The OECD has given the Australian economy and the government’s stewardship of it a ringing endorsement while urging a series of unpalatable reform to further strengthen it in its latest economic survey, released this morning. It has also urged the government to abandon its commitment to surplus in the event that growth weakens.

The current outlook for the economy is positive, the OECD concludes, “even though there are mainly negative risks stemming from the external environment, to which Australia is however less vulnerable than many other OECD countries”. Our “current monetary and fiscal policy mix is appropriate to sustain recovery, and Australia is in a good position to respond to risks”. However, “in case of a sharper-than-expected cyclical weakening, the central bank should loosen further and the fiscal automatic stabilisers should be allowed to work, even if this postpones the return to budgetary surplus”.

Automatic stabilisers are the shifts in fiscal policy caused by changes in the economy — in this case, lower tax revenue and higher transfer payments brought on by lower growth and higher unemployment, which means the government is pumping more money into the economy than forecast. Weaker-than-forecast growth is currently looming as the biggest threat to the government’s forecast surplus for this financial year, with corporate and mining tax revenues likely to be lower than expected.

“OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.”

The report also gives a tick to the carbon price, which “should encourage investment in clean energy technologies, and help enhance competitiveness in a carbon-constrained world”.

The OECD also makes recommendations for further reform, some of which have a familiar ring to them, and others that will have both sides of politics running scared. They include:

  • Dumping subsidies for irrigation infrastructure, which formed a key part of the recent, bipartisan agreement on the Murray-Darling Basin Plan, and the automotive sector, and removing fossil fuel subsidies for extractive industries
  • Consider establishing a “stabilisation fund” to reduce the pro-cyclicality of fiscal policy;
  • Cutting the corporate tax rate and expanding the MRRT (i.e. something closer to the original, Rudd RSPT than the current compromise)
  • A big program of tax reform, including lifting and widening the GST: “reduce or remove conveyance duties and the progressivity of the state land tax; broaden the state land tax base by eliminating exemptions for owner-occupiers; cut subsidies to first-home buyers; broaden the base of the goods and services tax and consider increasing its relatively low rate”
  • “Minor changes” to industrial relations, mainly on greenfields agreements
  • Road user charges, more cost-reflective water pricing and a freer water market, and the use of smart meters for electricity consumption.

The report also suggests that Australia’s “safe haven” currency might necessitate further interest rate cuts than would otherwise be the case; it also notes that a sovereign wealth fund might help with offsetting capital inflows.

In passing, the report also deals with a number of furphies peddled in economic debate. On the myth of the threat posed by falling house prices to bank stability, Australian house prices are undergoing an “adjustment” but it is likely to remain “orderly”:

“… households appear well placed to meet their debt obligations, as shown by the low rate of non-performing housing loans, which has remained below 1%. Indeed, nearly 50% of owner-occupiers are repaying their mortgages ahead of schedule … the risk of a house price bust is also limited by the fact that mortgage lenders have been refraining from easing lending standards.”

Indeed, “Australia’s leading banks, unlike those in many other countries, have managed to keep profitability close to pre-crisis levels and have maintained a strong financial position, as in Canada. They continue to be viewed relatively favourably by the international rating agencies.”

On Australia’s underlying budget deficit:

“the underlying health of the public finances has however significantly weakened in recent years … [it] reflects not only the impact of the crisis-induced fiscal stimulus, but spending of a large part of the pre-crisis mining-related revenues through permanent tax cuts and expenditure increases. To deal with this adverse trend, several savings measures have been introduced that will steadily build over time, providing ongoing improvements to the budget position. These measures include increasing the pension age, means testing the private health insurance rebate, reforms to family tax benefits, and reducing superannuation concessions for high income earners.”

And on industrial relations, “the Fair Work Act has made the system more employee- friendly — in terms for example of a slightly higher relative minimum wage and unionisation rate — with little effect so far on labour market performance and productivity… major changes do not seem warranted at this stage”.

The OECD says about half of Australia’s productivity problem in recent years has been due to the mining investment boom and associated lags, lags in energy infrastructure investment and drought, but that improving productivity must focus on human capital via training and education, and greater innovation through better links between large firms and universities. The OECD also wants to see greater private sector infrastructure investment and better infrastructure pricing (the road and water pricing recommendations).

Absent from the report is any justification for many of the hysterical campaigns peddled by parts of the media and the opposition — the demand for a return to WorkChoices to fix productivity, the fixation on government debt, the claim that the government is spending too much, or the David Murray thesis that a downturn could wreck our banks via the housing market.

Nonetheless, there’s plenty in the report the government won’t be too comfortable with. OECD economic reports often reflect the input of Treasury, and Treasury’s hard and politically unpalatable line on a number of issues can be discerned through the report’s recommendations.