Friday, December 07, 2007

What the Treasury is saying in private...

...the OECD usually says in public.

It is saying: "no tax cuts now".

The Organisation for Economic Co-operation and Development has spoken out against the tax cuts promised in during the Australian election campaign, saying they will make economic management more difficult and could prove unsustainable.

The Organisation's latest Economic Outlook released overnight in Paris also declares that Australia's Reserve Bank “will” further lift interest rates in order to bring inflation back into control.

The thoughts of the OECD are significant because they are believed to represent the thoughts of Australia's Treasury which briefs the OECD on its visits to Australia and appoints a permanent representative to organisation in Paris...

The report says that Australia's promised tax cuts are likely to heighten the pressures on capacity which are putting pressure on inflation.

Without “the additional reduction of taxes on households announced by the main political parties on the eve of the elections” the budget surplus would have been 0.25 per cent of GDP higher, an outcome that would have posed “no problem in view of the expected strength of the economy”.

The report acknowledges the argument made by both sides of politics during the campaign that the tax cuts could be expected to benefit the economy somewhat by encouraging people into work, but it says that benefit will be overwhelmed by the immediate expansionary effect of the cuts.

In an editorial attached to the report not specifically directed at Australia the OECD's acting chief economist Jorgen Elmeskov warned that the revenue bonanza facing many OECD governments might prove to be temporary, reflecting a boost in business profits and activities related to finance and housing that would not last.

“There is a risk that decisions could be taken in countries that cannot afford it to permanently raise spending or reduce taxes on the basis of temporarily high receipts,” he said.

When taxation revenue fell governments might find that they hadn't saved enough money to pump it into the economy when it was needed.

“Therefore fiscal policy needs to stay on the straight and narrow despite buoyant revenues,” Mr Elmeskov warned.

The OECD report treats further hikes in Australian interest rates as certain saying than a projected slowdown in economic growth next year “will be accompanied by a further tightening of monetary policy in order to keep inflation in line with the Reserve Bank's inflation target”.

The OECD is forecasting a lower inflation rate in the years ahead than in Australia's Reserve Bank and a gradual winding back in Australia's economic growth rate from 4.3 per cent to 3 per cent over the next two years, a pace that it believes is sustainable.

It says although economic growth forecasts have been revised down nearly everywhere in the OECD “the outlook is actually not that bad”. It does not expect a recession in the United States.

In Australia a report to be released today by the Centre for South Australian Economic Studies will back up the OECD's view about interest rates. The report says that Reserve Bank will lift interest rates twice in the first half of next year, by a total of 0.5 percentage points, taking the standard variable mortgage rate to around 9.1 per cent.