International Monetary Fund warning of weak growth and high inflation in Australia without tax reform

The IMF has called on Australia to cut corporate and income taxes and raise the GST to address chronically low productivity that risks saddling the nation with years of poor economic growth and high inflation.

As usual, the Federal Government has ruled out a sensible but politically very risky suggestion.

“Specifically, reductions of corporate and labour taxes would improve incentives for investment and work and could be offset by an increase in indirect taxation,” the IMF said.

This would be financed by raising the Goods and Services Tax from the current level of 10 per cent, which has remained unchanged since it debuted more than 25 years ago.

“Moreover, tax reforms can help support growth by shifting the tax burden away from the current reliance on capital and labour, and increasing reliance on indirect taxes,” the IMF said.

Treasurer Jim Chalmers talked down the prospect of taking the IMF’s policy advice when it came to raising the GST.

Australia’s consumption tax is still low by world standards and any reluctance to raise it means workers will be shouldering an unfair share of the tax burden.

This is a particular problem during a time of low unemployment, when businesses are struggling to attract staff.

“As always with these kinds of reports, the Government won’t pick up and run with every idea,” Dr Chalmers told reporters in Brisbane on Monday.

“Not something that we’re contemplating. We’ve made that clear on other occasions and as I said before in these IMF reports, often there are some ideas which are consistent with the Government’s direction and some which are not.

“We’ve made it clear that we don’t intend to go down that path when it comes to the GST.”

With economists expecting another interest rate rise in several months’ time, the Washington-based International Monetary Fund forecast that Australia’s economy would grow by just 2.1 per cent in 2026, a level well below the three-decade average of 3 per cent, and remain at weak levels out to 2031.

Inflation, which rose to 3.8 per cent at the end of last year, wasn’t expected to return to the midpoint of the Reserve Bank of Australia’s 2-3 per cent target until “the latter half of 2027”.

Persistently high inflation is also expected to see Australian workers again suffer a cut in real wages.

“Wage growth is anticipated to moderate further, partially attributable to weak productivity growth,” the IMF said on Sunday night.

“Risks to Australia’s economic outlook are skewed toward slower growth and higher inflation.”

Weak productivity, based on lacklustre output, also feeds into inflation if the higher costs of production like wages are passed on to customers.

“Significant uncertainty remains around the extent of residual excess demand and of supply capacity amid weak productivity growth,” the IMF said.

From July 1, the marginal tax rate for low-income workers earning $18,200 to $45,000 is falling to 15 per cent, down from 16 per cent. The rate is falling to 14 per cent from July 2027.

Beyond that, Labor is yet to announce plans for more income tax relief. Just more clever political lines.

Dr Chalmers noted the Liberal Party’s new leader Angus Taylor opposed these tax cuts when he was shadow treasurer under former Opposition leader Peter Dutton.

“This is the guy that took to the last election a policy not just to repeal the Albanese Labor Government’s tax cuts but to in the process increase income taxes,” he said.

“The idea that Angus Taylor should be listened to on tax is laughable. He is the architect of that policy for higher taxes on workers, bigger deficits and more debt and we will not let him forget that.”

Productivity rose by just 0.8 per cent in the year ended September 30, which was well below the 2.1 per cent average from the 1990s to the mid-2000s covering the first decade of the internet.

Small businesses pay a lower corporate tax rate of 25 per cent but this rises to 30 per cent for larger businesses with an annual turnover of more than $50 million.