The IMF’s latest assessment of Australia was released on Friday, but dated last Monday – before the US lost its AAA credit rating and before global markets started to freefall.
However, the IMF pointed out that the economy was strong, despite offshore factors.
“If global financial markets become severely disrupted or world growth falters, macroeconomic policy is well positioned to respond,” the IMF said.
“The exchange rate would likely depreciate, limiting the fall in commodity prices in Australian dollars and providing stimulus to the non-commodity tradable sector.”
The IMF said, given the government’s low level of net debt – 6% of GDP – there was ample scope to cut the policy interest rate and provide liquidity support for banks, which proved effective in the global financial crisis, as well as delaying the return to surplus.
However, it praised the Australian government for its commitment to returning the budget to surplus so soon, despite labelling it as “ambitious”
The IMF recommended targeting a budget surplus of 1% of GDP from the 2014 financial year and beyond, while the mining boom continued to support growth.
“This growth will provide an opportunity to increase government saving and strengthen public finances further by cutting debt and building funds for a rainy day,” the IMF said.
“Although Australia’s public debt is relatively low, larger fiscal buffers would give greater scope to spend during a downturn to support income and jobs.”
The IMF made a number of policy recommendations aimed at making the most of the mining boom.
“Strong commodity demand is expected to be long lasting because of favourable prospects for sustained growth in emerging Asia, but there could be bumps along the road,” the IMF said.
The IMF recommended larger surpluses than seen previously in future upswings, while temporary deficits in downturns would be appropriate.
The IMF said tax reform would play a big part in sustaining the mining boom and praised the introduction of the MRRT and the carbon tax.
However, it said the reform had not gone far enough and recommended “broadening the coverage of the Minerals Resource Rent Tax”
The IMF also praised the government for its investment in skills training, warning that labour shortages would continue to plague industry.
“Labour force participation has risen in recent years, in part reflecting government initiatives, but the mining boom is increasing the demand for labour,” it said.
“Meeting this demand will require not only raising labour supply, but also moving labour across industries and regions.
While employment growth is expected to slow, the IMF says unemployment will remain below 5% this year and next.
Unsurprisingly, Treasurer Wayne Swan welcomed the IMF’s assessment.
“The IMF's views are a timely reminder of Australia's strong fundamentals given the recent heightened concerns about the global economic outlook,” he said.
“Australia is not immune from developments in the rest of the world, but we should never forget our economic credentials are among the strongest in the world.”
Swan told ABC News Radio this morning that he would not speculate over another global financial crisis but would be monitoring the global situation closely.