The IMF likes where Australia is at, but sees serious risks ahead. It wants to see "comprehensive tax reform" and "greater spending efficiency" to hold on to fiscal sustainability

This is a re-post of the IMF Staff Concluding Statement of the 2025 Article IV Mission on Australia.

Washington, DC – November 19, 2025:

• Australia is managing a soft landing amid global uncertainty: inflation has declined significantly, the labor market is still strong, and private demand is recovering. The economy is gaining momentum, with growth forecast at 1.8 percent in 2025 and 2.1 percent in 2026. However, global developments including elevated trade tensions, along with uncertainty around the momentum in private consumption and labour market conditions, pose risks to growth and inflation.
• Macroeconomic policies are gradually approaching neutral settings as the economy is returning to balance. Given elevated uncertainty, scenario planning and agility in policy adjustment are essential. If global or domestic risks materialize, monetary policy should adjust, complemented by fiscal automatic stabilizers.
• Boosting Australia’s growth prospects requires continued efforts to tackle fiscal and structural challenges. Comprehensive tax reform and greater spending efficiency can maintain fiscal sustainability, enhance economic resilience, and boost productivity. Driving durable productivity growth also requires careful prioritizing and bundling of reforms around technology, competition, labor markets, and the green transition.

I. CONTEXT AND RECENT DEVELOPMENTS

1.Australia is managing a soft landing amid an uncertain global outlook. Following a period of high inflation and excess demand, the economy is showing signs of gradually returning to internal balance. This conjuncture has also created the opportunity to focus on refreshing the structural reform agenda to address medium-term challenges. Thus, the authorities are targeting reforms to boost productivity, maintain fiscal sustainability, and ensure economic resilience. Delivering on this ambitious agenda will require skillful economic management in a challenging global environment.

2.Despite elevated global uncertainty, growth has thus far proved resilient. The impact of higher US tariffs and global trade policy uncertainty on Australia’s economy has been limited. Real GDP grew by 1.8 percent (year-on-year) in the June quarter, supported by stronger private consumption and investment in dwellings and the non-mining sector, while public demand growth eased and mining business investment remained soft. Tightness in the labor market is gradually unwinding, but the unemployment rate (4.3 percent) remains low by historical norms.

3.While the disinflation process has come a long way, some sectors are experiencing renewed price pressures. Trimmed mean inflation steadily declined through 2025Q2, falling to 2.7 percent (year-on-year), supported by broad-based services disinflation. This allowed the Reserve Bank of Australia (RBA) to reduce its policy rate by 75 basis points to 3.6 percent over 2025. However, some price pressures re-emerged in 2025Q3, including in prices of new dwellings purchased by owner-occupiers and market services, which raised underlying inflation to 3 percent (year-on-year) and may signal residual tightness in the economy.

II. OUTLOOK AND RISKS

4.Growth is expected to strengthen into 2026. Real GDP growth is projected to rise to 2.1 percent in 2026, from 1.8 percent in 2025, as recent monetary easing supports continued recovery in private demand. Headline inflation is expected to return to within the RBA’s 2 to 3 percent target band. Meanwhile, gradual fiscal consolidation is expected to narrow state and commonwealth deficits, supported by spending reforms and a normalization of infrastructure spending, keeping public debt at a low level. The increase in public savings should support a gradual narrowing of the current account deficit.

5.The balance of risks to growth is tilted to the downside, but upside risks to inflation also persist. Global trade policy shifts and elevated uncertainty may weigh on demand and employment. Domestically, consumption growth may ease, delaying the recovery in private demand, and generating a rise in unemployment. On the other hand, inflationary pressures may prove more persistent than expected, including if a resilient job market drives stronger labor costs growth. Australia also faces elevated risks from shifting external demand for coal amid the energy transition, including weaker demand from China.

III. RECOMMENDED POLICIES AMID UNCERTAINTY

A. Near-Term Policy Mix and Scenario Analysis

6.Calibrating the macroeconomic policy mix amid heightened global and domestic uncertainty presents an important near-term challenge. Under baseline forecasts of an economy returning to balance in the near-term, macroeconomic policies should aim to converge to a broadly neutral setting, to support price stability and full employment. However, shifts in the global economy and signs of some residual capacity constraints, reflected in recent inflation data, require policymakers to remain vigilant and respond promptly if circumstances change.

7.In this context, scenario analysis can enhance preparedness, ensuring effective and timely countercyclical policy responses to external shocks. Given an agile macroeconomic policy toolkit, strong institutions, and flexible markets, Australia is well positioned to manage any materialization of risks related to trade policy uncertainty and tighter global financial conditions. Exchange rates would adjust to external shocks, allowing monetary policy to focus on addressing domestic implications, supported by fiscal automatic stabilizers.

B. Calibrating Monetary Policy Normalization Under Elevated Uncertainty

8.Judicious calibration of the monetary policy stance remains critical in the near term. As the economy moves toward internal balance, monetary policy is appropriately converging toward a neutral stance, although precisely assessing the neutral rate remains challenging under elevated uncertainty. Non-linearities in monetary policy transmission – with different reaction lags for consumption, dwelling, and non-mining investment to domestic financial conditions – imply the pass-through of recent easing will continue into next year; thus close monitoring of its impact is warranted. Going forward, given persistent uncertainty around the global economic environment, the degree of slack in the labor market, and the restrictiveness of financial conditions, monetary policy should remain cautious, agile, and data-dependent. If upcoming data flows continue to signal residual tightness in the economy, the RBA should hold off on further monetary easing, while if future data flows indicate a faster-than-expected softening in conditions, a somewhat less restrictive stance may be warranted.

9.In the context of heightened domestic and global uncertainty, clear communications by the RBA remain essential for guiding market expectations, and the RBA’s continued efforts in this area are very welcome. Recent efforts include detailed alternative scenarios in the Statement on Monetary Policy in reaction to elevated uncertainty; greater transparency around its decision-making process; and improved clarity in communicating the broad direction of monetary policy. Further efforts to clarify the RBA’s monetary policy reaction function under alternative scenarios, and to increase the number of public engagements by the Monetary Policy Board (MPB), may better anchor market expectations in a period of elevated uncertainty. The continued response to the recommendations to further bolster the RBA’s transparency and independence as outlined in the RBA review have also been welcome, including the establishment of the separate MPB earlier this year. The Treasury Secretary’s role on the MPB is retained but is confined to acting in an individual capacity. While it has never been invoked, repealing the Treasurer’s power to override monetary policy decisions—as also recommended by the RBA review—would further strengthen central bank independence.

C. Strengthening Budget Sustainability and Using Fiscal Policy as a Structural Tool to Boost Productivity

10.While the broadly neutral fiscal stance in the near term is appropriate to safeguard the recovery, the planned medium-term fiscal consolidation will rebuild fiscal buffers. The Commonwealth’s 2025/26 budget balances energy rebate extensions and a modest tax cut with planned savings in care and disability spending, and is expected to deliver a broadly neutral stance in the near-term. The ongoing gradual phase down of pandemic and cost-of-living support is welcome as the economy returns to balance. The planned fiscal consolidation, which focuses on greater spending efficiency, will strengthen resilience to future shocks. A comprehensive tax reform package could usefully complement these efforts by helping boost economic efficiency, productivity and intergenerational equity. For example, an increase in indirect taxation, the reintroduction of a resource revenue tax, and removing income tax exemptions could offset lower corporate and labour taxes, thereby lowering the cost of capital and increasing incentives for investment and work. Expenditure reforms should continue to target efficiency savings in growing cost areas (such as NDIS and aged care), and protect productive infrastructure investment.

11.Nationwide coordination of fiscal strategies and refinement of fiscal frameworks can improve efficiency and equity across the federation. Rising state and territory debt, driven by increased infrastructure, health and social protection spending and exacerbated by uneven commodity revenues, has caused missed sub-national fiscal targets and widening disparities. Fiscal coordination across the federation is crucial to ensure equitable burden‑sharing and efficient spending, especially in areas like climate governance and tax reform. Regular assessment of subnational fiscal positions as well as publishing compliance with sub‑national fiscal rules, either through an expanded oversight role for the Parliamentary Budget Office or the Commonwealth Treasury, could improve transparency and inform policy discussion. The Commonwealth’s fiscal strategy has been effective over the post-pandemic period, but if structural spending pressures intensify in the future, clearer fiscal anchors could help to safeguard fiscal sustainability.

D. Navigating Financial Stability and Housing Market Challenges amid Global Uncertainties and Structural Impediments

12. The Australian financial system remains sound, with contained systemic risks but potential vulnerabilities amid global uncertainty and easing of financial conditions. Banks report ample capital and liquidity, maintain robust profitability, and uphold sound lending standards, ensuring they can absorb losses while continuing to supply credit. However, potential spillovers from global uncertainty and market volatility pose risks to Australia’s financial system. In this regard, ongoing stress tests and close monitoring of emerging risks by the regulatory authorities are critical. The inaugural system-wide stress test by APRA will help improve understanding of interconnections across the financial system, including those between banks and the large and growing superannuation funds sector, and assess the associated risks. As financial conditions ease and housing prices rebound—further stretching valuations against income—vulnerabilities may arise from potential weakening in lending standards and excessive buildup of household debt. While current macroprudential policies support stability, regulators must stay vigilant and be prepared to tighten measures, such as pre-emptively activating additional borrower-based limits, in response to evolving vulnerabilities.

13. A holistic strategy is crucial to overcoming the structural barriers that impede new housing supply. Although cyclical pressures have eased somewhat, as population growth slowed and dwelling investment picked up, Australia’s housing imbalance persists due to long-standing challenges including some skilled labour shortages, expensive land, low construction productivity, and complex regulations and approval processes. As a result, the strong rebound in housing prices caused a further deterioration in affordability. The government has introduced supply-boosting initiatives on social housing, supporting infrastructure, and advanced construction methods. As housing supply remains constrained, expanded support for first-time home buyers may contribute to price pressures in the near-term by accelerating demand while financial conditions ease. Concerted efforts across different levels of governments are needed to meet national housing targets and improve affordability, focusing on easing zoning and building restrictions, expediting land release and approval processes, and enhancing construction productivity. As part of a comprehensive tax reform, a shift away from stamp duties to recurring property taxes at the state and territory government level can be considered to promote more efficient use of land and existing housing stock, and tax arrangements that affect housing demand and investment can be reviewed with potential savings redirected toward supporting new housing supply. Together, these efforts to support the government’s agenda to boost housing supply can help reduce the need for the recent tightening of capital flow management (CFM) measures that discriminate between residents and non-residents in the purchase of existing dwellings.

E. Turning Structural Reform Ambition into Action to Boost Productivity and Growth

14.Australia’s productivity growth has been weak over the past decade and has contributed to slow economic growth. While labour productivity growth has slowed across several advanced economies, Australia has experienced a particularly pronounced decline in labour productivity. The authorities are implementing a series of reforms to modernize competition policy to better support business dynamism, innovation, and investment. Recent commitments to ban non-compete clauses for low- and middle-income workers, as well as wage fixing arrangements and no-poach agreements, starting 2027, will likely improve labour mobility. Going forward, the authorities’ multi-pronged agenda as recently discussed at the August 2025 Economic Reform Roundtable, marks an important initiative, but it is essential to maintain momentum with clear implementation plans.

15.Prioritizing and bundling of reforms will be important to maximize synergies to deliver resilient growth and productivity gains. Australia benefits from strong institutions and macroeconomic stability, which together could create favorable conditions for attracting investments to drive the next wave of growth. Going forward, focus should be on easing the overarching binding constraints including significant regulatory compliance costs, skills mismatch, and falling R&D expenditure. Complex and overlapping regulations across government levels weigh on investment and business operations in multiple sectors, underscoring the need for streamlining and harmonization. Leveraging the adoption of technologies (including AI) for innovation, boosting competition and business dynamism, and undertaking labour market reforms are a key focus of the government’s reform agenda. Bundling and prioritizing reforms, like labour market reforms with AI integration to lower labour market disruptions, could accelerate output gains, broaden stakeholder support, and pave the way for deeper structural transformation. The green transition, including the authorities recently announced 2035 commitments, offers opportunities for enhancing investment, productivity, and diversification while contributing to Australia’s climate goals. Industrial policy such as Future Made in Australia (FMiA), should maintain a disciplined and narrow focus on addressing market failures and generating positive externalities.

The IMF’ s 2025 Article IV team would like to express its deep appreciation to the Australian authorities and other interlocutors for their close engagement and cooperation. Our unstinting gratitude particularly goes to the counterparts at the Treasury and the Reserve Bank of Australia for the substantial time and effort devoted to supporting our work. The team looks forward to maintaining this constructive engagement and policy dialogue.