The Organisation for Economic Co-operation and Development (OECD) has urged the Australian government to implement significant economic reforms, including broadening the Goods and Services Tax (GST) and enhancing social housing initiatives. This call to action is part of the OECD’s annual economic survey of Australia, released ahead of Treasurer Jim Chalmers’ fifth federal budget in May.
According to the OECD, Australia’s economy is “now normalising” after a prolonged period of weak growth in the aftermath of the COVID-19 pandemic. The report predicts that interest rate cuts and a rebound in household real disposable incomes will drive average economic growth to “a little more than 2% over the coming years.”
Addressing Longstanding Economic Challenges
The OECD report highlights persistent issues such as slow productivity growth, high housing costs, and significant carbon emissions. It emphasizes the detrimental impact of Australia’s unaffordable housing market, supporting federal and state efforts to increase housing supply by easing land restrictions and promoting higher density development.
“Housing shortages lead to overcrowding and financial strain, reduce labour mobility, worsen intergenerational equity and increase congestion as people travel large distances to work,” the report stated.
Furthermore, the OECD advocates for replacing state-based property stamp duties with a land tax, raising targets for social housing, and increasing public funding. The report notes that social housing comprises about 4% of Australia’s housing stock, a decrease from 6% in 1990 and only about half the OECD average.
Fiscal Sustainability and Tax Reforms
The Paris-based OECD, known for its economic orthodoxy and led by former Australian Finance Minister Mathias Cormann, underscores the need for Australia to place its budget on a more sustainable footing. The report recommends “expenditure restraint and revenue-enhancing tax reforms.”
Among the suggested tax reforms is the broadening of the GST and potentially raising its rate above 10%, with the additional revenue aimed at reducing Australia’s heavy reliance on personal income tax. The OECD estimates that such tax reforms could increase the size of the economy by 1.6% over the next decade.
Environmental Goals and Climate Action
On the environmental front, the OECD acknowledges that Australia is “broadly on track” to meet its 2030 emissions reduction targets. However, it stresses that “further efforts will be needed to reduce transport emissions, manage a higher share of renewables in transport, and tackle agricultural emissions.”
“Australia was for many years an international laggard on climate action and still has among the highest per capita carbon emissions of any country in the world and among the lowest implicit prices of carbon,” the report noted. “In recent years, however, Australia has made relatively rapid progress on the energy transition, with a growing proportion of climate policy instruments adopted in most areas.”
The OECD recommends a “gradual” increase in petrol taxes, which are currently “well below European levels,” contributing to the low adoption rate of low-emission vehicles.
Implications and Future Steps
The OECD’s recommendations come at a critical time as Australia grapples with budget deficits projected to persist over the coming decade. The call for reform is likely to spark debate among policymakers and the public, particularly regarding the potential impact on households and businesses.
As Australia prepares for the upcoming federal budget, the government’s response to the OECD’s recommendations will be closely watched. The proposed reforms could play a pivotal role in shaping the country’s economic trajectory and addressing the pressing challenges of housing affordability, fiscal sustainability, and climate change.
Moving forward, the Albanese government will need to balance these recommendations with domestic priorities and political considerations, ensuring that any reforms are both economically viable and socially equitable.
