Australia: Staff Report for the 2017 Article IV Consultation

International Monetary Fund. Asia and Pacific Dept

doi:10.5089/9781484341827.002.A001

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Australia: Staff Report for the 2017 Article IV Consultation

Author: International Monetary Fund. Asia and Pacific Dept

Publication Date:: 20 Feb 2018

eISBN:: 9781484341827

Language:: English

Keywords:: ISCR; CR; center; IMF staff's projection; core inflation; headline inflation; housing investor loan; full employment; monetary policy; capital gain; IMF staff calculation; exchange rate; Housing prices; Housing; Infrastructure; Income; Global; Asia and Pacific

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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia

Context

1. Australia has enjoyed a comparatively robust economic performance while adjusting and rebalancing after the end of the large mining boom of the 2000s. Exchange rate flexibility and prompt monetary easing have moderated the adverse demand impacts of lower commodity prices after 2011 and the unwinding of the large mining investment boom of the 2000s, as have Australia’s export orientation to the dynamic Asia economies and its relatively high population growth supported by immigration. Nevertheless, as in many other advanced economies (AEs) since the Global Financial Crisis, the adjustment to the demand shocks has been protracted, with persistent economic slack, and average growth has been lower (Figure 1, top left chart). Nominal and real wage growth have declined, both reflecting and contributing to inflation being below the Reserve Bank of Australia’s (RBA’s) target range of 2 to 3 percent since 2014.

2. A housing boom has supported the adjustment, but has led to housing market imbalances and higher household vulnerabilities. House prices in the major eastern capital cities of Melbourne and Sydney have risen sharply over the past few years, driven by demand fundamentals, including lower interest rates, high population growth, and foreign investor interest, and amplified by legacy supply constraints. Standard metrics indicate house price overvaluation in the order of 5 to 15 percent at the national level, and household debt ratios are high by international comparison. Commercial banks’ housing exposure is substantial at over 50 percent of total assets.

3. Australia has benefited from China’s rapid growth and its growing middle class, but needs to lay the foundation for future growth. The country faces infrastructure gaps after more than a decade of rapid population growth and challenges from urbanization, and structural and regional shifts in the economy. While increased trade and commodity linkages with China have led to substantial income gains, productivity has been lagging. As in other advanced economies, securing future productivity growth in a more services-based economy while avoiding higher structural unemployment after protracted adjustment and further reducing gender imbalances in labor force participation are important policy challenges.

Recent Developments, Outlook, and Risks

A. Developments over the Past Year

4. The rebalancing after the mining boom advanced further despite setbacks from temporary factors, but domestic demand momentum is not yet broad-based.

Demand. While volatile, average quarterly growth over the past year was close to potential, with much of the volatility due to weather-related disruptions to construction, and mining activity and exports. Aggregate demand was led by strong public investment growth amid a boost in infrastructure spending and a long-awaited recovery in business investment. Private consumption growth, however, remained subdued, held back by weak real income growth, and residential investment declined while net exports contributed less to growth. At the State¹ level, final demand growth remained strong in the non-resource-led states and began to recover in the resource-led states.
Labor markets. Strengthening domestic demand was mirrored in strong employment growth in 2017, with declines in unemployment, which dropped to 5.4 percent in the third quarter, and, more recently and tentatively, underemployment. Despite declining labor market slack, annual nominal wage growth has remained weak, consistent with the experience of changes in this relationship in other AEs (Box 1). A 3.3 percent increase in the statutory national minimum wage in mid-2017, which directly affects about 20 percent of the employed and could indirectly affect another 5 percent, has not yet had a discernible impact on aggregate wage statistics.
Prices. Inflation increased over the past year, but is still slightly below the Reserve Bank of Australia (RBA) target range of 2-3 percent. A rebound in nontradable inflation was largely the result of one-off increases in utility prices and higher tobacco excise, although inflation rate for domestic market services also increased modestly. Tradable inflation declined, reflecting in part the real exchange rate appreciation over much of the year but also increased competition in some sectors, including in retail trade.²

5. With stronger terms of trade, the current account deficit narrowed substantially and is broadly in line with fundamentals and desired policies. The terms of trade improved more than expected, primarily because of higher world prices for coal and iron ore, and the trade balance moved into surplus in the year through 2017Q3 (Figure 2, top right chart).³ Some of the improvements in the terms of trade are likely temporary, and the underlying current account deficit is estimated to have narrowed by less than the headline number. These developments have resulted in a narrowing of the midpoint estimate of the current account gap in 2017 to −0.5 percent of GDP in the 2017 EBA Update, suggesting that the current account deficit is broadly in line with fundamentals and desirable policies (Annex I). The picture is less clear-cut on the exchange rate side, where some approaches suggest continued overvaluation. In Staff’s view, the exchange rate overvaluation is moderate.

6. The housing market is cooling in the eastern capitals and price increases moderated in real terms. A broad set of indicators, including lower housing approvals following a mid-2016 peak and a lower share of residential real estate sold through public auctions, suggest cooling market conditions, concentrated in inner-city apartments in the eastern capitals (Brisbane, and especially in Melbourne and Sydney) (Figure 3, bottom right chart). Much of the recent increase in residential construction has occurred in these markets. Across capitals, the cooling has been notable in Sydney where housing affordability is lowest and house prices declined slightly, while it has been moderate in Melbourne where population growth is still running at above 3 percent per year and where prices are still increasing.

7. Household credit growth slowed after another round of prudential tightening aimed at riskier loan categories. The Australian Prudential Regulation Authority (APRA) further strengthened lending standard requirements in late 2016 and in early 2017. The new requirements involve tighter restrictions on the origination of interest-only mortgage loans, and retaining the 10 percent cap on lending growth (annually) for investment properties. But at an annualized rate of around 5½ percent, credit to households continued to grow faster than their income, which increased at around 2 percent, and household debt ratios rose further through 2017. There is considerable variation in balance sheet health across households, although the most recent household income and wealth survey indicates that the share of households facing debt-to-income ratios of three or higher rose further across income quintiles.

B. Outlook

8. The recovery is expected to accelerate and gradually return to full employment, building on the momentum from the infrastructure investment boost.

Investment-driven acceleration to broaden. Growth is forecast to strengthen over the next few years. The boost from infrastructure investment should remain strong—New South Wales increased its spending in its mid-year budget update—and broaden domestic demand momentum. Mining investment is expected to bottom out and will not subtract from growth any longer, increasing at rates consistent with capital stock maintenance. The rebound in business and public investment is expected to outweigh softening residential investment and a small rebound in import growth from higher investment growth. Export growth should remain robust amid higher global growth, continued strong demand for Australia’s key commodities, especially in Asia, and demand for services by Asia’s growing middle class. Private consumption is expected to step up on the back of recent strong employment growth and, eventually, rising compensation.
Inflation is forecast to return to the midpoint of the target range within the next three years. With growth above potential, the output gap should gradually close and the economy will return to full employment, eventually leading to upward pressure on wages and prices. In the near term, though, disinflationary effects from stronger retail competition, recent real appreciation, and shelter costs slowing with house prices are forecast to weigh on inflation.
The baseline outlook assumes a soft landing in the housing market. Household credit and debt growth are forecast to align with that of household income as house price increases slow, reflecting a combination of increased supply after stronger residential investment and demand shifts toward renting, as rental rates have become relatively more attractive, and, eventually, higher interest rates. A sharp price correction is not forecast, given robust underlying demand from strong population growth and little evidence of a rising inventory of new residential units.

9. After declining over the past decade, potential output growth is projected to remain broadly stable. Staff has updated its estimates of potential output, implying a small downward revision in medium-term growth prospects. Potential output growth declined by some ¾ percentage points over 2007-16 and is estimated at 2½ percent in 2016. The decline was mainly driven by lower net migration and lower rates of capital accumulation. Both developments reflect adjustments to the end of the mining boom that are assumed to be completed. Trend total factor productivity (TFP) growth has picked up, reflecting primarily sector-specific dynamics in mining, and it is assumed to remain at recent rates.⁴

C. Risks

10. Risks to the near-term growth outlook are broadly balanced, but downside risks from housing-related vulnerabilities and their interaction with large negative shocks are a concern.

Over the past year, the near-term risk outlook has improved with more supportive macroeconomic policies and a stronger global outlook (Annex II).

Domestic risks. On the upside, and against the backdrop of stronger global growth and further increases in infrastructure investment, the pickup in non-mining business investment and domestic momentum could turn out stronger than it is currently expected. On the downside, private consumption growth could be weaker if improvements in household incomes turn out to be more gradual, or if a cooling housing market and high debt-to-income ratios lead to more risk aversion among consumers.
External risks. Unexpectedly tighter global financial conditions could flow through to domestic financial conditions and result in lower growth in business investment and other interest-sensitive components of demand in Australia, where cyclical conditions are lagging those in the major advanced economies. That said, the passthrough of external financial shocks might be small, depending on the underlying drivers. The correlation between term premium changes on U.S. government bonds to Australian governments bonds has generally been low, consistent with the insulation provided by exchange rate flexibility and monetary policy autonomy. Given strong trade and commodity linkages, Australia is strongly exposed to economic and financial risks in China. While exchange rate flexibility in the context of flexible inflation targeting provides for substantial cushioning, the impact on specific sectors and demand components could still be large (Box 2).
Housing risks. A large negative shock, most likely external, could interact with housing-related vulnerabilities and trigger a sharp house price correction (“hard landing”), leading to negative feedback loops between prices, household wealth and financial positions, lending capacity of the financial sector, and aggregate demand. Against the backdrop of some house price overvaluation, the housing market cooling could also be less benign than in the baseline projections.⁵ Such a scenario could entail a larger non-completion of large apartment projects already approved and tentatively pre-sold on deposit, lower dwelling investment, and a larger house price correction than under the baseline, with corresponding negative aggregate demand effects.
Potential growth. The authorities expect potential growth at around 2¾ percent, broadly consistent with Staff’s updated estimates, given the large fluctuations in TFP growth over the recent mining investment cycle. Risks to potential growth over the IMF’s 5-year projection horizon are two-sided. On the upside, the ongoing infrastructure investment push and cost control efforts in the mining sector could raise TFP growth more than expected. The government’s policy package to reduce gender gaps in labor force participation could result in higher labor supply, and higher business investment could raise capital stock and productivity growth, the latter because of new technology embodied in investment. Increased competition could also help, as related recommendations from the 2015 Competition Policy Review have been implemented (see below). On the downside, TFP gains might be more difficult to realize than expected in a more services-oriented economy.

D. Authorities’ Views on Outlook and Risks

11. The authorities expect the economy to expand at a solid pace, with a gradual pickup in growth. Non-mining investment growth has been stronger than previously thought, and labor market conditions have also strengthened considerably of late. Looking forward, average GDP growth is projected to strengthen gradually to 3 percent over the next few years. The ramp-up in LNG production following the final leg of the capacity expansion would contribute to growth in 2018-19; non-mining investment growth is forecast to increase, driven initially by the rise in infrastructure activity and favorable financing conditions, and, eventually, through the reinforcement from stronger economic activity more generally.

12. The risks to growth are assessed as balanced. On the external front, the authorities noted that the current expansion in the global economy could be more self-sustaining than expected, particularly if investment growth gained momentum, which would also lead to higher potential output growth. Meanwhile, the possibility of a hard landing in China remained a medium-term concern, while geopolitical tensions and increased global trade protectionism had become more prominent risks. Domestically, public infrastructure work could generate larger flow-on effects and boost private business investment more than forecast. On the downside, consumption growth could be weaker if households started viewing lower income growth as being more persistent.

Macroeconomic Policies to Ensure Return to Full Employment

Context

13. Australia’s rebalancing to non-mining based growth is not yet complete. While growth is forecast to be above potential by next year, it will likely take time for domestic demand momentum to broaden and for the economy to return to full employment. As in other advanced economies that have experienced drawn-out adjustment to shocks, widespread upward pressure on prices and wages are expected to develop only once the economy has operated at full employment for some time.

14. The macroeconomic policy stance has become more supportive with the infrastructure investment boost. The monetary policy stance is accommodative, with the current policy rate setting implying a real policy rate at zero relative to estimates of the real neutral long-term interest rate in the range of 1 to 2 percent (Figure 4, top right chart). Infrastructure spending at the Commonwealth and State levels has increased by an average of 0.5 percent of GDP annually over the next 4 years relative to the last Article IV Consultation (Figure 5, lower left chart).

Staff’s Views

15. Securing the return to full employment and inflation objectives will require continued macroeconomic policy support. While the case for ex-ante policy insurance against downside risks has weakened compared to the last Article IV Consultation, given the improved balance of risks to growth in the near term, a premature unwinding of policy support should equally be avoided, given current macroeconomic conditions and prospects.

16. The monetary policy stance should remain accommodative until stronger domestic demand growth and inflation are highly likely. The RBA has signaled that its policy stance is sufficiently accommodative for inflation to return gradually to the 2-3 percent target. Staff agrees on the benefits of being flexible about the monetary policy horizon, given uncertainty about the unwinding of recent temporary disinflation (lower oil prices, stronger retail competition, and a real appreciation), and given that inflation has developed broadly as expected over the past year. At the same time, with such uncertainty, the RBA should communicate its commitment to meeting inflation objectives under the circumstances, as well as the implications for the monetary stance. In the current environment, in which monetary policy normalization in some other advanced economies has begun, forward guidance could help in avoiding a market-induced premature tightening of monetary and financial conditions in Australia (Box 3).

17. The turn to a more supportive fiscal policy stance because of the national infrastructure investment boost is welcome. While the fiscal impulse based on the general government structural budget balance remains negative, it underestimates both the multiplier from the higher infrastructure spending and the amount of the increase in spending since the Commonwealth also provides equity injections into non-financial public corporations and targets public-private partnerships. In Staff’s assessment, the overall fiscal stance is expected to be broadly neutral in 2017 and 2018, allowing increased infrastructure investment to support the adjustment and economic rebalancing of the economy.

18. The Commonwealth budget repair strategy is appropriately anchored by medium-term budget balance targets, but it is vulnerable to lower nominal growth. Infrastructure spending relative to output will slightly decline in the next fiscal year, as the Commonwealth government remains committed to returning to a balanced budget by FY2020/21. The consolidation plan laid out in the FY2017/18 budget is consistent with strong growth, and is predicated on a rapid rebound of nominal growth to trend, leading to structural revenue and expenditure improvements because of income bracket creep for personal income tax collection and informal caps on real spending growth. The risk is that with a gradual recovery, the rebound to trend nominal growth might not be as rapid as forecast, posing risks to spending envelopes supporting macrostructural reforms, including infrastructure spending.

19. Australia has substantial fiscal space to absorb the risk from lower nominal growth and protect or, if needed, increase the spending envelopes for macrostructural reforms.

Standard metrics, including gross debt, suggest that Australia has fiscal space under both the baseline and economic stress scenarios (Annex IV). The envelopes include infrastructure investment (given Australia’s current infrastructure gap relative to its needs, Box 4) and, structural reforms supporting growth and productivity in the longer term, including on research and development (R&D).

Authorities’ Views

20. The RBA assessed its current monetary stance as appropriately accommodative. Under the baseline outlook, it would support a gradual return of inflation toward the midpoint of the target range, while employment growth would be robust. RBA officials expect that tighter labor markets will eventually lift wages and prices. In the meantime, strong employment growth should support household income and consumption growth even if wage growth is slow to rise. The RBA does not see a case for further easing under the baseline outlook to try to achieve a more rapid rise in inflation, as it would come with higher risks to financial stability. While macroprudential policies have helped to lower medium-term risks to financial stability from high and rising household debt, a renewed boost to household borrowing from lower policy rates would still be unhelpful.

21. The government continues with its budget repair strategy, including a focus on containing recurrent spending. Both Commonwealth and State governments have markedly increased infrastructure spending, including through funding from previous partial privatization (“asset recycling”), or by encouraging public-private partnerships. Infrastructure is understood to contribute to broader economic growth and productivity, and will not be a recurrent drain on finances. The Commonwealth has accordingly shifted its approaches to financing for new recurrent spending, such as the upcoming increase in the Medicare levy to meet the remaining financing needs of the National Disability Insurance Scheme, and by earmarked funding pools to be drawn down in the long term, as is the case for the new Skilling Australians Fund for job retraining. Consequently, the Treasury noted that the projected increases in the public debt ratios are attributable for the most part to productive investment.

Reducing Housing-Related Imbalances and Vulnerabilities

Context

22. With house price increases moderating, related imbalances and vulnerabilities in the eastern capitals are expected to stabilize but they are unlikely to decline soon. In the absence of a significant house price correction, a prospective reduction in imbalances and vulnerabilities will likely be driven by higher income growth, implying a slow decline in price-to-income or debt-to-income ratios.⁶

23. The authorities have pursued a multipronged approach to manage these imbalances and vulnerabilities.⁷ In Australia’s federal structure, the Commonwealth and State governments share responsibilities in policies influencing housing market outcomes. The eastern states’ efforts have focused on strengthening the supply response, through increased spending on infrastructure, which helps increase the supply of accessible and developable land, and through zoning and planning reforms (Annex III). With the FY2017/18 budget, the Commonwealth also supported these efforts. APRA has addressed risks to the banking system and household balance sheets from rising housing-related vulnerabilities through prudential policies.

24. On the demand side, the policies include measures that discriminate between residents and nonresidents and are designed to limit capital inflows, hence being classified as capital flow management measures (CFMs) under the IMF’s Institutional View. Victoria, New South Wales, and Queensland have levied stamp duty surcharges on non-resident buyers, while Victoria and New South Wales have also levied land tax surcharges on foreign residential property owners (see Table). At the Commonwealth level, the CFMs include limits on sales for foreign investors by developers (but not individual owners) and the withdrawal of the primary residency exemption from capital gain taxes of nonresident investors.

25. Australian banks have further strengthened their resilience to negative housing and other shocks in 2017 and improved their funding profile (Figure 6). The capital adequacy ratio of the Australian banking system rose by another 0.8 percentage points through 2017, reaching 14.6 percent by end-September, with 10.6 percent in the form of Common Equity Tier 1 (CET-1) capital. For the four large banks, CET-1 capital amounted to 10 percent of risk-weighted assets. The liquidity coverage ratio was comfortably above minimum requirements. By end-September, many banks already had Net Stable Funding Ratios (NSFR) above the 100 percent required from January 1, 2018.

Australia: Key Features of Property-related Measures Applying to Foreigners

Sources: Korean authorities; and IMF staff estimates and projections.

^{^1/}The amount is generally equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired.

Australia: Key Features of Property-related Measures Applying to Foreigners

				Rate
		Application	Introduction	Initial	Lst revision	Comments
National level
	Annual charge on foreign owners of under-utilized residential property (on vacant properties only)	Foreign owners	May 2017	Amount ^1/	…	…
	Prohibition of property developers to sell more than 50% of new residential housing developments to foreigners	Foreign buyers	May 2017	…	…	Unlikely to be a binding constraint
	Eliminating the main residence capital gains tax exemption, increasing the withholding tax rate and reducing the withholding threshold on capital gains	Foreign owners	May 2017	…	…	Improving the integrity of capital gains tax rules
Victoria
	Foreign purchaser additional duty (stamp duty)	Foreign buyers	Aug 2015	3%	7% in Jul 2016	…
	Land tax surcharge (on vacant properties only)	Foreign owners	Aug 2015		1.5% in Jan 2017	…
New South Wales
	Surcharge purchaser duty (stamp duty)	Foreign buyers	June 2016	4%	8%	…
	Land tax surcharge	Foreign owners	June 20Lo	0.75%	2% in June 2017	…
Queensland
	Additional foreign acquirer duty (stamp duty)	Foreign buyers	Aug 2016	3%	…	…

Sources: Korean authorities; and IMF staff estimates and projections.

^{^1/}The amount is generally equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired.

Australia: Key Features of Property-related Measures Applying to Foreigners

				Rate
		Application	Introduction	Initial	Lst revision	Comments
National level
	Annual charge on foreign owners of under-utilized residential property (on vacant properties only)	Foreign owners	May 2017	Amount ^1/	…	…
	Prohibition of property developers to sell more than 50% of new residential housing developments to foreigners	Foreign buyers	May 2017	…	…	Unlikely to be a binding constraint
	Eliminating the main residence capital gains tax exemption, increasing the withholding tax rate and reducing the withholding threshold on capital gains	Foreign owners	May 2017	…	…	Improving the integrity of capital gains tax rules
Victoria
	Foreign purchaser additional duty (stamp duty)	Foreign buyers	Aug 2015	3%	7% in Jul 2016	…
	Land tax surcharge (on vacant properties only)	Foreign owners	Aug 2015		1.5% in Jan 2017	…
New South Wales
	Surcharge purchaser duty (stamp duty)	Foreign buyers	June 2016	4%	8%	…
	Land tax surcharge	Foreign owners	June 20Lo	0.75%	2% in June 2017	…
Queensland
	Additional foreign acquirer duty (stamp duty)	Foreign buyers	Aug 2016	3%	…	…

Sources: Korean authorities; and IMF staff estimates and projections.

^{^1/}The amount is generally equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired.

Staff’s Views

26. The broad multipronged policy to addressing housing imbalances and vulnerabilities is appropriate, given their macroeconomic and financial stability repercussions. The risks to domestic financial stability have been addressed through prudential measures, including the tightening of bank lending standards, although risks from a housing market hard landing remain a concern. Mirroring the experience in other countries, the measures and the resulting credit supply shifts have not reduced demand-side incentives for real estate investment. Besides the return to full employment and higher incomes, improving housing affordability in the eastern capital cities will ultimately require a strong supply response and more effective use of land.

27. Supply-side measures remain critical, as housing-related imbalances and vulnerabilities need to be lowered also from a longer-term perspective. Legacy supply-demand imbalances in the eastern capital cities are narrowing after strong residential investment growth. Nevertheless, house prices are expected to remain high, reflecting higher land scarcity and expectations of robust future demand for additional housing in these cities, given continued relatively high population growth. As is typical for densely populated areas, the empirical evidence points to a long-term price elasticity of housing supply well below unity (Box 5). But the flipside of low housing affordability is the possibility of “spatial” or geographical misallocation of resources because labor and business might not be able to afford to move to urban areas where their productivity would be higher. This, in turn, could hold back aggregate productivity growth in the economy, given the significant share of the eastern capital cities in national economic activity. This underscores the need for continued efforts at fostering housing and land supply as the eastern capitals become even larger, including through streamlining development processes, continued strengthening of planning processes, and providing for growth in smaller urban areas.

28. The effectiveness of supply-side measures should be strengthened through tax reform. At the State level, a prime revenue source is stamp duties, which tax real estate transactions and discourage alternative uses of urban land at a time of adjustment to higher relative prices in the eastern capitals by household and firms. Stamp duties may also hamper labor mobility. At the Commonwealth level, preferential tax treatment of home ownership and investment (e.g., capital gain tax exemptions for owner-occupiers and a 50 percent capital gain tax discount for investment property owned for more than one year combined with few limits on negative gearing) favor residential real estate relative to many other investments, supporting higher demand and valuation relative to a counterfactual of no or lower tax preferences.

29. Replacing stamp duties by broader land taxes should be a priority. Replacing the stamp duties with a systematic land tax with fewer exemptions (e.g., no unlimited exemptions for owner-occupiers) could be done gradually and with deferral options, to make it palatable to States, given the importance of stamp duties as a revenue source, and to currently-exempt owner-occupiers.⁸ In addition, lower capital gains discounts and limits to negative gearing for investors and limits to capital gains tax exemptions of owner-occupiers are desirable. Such reform would lower incentives for leveraged real estate investment, but should consider broader tax parameters, including possible land tax reform, to avoid disruptive valuation changes in housing markets.

30. The role of foreign buyers in the house price run-up is difficult to quantify, but data point to a capital inflow surge in the eastern capitals’ housing markets during 2012-16. Foreign investment approvals data for residential real estate purchases—the only comprehensive source for data across time and market—suggest a marked increase in the interest of foreign buyers to acquire residential real estate in the eastern capitals from 2012, especially in Melbourne and Sydney but also in Brisbane (which, together, accounted for more than 90 percent of the increase in approvals).⁹ The surge in the demand for residential property mirrors that in commercial property, recorded in approvals data. The RBA estimates that one fourth of new apartments in the eastern capitals over the past few years were purchased by foreign buyers, and about 10 to 15 percent of transactions in newly-built residential property overall.

31. The use of CFMs to counter demand pressure from a capital inflow surge into housing has been consistent with the IMF’s Institutional View in most cases. The CFMs have not substituted for warranted macroeconomic policies. A tightening of the latter for greater regional housing market stability and affordability is not warranted under current cyclical conditions, as discussed in the previous section. The authorities’ policy response to the housing market imbalances has been broad and has addressed all domestic sources of upward pressure on house prices. The CFMs are assessed to complement those measures by reducing price pressure from foreign buyers as an interim tool before supply measures become effective. APRA’s prudential measures could not address the capital inflow surge into the housing markets of the eastern capitals through credit supply channels, given the reliance of many nonresident investors on foreign sources of finance. The CFMs were designed as price measures to discourage, but not ban, the acquisition of residential property (“demand”) by foreign buyers. However, less discriminatory alternatives would have been possible in the case of CFMs targeting vacant property—a general surcharge on all vacant property in urban settings would have been more appropriate, as externalities from prolonged vacancy arise irrespective of the residency of owners.

32. The housing CFMs should be reconsidered. CFMs should be replaced by alternative and effective nondiscriminatory measures where available. As for the others, their use has been appropriate, but they should be removed once the inflow surge abates. Anecdotally, purchases by foreign buyers have declined recently, and the housing market is expected to cool. The role of foreign buyers in the local housing markets should therefore diminish and the use of CFMs would no longer be appropriate. At the same time, the completion of implementation of the housing policy packages should also be considered, as discussed above.

33. The capital adequacy framework is appropriately being refined further, raising capital requirements and addressing the concentrated exposure to mortgages.¹⁰ In July, APRA issued a framework that clarified the capital requirements for Australian banks to be “unquestionably strong,” as suggested by the 2014 Financial Sector Inquiry. For the four major banks, which use internal risk rating models, the framework implies CET-1 capital ratios of at least 10.5 percent by January 1, 2020, some 1.5 percentage points above current requirements and some 0.5 percentage points above ratios in 2017Q3. After adjusting for stricter requirements in capital and risk weight calculations in Australia, APRA estimates that this would translate into substantially higher CET-1 capital ratios on an internationally comparable basis.¹¹ It is also preparing regulations to address the systemic risks from banks’ concentrated exposure to residential mortgages, by making capital requirements also a function of exposure concentration, within unchanged overall capital adequacy requirements.

Authorities’ Views

34. Responding to growing concerns about household balance sheets, property market risks and housing affordability, Australia has implemented a range of policies. The policies have involved domestically-oriented macroprudential policies and measures to promote housing supply, through higher infrastructure spending and reforms to zoning and other regulations. The authorities have been encouraged by recent developments in lending activity following macroprudential policy interventions of recent years. The quality of new mortgage lending assets has started to improve, helping to lowering medium-term risks to financial stability. Housing supply has increased substantially over the past few years, lowering the gap between underlying demand and supply and thereby contributing to moderating upward pressure on house prices. Further efforts were in train, however, and housing markets are widely expected to stabilize. While recognizing that demand-side policies might contribute to upward pressures, the authorities felt that recent measures have been more targeted (e.g., new home buyers).

35. Australia remains a strong supporter of open capital markets and a flexible exchange rate and sees policy measures that have implications for non-resident investors as part of the broad policy package to safeguard financial stability and promote housing affordability. In view of the reliance of many non-resident investors on foreign sources of finance, and Australia’s jurisdictional inability to regulate related lending practices of banks operating in foreign countries, Australia has chosen to implement a range of additional policy measures that impact individual nonresident investors, which complement and balance measures put in place that impact only on domestic investors. These measures seek to ensure that foreign investment in Australian residential property increases dwelling supply, consistent with Australia’s foreign investment framework. The measures are mostly price-based and do not ban foreign investment. Moreover, they have been calibrated such that they only impose a small additional cost on foreign investors. Other Commonwealth measures have been aimed at closing tax loopholes and ensuring that large-scale developments seek to meet broad demands, rather than catering exclusively to a narrow group only. Alternative measures that would been less discriminatory with respect to the residency of buyers would either have been less effective or introduced other distortions. Against this backdrop, the authorities did not think that their measures should qualify as CFMs since they were not designed with a view to reducing capital flows or to delay warranted macroeconomic adjustment.

36. The authorities agreed that reform of some real estate taxation could contribute to housing market stabilization, but only in the longer term. States recognize the benefits of shifting from stamp duties to broad-based land taxes for revenue stability, redevelopment of property, and to encourage labor mobility. They noted, however, any change would have to be gradual, given the important share of stamp duties in their revenue and given the additional burden on existing property owners. And politically, such reforms were sensitive, including because of the need to coordinate land taxes with local council property taxes. Because the latter element was not present, State officials think that the ongoing, gradual switch from stamp duties to land taxes in the Australian Capital Territory (ACT) is unlikely to be a role model. As for the reform of capital gain taxation on residential real estate, the authorities noted that changing related tax parameters could have large valuation implications, which could potentially involve destabilizing house price effects. Prudential measures were preferable to address risks to financial stability in the shorter term.

Fostering Long-Term Growth Opportunities

Context

37. Recent developments highlight Australia’s productivity challenge. Over the past few decades, Australia has maintained its relative per capita income position vis-à-vis the United States in purchasing power terms. Since the early 2000s, both productivity and terms-of-trade gains have contributed to this outcome. While, unlike in many other AEs, trend TFP growth in the aggregate did not decline, on average, over the past five to seven years, this outcome largely reflects sector-specific dynamics in mining. Many other sectors recorded lower average productivity growth, and, in a cross-country comparison, Australia’s recent productivity performance was below average among AEs (Figure 9, top left chart).

38. Recent structural policy efforts have focused on addressing infrastructure gaps, strengthening competition, and fostering R&D. As discussed above, both the Commonwealth and eastern state governments have increased their infrastructure spending envelope. Reforms to the competition law at the Commonwealth level, as proposed in the 2015 Competition Policy Review (the “Harper Review”), were enacted in November 2017, which should encourage more competitive behavior in the economy. The National Innovation and Science Agenda (NISA) seeks to strengthen R&D. In 2014, the government committed to reduce the gender gap in labor force participation by 25 percent by 2025 as part of the Brisbane Commitments in the G-20 process. Company tax reform has sought to reduce the statutory corporate income tax rate gradually from 30 to 25 percent. So far, only the rate reduction to 27½ percent over 5 years for small companies with a turnover of up to A$50 million has been legislated.

39. The 5-Year Productivity Review released in October 2017 proposes an updated agenda for structural reforms. In its inaugural Review, the Productivity Commission, an independent government advisory body, proposes structural reforms to improve outcomes in health and education, foster urban development, and improve regulation affecting market efficiency, including in network industries, and strengthen government effectiveness, including in intergovernmental relations in the context of a complex overlap over responsibilities. These proposals could define an extended structural reform agenda, adding to recent priorities. The Commission suggests that these proposals form a joint reform agenda endorsed by the Council of Australian Governments (COAG).

Staff’s Views

40. The structural reform agenda appropriately focuses on key structural gaps. The reform agenda addresses gaps in infrastructure, R&D, and female labor force participation, as identified in analyses and reviews, including by the Productivity Commission and the OECD. Funding envelopes are limited for some programs, however, notwithstanding scope for efficiency gains in delivery, and longer-dated funding envelopes would increase certainty for potential participants. The delivery of reform is complicated by the overlap in responsibilities between the Commonwealth and States.

41. Further infrastructure spending increases should be considered. The recent spending increases have narrowed the Australia’s infrastructure gap. While there is uncertainty about the magnitude of the gap, given model and estimation uncertainty, the increases do not seem large enough to close it. Further increases in infrastructure investment thus have the potential to improve physical and digital interconnectivity, both internally and with Australia’s trading partners, thereby contributing to higher growth. Locally, such increases would also contribute to increasing the supply of developable land and reducing risks of geographical resource misallocation. Staff estimates that closing the infrastructure gap would raise real GDP by as much as 0.7 percent in the long term (Box 4).

42. Reforms aimed at fostering innovation should be supported by longer-dated resource commitments, underpinning a longer-term vision. Australia’s R&D share of GDP lags other OECD members. But the relatively small-scale A$1.1 billion (0.06 percent of GDP) NISA is only funded through FY2018/19. A clear implementation of the upcoming 2030 Strategic Plan for the Australian Innovation, Science and Research System by defining the scope and funding of policy instruments would help strengthen the reach and magnitude from its possible positive productivity externalities.

43. Stronger labor market and education reforms would complement better infrastructure. Flexible labor markets have provided for a relatively smooth reallocation of labor after the mining boom, but there may be residual frictions (e.g., skill mismatches) that hinder the adjustment and labor force participation. Active labor market policies for labor force re-education and skills upgrades are currently funded at low levels (A$1.8 billion, about 0.1 percent of GDP). There are efforts to secure long-term funding, including through a levy proposed to maintain the Skilling Australians Fund. With the transition toward non-mining sources of growth, the education system should support the development of new sectors, at a rate commensurate with the needs of growing population and realistic projections of the efficiency gains that can be incentivized through funding cuts.

44. The government’s strategy to reduce gender gaps in labor force participation and representation in senior positions will lift potential output directly and indirectly. Over the past few decades, female labor force participation has been close to the median in AEs. Reducing the gender gap in labor force participation—around 12 percentage points in 2014—by one fourth would lift real GDP by about 1 percent through the labor supply effect. In addition, greater work place gender diversity would have dynamic indirect effects through increased trend TFP growth. The government presented its implementation plan for the strategy in 2017, planning to raise women’s participation through an integrated strategy that raises incentives for participation, through enhancing availability of child care, improving workplace diversity, promoting the skill base for better integration into jobs of the future and fast-growing technology-intensive sectors, and enhancing financial incentives, and awareness building. The Commonwealth government is setting the pace for greater female representation in senior positions, with every government agency required to set targets for gender equality in leadership positions and gender equity in the workplace since 2016.

45. A broad tax reform package would benefit productivity and reduce inequality. The government seeks to broaden the corporate tax reduction beyond small enterprises. With Australia being a capital importer, it is appropriately concerned about the international standing of corporate tax rates. Australia’s effective average corporate tax rates are currently in the upper third among advanced economies, but the international environment is evolving.¹² A more comprehensive tax reform has the potential to increase efficiency of the tax system, increase investment and labor demand, and reduce inequality.¹³ This would entail lowering taxes on income from mobile factors of production (capital and labor) and increasing reliance on taxes on immobile factors of production (land) and indirect taxes on consumption, undertaken in a revenue-neutral way. According to a comprehensive reform scenario outlined in Pitt (2015), such a reform could raise real GDP by at least 1.3 percent. Concerns about the regressive nature of higher taxes on consumption at a time of low wage growth could be addressed by broadening the base, reducing generous tax concessions (some of which are not means-tested or are limited), and revising the design of the income tax reform.

46. The structural reform agenda could also be rejuvenated by drawing on measures proposed in the 5-Year Productivity Review. These proposals could define new policy parameters, which could also increase certainty about policy directions for business investment decisions. These would also build upon the recently enacted legislative agenda of the Competition Policy Review at the Commonwealth level. At the State level, there are still further agreements needed to meet its recommendations.

Authorities’ Views

47. Jobs and growth remain the economic policy priority, and the authorities are seeking to reinforce structural reforms. The Treasury has established a new structural reform group that will collaborate on reform priorities, within the Commonwealth government and across different levels of government. With shared responsibilities, the latter is a constraint in Australia’s federal system. New measures are being undertaken at the Commonwealth level for infrastructure, education, reducing gender gaps, energy and innovation. The Government will also work with the recommendations from the Productivity Commission’s inaugural 5-Year Productivity Review.

48. The authorities continue to implement the reforms proposed in previous reviews and inquiries. Most of the Financial Services Inquiry recommendations have been implemented to sustain a productive financial sector. The Commonwealth recently enacted important competition law reforms recommended by the Competition Policy Review, although States still have other microeconomic reform measures to implement, a subject of ongoing discussions in the COAG. The latter is also involved in implementing the recommendations of the Independent Review into the Future Security of the National Electricity Market (the “Finkel Report”), in tandem with a new framework—the National Energy Guarantee (NEG)—to ensure the reliability and security of the National Electricity Market (NEM), and to meet carbon emissions targets from the Paris Agreement.

49. The Commonwealth is continuing its commitment to encouraging innovation, although it is in the process of developing a new framework. The Commonwealth will let the existing NISA continue until and wind down by FY2018/19, and maintain some of the programs started under its aegis. It will use the upcoming release of the 2030 Strategic Plan for the Australian Innovation, Science and Research System to frame a new process going forward to encourage innovation.

50. The authorities agree with the merit of tax reform. The Commonwealth government continues to push for corporate tax cuts for all companies. The first tranche of this reform, which applies the lower rate to companies with turnover up to A$50 million, has already been legislated. Legislation for the remainder of the company tax cuts is before the Parliament. The way in which GST is used for fiscal equalization is also under review, with the possibility of reform to encourage more stable funding for States.

Staff Appraisal

51. Australia’s recovery from the end of the mining boom has advanced further in 2017 but is not yet complete. An infrastructure investment push has contributed to domestic momentum, and private business investment has picked up. Employment growth has thus strengthened markedly and unemployment has moderated further. But wage growth is weak, and private consumption growth has been subdued. Inflation outcomes remain below the midpoint of the Reserve Bank of Australia’s 2 to 3 percent target range. The external position is broadly consistent with medium-term fundamentals and desirable policies.

52. Conditions are in place for a pickup in economic growth to above-trend rates and further declines in economic slack. A stronger global outlook, recent stronger employment growth, and continued strong contributions from infrastructure investment are driving the growth pickup, with positive spillovers to private investment and the rest of the economy, more than offsetting the impact of slowing dwelling investment growth. But household consumption and real wages are expected to pick up later. Upward pressure on prices and wages should start once the economy has been at full employment for some time.

53. Continued macroeconomic policy support will be essential until stronger domestic demand momentum and inflation close to the target range midpoint are secured. With a pickup in public investment, the overall fiscal stance is expected to be broadly neutral in 2017 and 2018, contributing to a welcome rebalancing to a more supportive macroeconomic policy mix. With the cash rate at 1.5 percent, monetary policy remains appropriately accommodative. With Australia’s recovery lagging that of other major advanced economies, monetary policy should remain firmly focused on securing the domestic recovery.

54. The Commonwealth government’s budget repair strategy is appropriately anchored by medium-term budget balance targets. The strategy is predicated on a rapid rebound of nominal growth to trend, leading to structural revenue and expenditure improvements. The risk is that with a gradual recovery, the rebound to trend might not be as quick as expected. Australia has substantial fiscal space to absorb this risk and protect or, if needed, increase the spending envelopes for infrastructure investment, structural reforms supporting trend growth and productivity.

55. Australia has monetary and fiscal policy space to respond if downside risks to growth should materialize. The near-term balance of risks has improved, with both upside and downside risks to the recovery, but large external shocks, including their interaction with the domestic housing markets and high household debt, remain a concern. Australia is also particularly exposed to downside risk from China through its trade links in commodities and services.

56. Household vulnerabilities imbalances are unlikely to be corrected soon, even with a soft landing of the housing market. With continued strong population growth, demand growth for housing is expected to remain robust, and, in the absence of a large inventory of vacant properties, prices should stabilize, rather than fall significantly. Declines in household debt-to-income ratios would thus need to be driven by strong nominal income growth and amortization.

57. Supply-side policies will remain critical to manage housing affordability and risks, given continued demand for more urban space and should be complemented by tax reform. The broad set of measures at the State and Commonwealth levels to strengthen the housing supply response should be fully implemented, including reforms to rationalizing planning and zoning that further promote efficient use of land in denser urban settings. The States’ stamp duty tax regimes are inefficient and should be replaced with a systematic land tax regime applying to all residential and commercial properties. The capital gains discounts on housing should be reduced and other tax incentives limited. The housing CFMs should be reconsidered. Alternative, effective measures that do not discriminate between residents and nonresidents should be implemented where feasible (i.e., on vacant properties), and the rest of the CFMs should be phased out once the capital inflow surge into the housing market abates.

58. The structural reform agenda appropriately focuses on fostering productivity and strengthening labor force skills and composition but would benefit from new momentum. The increase in infrastructure spending has provided for a welcome catch-up with needs after a decade of strong population growth. Strengthening trend TFP growth through a stronger innovation system, labor force skills upgrades, and reduced gender imbalances is critical, and related programs should be underpinned by longer-term strategies and longer-dated resource commitments. The reform agenda should be rejuvenated by drawing on the structural reforms proposed in the inaugural 5-Year Productivity Review.

59. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Box 1.

Australia’s Wage Dynamics in International Comparisons

In Australia, like in virtually all advanced economies, nominal wage growth has declined since the Global Financial Crisis. A comparison based on Chapter 2 in the IMF’s October 2017 World Economic Outlook suggests that average annual wage growth in Australia declined from close to 6 percent in 2007 to about 1 percent in 2016, exceeding the median decline in advanced economies (AEs) by a substantial margin (left chart).¹

The common set of macroeconomic and structural factors identified in IMF (2017) can explain much of the weak nominal wage growth in Australia and other AEs.²

Economic slack. Despite recent improvements, increased labor market slack since the Global Financial Crisis has reduced wage growth. While the unemployment rate did not rise much in Australia and declined since early 2016, this measure underestimates the extent of slack. As in many other AEs, underemployment—people working fewer hours than desired—has also increased and still is above prerecession levels.
Inflation expectations. Nominal wage growth is influenced by recent inflation outcomes and inflation expectations. The lower inflation rates over the past few years have translated into lower nominal wage growth also in Australia, as reflected in the declines of the average size and frequency of wage increases (Bishop and Cassidy, 2017).
Labor productivity growth. Declining trend labor productivity growth in many AEs has also been another factor behind declining wage growth. In Australia, however, mining-related development have resulted in different productivity dynamics. Labor productivity has increased since the end of the mining boom.
Structural factors. Technological change, globalization of production processes, and changes in labor market institutions (e.g., lower worker bargaining power) have also contributed to lower wages.

Some country-specific factors need to be considered to understand the large decline in Australia’s wage growth. Australia benefited from sharply higher commodity prices before the Global Financial Crisis, and producer prices and wages were rising rapidly, unlike in most other AEs. Since the end of the mining boom, the economy has been rebalancing toward other sources of growth, with large compositional changes in labor markets, including employees moving from higher paid, mining-related job to lower paid jobs in other sectors, especially in services. The latter also accounted for much of the increase in female labor force participation in recent years. This labor market adjustment has contributed to the large decline in the wage growth measure shown in the left chart above. A wage measure that is not affected by such compositional change shows relatively smaller wage declines (right chart). Lastly, the recent modest appreciation of the real effective exchange rate may have also put downward pressure on wages with increased international competition in some sectors.

Tighter labor market conditions should eventually result in stronger wage growth in Australia. The country’s recovery is lagging that in other advanced economies, as its economy is adjusting to the negative demand effects from the end of the mining investment boom and lower commodity prices.

¹ IMF, 2017, “Recent Wage Dynamics in Advanced Economies: Drivers and Implications”, October 2017 World Economic Outlook, Chapter 2. The wage measures are based on compensation per hour, using national accounts data.² The Australian Treasury, 2017, “Analysis of Wage Growth”; and Bishop, and Cassidy, 2017, “Insights into Low Wage Growth in Australia”, RBA, Reserve Bank of Australia Bulletin (March) provide Australia-specific analyses.

Box 2.

Australia’s Linkages with China: Adjusting to Risks

China and Australia have increasingly strong linkages, especially through trade and commodity channels.¹ These are driven by demand from China for commodities such as coal and iron ore, or services such as tourism and education, of which Australia is a major supplier.

During China’s transition, both upside and downside risks may lead to rebalancing in Australia that dampens the overall impact. Scenario analysis suggests that real GDP often moves very little if a shock materializes. With Australia’s fully floating exchange rate regime, the economy can rebalance along two demand dimensions – between domestic and external demand, and between trade with China and the rest of Asia (and the world). On the supply side, production can rebalance across sectors after most shocks.

A disorderly rebalancing scenario in China illustrates the complexity of the linkages. Using the IMF’s ANZIMF (Australia-New Zealand Integrated Monetary and Fiscal model), China experiences a broad-based slowdown in growth under the scenario.² China’s real GDP is 10 percent lower after 10 years, because of a downward revision in its expected future path for productivity (leading to an appreciation of its REER, and a contraction of its exports), weaker imports and activity in the steel industry (with knock-on effects for demand for iron ore and coking coal), a decline in the housing market, and increased corporate risk.

The implications for Australia vary across sectors. While Australia’s net commodity and services exports to China fall permanently, the Australian REER depreciates, and exports to the rest of Asia (and the world) increase. This more than offsets some of the negative effects of lower exports to China; on net, services exports are appreciably stronger. On the other hand, the depreciation and loss of commodity wealth leads to weaker consumption and therefore imports. These movements in the components of aggregate demand lead to broadly offsetting effects on real GDP, which increases slightly (almost 0.4 percent) in the long term.

For the rest of Asia, there are two competing effects which allow for Australia to benefit on net. The first (negative) effect is lower Chinese demand for goods. The second (positive) effect is the large decline in global commodities prices because of China, which encourages demand for commodities and stimulates GDP in most of the rest Asia as net commodity importers. Other net commodity importers also benefit, with positive spillovers for the rest of Asia.

These relatively benign overall effects are conditional on a lack of financial contagion from China, or existing resilient financial sectors which can withstand a contraction in China’s financial sector. A scenario with substantial financial turmoil would dampen an otherwise optimistic outcome for Australia and the rest of Asia.

¹ Further details can be found in the accompanying Selected Issues Paper, Karam and Muir, 2018, “Australia’s Linkages with China: Prospects and Ramifications of China’s Economic Transition.”² ANZIMF is a specialized version of the IMF’s Global Integrated Monetary and Fiscal model (GIMF) that includes trade and production of consumer services (tourism and education) and commodities (coal, iron ore, other metals).

Box 3.

Forward Guidance Under Current Conditions

A baseline forecast with confidence bands, based on a prudent risk-management strategy to monetary policy is provided in the attached figure.¹ The path of the policy rate is derived by minimizing a loss function which places equal weights on output gap and inflation deviations, rather than a path produced based on a standard linear reaction function.² The scenario is based on assumptions of a modest expansion of the world economy going forward and some policy tightening by the U.S. Fed, with initial conditions reflecting Australia’s economic conditions as of 2017Q3.

In the baseline, the RBA would plan to keep the policy rate at its current level for about a year before raising rates gradually over time. This would eliminate slack fairly quickly by keeping nominal and real interest rates in an accommodative stance for an extended period of time. Headline inflation moves back to the 2.5 percent midpoint of the target range by 2020Q1.

The logic for not raising the policy rate is the risk of a premature tightening in financial conditions that would hamper the modest recovery. In this, as in other difficult situations, publication of all key aspects of a complete macroeconomic forecast, including the conditional interest rate path, would help the central bank give a credible public account of its intentions and strategies and minimize market mispricing or misinterpreting those intentions.

The RBA would not be committed to following this policy rate path, but would instead be prepared to adjust the policy rate path in response to new information that results in revisions in its forecasts. This is illustrated in the figure by confidence bands around the baseline forecast. If demand conditions were to end up being stronger than in the baseline, inflation would end up being higher and would call for a steeper path in the future policy rate. To emphasize that the central bank is not committed to a specific policy rate path, it could simply publish the bands without the modal baseline forecast (the red line) for the policy rate over the forecast horizon.

¹ The baseline is illustrative and does not necessarily reflect the final baseline adopted by Staff in this Report.² See Obstfeld and others (2016) for a comparison of the loss-minimization approach and the standard linear interest rate reaction function applied to the case of Canada. See also Helbling and others (2017) for an application to Australia.

Box 4.

Australia’s Infrastructure Gap and Fiscal Policy

Commonwealth and State governments have increased spending on infrastructure. The concerted effort aims to address the infrastructure gaps that have been identified in Australia. According to analysis published by the Global Infrastructure Hub, Australia is facing an annual shortfall of almost 0.4 percent of GDP on infrastructure investment in transportation, telecommunications, electricity and water services, translating into a cumulative gap of 10 percent of GDP by 2040.¹

Real GDP gains from closing the gap

(Percent of GDP, deviation from baseline)

Source: IMF staff calculations.

^{^1/}Using Deficit or tax financing or PPP funding.

^{^2/}Using Deficit financing and/or PPP funding.

There are important benefits to closing the infrastructure investment gap for Australia by 2040. Estimated long-term gains (from an IMF DSGE model) range from 0.5 to 0.7 percent of real GDP.² The gains are higher with deficit financing or public-private partnership (PPP) agreements. Here, most of the costs and risks of the PPP are borne by the private sector, so its GDP gains are an upper bound.³ Tax financing (PIT and/or GST) would offset almost one third of the long-term gains.

Using the closure of the gap as a fiscal policy instrument can yield greater short-term gains. If the gap were to be closed instead by 2027, short-term GDP gains would be twice as much until 2027, shortly after which real GDP would reach its new long-term level.

¹ The Global Infrastructure Hub is a new initiative of the G-20. Its prime output is the quantification of infrastructure investment gaps for over 50 countries, including Australia. The results published in its 2017 joint work with Oxford Economics as Global Infrastructure Outlook: Infrastructure Investment Needs, 50 Countries, 7 Sectors to 2040.² Further details can be found in the accompanying Selected Issues Paper, Muir, 2018, “Infrastructure Investment in Australia: Gaps and Multiplier Effects.”³ For more on the issue of fiscal risks from PPPs see Corbacho and Schwartz, 2008, “PPPs and Fiscal Risks: Should Governments Worry? “in Schwartz, Corbacho and Funke (eds.) Public Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks, New York: Palgrave Macmillan.

Box 5.

Australia’s Housing Boom¹

Australia’s housing boom of the past six years has primarily been a regional housing boom, concentrated in Sydney and Melbourne. Much of the increase in the average real price of existing houses in the 8 capital cities has been driven by prices in the two major eastern metropolitan areas. This suggests that local factors have influenced the price dynamics. On the demand side, the metropolitan areas of Sydney and Melbourne have seen stronger growth in economic activity—they accounted for two-thirds of national GDP growth in 2015-16—and they have registered population growth at around twice the national rate of 1.5 percent, reflecting the geographic shifts in activity and resource allocation after the end of the mining boom. Both cities have also seen growing foreign investor interest, particularly from the dynamic economies in eastern Asia.

The price dynamics in Sydney and Melbourne have also been amplified driven by supply constraints. Sydney already faced a housing shortage when the boom began, reflecting zoning restrictions aiming to limit city growth. Empirical research by Staff suggests that the housing supply elasticity (the elasticity of residential investment with respect to real house prices) in Australia is low in international comparison. Estimates of a standard supply equation yield an average elasticity of about 0.56 at the national level. In the United States, in comparison, the elasticity is well above unity. At the regional level, the supply elasticities in Sydney and Melbourne are estimated at 0.21 and 0.61, respectively.

¹ See the accompanying Selected Issues Paper, Helbling and Li, 2018, “Housing Market Imbalances in Australia: Developments, Prospects, and Policies.”

Table 1.

Australia: Main Economic Indicators, 2013-2023

(Annual percent change, unless otherwise indicated)

Sources: Authorities’ data; IMF World Economic Outlook database; and IMF staff estimates and projections.

^{^1/}Reflects the national accounts measure of household debt, including to the financial sector, state and federal governments and foreign overseas banks and governments. It also includes other accounts payable to these sectors and a range of other smaller entities including pension funds.

^{^2/}Calendar year.

Table 1.

Australia: Main Economic Indicators, 2013-2023

(Annual percent change, unless otherwise indicated)

					2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
									Est.			Projections
NATIONAL ACCOUNTS
Real GDP					2.2	2.6	2.5	2.6	2.2	2.9	3.1	2.9	2.7	2.7	2.6
		Domestic demand			0.8	0.9	1.2	1.8	2.6	2.7	2.8	2.7	2.9	2.7	2.6
			Private consumption		1.8	2.5	2.4	2.8	2.1	2.4	2.8	2.8	2.8	2.8	2.8
			Public consumption		1.5	0.1	4.5	4.1	3.3	2.1	2.2	2.2	2.1	1.9	1.8
			Investment		−1.7	−2.0	−3.6	−2.1	3.1	3.9	3.1	3.0	2.9	2.8	2.6
				Public	−11.1	−3.0	−2.2	13.6	10.0	6.4	2.2	0.3	0.0	0.0	0.0
				Private business	−1.3	−6.1	−9.6	−11.4	2.7	4.5	4.5	5.0	4.8	4.5	4.2
				Dwelling	3.5	9.9	9.6	8.6	−2.3	1.2	1.5	1.5	1.5	1.4	1.3
		Net exports (contribution to growth, percentage points)			1.5	1.5	0.8	1.2	−0.6	0.1	0.3	0.1	0.0	0.0	0.0
Gross domestic income					1.3	1.0	−0.1	2.7	4.5	1.7	2.8	2.5	2.5	2.6	2.5
Investment (percent of GDP)					27.0	26.3	25.8	24.6	24.4	25.0	25.0	25.0	25.1	25.0	24.9
		Public			4.6	4.4	4.4	4.8	5.0	5.4	5.3	5.2	5.1	4.9	4.8
		Private			22.5	21.9	21.3	19.7	19.1	19.6	19.6	19.7	19.9	20.0	20.0
		Mining investment			8.5	7.2	5.5	4.0	3.0	3.0	2.6	2.6	2.6	2.6	2.6
		Non-mining investment			14.0	14.7	15.8	15.7	16.1	16.6	17.0	17.1	17.3	17.4	17.4
Savings (gross, percent of GDP)					23.7	23.1	21.5	21.0	22.0	22.6	22.6	22.4	22.5	22.4	22.4
Potential output					2.8	2.7	2.6	2.5	2.5	2.6	2.6	2.6	2.6	2.6	2.6
Output gap (percent of potential)					−0.7	−0.9	−1.0	−0.9	−1.2	−0.9	−0.4	−0.1	0.0	0.0	0.0
LABOR MARKET
Employment					1.0	0.7	2.0	1.7	2.0	2.0	1.9	1.9	1.7	1.7	1.7
Unemployment (percent of labor force)					5.7	6.1	6.1	5.7	5.6	5.3	5.2	5.0	5.0	5.0	5.0
Wages (nominal percent change)					2.9	2.5	2.1	1.9	1.9	2.3	2.3	2.5	2.8	2.9	2.9
PRICES
Terms of trade index (goods, avg)					131	121	106	105	119	110	108	106	105	104	104
			% change		−3.5	−8.0	−12.4	−0.2	12.7	−7.4	−1.8	−1.8	−1.2	−0.4	−0.5
	Iron ore prices (index)				107	77	44	46	56	51	48	45	45	45	45
		Coal prices (index)			97	81	67	75	101	105	97	94	94	94	94
		.NG prices (index)			97	95	61	42	40	52	52	52	52	52	52
		Crude prices (Brent; index)			100	91	48	40	50	56	54	53	52	52	52
Consumer prices (avg)					2.5	2.5	1.5	1.3	1.9	2.1	2.2	2.3	2.5	2.5	2.5
	Core consumer prices (avg)				2.4	2.6	2.3	1.7	1.7	1.8	2.1	2.3	2.5	2.5	2.5
GDP deflator (avg)					1.3	0.4	−0.8	1.1	3.3	1.3	1.8	2.0	2.3	2.6	2.9
FINANCIAL
Reserve Bank of Australia cash rate (percent, avg)					2.7	2.5	2.1	1.7	1.5	1.6	2.0	2.5	3.0	3.4	3.5
10-year treasury bond yield (percent, avg)					3.7	3.7	2.7	2.3	2.7	2.9	3.2	3.7	4.1	4.4	4.4
Mortgage lending rate (percent, avg)					6.2	6.0	5.6	5.4	5.1	5.4	5.9	6.4	6.9	7.1	7.1
MACRO-FINANCIAL
Credit to the private sector					5.9	7.4	8.1	7.0	5.6	6.6	4.9	4.5	4.3	3.6	3.6
		To households			6.6	7.3	7.7	6.8	6.4	6.2	4.9	4.1	3.6	2.7	2.6
		To business			3.0	5.2	8.0	6.0	4.3	7.2	4.9	5.0	5.2	5.0	5.0
House price index					113	120	131	140	149	158	166	172	179	183	188
		% change			10.0	6.7	8.7	6.9	6.4	6.2	4.9	4.1	3.6	2.7	2.6
House price-to-income, capital cities (ratio)					4.2	4.2	4.5	4.7	4.9	4.9	4.8	4.8	4.7	4.6	4.4
Interest payments (percent of disposable income)					8.8	8.8	8.6	8.2	8.3	8.9	9.6	10.5	10.4	10.8	10.8
Household savings (percent of disposable income)					6.6	7.0	6.0	4.6	3.5	4.9	5.6	6.3	6.3	6.2	5.9
Household debt (percent of disposable income) ^1/					171	175	183	188	195	196	192	190	189	188	188
Business credit (percent of GDP)					48	48	51	52	51	53	52	53	53	52	52
GENERAL GOVERNMENT (percent of GDP) ^2/
Revenue					33.8	34.0	34.6	34.8	34.8	35.2	35.3	35.6	35.7	35.7	35.7
Expenditure					36.6	36.9	37.4	37.5	37.0	37.0	36.4	35.7	35.4	35.4	35.4
Net lending/borrowing					−2.8	−2.9	−2.8	−2.7	−2.2	−1.8	−1.1	−0.1	0.3	0.3	0.3
Operating balance					−1.5	−1.6	−1.5	−1.3	−0.9	−0.3	0.5	1.2	1.5	1.5	1.5
Cyclically adjusted balance					−2.5	−2.5	−2.4	−2.2	−1.7	−1.4	−0.9	0.0	0.3	0.3	0.3
Gross debt					30.6	34.1	37.8	41.0	42.6	43.4	42.9	40.6	38.1	36.2	34.3
Net debt					13.1	15.5	17.8	19.5	20.0	20.6	20.3	19.0	17.4	15.8	14.2
Net worth					53.7	52.1	49.3	50.3	53.1	52.9	52.6	53.0	52.8	52.1	51.2
BALANCE OF PAYMENTS
Current account (percent of GDP)					−3.4	−3.1	−4.7	−2.9	−1.9	−2.5	−2.5	−2.6	−2.5	−2.6	−2.5
Export volume					5.8	6.9	6.5	6.8	5.1	6.8	7.4	6.7	5.8	5.7	5.6
Import volume					−2.0	−1.4	1.9	0.2	7.6	5.8	5.6	5.8	5.3	5.4	5.3
Net international investment position (percent of GDP)					−53	−53	−57	−58	−54	−54	−54	−54	−54	−54	−54
Gross official reserves (bn US$)					59	66	67	76	…	…	…	…	…	…	…
MEMORANDUM ITEMS
Nominal GDP (bn A$)					1,565	1,612	1,638	1,700	1,795	1,871	1,964	2,061	2,165	2,280	2,406
		Percent change			3.5	3.0	1.6	3.8	5.6	4.2	5.0	4.9	5.1	5.3	5.5
Real net national disposable income per capita (% change )					−1.0	−0.8	−2.1	1.7	2.6	0.0	0.8	0.3	0.5	0.3	0.2
Population (million)					23.3	23.7	24.0	24.4	24.8	25.1	25.5	25.9	26.3	26.7	27.2
Nominal effective exchange rate					105	99	92	92	…	…	…	…	…	…	…
Real effective exchange rate					105	100	93	93	…	…	…	…	…	…	…

Sources: Authorities’ data; IMF World Economic Outlook database; and IMF staff estimates and projections.

^{^2/}Calendar year.

Table 1.

Australia: Main Economic Indicators, 2013-2023

(Annual percent change, unless otherwise indicated)

					2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
									Est.			Projections
NATIONAL ACCOUNTS
Real GDP					2.2	2.6	2.5	2.6	2.2	2.9	3.1	2.9	2.7	2.7	2.6
		Domestic demand			0.8	0.9	1.2	1.8	2.6	2.7	2.8	2.7	2.9	2.7	2.6
			Private consumption		1.8	2.5	2.4	2.8	2.1	2.4	2.8	2.8	2.8	2.8	2.8
			Public consumption		1.5	0.1	4.5	4.1	3.3	2.1	2.2	2.2	2.1	1.9	1.8
			Investment		−1.7	−2.0	−3.6	−2.1	3.1	3.9	3.1	3.0	2.9	2.8	2.6
				Public	−11.1	−3.0	−2.2	13.6	10.0	6.4	2.2	0.3	0.0	0.0	0.0
				Private business	−1.3	−6.1	−9.6	−11.4	2.7	4.5	4.5	5.0	4.8	4.5	4.2
				Dwelling	3.5	9.9	9.6	8.6	−2.3	1.2	1.5	1.5	1.5	1.4	1.3
		Net exports (contribution to growth, percentage points)			1.5	1.5	0.8	1.2	−0.6	0.1	0.3	0.1	0.0	0.0	0.0
Gross domestic income					1.3	1.0	−0.1	2.7	4.5	1.7	2.8	2.5	2.5	2.6	2.5
Investment (percent of GDP)					27.0	26.3	25.8	24.6	24.4	25.0	25.0	25.0	25.1	25.0	24.9
		Public			4.6	4.4	4.4	4.8	5.0	5.4	5.3	5.2	5.1	4.9	4.8
		Private			22.5	21.9	21.3	19.7	19.1	19.6	19.6	19.7	19.9	20.0	20.0
		Mining investment			8.5	7.2	5.5	4.0	3.0	3.0	2.6	2.6	2.6	2.6	2.6
		Non-mining investment			14.0	14.7	15.8	15.7	16.1	16.6	17.0	17.1	17.3	17.4	17.4
Savings (gross, percent of GDP)					23.7	23.1	21.5	21.0	22.0	22.6	22.6	22.4	22.5	22.4	22.4
Potential output					2.8	2.7	2.6	2.5	2.5	2.6	2.6	2.6	2.6	2.6	2.6
Output gap (percent of potential)					−0.7	−0.9	−1.0	−0.9	−1.2	−0.9	−0.4	−0.1	0.0	0.0	0.0
LABOR MARKET
Employment					1.0	0.7	2.0	1.7	2.0	2.0	1.9	1.9	1.7	1.7	1.7
Unemployment (percent of labor force)					5.7	6.1	6.1	5.7	5.6	5.3	5.2	5.0	5.0	5.0	5.0
Wages (nominal percent change)					2.9	2.5	2.1	1.9	1.9	2.3	2.3	2.5	2.8	2.9	2.9
PRICES
Terms of trade index (goods, avg)					131	121	106	105	119	110	108	106	105	104	104
			% change		−3.5	−8.0	−12.4	−0.2	12.7	−7.4	−1.8	−1.8	−1.2	−0.4	−0.5
	Iron ore prices (index)				107	77	44	46	56	51	48	45	45	45	45
		Coal prices (index)			97	81	67	75	101	105	97	94	94	94	94
		.NG prices (index)			97	95	61	42	40	52	52	52	52	52	52
		Crude prices (Brent; index)			100	91	48	40	50	56	54	53	52	52	52
Consumer prices (avg)					2.5	2.5	1.5	1.3	1.9	2.1	2.2	2.3	2.5	2.5	2.5
	Core consumer prices (avg)				2.4	2.6	2.3	1.7	1.7	1.8	2.1	2.3	2.5	2.5	2.5
GDP deflator (avg)					1.3	0.4	−0.8	1.1	3.3	1.3	1.8	2.0	2.3	2.6	2.9
FINANCIAL
Reserve Bank of Australia cash rate (percent, avg)					2.7	2.5	2.1	1.7	1.5	1.6	2.0	2.5	3.0	3.4	3.5
10-year treasury bond yield (percent, avg)					3.7	3.7	2.7	2.3	2.7	2.9	3.2	3.7	4.1	4.4	4.4
Mortgage lending rate (percent, avg)					6.2	6.0	5.6	5.4	5.1	5.4	5.9	6.4	6.9	7.1	7.1
MACRO-FINANCIAL
Credit to the private sector					5.9	7.4	8.1	7.0	5.6	6.6	4.9	4.5	4.3	3.6	3.6
		To households			6.6	7.3	7.7	6.8	6.4	6.2	4.9	4.1	3.6	2.7	2.6
		To business			3.0	5.2	8.0	6.0	4.3	7.2	4.9	5.0	5.2	5.0	5.0
House price index					113	120	131	140	149	158	166	172	179	183	188
		% change			10.0	6.7	8.7	6.9	6.4	6.2	4.9	4.1	3.6	2.7	2.6
House price-to-income, capital cities (ratio)					4.2	4.2	4.5	4.7	4.9	4.9	4.8	4.8	4.7	4.6	4.4
Interest payments (percent of disposable income)					8.8	8.8	8.6	8.2	8.3	8.9	9.6	10.5	10.4	10.8	10.8
Household savings (percent of disposable income)					6.6	7.0	6.0	4.6	3.5	4.9	5.6	6.3	6.3	6.2	5.9
Household debt (percent of disposable income) ^1/					171	175	183	188	195	196	192	190	189	188	188
Business credit (percent of GDP)					48	48	51	52	51	53	52	53	53	52	52
GENERAL GOVERNMENT (percent of GDP) ^2/
Revenue					33.8	34.0	34.6	34.8	34.8	35.2	35.3	35.6	35.7	35.7	35.7
Expenditure					36.6	36.9	37.4	37.5	37.0	37.0	36.4	35.7	35.4	35.4	35.4
Net lending/borrowing					−2.8	−2.9	−2.8	−2.7	−2.2	−1.8	−1.1	−0.1	0.3	0.3	0.3
Operating balance					−1.5	−1.6	−1.5	−1.3	−0.9	−0.3	0.5	1.2	1.5	1.5	1.5
Cyclically adjusted balance					−2.5	−2.5	−2.4	−2.2	−1.7	−1.4	−0.9	0.0	0.3	0.3	0.3
Gross debt					30.6	34.1	37.8	41.0	42.6	43.4	42.9	40.6	38.1	36.2	34.3
Net debt					13.1	15.5	17.8	19.5	20.0	20.6	20.3	19.0	17.4	15.8	14.2
Net worth					53.7	52.1	49.3	50.3	53.1	52.9	52.6	53.0	52.8	52.1	51.2
BALANCE OF PAYMENTS
Current account (percent of GDP)					−3.4	−3.1	−4.7	−2.9	−1.9	−2.5	−2.5	−2.6	−2.5	−2.6	−2.5
Export volume					5.8	6.9	6.5	6.8	5.1	6.8	7.4	6.7	5.8	5.7	5.6
Import volume					−2.0	−1.4	1.9	0.2	7.6	5.8	5.6	5.8	5.3	5.4	5.3
Net international investment position (percent of GDP)					−53	−53	−57	−58	−54	−54	−54	−54	−54	−54	−54
Gross official reserves (bn US$)					59	66	67	76	…	…	…	…	…	…	…
MEMORANDUM ITEMS
Nominal GDP (bn A$)					1,565	1,612	1,638	1,700	1,795	1,871	1,964	2,061	2,165	2,280	2,406
		Percent change			3.5	3.0	1.6	3.8	5.6	4.2	5.0	4.9	5.1	5.3	5.5
Real net national disposable income per capita (% change )					−1.0	−0.8	−2.1	1.7	2.6	0.0	0.8	0.3	0.5	0.3	0.2
Population (million)					23.3	23.7	24.0	24.4	24.8	25.1	25.5	25.9	26.3	26.7	27.2
Nominal effective exchange rate					105	99	92	92	…	…	…	…	…	…	…
Real effective exchange rate					105	100	93	93	…	…	…	…	…	…	…

Sources: Authorities’ data; IMF World Economic Outlook database; and IMF staff estimates and projections.

^{^2/}Calendar year.

Table 2.

Australia: Fiscal Accounts, 2012/13-2022/23

(In percent of GDP, unless otherwise indicated)

Sources: Authorities’ data and IMF staff estimates and projections.

^{^1/}Accrual basis; GFS. Comprises the Commonwealth, and state, territory, and local goverments.

^{^2/}Includes Future Fund assets.

^{^3/}Excludes general revenue assistance to states and territories from revenue and expenditure.

^{^4/}Excludes Commonwealth payments for specific purposes from revenue and expenditure.

Table 2.

Australia: Fiscal Accounts, 2012/13-2022/23

(In percent of GDP, unless otherwise indicated)

				2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23
									Est.	Projections
CONSOLIDATED GENERAL GOVERNMENT OPERATIONS ^1/
Revenue				33.7	34.0	34.3	34.6	34.6	35.2	35.1	35.5	35.7	35.7	35.7
	Tax revenue			27.1	27.5	27.5	27.8	27.9	28.6	28.8	29.2	29.5	29.4	29.4
		Direct taxes		19.4	19.6	20.1	20.2	20.5	21.1	21.2	21.6	21.8	21.8	21.8
			Individual and withholding	13.0	13.4	14.2	14.7	14.6	14.5	14.7	14.9	15.2	15.2	15.2
			Corporate	6.4	6.2	5.9	5.7	5.8	6.5	6.5	6.7	6.6	6.6	6.6
		Indirect taxes		7.6	7.8	7.4	7.6	7.4	7.6	7.6	7.6	7.6	7.6	7.6
			Of which: GST	3.3	3.5	3.5	3.6	3.6	3.6	3.6	3.6	3.6	3.6	3.6
	Non-tax revenue			6.6	6.5	6.8	6.8	6.7	6.6	6.3	6.3	6.3	6.3	6.3
Expenditure				36.3	36.9	37.1	37.3	37.3	37.0	36.9	36.0	35.4	35.4	35.4
	Expense			35.2	35.5	35.9	36.0	35.8	35.7	35.1	34.6	34.2	34.2	34.2
		Employee expenses		9.8	9.6	9.7	9.9	10.0	9.8	9.5	9.3	9.1	9.1	9.1
		Other operating expenses (excl. depreciation)		9.2	9.3	9.6	9.8	10.2	10.7	10.8	10.7	10.6	10.6	10.6
		Transfers		12.4	12.7	12.6	12.2	11.5	11.2	10.7	10.6	10.5	10.4	10.4
			Current	11.8	12.1	12.1	11.8	11.2	10.9	10.4	10.3	10.2	10.2	10.1
			Capital	0.6	0.6	0.5	0.4	0.3	0.3	0.3	0.3	0.3	0.3	0.3
		Interest (excl. superannuation)		1.3	1.4	1.5	1.5	1.4	1.4	1.4	1.5	1.4	1.4	1.4
		Other		2.4	2.5	2.6	2.6	2.6	2.6	2.6	2.5	2.7	2.7	2.7
	Net acquisition of nonfinancial assets			1.2	1.4	1.2	1.3	1.5	1.2	1.8	1.3	1.2	1.2	1.2
		Of which: Gross fixed capital formation		3.0	2.9	2.9	2.9	3.6	3.5	3.6	3.2	3.0	3.0	3.0
Operating balance				−1.5	−1.5	−1.7	−1.4	−1.2	−0.6	0.0	0.9	1.5	1.5	1.5
Primary balance				−1.3	−1.5	−1.4	−1.2	−1.2	−0.4	−0.3	1.0	1.7	1.7	1.7
Net lending (+)/borrowing (-)				−2.6	−2.9	−2.9	−2.7	−2.6	−1.8	−1.7	−0.5	0.3	0.3	0.3
CONSOLIDATED GENERAL GOVERNMENT BALANCE SHEET
Liabilities				59.0	64.3	69.0	78.0	70.0	69.2	68.5	66.6	62.3	59.3	56.3
	Gross debt			28.7	32.6	35.8	39.3	42.2	43.1	43.4	42.3	39.0	37.1	35.2
		Commonwealth		19.8	23.1	26.3	30.3	33.3	33.4	33.6	32.9	30.3	28.6	26.9
		States, territories and local governments		8.9	9.4	9.4	9.0	8.9	9.7	9.8	9.4	8.7	8.5	8.3
	Other liabilities			30.3	31.7	33.2	38.7	27.8	26.1	25.1	24.3	23.3	22.2	21.1
Assets				113.9	117.0	120.7	124.4	123.4	122.2	121.0	119.2	115.5	111.7	107.9
	Financial assets			45.1	48.0	49.3	50.5	51.3	52.2	52.4	52.5	50.7	49.0	47.2
	Other assets			68.7	68.9	71.4	74.0	72.1	70.0	68.7	66.8	64.8	62.8	60.7
Net financial worth				−13.9	−16.2	−19.7	−27.5	−18.7	−17.0	−16.1	−14.1	−11.6	−10.3	−9.1
Net debt				11.7	14.5	16.5	19.0	19.9	20.3	20.7	19.8	18.2	16.6	15.0
	Commonwealth ^2/			10.0	12.8	14.9	17.8	18.9	19.0	18.8	17.9	16.2	14.7	13.2
	States, territories and local governments			1.7	1.8	1.6	1.2	0.9	1.3	1.9	2.0	1.9	1.9	1.8
Net worth				54.8	52.7	51.7	46.5	53.4	53.0	52.5	52.7	53.1	52.4	51.6
	Commonwealth			−12.6	−14.5	−17.7	−25.1	−17.6	−18.0	−17.4	−16.2	−14.2	−12.5	−10.8
	States, territories and local governments			67.4	67.2	69.4	71.5	71.0	71.0	70.0	68.8	67.4	64.9	62.4
MEMORANDUM ITEMS
Cyclically adjusted balance (in percent of potential GDP)				−2.4	−2.5	−2.5	−2.2	−2.2	−1.3	−1.4	−0.3	0.3	0.3	0.3
	Fiscal impulse (change in CAB; in percent of potential GDP)			−1.5	0.1	−0.1	−0.2	−0.1	−0.9	0.1	−1.1	0.7	0.0	0.0
Change in real revenue (percent)				4.5	1.7	1.1	2.4	3.1	4.5	2.2	3.7	3.1	2.7	2.9
Change in real primary expenditure (percent)				−2.1	4.3	1.1	0.4	3.2	0.9	2.7	0.9	1.2	2.8	3.1
Commonwealth general government ^3/
	Revenue			20.2	20.2	19.9	20.1	20.4	21.0	21.3	21.7	22.0	22.0	22.0
	Expenditure			21.6	22.4	22.5	22.4	22.3	22.0	22.0	21.6	21.2	21.3	21.3
	Net lending (+)/borrowing (-)			−1.4	−2.2	−2.6	−2.2	−2.0	−1.0	−0.7	0.1	0.8	0.7	0.7
States, territories and local governments ^4/
	Revenue			12.7	13.3	13.7	13.9	13.7	13.6	13.2	13.2	13.2	13.1	13.1
	Expenditure			13.8	13.7	13.7	14.0	14.0	14.1	14.0	13.5	13.3	13.2	13.2
	Net lending (+)/borrowing (-)			−1.1	−0.4	0.0	−0.1	−0.3	−0.5	−0.7	−0.2	−0.1	−0.1	−0.1
Commonwealth transfers to subnational governments				6.0	6.2	6.4	6.4	6.8	6.5	6.6	6.3	6.2	6.2	6.2
	Of which: General revenue assistance			3.3	3.4	3.6	3.5	3.6	3.5	3.6	3.6	3.6	3.6	3.6
Nonfinancial public sector capital stock				95.8	96.4	99.5	102.8	101.6	101.2	100.8	99.8	98.1	96.4	94.3
GDP (in billion A$)				1,539	1,588	1,625	1,669	1,747	1,833	1,917	2,012	2,113	2,222	2,343

Sources: Authorities’ data and IMF staff estimates and projections.

^{^1/}Accrual basis; GFS. Comprises the Commonwealth, and state, territory, and local goverments.

^{^2/}Includes Future Fund assets.

^{^3/}Excludes general revenue assistance to states and territories from revenue and expenditure.

^{^4/}Excludes Commonwealth payments for specific purposes from revenue and expenditure.

Table 2.

Australia: Fiscal Accounts, 2012/13-2022/23

(In percent of GDP, unless otherwise indicated)

				2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23
									Est.	Projections
CONSOLIDATED GENERAL GOVERNMENT OPERATIONS ^1/
Revenue				33.7	34.0	34.3	34.6	34.6	35.2	35.1	35.5	35.7	35.7	35.7
	Tax revenue			27.1	27.5	27.5	27.8	27.9	28.6	28.8	29.2	29.5	29.4	29.4
		Direct taxes		19.4	19.6	20.1	20.2	20.5	21.1	21.2	21.6	21.8	21.8	21.8
			Individual and withholding	13.0	13.4	14.2	14.7	14.6	14.5	14.7	14.9	15.2	15.2	15.2
			Corporate	6.4	6.2	5.9	5.7	5.8	6.5	6.5	6.7	6.6	6.6	6.6
		Indirect taxes		7.6	7.8	7.4	7.6	7.4	7.6	7.6	7.6	7.6	7.6	7.6
			Of which: GST	3.3	3.5	3.5	3.6	3.6	3.6	3.6	3.6	3.6	3.6	3.6
	Non-tax revenue			6.6	6.5	6.8	6.8	6.7	6.6	6.3	6.3	6.3	6.3	6.3
Expenditure				36.3	36.9	37.1	37.3	37.3	37.0	36.9	36.0	35.4	35.4	35.4
	Expense			35.2	35.5	35.9	36.0	35.8	35.7	35.1	34.6	34.2	34.2	34.2
		Employee expenses		9.8	9.6	9.7	9.9	10.0	9.8	9.5	9.3	9.1	9.1	9.1
		Other operating expenses (excl. depreciation)		9.2	9.3	9.6	9.8	10.2	10.7	10.8	10.7	10.6	10.6	10.6
		Transfers		12.4	12.7	12.6	12.2	11.5	11.2	10.7	10.6	10.5	10.4	10.4
			Current	11.8	12.1	12.1	11.8	11.2	10.9	10.4	10.3	10.2	10.2	10.1
			Capital	0.6	0.6	0.5	0.4	0.3	0.3	0.3	0.3	0.3	0.3	0.3
		Interest (excl. superannuation)		1.3	1.4	1.5	1.5	1.4	1.4	1.4	1.5	1.4	1.4	1.4
		Other		2.4	2.5	2.6	2.6	2.6	2.6	2.6	2.5	2.7	2.7	2.7
	Net acquisition of nonfinancial assets			1.2	1.4	1.2	1.3	1.5	1.2	1.8	1.3	1.2	1.2	1.2
		Of which: Gross fixed capital formation		3.0	2.9	2.9	2.9	3.6	3.5	3.6	3.2	3.0	3.0	3.0
Operating balance				−1.5	−1.5	−1.7

*Gap Closed by*:	*2040 ^1/*	*2027 ^2/*
*Real GDP as of*:
*2018*	0.1-0.2	0.2-0.3
*2022*	0.0-0.2	0.4-0.5
*2027*	0.2-0.4	0.6-0.7
*Long term*	0.5-0.7	0.7

*Gap Closed by*:	*2040 ^1/*	*2027 ^2/*
*Real GDP as of*:
*2018*	0.1-0.2	0.2-0.3
*2022*	0.0-0.2	0.4-0.5
*2027*	0.2-0.4	0.6-0.7
*Long term*	0.5-0.7	0.7

Topics

Countries

Series

About

Resources

Abstract

Context

Recent Developments, Outlook, and Risks

A. Developments over the Past Year

B. Outlook

C. Risks

D. Authorities’ Views on Outlook and Risks

Macroeconomic Policies to Ensure Return to Full Employment

Context

Staff’s Views

Reducing Housing-Related Imbalances and Vulnerabilities

Context

Staff’s Views

Fostering Long-Term Growth Opportunities

Context

Staff’s Views

Staff Appraisal