2014 OECD Economic Survey of Australia

1. www.oecd.org/eco/surveys/economic-survey-australia.htm
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2014 OECD ECONOMIC
SURVEY OF AUSTRALIA
REBALANCING TO SUSTAIN
GROWTH
Paris,17 December 2014

2. Key findings
With the end of the mining boom, Australia must look toward non-
resource sectors for future growth:
1. House-market developments risk macroeconomic stability
2. The tax mix relies too much on income tax instead of consumption tax
3. Reform of federal-state relations would increase public spending
efficiency
4. Meeting environmental goals will be challenging

3. Enable the economy to diversify towards more sectors of high-value-
added activity:
1. Use macro-prudential tools, if needed, to cool off demand for housing
credit
2. Rebalance tax burden from income to consumption (in particular, the
goods and services tax)
3. Address federal-state shared responsibilities to improve efficiency
4. Reinforce the Emission Reduction Fund programme with a safeguard
mechanism that prevents offsetting emission increases
Key recommendations

4. Australia ranks well in
international comparison
1. GDP is measured per head, US $, constant prices, constant PPPs, OECD base year 2005. "1" indicates the same
GDP per capita as the average of the top half of the OECD distribution. Ranking is based on the 2012
performance.
Source: OECD (2014), Going for Growth database; OECD (2014), National Accounts database; Australia, Closing the
Gap, Prime Minister's Report 2014; Economics Department Working Paper No. 1048.
• A well-managed and successful economy
• GDP per capita has risen relative to other countries over the past 20 years…
• …and is now among the highest in the OECD area
0
0.2
0.4
0.6
0.8
1
1.2
1.4
NOR USA CHE AUS CAN NLD AUT IRL
B. GDP per capita relative to
top OECD countries¹
AUS=1
- 15
- 10
- 5
0
5
10
15
1991 1994 1997 2000 2003 2006 2009 2012
%
A. GDP per capita gap relative to the
upper half of OECD

5. Well being is high
0
2
4
6
8
10
Income and wealth
Jobs and earnings
Housing
Work and life balance
Health status
Education and skillsSocial connections
Civic engagement and governance
Environmental quality
Personal security
Subjective well-being
Australia
OECD
1. Source: OECD (2014), Better Life Index 2014 database.
How to read this figure: Each well-being dimension is measured using one to three indications from the OECD
Better Life indicator set with equal weights. Indicators are normalised by re-scaling to be from 0 (worst) to 10
(best).

6. This calls for:
• Strengthening the policy environment to foster
rebalancing
• Maintaining macroeconomic stability with
appropriate fiscal and monetary policies
• More attention to socio-economic and
environmental challenges
The key challenge is to rebalance the
economy to sustain growth

7. The mining boom is fading
-6
-4
-2
0
2
4
6
8
1995 2000 2005 2010 2015
Y-o-y %
changes
A. Real GDP growth
Australia OECD World
-10
0
10
20
30
2000 2005 2010 2015
-10
0
10
20
30
Y-o-y %
changes
% of GDP B. Capital expenditure¹
Mining
Non-mining
Business investment (right scale)
0
20
40
60
80
100
120
140
160
180
1995 2000 2005 2010
Index
'96Q1=100
C. Nominal and real effective
exchange rate
Nominal effective exchange rate, constant trade weights
Real effective exchange rate, constant trade weights
0
50
100
150
200
250
300
350
400
1995 2000 2005 2010 2015
index
'95Q1=100
D. Terms of trade and
commodity prices²
Commodity prices
Terms of trade
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1995 2000 2005 2010 2015
%
E. Output gap³
0
1
2
3
4
5
6
7
8
9
10
71
72
73
74
75
76
77
78
79
80
1995 2000 2005 2010 2015
%%
F. Labour market
Labour force participation rate (15-64)
Unemployment rate (15+, right scale)
Business investment is falling as large-
scale resource-sector projects approach
completion
The Australian dollar is depreciating,
largely due to declines in commodity prices
The rate of unemployment is rising
1. Capital expenditure refers to private gross fixed capital formation. Mining and Non-mining sector investment refers to financial years. Business investment
covers private non-residential gross fixed capital formation, in volume terms.
2. Terms of trade is the ratio of export and import prices.
3. Output gap refers to the deviation from potential GDP. The OECD calculation of output gap is based on a production-function approach (for more details, see
Johansson et al. (2013), ""Long-term growth scenarios"", OECD Economics Department Working Papers, nº 1000.“
Source: Reserve Bank of Australia (2014); Australian Bureau of Statistics (2014), Cat. No. 5204.0 and 5206.0; OECD (2014), Economic Outlook 96 database.

8. There’s more to do in the fight against
poverty
• Relative poverty is only middle-ranking in international comparison,
improving the position of Australia’s indigenous peoples is a main challenge
• Population ageing will increase spending on public health and pensions
1. The projection is based on a scenario accounting for cost pressure.
2. Source: Australia, Closing the Gap, Prime Minister's Report 2014; Economics Department
Working Paper No. 1048.
0
10
20
30
40
50
60
70
80
90
100
life expectancy of men
(years)
life expectancy of
women (years)
employment rate (%
point)
A. Life expectancy and
employment gaps
Indigenous Non-indigenous Gap
0
2
4
6
8
10
12
14
Current By 2030 By 2060
% of GDP
B. Projections of public health care expenditure¹
Australia OECD average

9. Macroeconomic
policies

10. Macroeconomic policies have steered the
economy well, but there are risks from the
housing market
• Inflation targeting continues to work well
• Banks are strong, but the degree of concentration may limit the efficiency of
lending and borrowing
• But, the rapid rise in housing prices raises macroeconomic concerns
House prices in Australia compared with selected other OECD economies
Index of real house prices
0
50
100
150
200
250
1995 2000 2005 2010 2015
Index 1995Q1=100
Canada Australia Euro area United States
Source: OECD (2014), Housing Prices database.

11. Use macro-prudential tools to cool off
housing credit
• Continue intensive monitoring of the housing
market, intervening as appropriate with further
measures, including macro-prudential mechanisms
• Examine the financial sector conditions, especially
banks’ implicit guarantees, mortgage lending
regulation and credit databases with a view to
improving credit quality and competition

12. Rebalance the fiscal position through prudent and
gradual consolidation
• The scale of government spending and revenues have long been low and public
debt is not high by international comparison
• However, the budget balance has been in deficit for the past six years; gross
public debt has increased from 20 to 30% of GDP
0
20
40
60
80
100
120
1995 2000 2005 2010 2015
% of GDP
Gross public debt¹
25th to 75th percentile range of OECD members
Australia
OECD
1. Data represent general-government accounts (i.e. including sub-national government accounts). The shaded area denotes the 25th to
75th percentile range of available data for OECD countries. OECD is a simple average of data for available countries.
Source: OECD (2014), Economic Outlook 96 database.

13. • Prioritise medium-term fiscal consolidation to rebuild
fiscal room in the event of unexpected downturns
• Consider establishing a stabilisation fund to save
revenues for bad times
Rebalance the fiscal position through prudent and
gradual consolidation (continued)

14. Rebalance the tax mix to boost growth
• Australia’s tax mix is low on consumption taxation and
high on income tax
• Rebalance the tax mix; shift away from income and
transaction taxes, in particular by generating more
revenue from the goods and services tax
0
10
20
30
40
50
60
MEX
CHL
TUR
HUN
EST
NZL
ISR
GRC
POL
PRT
OECD
AUS
%
A. Taxes on goods and services
as a share of total taxation, 2011
0
10
20
30
40
50
60
70
80
JPN
CHE
NOR
AUT
USA
DEU
SWE
BEL
ESP
LUX
AUS
OECD
%
B. Income tax and related taxation²
as a share of total taxation, 2011
1. Panels A and B show national accounts general government data (i.e. including sub-national government) on a calendar year basis
and using a standardised international classification. OECD refers to a simple average based on 32 OECD countries.
2. Income tax and related taxation comprise taxes on income, profits and capital gains, social security constributions and taxes on
payroll and workforce.
Source: OECD (2014), Revenue Statistics database.

15. Improving
the business
environment

16. Business taxation and support schemes should
be more growth friendly
• Rebalancing away from income to consumption taxation would help
business investment
• Tax and subsidy policy needs to balance business interests and fiscal
concerns
Recommendation
• Concentrate on broad support for business; prioritise corporate-tax rate
cuts and reduce regulatory burdens but be tough on corporate welfare and
tax avoidance

17. Invest more in infrastructure
• Shortfalls in road transport infrastructure create problems of congestion in
urban areas
• Ensure good selection of infrastructure projects by making full use of cost-
benefit analysis

18. Federal-state
relations

19. Enhance spending efficiency and quality of services
• The current division of responsibilities between state and federal governments in some cases
creates wasteful duplication and cost- and blame-shifting
• Half of state financing requirements are financed from own revenues, with the remainder met by
federal grants subject to varying degrees of conditionality
• This large vertical fiscal imbalance potentially reduces accountability and provides opportunities
for blame shifting between government levels
0
10
20
30
40
50
60
70
80
90
United States Germany Canada Austria Australia Belgium Mexico
% Vertical fiscal impalance: a comparison with other federation¹
Goods and Services Tax (GST)Goods and Services Tax (GST)
1. The vertical fiscal imbalance (VFI) is defined as the total of federal payments to total sub-national revenue. For
Australia, VFI is the share of Commonwealth payments in total state revenue. Data refer to 2011 and in the case of
Canada to 2010.
Source: International Monetary Fund (2013), Government Finance Statistics Yearbook; Australian National Authorities.

20. • Improve co-ordination and co-operation and, in health care in particular,
consider a reallocation of responsibilities
• Reduce grant conditionality further, instigate state-level tax reform to
enhance funding autonomy, and increase state-level responsibilities and
accountabilities
Enhance spending efficiency and quality of services
(continued)

21. Education and
welfare reforms

22. Education and welfare reforms to protect
the vulnerable
• A proposed liberalisation of higher-education tuition fees and reforms to
student support will potentially increase competition and choice but may
compromise access
• Substantial welfare reforms are under discussion, including increased
parental leave pay outs and significant tightening of eligibility for those
unemployed aged under 30. The latter may jeopardise the position of low-
income groups

23. Environmental
challenges

24. There are several environmental
challenges
• Agriculture and ecosystems are vulnerable to climate change
• Per-capita greenhouse-gas emissions are substantial
• Congestion is high in urbanised areas
1. CO2 emissions refer to greenhouse gases emissions equivalent to tonnes of CO2 and to the year 2012. OECD refers to a simple
average of 30 OECD member countries.
2. Traffic congestion is measured as excess travel time due to congestion, i.e. the average trip takes 27.5 percent longer in Australia
because of traffic congestion, compared to the average trip without congestion as calculated by GPS devices.
Source: OECD (2014), Environment Statistics database; Tom Tom Traffic Index 2013 Q2.
0
5
10
15
20
25
30
AUS
LUX
USA
CAN
NZL
EST
ICE
IRL
CZE
DEU
OECD
Tonnes per
capita
A. CO2 emissions in top ten OECD countries¹
Per capita
0
5
10
15
20
25
30
35
New Zealand Australia Canada Western
Europe
United States
%
B. Traffic Congestion²

25. New policies to reduce
greenhouse gas emissions
• Commitment to reduce GHG emissions by 5 per cent below 2000 levels
by 2020 has been retained
• The approach to emission reduction has changed tack: The “carbon tax”
has been repealed and a suite of new measures has been developed,
including mechanisms (Emissions Reduction Fund) providing incentives
for business to reduce emission
Recommendation
• The Emission Reduction Fund can meet emission-reduction targets if : i)
robust measurement and verification methods are employed; and ii) a
safeguard mechanism that prevents offsetting emissions elsewhere in the
economy is implemented

26. More Information…
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