IMF warns on slowing growth for Australia and calls for aggressive tax reform

Australia has experienced exceptionally good growth over the past decade but a report released yesterday by the International Monetary Fund (IMF) suggests this might be about to change.

The findings, a conclusion of the Washington-based fund’s official annual visit to Australia, say “over the medium term and without reform growth [the Australian economy] is likely to converge to a slower potential rate, reflecting less capital accumulation and only modest productivity growth”.

“This lower potential would still mean income growth in line with other advanced countries, but significantly slower than Australians have been used to over the last two-decades.”

The IMF suggests changes are needed in the country’s tax system with the ending of capital gains tax discount, broader GST and urging a stop to high-end superannuation concessions.

Without the government making these changes to the country’s taxation system, it could be the end of an era for Australian growth, the report concludes.

“We see Australia’s outperformance ending,” James Daniel, IMF mission chief, told reporters in Sydney.

Paul Bloxham, HSBC Australia and New Zealand chief economist, told SmartCompany he is also concerned about Australia’s weak investment outlook and potential for lowering productivity growth progressing in the coming years.

“Private sector businesses need to do more investment and show a lift in productivity growth, if it doesn’t arrive we’re likely to see lower potential growth rates in Australia in the future.”

Bloxham recommends the government moves away from policies that “distort economic decisions”, such as income taxes, and towards more “efficient” taxes such as GST.

“Australia’s tax system is being increasingly inefficient and weighing on our potential to grow as a country.”

The IMF also questioned how beneficial the Abbott government’s budget repair has been, with over-inflated revenue and spending expectations becoming increasingly apparent.

“The federal budget is not enough to support our medium-term budget goal for small businesses in Australia,” says Bloxham.

Bloxham says Australian SMEs would be affected by the suggested tax reforms, acting as encouragement for small businesses to do more investment and hiring in their industries.

“It will lift potential growth rate by productivity enhancing reform, which will hopefully encourage more investment in Australian small businesses.”

The report also warns of these lower rates of growth lingering around 2.5% year-over-year in the medium term, compared to the 3% to 4% rates the country has experienced over the last two decades.

The IMF notes while Australia is facing difficult times amid sliding iron ore and coal prices, if the government doesn’t embrace taxation reform, the fund confidently says our growth will drop below 3%.

 “As the mining investment boom comes to an end, other sectors need to be prepared to pick up the slack and we aren’t seeing that yet,” says Bloxham.