A global financial agency has warned that ‘stronger-than-expected’ government spending and high immigration are fuelling inflation and stopping interest rate cuts – and could mean more pain later.
The International Monetary Fund, the UN’s major financial agency, has released a report warning about excessive government spending and population growth only months out from Prime Minister Anthony Albanese going to an election.
With unemployment still low at 3.9 per cent, the Washington DC-based IMF warned too much government spending was likely to stop the Reserve Bank of from cutting interest rates, as borrowers in the rest of the world get relief.
‘Domestically, persistent labor market tightness, stronger than expected fiscal impulses and lower spare capacity than currently assessed could contribute to stalling the disinflation process, potentially leading to higher-for-even-longer interest rates that adversely impact consumption and investment,’ the IMF said.
The IMF’s December 2024 report on also suggested the federal government needed to cut spending to help the RBA fight inflation, arguing it would be unable to cut interest rates until public expenditure was reduced.
‘In this context, the current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance and complements monetary policy’s disinflation objective,’ it said.
The IMF warned a failure to bring down n inflation could mean interest rate rises and big cuts in government spending.
‘If disinflation stalls, tighter monetary and fiscal policies may be necessary,’ it said.
The IMF also noted that while record-high immigration had stopped sinking into a recession, the strongest population growth of any OECD nation was causing a housing shortage, and leading to more government spending.
‘A surge in immigration and robust public demand have staved off a recession, paving the way for a narrow path toward a soft landing,’ it said.
‘Labour markets have been resilient, with a gradual softening preserving some gains made in the post-pandemic period.
‘However, inflationary pressures have persisted, with upside risks stemming from the labour and housing markets, a more expansionary than expected fiscal stance in the future Budgets of commonwealth and state governments, and an uncertain external environment.’
The IMF’s warning about public spending has been made just weeks after Reserve Bank of Governor Michele Bullock warned ‘it’s not just the federal governments, it’s the state governments as well’ with transport infrastructure projects that are adding to inflation.
State and federal government spending now make up a record 28 per cent of gross domestic product, and Victoria in particular has gone into even more debt to build Melbourne’s Suburban Rail Loop to accommodate an influx of overseas immigration.
In late 2023, a record 548,800 migrants moved to , with the majority moving to Sydney and Melbourne.
While immigration has since eased to 448,090 in the year to October, it’s still significantly higher than Treasury’s revised Mid-Year Economic and Fiscal Outlook forecast of 340,000 for 2024-25.
n borrowers have missed out on rate cuts in 2024 as central banks in the United States, the UK and the European Union, among others, eased monetary policy.
The Reserve Bank of ‘s 4.35 per cent cash rate is now also significantly higher than Canada’s equivalent cash rate of 3.35 per cent and New Zealand’s 4.25 per cent level.
Financial markets and major bank economists aren’t expecting the RBA cut rates until May, by which time an election must be held.
The RBA’s December meeting minutes did suggest the next move was likely to be a cut, but it still expressed concern about inflation still being too high with the underlying inflation rate of 3.5 per cent still well above its 2 to 3 per cent target.
The IMF also criticised ‘s 50 per cent capital gains tax discount that has existing since 1999, which means only $50,000 of a capital gain has to be declared on an annual tax return if the price of an investment unit goes up by $100,000.
‘Tax reforms should focus on efficiency and fairness, reducing dependence on direct taxes and high capital costs, and phasing out tax breaks like capital gains tax discounts,’ it said.
‘A comprehensive policy package is essential to tackle ’s housing affordability crisis, focusing on increasing the construction workforce, relaxing zoning regulations, advancing initiatives to boost new housing supply, and reevaluating property taxes and stamp duty.’
Labor lost the 2019 election under former leader Bill Shorten with a plan to halve the 50 per cent capital gains tax discount to 25 per cent and scrap negative gearing tax breaks for future purchases of existing properties.
The former New South Wales Coalition government also lost the 2023 election after offering home buyers the choice of paying an annual land tax instead of an upfront stamp duty, a policy Labor scrapped after coming to power at a state level.
While Labor has delivered two consecutive Budget surpluses, Treasury’s Mid-Year Economic and Fiscal Outlook is forecasting deficits from 2024-25 onwards as falling iron ore price reduce federal company tax revenue.
But Treasurer Jim Chalmers argued Labor had been ‘responsible’ in managing real spending growth.
‘Overwhelmingly the story about real spending growth has been a responsible one,’ he told podcaster Michelle Grattan.
‘And that’s part of the story, it’s part of the reason we’ve had those two surpluses, part of the reason why the deficit this year is much smaller than anticipated a few years ago, is because we’ve shown that spending restraint, we’ve found modest but meaningful tax changes, and we’ve found a lot of savings as well, and this has been ignored.’
Despite a surge in government spending, ‘s economy grew by just 0.8 per cent in the year to September – the weakest annual pace outside of a pandemic since the 1991 recession as a result of higher interest rates.