NO.058

OECD Survey of the Australian Economy

The 2001 Survey of Australia released by the OECD today is a strong endorsement of the Government’s approach to macroeconomic and structural policy, including in particular taxation reform. The OECD also forecasts a strong recovery in activity in the year ahead.

A key theme of the Survey is the significant contribution of macroeconomic and structural reforms to increasing living standards by lowering inflation and interest rates, raising the trend growth rate of multifactor productivity and lowering the structural rate of unemployment.

In particular, the OECD acknowledges that substantial economic improvements should accrue under The New Tax System. The OECD has long recommended that Australia should reform its indirect tax system and introduce a broad based consumption tax. In this Survey, the OECD notes that the Government’s tax reform “should contribute to a further improvement in economic performance.”

The OECD Survey provides a strong backing for the Government’s macroeconomic policy management. The OECD has supported the Government’s approach to the 2001-02 Budget and applauds the Government’s fiscal strategy of achieving budget balance over the cycle.

The Survey points to the success of monetary policy in keeping inflation low, allowing monetary conditions to be more supportive of economic activity. It also observes that “there have been no major second round inflation effects from the GST.”

The OECD attributes the marked reduction in the structural unemployment rate to the progress made on structural reform, in particular, the steps the Government has taken to improve labour market flexibility. It notes that the implementation of the Workplace Relations Act 1996 has moved Australia’s industrial relations system away from a complex set of prescriptive and centrally-determined awards and towards a largely decentralised and more flexible industrial relations system, with expanded opportunities for enterprise bargaining. It is also recognised that the Job Network has “improved the quality of service to job-seekers and facilitated job placement”. The Government’s welfare reform measures outlined in the 2001-02 Budget are endorsed as a significant step in reducing the impediments which face people in moving from welfare to work.

The Survey also notes Australia’s economic reform agenda is not yet fully complete. In particular, the OECD points to industrial relations and welfare reform as areas where more needs to be done. Similarly, the OECD notes the importance of adhering to the medium term fiscal strategy, and in particular maintaining discipline over discretionary increases in public expenditure.

The OECD attributes the slowdown in economic activity in the second half of 2000 to higher world energy prices and the impact of developments in the US on the climate for activity in Australia. It recognises the temporary impact on the timing of economic activity arising from The New Tax System, in particular the bring-forward of housing investment.

Given the absence of major imbalances in the Australian economy, the OECD expects GDP growth to pick up to 3½ to 4 per cent in 2002. It cautions however that major risks remain around the international economy. The OECD expects this very solid rebound in Australian economic growth to be combined with low consumer prices, with inflation over 2001-02 expected to stay comfortably within the RBA’s 2 to 3 per cent inflation target band.

The special topic in this year’s Survey is Sustainable Development. The OECD acknowledges the development in Australia of a coherent response to environmental and natural resource management policy. The Survey suggests that economic instruments (such as tax and pricing mechanisms) are often the most efficient way to foster environmentally sustainable growth. The OECD encourages Australia to make more extensive use of such policy approaches.

The Government does not believe more taxes are the answer to reducing Australia’s greenhouse emissions. A separate release in relation to the report on Sustainable Development is being issued by Senator the Honourable Robert Hill.

CANBERRA

8 August 2001