmers’ essay offered an even broader assessment of the economic landscape. The starting point was the proposition that policymakers failed to learn their lessons after the global financial crisis (GFC). Not only did this leave Australia vulnerable to further crises such as the pandemic and the subsequent inflationary breakout, but we were also ill-prepared to deal with a list of longer-running problems including skills shortages, energy market “chaos”, stagnant wages, stalled investment and an aged care crisis. The required response comprises an “orderly energy and climate transition”, a “more resilient and adaptable economy”, and “growth that puts equality and equal opportunity at the centre”. These are to be delivered by what the Treasurer calls a “new values-based capitalism”, including three sets of policy initiatives:

• Strengthened institutions and capacity, comprising enhanced intergenerational reports and tax expenditure statements, a “renovated” RBA and a “renewed and revitalised” Productivity Commission.
• Renewed and restructured markets, including a “new sustainable finance architecture”
• Greater coordination and co-investment, building on the example of the Clean Energy Finance Corporation.

It is notable that these policy prescriptions — at least on the surface — while interesting, appear modest relative to the catalogue of challenges, thereby making for an interesting contrast with the ambition of some of the Article IV’s suggestions. Of course, the Treasurer could reasonably respond that many of the latter are politically unrealistic. But that gets to the heart of the challenge yet to be met by every post-GFC Australian government — how to convince a sceptical electorate of the case for major reform. A task potentially made even more challenging when higher prices and higher interest rates are squeezing a large proportion of that same electorate. Presumably, institutional reform is intended to do some of the required heavy lifting here. Yet the reaction to the realities set out in the latest Tax Expenditures and Insights Statement, for example, suggest no quick fix is available.