The OECD survey of Australia, just released, makes a number of important observations and recommendations about how the quality of life experienced can be sustained as the mining boom ebbs. Here are the main findings:
Australia’s material living standards and well-being compare well internationally, reflecting a well-managed and successful economy. The economy is slowing as the prolonged mining boom recedes. Output growth of about 3% is expected for 2014 and 2.5% in 2015. Macroeconomic policies are appropriate for the current conjuncture while long term prosperity depends on ensuring that structural settings help all forms of economic activity and promote broad-based productivity growth.
Ensuring price and financial stability. Inflationary pressure is contained. Low interest rates are supporting activity and the rebalancing of growth. House prices have grown by about 10% over the past year, prompting construction activity but also attracting some speculative demand. Strong prudential regulation and a concentrated financial sector have supported financial stability, but the latter has also created concerns about competition and credit supply in some segments.
Pursuing fiscal consolidation and ensuring efficient tax and public spending. Gross public debt has risen from below 20% of GDP to over 30% since the global financial crisis. The budget faces significant volatility from movements in global prices for natural resources, and past spending commitments have created a medium-term structural fiscal challenge. Australia’s heavy reliance on inbound investment and exposure to resource market fluctuations provide strong arguments for fiscal discipline and low public indebtedness. The country has a comparatively light tax burden overall, but the heavy reliance on direct taxation is not ideal. Public-spending efficiency in some services is adversely affected by overlapping responsibilities and complex funding arrangements between federal and state governments.
Improving framework conditions for business. Improvements in productivity growth will require reforms across a wide range of structural policy areas including taxation, competition and deregulation. Government plans to ramp up infrastructure investment make sense, but only if funds are spent efficiently. Targeted business support needs to be judicious as it can be a short step from value-for-money subsidy to outlays on corporate welfare.
Encouraging employment, deepening skill, and addressing inequality. The importance of raising participation, combined with budgetary concerns, means effective welfare-to-work policies remain a priority. The government plans to incentivise unemployed youth, including lengthening the benefit waiting period. A proposed liberalisation of higher education tuition fees and reforms to student support aim to improve competition, access and choice. It will be important to monitor the impact of these reforms, particularly for students from disadvantaged backgrounds.
Tackling environmental challenges. The government is fundamentally changing Australia’s environmental policy, replacing a carbon tax with a suite of planned new measures, including a mechanism to provide incentives to businesses for reducing emissions. Ramping up road building provides opportunities to extend road pricing. Ensuring efficient supply chains for water is important.
Key recommendations
Ensuring price and financial stability
● Continue intensive monitoring of the housing market; maintain deep micro-prudential oversight and consider using macro-prudential tools to bolster credit safeguards and signal concern.
● Examine credit and competition issues in the financial sector; consider reducing banks’ implicit guarantees, tackling risk-weighting advantages in mortgage lending, improving credit databases.Pursuing fiscal consolidation and ensuring efficient tax and public spending
● Prioritise medium-term fiscal consolidation to rebuild fiscal buffers in light of Australia’s exposure to external risk and consider establishing a stabilisation fund.
● Rebalance the tax mix; shift away from income and transaction taxes, make greater use of efficient tax bases such as the Goods and Services Tax and land tax.
● Reform federal-state financial relations; reduce grant conditionality further, instigate state-level tax reforms to enhance funding autonomy, and increase state-level responsibilities and accountabilities.
● Address federal-state shared responsibilities to improve efficiency; improve co-ordination and co-operation and in some cases, health care in particular, consider a reallocation of responsibilities.
● Strengthen capacity for assessing and comparing state-level public services; further develop performance indicators; and continue enhancing the availability and quality of data.Improving framework conditions for business
● Ensure infrastructure delivers value for money through robust and transparent cost benefit analysis both to ensure economic use of the existing stock and appropriate selection of new infrastructure projects.
● Concentrate on broad support for business; prioritise corporate-tax rate cuts, reduce regulatory burdens and continue to be tough on corporate welfare and tax avoidance.
● Strengthen competition; continue adjusting network-industry regulation and improve the competitive environment more generally in light of the review currently underway.Encouraging employment, deepening skills and addressing inequality
● Monitor the proposed welfare reforms to ensure they raise work-force participation cost effectively without adverse social outcomes. Better target superannuation (pension) tax concessions.
● Monitor the proposed higher education reforms to ensure that choice and quality is enhanced and access is not compromised.Tackling environmental challenges
● Achieve greenhouse-gas emission targets; ensure the proposed Emission Reduction Fund is efficient through: i) robust measurement and verification methods; and ii) implementation of a safeguard mechanism that prevents offsetting emissions elsewhere in the economy.
● Make transport policy greener; enact the proposal to index excise duty on retail fuel, expand other use-based vehicle charges and extend public transport.
● Continue strong commitment to water reform including the Murray-Darling Plan.
