Australia needs to cut spending if disinflation stalls: IMF

AUSTRALIA will need to rein in fiscal spending in the event inflation fails to ease further, the International Monetary Fund (IMF) said, countering the government’s claims its policies are not impacting price pressures.

“A preannounced personal income tax cut and new expenditure items including broad-based cost-of-living support, are expected to contribute to moving the budget to a deficit,” the IMF said in the concluding statement of its 2024 Article IV Mission on Thursday (Oct 3). Energy rebates and other measures “may inject some additional stimulus into the broader economy”.

The fund’s assessment will be a blow to Treasurer Jim Chalmers, who insists that increased spending is not to blame for sticky prices. Australia is struggling with the so-called last mile of returning inflation to the Reserve Bank of Australia’s (RBA) 2 to 3 per cent target and as a result, has refrained from joining a global monetary policy easing cycle.

The IMF backed the RBA’s decision to keep interest rates at a 12-year high of 4.35 per cent even as the Federal Reserve last month embarked on easing with a half-percentage point rate cut.

“The still persistent inflation and emerging upside risks emphasise the importance of a tight monetary stance until the inflation outlook sustainably aligns with the target range,” it said.

Chalmers responded to the report by reiterating that the government is trying to help rein in inflation while assisting households struggling with higher cost.

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“The government’s primary focus is to get on top of our inflation challenge without ignoring the risks to growth,” he said. “Our approach is all about easing the cost of living and fighting inflation at the same time as we lay the foundations for a stronger economy for the future.” BLOOMBERG