15/09/2021 - After rebounding rapidly from last year’s COVID-19 recession, Australia’s economy has weakened due to containment measures to combat new outbreaks of the virus. Once the economy reopens and the recovery resumes, the focus should turn to reforms to revive productivity growth, lift living standards and strengthen resilience, according to a new OECD report.
The latest OECD Economic Survey of Australia notes that while the pandemic interrupted a 28-year run of uninterrupted growth, Australia’s initial downturn was mild compared to most OECD countries and the rebound was swift, thanks to generous policy support and the prompt reopening of domestic activity. Still, with a wave of COVID-19 now gripping the two largest states in Australia, risks and uncertainties remain large.
The Survey projects GDP growth of 4.0% in 2021 and 3.3% in 2022, after a drop of 2.5% in 2020. The economy is set to contract in the third quarter of 2021 then return to growth as higher vaccination rates enable an easing of restrictions. The recovery may be more gradual than in past episodes, as it will occur in an environment of higher virus transmission. An acceleration in vaccine rollout could enable a faster reopening and a rapid pick-up of household consumption, given the stock of excess savings. On the other hand, were significant COVID-19 outbreaks to occur in other states, then the economic shock could deepen. Any ratcheting up of tensions with China could further weaken trade activity.
Short-term fiscal policy should remain responsive to developments such as the evolution of the pandemic, the Survey says. Vaccines should be made available to all eligible adults and international borders should be opened as soon as possible. Once the recovery is well under way, Australia should continue to reduce regulatory, administrative and financial barriers for high-potential young firms. Rethinking institutional frameworks related to fiscal and monetary policy and ensuring an adequate social safety net would leave the economy better prepared to face future shocks.
In general, post-pandemic reforms should seek to address longstanding challenges that existed prior to COVID-19 such as stagnating growth in living standards and weaker productivity growth that had led to disappointing wage outcomes for workers. With young and low-paid workers now hit hard by the COVID-19 crisis, effective activation policies will be key to avoid scarring effects on the long-term unemployed and to support job reallocation.
Another legacy of the pandemic will be higher public debt. Future fiscal strategy should be framed in the context of future budgetary pressures and monitored by an independent fiscal institution. Tax reform will be necessary to reduce Australia’s reliance on taxing personal incomes, which leaves public finances vulnerable to an ageing population. This could be achieved by 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 should replace stamp duty with a well-designed recurrent land tax.
The Survey takes an in-depth look at how the financial sector can contribute to a stronger, more sustainable and inclusive recovery. While financial institutions provided a buffer against the economic blow from the pandemic, lending to businesses has declined relative to individuals, leaving some innovative enterprises constrained by limited access to finance. Furthermore, many households lack sufficient financial knowledge and capability and more can be done to ensure financial flows are aligned with environmental sustainability. Addressing these obstacles, through regulatory change, providing alternatives to bank finance and strengthening consumer protection could help to raise productivity, improve household resilience and drive the transition to a climate-neutral economy.
Being the world’s driest inhabited continent, Australia is vulnerable to climate change, for example through the rise in catastrophic bushfires. It is also uniquely placed to benefit economically from the green transition due to its large and windy land mass, plentiful sunshine and ocean access, and its potential for innovation in carbon abatement technologies. Australia now needs a coherent national strategy that defines clear goals and policies to move to net zero. The financial sector can play a key role in achieving these aims.
See an Overview of the Survey with key findings and charts (this link can be used in media articles).
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