AFR Article 25 September 2021 page 3

The International Monetary Fund has called on Australia to address the rising financial stability risks posed by surging house prices, which are expected to increase by up to 20 per cent this year.

The IMF also warned there would be a ‘‘reckoning’’ for so-called zombie companies once pandemic supports were withdrawn, which could result in a spike in corporate insolvencies, particularly in small and medium firms.

Australia’s consistent lack of large-scale systemic tax reform also needed attention, according to the global financial institution, which said a failure to act on productivity-enhancing reforms would come with a long-term cost.

‘‘We think the tax reform would help economic efficiency and strengthen Australia’s position fiscally over the medium term … but also in terms of economic efficiency by realising gains from having a better system of direct taxation,’’ IMF’s Australian division chief, Harald Finger, said.

Echoing recommendations from the OECD last week, the IMF called for Australia to reduce the income tax burden on households and business – which is higher than the OECD average – by increasing GST revenue and offsetting the regressive effects on low- and middle-income households.

‘‘Not pursuing the reform basically means losing out on the gains that one can have from better incentivising investment,’’ Mr Finger said.

Treasurer Josh Frydenberg last week ruled out any change to the GST.

The recommendations came at the conclusion of the IMF’s biannual (and this time online) assessment of Australia’s economy, which forecast growth of 3.5 per cent by the end of the year and 4.1 per cent next year.

Of note was the IMF’s projection that inflation would grow to 2 per cent by the end of next year and stay within the Reserve Bank of Australia’s target band of 2 per cent to 3 per cent. This would suggest interest rates could begin to lift by the end of next year, ahead of the RBA’s current 2024 forecast.

The release of the IMF report came as Prime Minister Scott Morrison and his ambassador to the United States, Arthur Sinodinos, met with IMF managing director Kristalina Georgieva in Washington on Friday (AEST).

The meeting focused on the international economic outlook and the world’s recovery from the COVID-19 crisis, particularly the challenges for Australia’s neighbours in the Pacific and its largest trading partner, China.

On Australia’s booming housing market, Mr Finger said the IMF’s concerns were growing affordability issues and the potential for rising financial vulnerabilities. ‘‘We think that requires a comprehensive policy response,’’ he said. ‘‘Macro-prudential policy should be tightened to address gradually rising financial stability risks.’’

Possible options include increasing interest-serviceability buffers (the stress test on household for their ability to pay loans with higher interest rates), as well as caps on debt-to-income ratios or loan-to-value ratios.

The chief executives of the Commonwealth and ANZ banks this week said they were concerned about rising house prices, and CBA boss Matt Comyn said the bank, which is Australia’s biggest residential mortgage lender, has already increased its rate benchmark from 5.1 per cent to 5.25 per cent.

Mr Comyn suggested this was a more nuanced approach to dealing with financial instability issues than caps on loan ratios, which had the potential to disadvantage certain groups, such as first home buyers.

Reserve Bank of Australia assistant governor Michelle Bullock this week said the RBA was monitoring the situation closely, given the risk to financial stability caused by high household debt-to-income ratios.

Australia’s top grouping of watchdogs, the Council of Financial Regulators, held its quarterly meeting on Friday and discussed potential measures to cool the property market.

While no immediate crackdown is planned, regulators are nudging banks to ensure prudent lending.