IMF Article IV Consultation with Australia - Release of the Public Information Notice

Australia’s economic management and the Government’s plans for tax reform have received strong international endorsement.

These endorsements are contained in a Public Information Notice (PIN) issued today by the International Monetary Fund. This is the first time the IMF Board’s assessment of Australia has been released. The Australian Government has agreed to release the PIN as part of its commitment to greater transparency in relation to the international financial system and to improve understanding of key Australian policy issues within international markets.

The Treasurer welcomed the strong support for the Government’s economic policies and its proposals for further reform from the Executive Board of the IMF in the PIN.

In particular, the IMF Executive Directors have commended the Australian authorities for implementing sound macroeconomic policies and structural reforms, which have built the foundation for what they recognise is Australia’s impressive record of strong growth and low inflation in recent years.

The IMF Board noted that fiscal consolidation and the monetary policy framework have contributed to a fall in long term interest rates. The Board is also supportive of the current macroeconomic policy mix which the Government has put in place, noting that it ‘would help minimise the adverse effects of the Asian crisis on Australia.’ Importantly for the outlook, the mix is viewed as supportive of growth, while bringing down the current account deficit.

Although the IMF Board has expressed concern that unemployment remains high, it has welcomed the Government’s efforts at labour market reform. The Government remains concerned about the high rate of unemployment and will continue to pursue a wide range of reforms to reduce the rate of unemployment.

In the PIN, there is endorsement of the Government’s strategy to raise national saving over the medium term so as to reduce Australia’s call on foreign savings. In particular, there is agreement with the Government’s emphasis on achieving significant fiscal consolidation and measures to promote private saving, as key elements of the medium term strategy.

The Board of the IMF has also praised the ‘high standard for fiscal transparency and accountability’ set by Australia’s Charter of Budget Honesty, as well as strongly supporting our commitment to microeconomic reforms to improve efficiency and the environment for investment and growth.

At a time of international financial turmoil, our financial sector reforms are seen as "pathbreaking". The IMF commended the Government for its "comprehensive" corporate law and financial sector reforms, which it said "will put Australia’s prudential regime at the forefront of international practice".

IMF Directors strongly endorse the Government's tax reform package. The Government's reforms are designed to improve incentives to work and to save, and to protect the wellbeing of Australian families. In planning to introduce a Goods and Service Tax, the PIN notes that the Government's reforms will ‘enhance efficiency, while protecting the revenue base from continued erosion.’ Directors also cautioned "against granting concessions that would introduce distortions and erode the benefits of the tax reform."

The Government has also established a Review of Business Taxation to develop a sound, competitive, and efficient business income taxation system for Australia. This is designed to promote Australian business growth and employment.

The Government is committed to pushing ahead with economic reforms to build on the achievements of recent years and to strengthen the economy in response to the external downturn.

CANBERRA
17 November 1998

ATTACHMENT

IMF Concludes Article IV Consultation with Australia

On October 28, 1998, the Executive Board concluded the Article IV consultation with Australia.

Background

Australia has enjoyed a strong economic performance over the past seven years, with growth averaging 3.5 percent and Inflation 2 percent. Growth has been underpinned by an improved economic policy framework and regulatory reforms that have promoted investment and boosted productivity. The progress in bringing down inflation has been facilitated by a forward-looking monetary policy that has targeted low inflation.

Growth picked up to an estimated 4 percent In 1997/98 (July-June). The expansion was driven exclusively by domestic demand, which accelerated to 6 percent, in contrast to previous years when more balanced contributions from both domestic and foreign demand underpinned activity. Export volume growth slowed markedly in 1997/98, reflecting not only the impact of the Asian crisis and Japanese recession, but also the boost to export volumes in 1996-97 from Reserve Bank of Australia non-monetary gold sales and the sale of a frigate to New Zealand. This slowdown, together with strong domestic demand, contributed to a sharp widening of the current account deficit. The impact of the Asian crisis on exports was nevertheless cushioned by a switching of exports to other markets.

Despite continued strong growth over the past few years, progress in reducing the unemployment rate stalled. The rate has hovered around 8 percent over the past year, and reflects mainly structural factors.

Underlying Inflation declined to 1 percent in 1997/98, below the Reserve Bank’s target of 2-3 percent, on average, over the economic cycle. This decline reflected mainly the lagged effect of the earlier appreciation of the Australian dollar and the absence of significant inflationary pressures from domestic sources. Monetary conditions have eased with the recent depreciation of the Australian dollar.

Australia has made significant progress in fiscal consolidation over the past five years, mainly through cuts in structural expenditure. As a result, the Commonwealth's underlying budget balance (that is, exclusive of net advances) improved to reach a small surplus in 1997/98, in contrast to deficits of about 3 percent of GDP at mid-decade. At the same time, the government has undertaken substantial asset sales, leading to a sharp decline in public debt. The improved fiscal position has supported a fall in long-term interest rates toward international levels.

This fiscal strategy Is in line with the broad principles laid out in the recently legislated Charter of Budget Honesty. These principles include achieving adequate national saving and maintaining Commonwealth debt at prudent levels. In addition, the Charter aims to improve the transparency and accountability of fiscal policy.

In addition to fiscal reform, Australia hits been pursuing a range of other microeconomic reforms, with important recent achievements in several key areas. These reforms cover: the labor market; the financial sector; competition policy; trade policy; and the corporate law code. An important measure is the passage, in late 1996, of the Workplace Relations Act (WRA) that has encouraged wage bargaining at the enterprise level. With respect to the financial sector, a package of pathbreaking reforms, which puts Australia at the forefront of international practice, is in the process of being adopted. A major reform proposal for the tax system, which would address many of the shortcomings in the current system, was announced in mid-August, 1998.

Executive Board Assessment

Executive Directors commended the authorities for implementing sound macroeconomic policies and structural reforms, which have built the foundation for Australia's impressive record of strong growth and low inflation in recent years. Directors noted that fiscal consolidation and the inflation targeting framework had contributed to a fall in long-term interest rates, which together with labor and product market reforms, had supported increased investment and productivity. Moreover, the adoption of the Charter of Budget Honesty, which sets a high standard for fiscal transparency and accountability, was welcomed by Directors. At the same time, they expressed concern that unemployment remained high and national saving was low. Furthermore, the near-term outlook was seen as somewhat less favourable, reflecting the deterioration in the external environment, with Australia's growth expected to slow and the current account deficit to widen.

Directors agreed that the current mix of relatively easy monetary conditions (as a result of the depreciation of the Australian dollar) and maintenance of a budget surplus was appropriate, and would help minimise the adverse effects of the Asian crisis on Australia. This mix would support growth while bringing down the current account deficit. In the event of a sharper than expected economic slowdown, Directors agreed that a somewhat lower budget surplus would be appropriate in the near term, by permitting the operation of automatic stabilisers. On monetary policy, Directors noted that it may be possible to accommodate a modest easing if the pass through from the recent depreciation continues to be lower than expected, and if inflationary pressures from other quarters remain subdued. Some other Directors, however, cautioned that a tightening of monetary policy could be called for, if additional price shocks or exchange rate pass through occurs, and causes a rise in inflationary expectations.

Directors strongly endorsed the proposed tax reform package. The introduction of a broad-based tax on goods and services would enhance efficiency, while protecting the revenue base from continued erosion. The accompanying reduction in effective marginal income tax rates would improve the incentives for saving and employment. Some Directors considered that the budgetary costs of the proposed tax reform package should be offset by expenditure measures, over the medium term, to avoid compromising fiscal consolidation. Others considered that the cost of introducing the tax reform of the order envisaged by the authorities would be acceptable, given the importance and long-run benefits of the tax reform. Directors cautioned against granting concessions that would introduce distortions and erode the benefits of the tax reform.

Directors considered that raising national saving must remain a top priority for the medium term. They agreed with the Australian authorities that the main elements of this strategy should be a significant fiscal consolidation effort and measures to promote private saving, so as to reduce Australia's call for foreign saving. Directors referred to Australia's high level of external liabilities, and agreed that policies must continue to be conducted in a prudent way, so as to avoid any potential weakening in market confidence. With respect to public saving, Directors agreed with the authorities' focus on structural expenditure cuts, particularly in view of the long-term pressures on the budget from the ageing of the population. In this regard, there could be scope to hold down social spending, given the sharp increase of the past five years. Directors also called for further efforts to boost private saving.

Directors welcomed the government's efforts at labor market and social welfare reform. Further reforms will be necessary, however, to reduce the high level of structural unemployment. In the labor market, reforms should focus on strengthening enterprise bargaining further, and reducing the role of awards and third parties in wage determination. On social welfare reform, Directors stressed that, while it was necessary to maintain an adequate social safety net, it was also important to limit the duration of unemployment benefits to encourage employment search, and to scale back other social welfare benefits that discourage labor force participation.

The authorities' long-standing commitment to product market and financial sector reforms was strongly supported by Directors, as they would help to improve efficiency and the environment for investment and growth. These reforms included the broadening of the applicability of competition policy rules, comprehensive corporate law reform, and financial sector reforms, which will put Australia's prudential regime at the forefront of international practice. On trade policy, Directors welcomed Australia's commitment to liberalisation, and agreed that the tariff reductions proposed for 2005 and beyond should proceed as planned, but regretted the decision to allow a pause in liberalisation for two sectors. As regards industrial policy, Directors agreed that the use of selective incentives should be avoided to maintain as level a playing field as possible for private investment decisions.

Noting that Australia now provides a relatively low level of official development assistance (ODA), some Directors urged the authorities to seize the opportunity of the expected budget surpluses to gradually raise the level of ODA.

Public Information Notices (PINs) are issued, at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies.

Australia: Selected Economic and Financial Indicators 1/

Sources, Data provided by the Australian authorities; and Fund staff estimates.
1/ Fiscal year ends June 30.
2/ National accounts basis, as measured by the authorities.
3/ Underlying expenditure and balance exclude asset sales and other one-off factors.
4/ IMF Information Notice System index (1990-100).