OECD calls for reviews of RBA, debt policy
High government debt and limited scope for the Reserve Bank of Australia to manoeuvre monetary policy will present future challenges for managing the economy, the Organisation for Economic Cooperation and Development says.
But the OECD says in its latest economic survey of Australia that the policy support delivered by both the federal government and the central bank at the onset of the coronavirus pandemic was swift and appropriate.
"While the institutional framework has supported the strong economic response to the pandemic, there are some areas that could be improved," the OECD says.
It believes there should be a review into the RBA's monetary policy framework, noting underlying inflation has undershot its two to three per cent target band since 2015.
The RBA does not expect inflation to be sustainably within the target before 2024.
The OECD is predicting the Australian economy to grow by four per cent in 2021 and 3.3 per cent in 2022, a downgrade from its respective forecasts of 5.1 per and 3.4 per cent it made in May.
"The economy is expected to contract in the third quarter of 2021, before state-based restrictions can begin to be eased as higher vaccination rates are achieved," it says.
"The ensuing recovery may be more gradual than in previous episodes, given it will occur in an environment of higher community transmission of COVID-19."
It says the government should be prepared to announce further targeted support measures if current COVID-19 lockdowns have a significant impact on economic growth.
But over the longer term, it says public finances will be pressured by an ageing population, causing debt to rise out to 2060.
The government has promised to reduce debt in the medium term once the economic recovery is well entrenched and the unemployment rate is five per cent or lower.
Debt is expected to hit $963 billion this financial year and rise to over $1 trillion in 2022/23.
But the OECD believes the government's fiscal strategy should be regularly evaluated and monitored by an independent institution.
"The Parliamentary Budget Office is a credible and independent institution that could fulfil this task within its current mandate," the OECD said, noting it fulfils a narrower role than its counterparts in other OECD countries.
Among its list of other recommendations, the Paris-based institution again calls for tax reform, saying the heavy reliance on personal income taxation adds to the vulnerability of public finances from an ageing population.
It says the rate of GST should be increased, or have its base broadened, to shift the tax mix away from personal income and inefficient taxes, such as stamp duty on properties.
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