THE OECD has told Wayne Swan how to get his budget back into surplus. Indeed, it has told him how he could run a $100 billion surplus if he wants one. But there's a catch most of its suggestions would be political dynamite.
They include scrapping tax breaks for superannuation and for owner-occupied housing. An emissions trading scheme with a target of a 20 per cent cut from 1990 levels and no compensation. A GST imposed on food, healthcare and financial services.
But in a new report to its 35 member countries, Fiscal Consolidation: how much, how fast, and by what means?, the IMF does not call on Mr Swan to do any of this in 2012-13. It says fiscal tightening must take account of economic growth in "a consolidation strategy that could be implemented flexibly, capable of adjusting the speed and intensity as new information becomes available".
International Monetary Fund chief Christine Lagarde gave the same advice overnight in a speech in Washington, urging countries that "have the flexibility to reconsider the pace of deficit reduction this year, to limit the harm to growth.
"We need more confidence and demand," Ms Lagarde said. "The immediate focus of policies must therefore be to support growth where it is still weak.
"Let me be clear: in many countries, especially in the advanced economies, fiscal adjustment is essential. But the pace of adjustment matters."
The OECD report finds Australia has the lowest government debt of any of the 28 rich countries studied. Gross debt is a bit over 20 per cent of GDP here, compared with almost 100 per cent in the United States and more than 200 per cent in Japan.
The main thrust of the OECD report is to warn countries to adopt medium to long-term plans to get their debt back below 50 per cent of GDP, to give them the flexibility to handle crises at the same time as dealing with the costs of ageing populations.
Even Australia, it warns, will need to tighten its budget to cope with the healthcare, aged care and pension costs as its population ages. An IMF report earlier this week reported that the life expectancy of 60-year-olds in Australia is increasing at the rate of nine years every half-century.
The IMF suggests six reforms it estimates could improve federal and state budget bottom lines by 8.9 per cent of GDP, or roughly $138 billion a year. But few appear politically feasible. They include:
Cut the greenhouse gas emissions target to 20 per cent below 1990 levels, driving up emissions permit prices, with no compensation (saving: $65 billion a year).
Scrap tax breaks for superannuation and owner-occupied housing ($42 billion).
Extend the GST to food, healthcare and financial services ($9 billion).
Tighten eligibility for family benefits ($8 billion), and find savings in healthcare ($8 billion) and schools ($6 billion).
Frequently Asked Questions about this Article…
What did the OECD recommend to help Australia return its budget to surplus?
The OECD suggested a range of tough measures to push the budget into surplus, including scrapping tax breaks for superannuation and owner‑occupied housing, imposing a GST on food, healthcare and financial services, and adopting an emissions trading scheme with a 20% cut from 1990 levels (with no compensation). The report noted many of these steps would be politically difficult.
Did the IMF call for immediate fiscal tightening in 2012–13?
No. The IMF’s report urged fiscal consolidation that takes economic growth into account and recommended a flexible approach — adjusting the speed and intensity of tightening as new information arrives. IMF chief Christine Lagarde also advised countries with flexibility to reconsider the pace of deficit reduction to limit harm to growth.
How much government debt does Australia have compared with other advanced economies?
The OECD found Australia has the lowest government debt of the 28 rich countries it studied, with gross debt a bit over 20% of GDP. By comparison, the United States was near 100% of GDP and Japan above 200% in the report.
Why does the OECD say Australia will still need to tighten its budget in the long term?
Even with relatively low current debt, the OECD warned Australia must plan medium‑ to long‑term to bring debt below 50% of GDP and to handle the rising costs of an ageing population — notably higher healthcare, aged care and pension costs.
What specific fiscal reforms did the IMF estimate could improve Australia’s budget, and by how much?
The IMF suggested six reforms it estimated could improve federal and state budgets by about 8.9% of GDP (roughly $138 billion a year). The measures listed in the article included: an emissions policy adjustment (saving ~$65 billion), scrapping tax breaks for superannuation and owner‑occupied housing (~$42 billion), extending the GST to food/healthcare/financial services (~$9 billion), tightening family benefit eligibility (~$8 billion), finding health savings (~$8 billion) and schooling savings (~$6 billion).
Would extending the GST to food, healthcare and financial services significantly affect the budget?
According to the IMF estimates cited, extending the GST to those items would raise about $9 billion a year. The article also notes such a move would be politically sensitive.
How would an emissions trading scheme with a 20% cut from 1990 levels affect government finances?
The IMF estimated that tightening the emissions target to 20% below 1990 levels and increasing permit prices — with no compensation — could save about $65 billion a year for federal and state budgets, according to the article.
What should everyday investors watch for as Australia debates fiscal consolidation and these policy suggestions?
Investors should monitor political debate and policy signals around superannuation tax concessions, housing tax settings, GST scope, emissions policy and public spending on healthcare/aged care — the article identifies these as areas with potential fiscal impact. Also note the IMF’s caution that the pace of consolidation matters: policymakers may move flexibly to protect growth, which can influence economic conditions and market sentiment.
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