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Sustainable tax conditions only way forward: OECD

  • September 15 2021
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Sustainable tax conditions only way forward: OECD

By Michael Karpathios
September 15 2021

The Australian economy had been on a 28-year winning streak of uninterrupted growth before the pandemic. However, despite a return to lockdowns, the OECD has predicted that winning ways can return should the Morrison government create suitable tax conditions.

Sustainable tax conditions only way forward

Sustainable tax conditions only way forward: OECD

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  • September 15 2021
  • Share

The Australian economy had been on a 28-year winning streak of uninterrupted growth before the pandemic. However, despite a return to lockdowns, the OECD has predicted that winning ways can return should the Morrison government create suitable tax conditions.

Sustainable tax conditions only way forward

Despite an inevitable contraction of the Australian economy in the third quarter of the calendar year, the Organisation for Economic Co-operation and Development (OCED) has forecast growth of over 3 per cent for both 2021 and 2022, on the back of a strong economic rebound.

Namely, the OCED expects GDP growth to pick up to 4.0 per cent in 2021 GDP followed by 3.3 per cent in 2022.

The economy contracted by 2.5 per cent in 2020.

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But if Australia wants to steer its economy back on track, it will need to focus on holistic tax reform, which includes reducing its reliance on income taxes, overhauling the GST and lowering tax concessions, the OECD’s economists noted. 

According to the OECD, fiscal policy will need to take a more active role, given the limited space for conventional monetary policy at the lower bound. 

The OECD also highlighted the threat of Australia’s ageing population, which is said to be vulnerable to the state’s current reliance on taxing personal incomes — an issue exacerbated by bracket creep increasing average tax over time. 

“Fortunately, there is a clear path for tax reforms that will provide a more sustainable tax base, enhance economic growth and promote other government priorities like improving housing affordability and reversing the trend towards rising income and intergenerational inequality common to many countries,” the report reads. 

This clear path includes increasing the goods and services tax rate or broadening the base — offsetting any regressive effects through additional personal income tax cuts, reducing private pension tax breaks, and reducing the capital gains tax discount. 

In addition, more state governments would need to replace stamp duty with a well-designed recurrent land tax.

“The government entered the pandemic from a strong fiscal position. Its newly revised fiscal strategy is to support the economy until the recovery is well entrenched and the unemployment rate is back to pre-pandemic levels (5 per cent) or lower and then to switch focus to stabilising and then reducing public debt in the medium term,” the OECD said. 

“As this transition draws nearer, the government should provide a medium-term fiscal strategy with targets that are associated with specific time frames or conditional on measurable economic outcomes.” 

Furthermore, it recommended that future fiscal strategies be regularly evaluated by an independent fiscal institution.

Welcoming the OECD’s praises on the country’s “strong economic response to the pandemic”, Treasurer Josh Frydenberg said on Wednesday that the latest OECD survey essentially confirms “the government’s economic plan is working and that the fundamentals of the Australian economy remain strong”.

“The OECD survey highlights the government’s well-co-ordinated response since the start of the COVID‑19 pandemic, acknowledging that macroeconomic policy support was delivered swiftly and with appropriate force at the onset of the pandemic and played a particularly important role in stabilising the economy and the living standards of the population,” Mr Frydenberg said. 

Jumping on the chance to tout the government’s wins, Mr Frydenberg noted the survey also recognises “the significant tax relief” provided to low and middle-income earners through the Personal Income Tax Plan.

“The report also notes that bracket creep, if unaddressed, will result in increasing average taxes over time,” the Treasurer added.

“This further underlines the importance of the structural reform implemented through the government’s stage 3 tax cuts which will remove an entire tax bracket and ensure that 95 per cent of taxpayers face a marginal tax rate of no more than 30 cents in the dollar.”

While the Treasurer did not comment specifically on the OECD’s tax-related changes, he noted the “Morrison government will continue to support the recovery”, without divulging details.

RBA monetary review 

The OECD’s report also called for a review of Australia’s monetary policy framework, noting its need due to the “institutional and structural changes” that have occurred in the economy as a result of the pandemic and the “unconventional policy” instruments the Reserve Bank has begun to employ.

“Such a review should be broad in scope, potentially including a review of the central bank mandate, policy tools, methods of public communication, hiring processes and internal structures,” the OECD said. 

“It could also consider the alternative paths for rebuilding monetary policy space from the current position of policy rates at the zero lower bound.”

Sustainable tax conditions only way forward: OECD
Sustainable tax conditions only way forward
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