Thursday, May 30, 2013

Australia, you're standing in the middle of a very delicate transition

So says the OECD

The next Australian government should be prepared to push the budget even further into deficit if the economy weakens, the OECD says.

In a new assessment of Australia the Paris-based organisation says confidence is “fragile”, the business situation “relatively discouraging” and growth outside the mining sector “timid”.

“If activity worsens significantly, the authorities should not hesitate to ease fiscal policy,” it says in its latest economic outlook released Wednesday.

The pronouncements of the Organisation for Economic Co-operation and Development are widely thought to reflect the views of the Australian Treasury. The Treasury stations an officer in Paris to work with the OECD full time and consults closely with OECD staff when they visit Australia.

The Australian chapter of the report paints a picture of an economy transitioning away from growth driven by mining investment. But it says “the new drivers of growth are yet to emerge”.

In the meantime the outlook is uncertain. Economic growth should slip to 2.6 per cent this year before recovering to 3.2 per cent next year. But if the new drivers of growth do not emerge the government should ease the budget conditions that are themselves weighing on economic growth.

In another potential insight into the Treasury’s thinking the OECD says Australia would be well advised to boost the goods and services tax, cut the company tax rate and “improve the effectiveness of housing taxation,” an apparent reference to the tax-free status of the family home and to negative gearing...

Opposition leader Tony Abbott has promised to commission a taxation white paper with no topic off limits should he win office. The terms of reference for the Rudd government’s Henry Tax Review precluded discussion of the goods and services tax.

The OECD says the advanced economies should strengthen throughout 2013 and 2014 helped by very low interest rates, improving financial market conditions and slowly recovering confidence.

The United States is likely to recover the fastest recording economic growth of 3.2 per cent by the end of 2014. The so-called eurozone will grow by only 0.1 per cent in 2013 and 1.5 per cent in 2014.

Japan should grow unevenly, recording unusually fast growth of 3 per cent in 2013 followed by a return to tepid growth of 0.5 per cent in 2014.

“The global economy is moving forward at multiple speeds,” OECD chief economist Pier Carlo Padoan says in the report. “Each path carries its own mix of risks”.

In today's Canberra Times, Sydney Morning Herald and Age

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