OECD delivers snapshot of Aussie economy

The Federal Government should be prepared to delay returning the budget to surplus if economic conditions significantly worsen, according to an international analysis of Australia's economy.

A report by the Organisation for Economic Co-operation and Development (OECD) says the forecast surplus of $1.1 billion this financial year could turn into a deficit of 2-3 per cent of GDP if the terms of trade return to their longer-term average.

It says Australia weathered the global financial crisis well, through sound macroeconomic policy and strong demand from China.

But it suggests the Government should be flexible about its approach to the budget, saying: "Authorities should let automatic stabilisers work in case of a sharper-than-expected cyclical weakening, even if this postpones the return to a budgetary surplus".

The report adds to the growing calls for a possible delay to surplus, .

If a new economic crisis were to break out, the OECD suggests the Government should be prepared to implement a new fiscal stimulus package, as it did during 2008-09.

Treasurer Wayne Swan says the report is another sign that Australia's economy has been well managed, and that the current policy mix is appropriate to sustain recovery.

"While we understand that not everyone is doing it easy, this OECD report today is another reminder that Australians have a lot to be proud of and confident about," he said in a statement.

Shadow treasurer Joe Hockey has today continued his attack on the Government's economic credentials, saying: "It's not in the Labor party's DNA to run a surplus, to live within their means, and to start paying down $251 billion of debt".

Expand mining tax In its 140-page report, the OECD also recommends sweeping changes to how minerals are taxed in Australia, suggesting the federal mining tax be expanded, and that the states do away with royalties in favour of their own profit-based schemes.

"The MRRT [Minerals Resource Rent Tax] in its current form will not eliminate distortions caused by state-levied mining royalties, especially for low-return projects where they are heaviest," the report states.

"Consideration should be given to replacing the royalties with a mining rent tax modelled on the federal approach, leaving the states with the option of setting their own tax rate.

"This change should be accompanied by broader MRRT coverage, which is limited to iron and coal mining and excludes small firms." The report suggests using the proceeds of the mining boom to establishing a 'sovereign wealth fund', aimed at protecting the budget from future revenue volatility.

The OECD suggests that such a fund could act as a strong "fiscal buffer" in the event of a large-scale shock to the economy.

Cut car subsidies The OECD has recommended there be a further reduction in the corporate tax rate, and that the Government cut taxpayer-funded subsidies for industries under pressure by the increasingly globalised economy.

"Australia should not try to resist the changes imposed by this transformed environment.

Using public subsidies to keep resources in sectors adversely affected by such changes, such as the automotive industry, would likely prove futile and expensive and imply lost opportunities elsewhere.

"It will force stiffer adjustments on sectors that do not benefit from such special support, and over time become a drag on living standards.

"It is also important not to procrastinate in making these adjustments, for they are easier to undertake in current circumstances, when the economy is growing strongly and resources are available to ease the transition and to compensate the "losers" from the adjustment process." As part of its suite of recommendations for overhauling the tax system, the OECD says a priority needs to be getting rid of inefficient state taxes such as conveyancing fees.

It suggests such changes could be financed by cutting subsidies for first home buyers or increasing the rate of the GST - which is currently set at 10 per cent - and removing the exemptions that apply to fresh food, medical services and school supplies.

Carbon tax The OECD believes the adverse impacts of the carbon tax on Australia's international competitiveness will be moderated by the "significant" assistance offered in the form of free emissions permits.

And it says future risks to trade-exposed industries should be limited through the government's decision to remove the floor price on the carbon tax, and link it to the European price.

However it says a lower-than-expected carbon price will have a "budgetary cost", unless the household assistance package is also wound back to reflect the revised international market.

"According to some estimates, this fiscal cost would be relatively limited since a carbon price at $15 in 2015/16 instead of the expected $29, would reduce the budget balance by only around $3 billion," the report states.

In a recommendation that will please the Greens, the OECD suggests that extra revenue could be found by getting rid of "inefficient fossil fuel subsidies" in sectors such as agriculture, forestry and fishing, adding that the move would ensure that an effective carbon price reaches those industries as well.

The report notes that the introduction of a carbon price should encourage investment in "clean energy technologies", and thereby enhance Australia's competitiveness in a carbon-constrained world.

Other recommendations: Avoid substantial changes to the existing industrial relations policy.

Allow genuinely new businesses to negotiate "collective agreements" directly with potential employees and/or unions.

Introduce time-specific congestion charges for some roads.

Consider a voucher system for job seekers to help them move easily between employment services.

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