IMF Says Australia Needs More Government Spending

The federal government in Australia should consider slowing its path to budget balance and instead spend more on growth-friendly infrastructure projects, IMF staff said in their annual check-up on the economy.

The International Monetary Fund report also recommended the Reserve Bank of Australia keep monetary policy stimulative, given that risks to the economy and inflation remained on the downside, AAP reported.

“Ensuring the return to full employment under weak global conditions will need continued accommodative monetary policy and quality infrastructure spending, which will also boost long-term growth potential,” IMF staff wrote in their regular assessment.

While Australia was transitioning from a mining boom with strong growth and relatively low unemployment, it had not been immune to symptoms of the “new mediocre”, the report said.

Business investment outside of mining had disappointed, underemployment remained high and wage growth sluggish, said the Washington-based organization.

The report recommended the conservative government of Malcolm Turnbull slow efforts to balance its budget on a five-year horizon.

“In IMF staff’s view, the pace of targeted fiscal consolidation under the baseline should be more gradual and some of the growth-friendly spending should be ramped up.”

In particular, plans to tighten fiscal policy aggressively in 2017-18 could prove counter-productive, the report said. Rather, the government should consider spending more on infrastructure, a hot-button topic in Australia.

“A more sustained, multi-year increase in spending on efficient infrastructure ... would be desirable, considering that Australia has infrastructure needs and fiscal space, the funding environment is favorable, and that the expected return to full employment is gradual,” the IMF staff said.

 Uncertain Job Market

The RBA is struggling to gauge the strength of the labor market and its implications for inflation while house prices on the east coast accelerate.

At the same time, the RBA said in minutes of its November 1 meeting in Sydney that the risks to the global inflation outlook “were more balanced than they had been for some time”. That follows a rebound in commodity prices and faster forecast growth in major advanced economies.

“Considerable uncertainty remained about the strength of labor market conditions and the implications for labor cost growth,” the RBA said after leaving the cash rate at a record-low 1.5%. It added “the overall assessment was that the risks around the inflation forecast were broadly balanced”.