Bold take: Australia’s economy gets a clean bill of health from the IMF, and the math backs Labor’s fiscal plans—with plenty of caveats. Treasurer Jim Chalmers is framing a global check-up as a strong vote of confidence in his government’s economics, while acknowledging there’s more work ahead.
Overview from the IMF:
- The IMF says Australia is managing a soft landing after the turmoil of Covid-19, supply chain disruptions, wars, and trade frictions.
- Growth rose to 2.1% year over year in the third quarter of 2025, following a weaker 2024, as private demand gradually recovered.
- As the output gap narrowed, inflation declined through the first half of 2025, allowing central banks to ease policy during the year.
- Yet, inflation pressures resurfaced, with underlying inflation exceeding 3% by 2025Q3.
- Real GDP was forecast to grow 1.9% in 2025 and another 2.1% in the current year.
Risks and outlook:
- External demand and the current account are expected to stay under pressure in the medium term due to global uncertainty, and inflation remains a threat.
- The IMF notes risks skew toward slower growth and higher inflation in Australia.
- External risks include trade tensions, financial instability, and volatile commodity prices, which could dampen demand and jobs. Conversely, new trade agreements and stronger regional integration could bolster resilience.
- Domestically, persistent inflationary pressures may come from tight labor markets and limited supply capacity; alternatively, a slower domestic demand recovery could lift unemployment.
- Medium-term challenges include climate events and shifting global energy demand.
IMF’s domestic snapshots:
- State debt and rising public spending were flagged as concerns, with recommendations to revisit spending and taxation amid growing debt from pandemic-era supports and infrastructure.
- If state spending keeps accelerating, risks include inefficiencies from higher construction costs and possible credit-rating downgrades that raise interest costs. Some agencies view the Commonwealth as a de facto guarantor of state debt, which could push up federal borrowing costs if sub-national debt worsens.
- Per-person debt: Northern Territory at about $5,000; Victoria leading states at around $3,000 per resident. The IMF forecast Garden State debt exceeding $240 billion by 2028–29. Nationally, Commonwealth debt is about $3,500 per Australian, totaling roughly $990 billion.
- Despite debt nearing the trillion-dollar mark, the Commonwealth continues to hold a AAA credit rating.
Chalmers’ reaction and emphasis:
- Chalmers described the IMF briefing as a remarkably positive assessment of Australia and of the government’s economic plan, calling it a “powerful endorsement” of responsible budget management and the reform agenda.
- He cautioned that there are challenges ahead, notably how to keep the budget sustainable enough to fund public spending and how to navigate the ongoing inflation fight—topics that will feature prominently in the upcoming budget.
- While he welcomed IMF suggestions, he noted that some recommendations will be adopted and others may be set aside, underscoring a nuanced reception of the report.
Potential tensions and debate:
- The IMF’s call for tighter scrutiny of state spending and debt, and the concern about federal guarantees potentially elevating Commonwealth borrowing costs, could spark political and policy contention.
- Opinions may diverge on the best path to balance inflation, growth, and debt. For instance, some may argue for bolder consolidation or structural reform, while others warn against crowding out investment with higher taxes or austerity.
Question for readers:
What’s your take on Australia’s debt trajectory and the IMF’s assessment—does it push you toward stronger fiscal restraint, or do you think more investment is needed to sustain growth and productivity? And what reforms would you prioritize to improve long-term sustainability without dampening growth?
