The International Monetary Fund has issued a stark warning to Australia, urging Treasurer Jim Chalmers to implement sweeping tax changes in the upcoming May budget. While the IMF acknowledged that Australia has emerged from 2025 in better shape than anticipated, it emphasised that deeper structural reforms can no longer be postponed.
Proposed Tax Reforms and Their Implications
The IMF's recommendations are comprehensive and far-reaching. It has called for the 10 per cent Goods and Services Tax to be increased, while also advocating for the removal of exemptions on items such as financial services, fresh food, and education. According to the IMF, this move would generate sufficient revenue to allow states to abolish stamp duty on property purchases, a long-criticised tax that hampers housing mobility.
Corporate and Resource Tax Adjustments
In addition to GST reforms, the IMF has proposed cutting company tax rates to stimulate business investment. However, it also recommends higher taxes on resource companies to ensure a fairer distribution of mining profits. The report highlights the need to phase out certain tax breaks, including the capital gains tax discount and superannuation concessions, to create a more equitable and efficient tax system.
'A high reliance on direct taxes and a relatively high effective cost of capital hinders investment and productivity growth and suggest there is scope for tax reform,' the IMF stated. 'A comprehensive reform package should aim at improving the efficiency, equity and sustainability of the tax system.'
Infrastructure and Federal-State Cooperation
The report also addresses escalating infrastructure project costs, calling for tighter federal-state cooperation. It echoes arrangements from decades past where Canberra exercised more control over state budgets, suggesting such measures could help rein in spending and improve project delivery.
Economic Outlook and Government Response
The IMF projects that inflation will gradually decline from 3.4 per cent this year to 2.7 per cent by 2027. It praised Australia's handling of the economy during challenging times, noting robust institutions, flexible markets, and an agile policy toolkit as key strengths that position the country to manage external risks.
Treasurer Jim Chalmers has indicated that the federal budget on May 12 will include spending cuts and tax reforms. He is expected to announce a reduction in the 50 per cent concession for capital gains tax, aligning with some of the IMF's suggestions. However, Chalmers has been cautious in his response to the report.
'There are some ideas in these reports that we agree with, some that we don't, that we won't be picking up and running with,' Chalmers told ABC radio. 'But overwhelmingly, this IMF report was a very positive report about Australia and about the government's economic plan.'
Despite the praise, Chalmers acknowledged that more work is needed to address the complex tax landscape. The IMF's call for reform underscores the urgency of action as Australia navigates post-pandemic recovery and global economic uncertainties.
