- Australia must address long-running economic handbrakes while building from the coronavirus pandemic, a new OECD report states.
- The nation should tweak its tax strategy to brace for an aging population, while doing more for unemployed Australians and net-zero emission commitments.
- The review also calls for a review of the Reserve Bank and regular assessments of fiscal policy.
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Australia has the potential to return to sustained economic growth while undertaking significant reforms to taxation, business regulation, climate change strategies, and welfare, according to a major Organisation for Economic Co-operation and Development (OECD) report.
In a new economic survey, published Wednesday, the OECD suggests the -2.5% drop in GDP through 2020, caused by the coronavirus pandemic, will be countered by growth of 4.0% in 2021 and 3.3% in 2022.
Even so, the nation’s bounce-back from the latest round of lockdown restrictions will be slower than previous rounds, due to the lingering impacts of the COVID-19 Delta variant.
In this period, Australia should work to “revive productivity growth, lift living standards and strengthen resilience,” the authors state, while working to address economic handbrakes in place before the pandemic hit.
Major changes to the nation’s welfare and emission reduction schemes should be considered, the report adds.
Tax reforms, the RBA, and red tape
The OECD, led by former Finance Minister Matthias Cormann, suggests the current levels of state and federal government fiscal support are “appropriate”.
The nation’s leaders should stand ready to funnel further funding into the community should “restrictions end up being more prolonged than currently anticipated”.
Low interest rates have enabled those flows of fiscal support, with repayment conditions manageable in the short-term.
Yet the task of servicing the budget deficit will largely fall to future generations, the report notes, requiring tweaks to the nation’s taxation system.
“Tax reform will be necessary to reduce Australia’s reliance on taxing personal incomes, which leaves public finances vulnerable to an ageing population,” the OECD notes.
This could be done by expanding the Goods and Services Tax, taking a closer look at private pension tax breaks, like franking credits, or slashing the capital gains tax discount.
A more specific recommendation comes through a call for the government to “explicitly” require “an independent fiscal institution to regularly evaluate and monitor the fiscal strategy.”
That call comes in tandem with OECD focus on the Reserve Bank of Australia, which the organisation says should be the target of a formal review.
“Looking forward, strong consideration should be given to enshrining such a review on a recurring basis,” the authors say.
Cutting red tape could unleash further productivity once the economy has stabilised, the report states.
“Australia should continue to reduce regulatory, administrative and financial barriers for high-potential young firms” once the recovery is well underway, it reads.
Video: OECD urges Morrison government to engage in genuine tax reform (Sky News Australia)
While the long-term prognosis has promise, Australia must address the hardships facing low-paid workers and those facing unemployment.
Australia’s unemployment payments, offered through JobSeeker, remain well below the OECD average, the report notes.
Australia’s support for the unemployed should be directly indexed to wage inflation, as opposed to their current stapling to the Consumer Price Index, the report suggests.
“With young and low-paid workers now hit hard by the COVID-19 crisis, effective activation policies will be key to avoid scarring effects on the long-term unemployed and to support job reallocation,” the report states.
“More can be done to make the recovery work for all.”
Australia remains “uniquely vulnerable” to the worst impacts of unrestrained climate change, the report states, with the nation required to embrace more ambitious emission reduction targets to achieve net zero by 2050.
Prolonged droughts and other climate-based disasters could have “significant costs in terms of property damage, the health and wellbeing of the population.”
The report also highlights the financial repercussions of carbon reductions worldwide.
Carbon border adjustments or tariffs on emissions-heavy exports, declining fossil fuel demand in major export partners, and flaring trade tensions could damage the viability of future coal exports.
At the same time, the nation is also poised to benefit from the global energy transition.
“Significant economic benefits” could arise from “the global move towards carbon neutrality due to a large (and windy) land mass, high solar radiation, plentiful ocean access and strong human capital to form the basis of innovation in carbon abatement technologies,” the report states.
The OECD also references carbon price mechanisms, a historical bugbear for Cormann’s former Liberal Party colleagues.
“The least cost approach to meeting these emissions targets would involve an economy-wide carbon price,” the report states.
The effectiveness of public investment in green technology would be “enhanced by ensuring that market prices adequately reflect carbon content,” the report adds, while noting Australia’s current effective carbon price is among the lowest of leading OECD nations.
Responding to the report, Treasurer Josh Frydenberg said the federal government has “made strong progress on the OECD’s key Survey recommendations.”
In regards to calls for further support for emerging businesses, Frydenberg said the government will “continue to pursue reforms to ensure small and emerging businesses have access to a range of funding sources, including streamlining lending laws, expanding ‘Open Banking’ and via the Australian Business Growth Fund.”
The Treasurer did not reference the report’s focus on JobSeeker, which the Morrison government this year elevated by $50 per fortnight, or about $3.50 a day.
Frydenberg also glanced past the report’s calls for a holistic focus on climate change and concrete net zero by 2050 targets.
“With respect to climate change, the Government remains committed to its approach of technology, not taxes, in reaching net zero emissions as soon as we possibly can, preferably by 2050,” he said.
In a statement obtained by The Australian, Opposition Treasury Spokesperson Jim Chalmers said the federal government was on the hook for economic damage on both ends of the COVID-19 crisis.
“Australia’s economic weaknesses predated the pandemic, and that the recovery is hostage to the government’s failures on vaccines,” he said.