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Dec 14, 2012

OECD hands govt praise -- and an awkward to-do list

The latest OECD report on the Australian economy is positive towards many government policies, but makes some politically unpalatable suggestions about future reform. Is the hand of Treasury at work here?

The OECD has given the Australian economy and the government’s stewardship of it a ringing endorsement while urging a series of unpalatable reform to further strengthen it in its latest economic survey, released this morning. It has also urged the government to abandon its commitment to surplus in the event that growth weakens.

The current outlook for the economy is positive, the OECD concludes, “even though there are mainly negative risks stemming from the external environment, to which Australia is however less vulnerable than many other OECD countries”. Our “current monetary and fiscal policy mix is appropriate to sustain recovery, and Australia is in a good position to respond to risks”. However, “in case of a sharper-than-expected cyclical weakening, the central bank should loosen further and the fiscal automatic stabilisers should be allowed to work, even if this postpones the return to budgetary surplus”.

Automatic stabilisers are the shifts in fiscal policy caused by changes in the economy — in this case, lower tax revenue and higher transfer payments brought on by lower growth and higher unemployment, which means the government is pumping more money into the economy than forecast. Weaker-than-forecast growth is currently looming as the biggest threat to the government’s forecast surplus for this financial year, with corporate and mining tax revenues likely to be lower than expected.

“OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.”

The report also gives a tick to the carbon price, which “should encourage investment in clean energy technologies, and help enhance competitiveness in a carbon-constrained world”.

The OECD also makes recommendations for further reform, some of which have a familiar ring to them, and others that will have both sides of politics running scared. They include:

  • Dumping subsidies for irrigation infrastructure, which formed a key part of the recent, bipartisan agreement on the Murray-Darling Basin Plan, and the automotive sector, and removing fossil fuel subsidies for extractive industries
  • Consider establishing a “stabilisation fund” to reduce the pro-cyclicality of fiscal policy;
  • Cutting the corporate tax rate and expanding the MRRT (i.e. something closer to the original, Rudd RSPT than the current compromise)
  • A big program of tax reform, including lifting and widening the GST: “reduce or remove conveyance duties and the progressivity of the state land tax; broaden the state land tax base by eliminating exemptions for owner-occupiers; cut subsidies to first-home buyers; broaden the base of the goods and services tax and consider increasing its relatively low rate”
  • “Minor changes” to industrial relations, mainly on greenfields agreements
  • Road user charges, more cost-reflective water pricing and a freer water market, and the use of smart meters for electricity consumption.

The report also suggests that Australia’s “safe haven” currency might necessitate further interest rate cuts than would otherwise be the case; it also notes that a sovereign wealth fund might help with offsetting capital inflows.

In passing, the report also deals with a number of furphies peddled in economic debate. On the myth of the threat posed by falling house prices to bank stability, Australian house prices are undergoing an “adjustment” but it is likely to remain “orderly”:

“… households appear well placed to meet their debt obligations, as shown by the low rate of non-performing housing loans, which has remained below 1%. Indeed, nearly 50% of owner-occupiers are repaying their mortgages ahead of schedule … the risk of a house price bust is also limited by the fact that mortgage lenders have been refraining from easing lending standards.”

Indeed, “Australia’s leading banks, unlike those in many other countries, have managed to keep profitability close to pre-crisis levels and have maintained a strong financial position, as in Canada. They continue to be viewed relatively favourably by the international rating agencies.”

On Australia’s underlying budget deficit:

“the underlying health of the public finances has however significantly weakened in recent years … [it] reflects not only the impact of the crisis-induced fiscal stimulus, but spending of a large part of the pre-crisis mining-related revenues through permanent tax cuts and expenditure increases. To deal with this adverse trend, several savings measures have been introduced that will steadily build over time, providing ongoing improvements to the budget position. These measures include increasing the pension age, means testing the private health insurance rebate, reforms to family tax benefits, and reducing superannuation concessions for high income earners.”

And on industrial relations, “the Fair Work Act has made the system more employee- friendly — in terms for example of a slightly higher relative minimum wage and unionisation rate — with little effect so far on labour market performance and productivity… major changes do not seem warranted at this stage”.

The OECD says about half of Australia’s productivity problem in recent years has been due to the mining investment boom and associated lags, lags in energy infrastructure investment and drought, but that improving productivity must focus on human capital via training and education, and greater innovation through better links between large firms and universities. The OECD also wants to see greater private sector infrastructure investment and better infrastructure pricing (the road and water pricing recommendations).

Absent from the report is any justification for many of the hysterical campaigns peddled by parts of the media and the opposition — the demand for a return to WorkChoices to fix productivity, the fixation on government debt, the claim that the government is spending too much, or the David Murray thesis that a downturn could wreck our banks via the housing market.

Nonetheless, there’s plenty in the report the government won’t be too comfortable with. OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.

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27 comments

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27 thoughts on “OECD hands govt praise — and an awkward to-do list

  1. Jimmy

    Very good article and the OECD report agina shows 2 things the “ALP can’t manage the economy” crowd continue to ignore – the economy is actually going reasonably well all things considered and Howard wasted his boom years by creating a structural deifct through vote buying middel class welfare.

    I also predict that elsewhere the OECD reoprt will be reported as “OECD predict govt wn’t produce surlpus”

  2. Coaltopia

    Now to convince Swanny to remove these “fossil fuel subsidies for extractive industries”:

    “Adam Collins, spokesman for the Treasurer, Wayne Swan, said none of the programs qualified as subsidies under the G20 definition.” – SMH March 2011

    Oh yeah, then “Swan says no to sovereign wealth fund” in May 2012.

    Then there’s the MRRT…

  3. Simon Mansfield

    Dorthory wrote this report for Dix to read on the plane home tonight.

    Only the Lemming Party would ever enact a broad based property tax in Australia. Gillard didn’t even have the guts to broaden the GST tax base this year let alone take on the issue of GST on imports below $1000.

    Why do we pay people at Treasury to write these reports for their OECD counterparts to rubber stamp. Nominate just one of these suggestions/recommendations that will ever see the light of day.

  4. Gavin Moodie

    Mightn’t the high capital inflows inflating the value of the $ be tempered by a Tobin tax, which may also increase revenue?

    While it is true that many such OECD reports (and presumably much Treasury advice) may not seem immediately feasible, they make important contributions over the medium term. In the 1990s it seemed impossible to get State governments to balance their budgets over the economic cycle, but of course that is now orthodox, altho taken to a damaging extreme.

  5. Simon Mansfield

    Reports like these should focus on a few ideas at a time.

    Broadening the GST base is probably the number tax reform needed at present. It would have the complete support of all the state govts and the current opposition – unless Tony wanted to be complete dumbo. Only the Greens would oppose it outright. The last COAG meeting should have signed off on it with Jan 1 2013 as the start date. Now that would be a sign of gutsy economic leadership.

    Instead we have policy wonks in Canberra pretending they are so clever suggesting the state governments of Australia bring in a broad based property tax on homeowners.

  6. Gavin Moodie

    Broadening or increasing the GST is opposed vociferously by the Coalition.

    It is also regressive, while a broad based property tax would be progressive, easier to collect and harder to avoid.

  7. Simon Mansfield

    Broadening the GST was Coalition policy. They’d be hard pressed to oppose it. Increasing it to 12-15% is another matter entirely. A broad based property tax on the family home is never going to happen.

  8. Jimmy

    Simon – I think was is the operative word there – Abbott isn’t going to either support any ALP policy, especially something that “hurts working families” and Abbott wouldn’t take a tax increase to the election

  9. Jimmy

    Simon – I think was is the operative word there – Abbott isn’t going to either support any ALP policy, especially something that “hurts working famil ies” (even if it doesn’t) and Abbott wouldn’t take a tax increase to the election

  10. Gavin Moodie

    ‘Mr Abbott was keen to quash the possibility of a change to the tax. “The Coalition has no plans to change the GST, none whatsoever,” he said.’

    Hayward, Andrea (2012) ‘Abbott quick to quash Coalition GST hike talk’, Canberra Times, September 17 2012.

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