IMF: Three Pillars to Fixing the Australian Economy

Australia Economy

The commodity price slump hasn’t been kind to the world’s major exporters. As a key exporter of both iron ore and coal, Australia has seen revenues plunge since the rout took hold in 2012.

During the boom years, the value of mining exports more than doubled to $139 billion. But the recent price glut saw revenues decline by 10% during 2014–15. Yet we didn’t make the most of it.

Resource cycles come and go. The latest bust hit home for many last year when iron ore prices plunged from US$180 to US$60 a tonne.

The government failed us. Its inability to plan for this downturn is the cause of our ills today. It’s the reason why we sit on top of a $40 billion budget deficit…one that could balloon to over $100 billion in the next few years.

As The Daily Reckoning’s Greg Canavan noted in a recent report, the wealth created from the resource boom never trickled down to households. Instead, as he explains, most proceeds ended up offshore. As for the share of earnings we did see, the government made a mess of that too. We know this because households came out of the boom with massive debts.

Household liabilities doubled between 2000 and 2015. Liabilities blew out to 150% as a percentage of disposable income.

In light of all this, there’s been a lot of soul searching of late. Fixing both the budget, and the nation’s economic outlook, became top priority. So far, there are few palatable answers for fixing any of this. Of the solutions that exist, most are hard on taxpayers.

The International Monetary Fund (IMF) is the latest body to wade into this debate.

A recent report from the Fund, Fiscal Monitor, looked into the effects of the resource busts on economies. The IMF gauged the impact of it, across both emerging and developed economies. Not surprisingly, it found national budgets were left strained. The IMF notes:

The experience of the past several years has provided a stark reminder of the considerable uncertainty that resource-rich economies face and the implications this has for fiscal policy.

In many other countries, however, budgets are under stress. All commodity exporters will need to adjust public spending to lower commodity revenues, while safeguarding to the extent possible essential capital and social spending’.

Countries, from Chile to Norway, managed this transition better than Australia. Their savings rates were above 30%, helping to maintain high public spending levels today.

So what advice does the IMF have for Australia? Learn from the lost decade…

IMF suggests higher taxes

Hiking taxes is the kind of advice you’d expect to hear from policymakers. Save more. Make the budget more resilient. Shift more of the tax burden towards the GST tax. It’s all stock standard stuff. But it’s also a draconian playbook that shifts most of the burden onto taxpayers.

Whether we have any choice in this matter is irrelevant. Taxes will go up; it just depends on which taxes go up.

The IMF endorses the so called ‘broad based’ taxes. These are taxes which target everyone, rather than any specific socioeconomic group. The most obvious example of this is the goods and services tax.

The idea of raising the GST won’t come as news to you. Talking heads discuss it nonstop at all levels of society. You’ll also know there are plans afoot to raise the GST from 10% to 15%. More than that, it’s likely the tax base will broaden to cover things like education and health.

Yet it’s won’t be a hard sell. The budget deficit is widening, and the public knows this. People prefer taxes where they feel they have some control over things. Many will argue that taxing individual spending habits is more digestible. And there’s certainly truth to that.

Such a move could net Australia $20 billion extra in annual tax revenues. That’s roughly half the budget deficit reported for the latest financial year.

Compared with other nations, Australia’s GST rate remains low too. The OECD average for value-added taxes (or GST) is 19.5%. Countries with regressive tax codes, like Sweden, have VAT’s as high as 25%. In other words, the Aussie government has scope for hiking the GST over the coming years. And chances are they will.

Spending cuts aren’t always the answer

When you hear of ‘efficiency’ in spending, what comes to mind? If you’re like me, alarm bells start ringing. When major institutions use words like efficiency, you can take it to mean only one thing. Spending cuts.

In this case, the IMF endorses ‘efficiency’ in public investments, health and education. In other words, cuts to public investment. Cuts to healthcare spending. And cuts to education.

Slashing costs across health and education has obvious downsides, putting strain on these sectors.

Take healthcare for instance.

Australia’s expenditure on healthcare is low by international standards. The government, contrary to popular belief, doesn’t actually spend that much on healthcare. As a percentage of GDP, Australia’s outlay is the 10th lowest across 33 OECD countries. And it ranks as the lowest among wealthy nations.

Even the US spends more of its GDP on healthcare, at 8.3%, than Australia does (6.4% of GDP). And that is in a country where private healthcare is a far bigger industry than in it is here.

Save when the going is good

The IMF’s final suggestion for Australia is simple enough: save during the good times. How? By using sovereign wealth funds:

This saving has to strike the right balance between accumulating financial assets, investing in physical infrastructure, and investing in people through health and education spending.

Moreover, it is essential to start now… [to] deal with the uncertainty that lies ahead’.

Australia already has experience with sovereign funds. The Australian Government Future Fund had assets of $103 billion as of 2014. It was designed to fund future superannuation and public servant payments. But that fund has a purpose.

Accounting for commodity busts, which come irregularly and infrequently, makes less sense. From a political point of view, that’s money not being used to curry favour with taxpayers today.

If the IMF has figured out a way to convince governments to think about the long term, it should speak up. Governments think about their own skin, and only as far as the next election. Things like sovereign funds work when the economy is reaping vast revenues. As was the case during the boom years. But the good times have passed.

The question of how we manage this downturn is one of the most pressing issues facing the nation in decades. But it appears as if there’s no real answer to it. At least nothing that doesn’t require taking on higher taxes, spending cuts, or more debt.

As one of Australia’s leading investment analysts, Greg knows that we can only get by with rising debt levels for so long. Unfortunately, as he says, we’ve reached the end of the road.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why Australia faces an imminent recession this year. Unsurprisingly, rising household and government debt is a major reason for the coming downturn.

But there’s always a silver lining for those who can plan ahead of time. You can take actions right now to lessen the blows of the likely recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Mat Spasic,

Contributor, The Daily Reckoning


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