The IMF has forecast stronger economic growth for Australia than the RBA is expecting while recommending tax reforms ahead of the May budget.

In its yearly report on Australia’s economy, the International Monetary Fund (IMF) said the country was managing a “soft landing” following the pandemic, with “economic recovery expected to continue in the near-term.” 

Its outlook was more optimistic than recent forecasts from the Reserve Bank of Australia (RBA), projecting the economy to grow by 2.1 per cent this year to $3 trillion, compared with the RBA’s 1.8 per cent growth forecast. The IMF predicted that this growth would be driven by the private sector. 

However, the fund also noted that inflationary pressures have “re-emerged” for the country in recent months, while wage growth is expected to ease further, partly reflecting subdued productivity growth. 

“Executive directors welcomed Australia’s progress toward a soft landing and internal balance, notwithstanding uncertainties regarding residual excess demand and supply capacity in the context of weak productivity growth,” it stated. 

In response, the IMF said the government should pursue measures to boost overall growth and productivity – including cutting red tape, advancing industrial relations reform and prioritising infrastructure projects with strong economic returns – alongside spending restraint. 

The specialised agency of the United Nations also called for sweeping tax reform, including lifting the GST and removing exemptions, overhauling capital gains tax and reducing company tax. 

“A high reliance on direct taxes and a relatively high effective cost of capital hinders investment and productivity growth and suggest there is scope for tax reform.” 

It added that any comprehensive reform package should be designed to enhance the efficiency, equity and sustainability of the tax system. 

“Tax breaks, including superannuation concessions and capital gains tax discount, could be phased out to generate a more equitable and efficient tax system.” 

The report comes ahead of Treasurer Jim Chalmers’s upcoming budget on 12 May, which he has already flagged will include a series of spending cuts, tax reforms and measures aimed at lifting productivity. The government is already widely expected to pare back the 50 per cent capital gains tax (CGT) concession, and the IMF’s signal effectively provides tacit backing for the move. 

Meanwhile, the IMF also highlighted debt risks. It warned that while the federal budget is strengthening, rising sub-national debt from new spending commitments on infrastructure and social protection has created significant challenges for states and territories, causing them to miss fiscal targets. 

In one of its strongest statements on the Australian federation, the IMF recommended a review of all Commonwealth tax and spending policies, warning that the sharp rise in state and territory debt could ultimately weigh on the federal budget. 

“Should state spending continue to accelerate, risks include inefficiency due to rising construction costs and additional credit rating downgrades leading to higher interest expenses,” it stated. 

“As the Commonwealth is viewed as a de facto guarantor of state debt by some credit rating agencies, higher sub-national debt could eventually impact Commonwealth borrowing costs.” 

Currently, the IMF forecasts that all states except Western Australia will face rising debt per capita, with Victoria and the Northern Territory projected to be the most affected. 

The suggestion also comes as new Liberal leader Angus Taylor has called on the prime minister to form a bipartisan taskforce to rein in government spending and help lower inflation and interest rates. 

Chalmers has since dismissed the proposal, saying it echoes the same argument Taylor made as shadow treasurer in the last election and amounts to little more than a “predictable stunt”. 

Reacting to the report, Chalmers said the report is a “powerful endorsement” of Australia’s economic and fiscal management.

“Economic growth is picking up, business investment is strengthening, unemployment is low, participation is at near record highs, real wages are growing, debt is down and the budget is stronger but we know there are big challenges too. We’ve made a lot of progress together on the economy but the job’s not done because inflation is too high and people are still under pressure.

“That’s why we continue to address inflation and roll out responsible cost of living relief at the same time as we modernise Australia’s economy.”