27/10/2023 - Australia recovered from the COVID-19 pandemic faster than other major economies, but growth is now slowing amid tightening financial conditions. To bring inflation down, monetary policy will need to remain restrictive and further windfall government revenues from elevated commodity prices be saved, according to a new OECD report.

The latest OECD Economic Survey of Australia says that accommodative macroeconomic policies and higher commodity export prices helped real domestic demand rebound to its pre-pandemic trend by mid-2022. However, coupled with supply constraints, the rapid demand recovery has contributed to macroeconomic imbalances, with labour shortages in key sectors. While inflation has peaked, price pressures have broadened from manufactured goods, food and energy to services.

OECD projections envisage subdued economic growth through to 2025. High interest rates and cost of living pressures will dampen spending by households. Strong population growth and higher exports will partly offset these headwinds. Labour market pressures are expected to ease, with the unemployment rate projected to rise to around 4.4% in 2025, and inflation is expected to further moderate. A sharper than expected slowdown in China is a downside risk to economic growth.

The public debt to GDP ratio has increased by over 30 percentage points since 2010. Furthermore, annual fiscal costs from health and long-term care are estimated to increase by 0.8% of GDP between 2023 and 2040. Tax and spending reforms are needed, along with measures that ensure a robust fiscal framework, to rebuild fiscal buffers and offset the fiscal costs of population ageing.

Revenue should be raised by reducing exemptions in the goods and services tax and consideration should be given to raising the rate. In addition, further reducing tax concessions on private pensions would more closely align their tax treatment with that of other forms of saving and raise revenues. There are also potential savings on the spending side. Encouraging more patient care in primary care settings and preventive health policies can reduce public spending growth as the population ages.

Gender inequalities in the labour market have been steadily reduced but remain visible. Reforms to tax, childcare, education, social benefits and parental leave would improve labour market opportunities for women, promote more equal sharing of unpaid work between genders and help more vulnerable women, notably single mothers. More effective policies are also needed to improve outcomes for Indigenous Australians.

The authorities are committed to achieving net zero emissions by 2050. Australia is well-placed to become a major producer of renewable power, having plentiful wind and solar resources and a large wealth of minerals critical to the climate transition. However, further reforms are required to meet emission reduction goals, support the reallocation of workers and adapt to climate change.

Australia’s renewable electricity target of 82% by 2030 is central to the net zero transition. To ensure this target is met, Australia should stand ready to provide further policy support and consider scaling up and refocusing public funding towards the development and demonstration of clean energy and energy-efficiency technologies.

As the economy decarbonises, workers will need to reallocate from high carbon to low carbon industries. Many occupations integral to the renewable energy transition face national shortages, requiring training programmes focused on reallocating displaced workers and developing the skills for renewable energy jobs.
 

Australia is highly exposed to climate-related hazards such as wildfires, extreme heat and heavy rainfall. Adapting to climate change will require substantial investment and careful planning. Mandatory disclosure of climate-related risks in certain cases such as the sale of property will help raise awareness of these hazards and encourage more effective adaptation. In addition, incorporating climate hazard considerations in land-use planning will help reduce risks.

 

See an Overview of the Economic Survey of Australia with key findings and charts (this link can be used in media articles).

 

For further information, journalists are invited to contact Spencer Wilson in the OECD Media Office (+33 1 45 24 81 18).

 

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