Economic Policies
#22Key Findings
With a looming set of unaddressed structural issues, Australia falls into the middle ranks (rank 22) with respect to economic policy. Its score in this area has declined by 0.2 points relative to 2014.
After a coronavirus-driven recession in mid-2020, the economy bounced back robustly. Wage subsidies and extended unemployment benefits helped limit damage. Unemployment initially surged but fell back to low levels by late 2021. A balanced monetary policy helped sustain spending without being unsustainable.
Restrictions on overseas travel helped boost domestic demand. The effective immigration freeze helped keep unemployment low. Skill shortages remain a concern. The slowdown in Chinese growth and continued conflict with China have dampened future economic prospects.
Net federal debt has risen substantially due to COVID-19 spending, reaching around 45% of GDP. Low commodity prices and an aging population have helped generate a structural budget deficit. The moderate tax levels have contributed to low-quality public infrastructure. The tax system does little to produce ecological sustainability.
After a coronavirus-driven recession in mid-2020, the economy bounced back robustly. Wage subsidies and extended unemployment benefits helped limit damage. Unemployment initially surged but fell back to low levels by late 2021. A balanced monetary policy helped sustain spending without being unsustainable.
Restrictions on overseas travel helped boost domestic demand. The effective immigration freeze helped keep unemployment low. Skill shortages remain a concern. The slowdown in Chinese growth and continued conflict with China have dampened future economic prospects.
Net federal debt has risen substantially due to COVID-19 spending, reaching around 45% of GDP. Low commodity prices and an aging population have helped generate a structural budget deficit. The moderate tax levels have contributed to low-quality public infrastructure. The tax system does little to produce ecological sustainability.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Australia’s economy went into recession in the quarter beginning June 2020, as a result of lockdowns introduced in response to the COVID-19 pandemic. However, since then, the economy has performed quite strongly, despite continued lockdown measures, and the severe curtailment of travel and an effective freeze on immigration since March of 2020. The unemployment rate rose from 5.1% in February 2020 to a peak of 7.4% in July 2020, but has since trended downward, reaching 4.6% in November 2021. Moreover, in November 2021 the employment rate reached 63%, the highest level on record (exceeding even the peak of the mid-2000s’ mining boom).
Provision of income supports and other fiscal stimulus measures, as well as monetary policy settings, have been important drivers of this performance. Most notably, the government implemented a massive AUD 180 billion wage subsidy scheme called JobKeeper that ran from March 2020 to March 2021. The unemployment benefit, JobSeeker Payment, was temporarily doubled in value, while a variety of other income supports and expenditure measures were also introduced in response to the pandemic. State governments additionally introduced their own income supports for individuals and businesses. The Reserve Bank of Australia was quick to reduce the cash rate to 0.25% in March 2020 and subsequently reduced it to 0.1% in November 2020, where it has since remained. It has also engaged in quantitative easing since November 2020 via the purchase of over AUD 200 billion of Australian government bonds.
The immigration freeze and travel restrictions have also been contributors to the strength of the labor market. Restrictions on travel have provided a net boost to domestic demand (since Australians typically spend considerably more overseas than foreign tourists spend in Australia). Meanwhile, the immigration freeze has reduced the supply of workers, resulting in employment growth and declines in unemployment for the incumbent population.
Australia’s monetary policy is one of the country’s economic bright spots. The Reserve Bank of Australia (RBA) has steered a convincing course between the ultra-loose policies of the European Central Bank (ECB) and the more sustainable approach of the U.S. Federal Reserve. The RBA has sought to prevent a sharp appreciation in the value of the Australian dollar, while also avoiding a situation in which it was providing liquidity too cheaply. It has been quite successful in recent years, but has been unable to contain rising asset prices, real estate in particular.
Nonetheless, a lack of microeconomic and tax reforms over the last decade continues to act as a drag on Australia’s economic-growth prospects. Both the slowdown in the growth of the Chinese economy and the political conflict with China, which continued unabated in 2020 and 2021, dampen the economy’s future prospects.
Citations:
Details on the operation of National Cabinet: https://federation.gov.au/
Provision of income supports and other fiscal stimulus measures, as well as monetary policy settings, have been important drivers of this performance. Most notably, the government implemented a massive AUD 180 billion wage subsidy scheme called JobKeeper that ran from March 2020 to March 2021. The unemployment benefit, JobSeeker Payment, was temporarily doubled in value, while a variety of other income supports and expenditure measures were also introduced in response to the pandemic. State governments additionally introduced their own income supports for individuals and businesses. The Reserve Bank of Australia was quick to reduce the cash rate to 0.25% in March 2020 and subsequently reduced it to 0.1% in November 2020, where it has since remained. It has also engaged in quantitative easing since November 2020 via the purchase of over AUD 200 billion of Australian government bonds.
The immigration freeze and travel restrictions have also been contributors to the strength of the labor market. Restrictions on travel have provided a net boost to domestic demand (since Australians typically spend considerably more overseas than foreign tourists spend in Australia). Meanwhile, the immigration freeze has reduced the supply of workers, resulting in employment growth and declines in unemployment for the incumbent population.
Australia’s monetary policy is one of the country’s economic bright spots. The Reserve Bank of Australia (RBA) has steered a convincing course between the ultra-loose policies of the European Central Bank (ECB) and the more sustainable approach of the U.S. Federal Reserve. The RBA has sought to prevent a sharp appreciation in the value of the Australian dollar, while also avoiding a situation in which it was providing liquidity too cheaply. It has been quite successful in recent years, but has been unable to contain rising asset prices, real estate in particular.
Nonetheless, a lack of microeconomic and tax reforms over the last decade continues to act as a drag on Australia’s economic-growth prospects. Both the slowdown in the growth of the Chinese economy and the political conflict with China, which continued unabated in 2020 and 2021, dampen the economy’s future prospects.
Citations:
Details on the operation of National Cabinet: https://federation.gov.au/
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Between 2012 and 2019, the overall unemployment rate rose only slightly, sitting at 5.2% in November 2019 (the beginning of the review period). The onset of the pandemic saw the unemployment rate rise to 7.4% by July 2020, and the underemployment rate rose from 8.6% in February 2020 to a peak of 13.6% in April 2020. However, since mid-2020 both unemployment and underemployment have trended downward, respectively reaching 4.6% and 7.5% in November 2021. This has been driven by government stimulus measures, as well as strong domestic demand due to restrictions on travel and reductions in labor supply due to the effective freeze on immigration.
Wage growth has nonetheless remained very subdued, with almost no increase in real average earnings since 2013. Questions have been raised as to whether the industrial relations system has excessively reduced the bargaining power of employees, for example, through restraints on the right to strike, contributing to tepid wage growth.
Minimum wages, which are set by an independent statutory authority, the Fair Work Commission, have potentially acted as an increasing constraint on employment over the review period. The national minimum wage is relatively high by international standards, at approximately 55% of the median full-time wage; more importantly, there are also a large number of industry- and occupation-specific minimum wages that can be substantially higher than the national minimum wage. Taking effect in July 2021, the minimum wage was increased by 2.5% to AUD 20.33 per hour. Given the stagnation in real wage levels in the broader economy, the “bite” of minimum wages (i.e., the extent to which they negatively impact employment) has been increasing. Nevertheless, high minimum wages have arguably contributed to stabilizing domestic demand.
In March 2021, the Morrison government passed legislation that for the first time formally defined “casual” employment (no firm advance commitment to ongoing work with an agreed pattern of work). The legislation also required employers with 15 or more employees to offer casual employees permanent work if they have been employed for 12 months or more and have had a regular pattern of hours on an ongoing basis for at least the last six months. The legislation has the potential to improve job security for a significant number of employees. However, it is unclear how many casual employees will take up the offer of permanent employment, since it typically involves the loss of the 25% loading paid in lieu of the entitlements accruing to permanent employees.
So-called skills shortages have been a recurring topic of concern in the Australian labor market, which the immigration freeze since March 2020 has only exacerbated.
Citations:
Minimum wage: How does Australia compare to other countries? ABC. 31 May 2016. Available at http://www.abc.net.au/news/2016-05-31/minimum-wage-how-does-australia-compare/7461794
Temporary skill shortage visa: https://immi.homeaffairs.gov.au/visas/getting-a-visa/visa-listing/temporary-skill-shortage-482
Legislation regarding casual employment: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd2021a/21bd053
Wage growth has nonetheless remained very subdued, with almost no increase in real average earnings since 2013. Questions have been raised as to whether the industrial relations system has excessively reduced the bargaining power of employees, for example, through restraints on the right to strike, contributing to tepid wage growth.
Minimum wages, which are set by an independent statutory authority, the Fair Work Commission, have potentially acted as an increasing constraint on employment over the review period. The national minimum wage is relatively high by international standards, at approximately 55% of the median full-time wage; more importantly, there are also a large number of industry- and occupation-specific minimum wages that can be substantially higher than the national minimum wage. Taking effect in July 2021, the minimum wage was increased by 2.5% to AUD 20.33 per hour. Given the stagnation in real wage levels in the broader economy, the “bite” of minimum wages (i.e., the extent to which they negatively impact employment) has been increasing. Nevertheless, high minimum wages have arguably contributed to stabilizing domestic demand.
In March 2021, the Morrison government passed legislation that for the first time formally defined “casual” employment (no firm advance commitment to ongoing work with an agreed pattern of work). The legislation also required employers with 15 or more employees to offer casual employees permanent work if they have been employed for 12 months or more and have had a regular pattern of hours on an ongoing basis for at least the last six months. The legislation has the potential to improve job security for a significant number of employees. However, it is unclear how many casual employees will take up the offer of permanent employment, since it typically involves the loss of the 25% loading paid in lieu of the entitlements accruing to permanent employees.
So-called skills shortages have been a recurring topic of concern in the Australian labor market, which the immigration freeze since March 2020 has only exacerbated.
Citations:
Minimum wage: How does Australia compare to other countries? ABC. 31 May 2016. Available at http://www.abc.net.au/news/2016-05-31/minimum-wage-how-does-australia-compare/7461794
Temporary skill shortage visa: https://immi.homeaffairs.gov.au/visas/getting-a-visa/visa-listing/temporary-skill-shortage-482
Legislation regarding casual employment: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd2021a/21bd053
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
Concerns persist that the federal government faces a structural deficit that will require difficult fiscal decisions in the coming years, most likely involving a combination of spending reductions and tax increases. Moreover, there is long-standing concern over the fiscal sustainability of state and territory governments, which have very limited independent capacities for raising revenue. The increasing need for health and education expenditure by the states and territories has outpaced revenue growth. The massive expenditure measures that were introduced in the wake of the COVID-19 pandemic have only increased the urgency of addressing these problems.
The tax system achieves a reasonably high degree of horizontal equity, with income generally taxed at the same rate irrespective of its source. The main exception is capital-gains taxation, where the family home is exempt from taxation and a 50% discount is applied to capital gains on other assets held at least one year. A further significant exemption is retirement savings (known as superannuation), which are minimally taxed. These exceptions aside, the income-tax system is moderately progressive. Australia’s taxation system redistributes less than other OECD countries, and relatively high remuneration after taxes and social security is a major pull factor in its migration policy.
In 2019, significant changes to the income-tax system were passed by the legislature, although the changes will be implemented over seven years. Beginning in 2024, over 90% of taxpayers will face a top marginal income-tax rate of 30%, which will apply on incomes in the range of AUD 45,000 to AUD 200,000 per annum. The current 32.5% rate, applying to incomes in the range AUD 37,000 – AUD 90,000, and the 37% tax rate, applying to incomes in the range of AUD 90,000 – AUD 180,000, will be eliminated, with the current 45% top rate (currently for incomes over AUD 180,000) to apply to incomes over AUD 200,000. This represents a significant reduction in the progressivity of the income-tax system.
The government has been frustrated by the Senate in its attempts to reduce the company tax rate from 30% to 25%, and has settled on a phased reduction for companies with annual turnover of less than AUD 50 million. The 25% tax rate was fully implemented for companies with an annual turnover of less than AUD 50 million from 1 July 2021.
The tax-to-GDP ratio in Australia remains among the lowest of any OECD economy, and has therefore helped preserve the Australian economy’s competitiveness. However, this low level of taxation arguably creates bottlenecks in infrastructure development that have not been sufficiently addressed. Sydney and Melbourne are particularly exposed to infrastructure bottlenecks, although there has been a substantial surge in infrastructure investment in recent years (albeit mostly funded by state governments).
The tax system does very little to promote ecological sustainability. There are some tax offsets or credits intended to encourage rural property owners to improve the sustainability of their land use, but little else of note. There is no taxation of carbon emissions.
Citations:
Australia’s Future Tax System, Report to the Treasurer. Canberra: Commonwealth Government, 2009. Available from http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm.
Australian government ‘Re:think Tax Discussion Paper,’ March 2015: http://bettertax.gov.au/publications/discussion-paper/.
http://www.treasury.gov.au/Policy-Topics/Taxation/Pocket-Guide-to-the-Australian-Tax-System/Pocket-Guide-to-the-Australian-Tax-System/Part-1
The tax system achieves a reasonably high degree of horizontal equity, with income generally taxed at the same rate irrespective of its source. The main exception is capital-gains taxation, where the family home is exempt from taxation and a 50% discount is applied to capital gains on other assets held at least one year. A further significant exemption is retirement savings (known as superannuation), which are minimally taxed. These exceptions aside, the income-tax system is moderately progressive. Australia’s taxation system redistributes less than other OECD countries, and relatively high remuneration after taxes and social security is a major pull factor in its migration policy.
In 2019, significant changes to the income-tax system were passed by the legislature, although the changes will be implemented over seven years. Beginning in 2024, over 90% of taxpayers will face a top marginal income-tax rate of 30%, which will apply on incomes in the range of AUD 45,000 to AUD 200,000 per annum. The current 32.5% rate, applying to incomes in the range AUD 37,000 – AUD 90,000, and the 37% tax rate, applying to incomes in the range of AUD 90,000 – AUD 180,000, will be eliminated, with the current 45% top rate (currently for incomes over AUD 180,000) to apply to incomes over AUD 200,000. This represents a significant reduction in the progressivity of the income-tax system.
The government has been frustrated by the Senate in its attempts to reduce the company tax rate from 30% to 25%, and has settled on a phased reduction for companies with annual turnover of less than AUD 50 million. The 25% tax rate was fully implemented for companies with an annual turnover of less than AUD 50 million from 1 July 2021.
The tax-to-GDP ratio in Australia remains among the lowest of any OECD economy, and has therefore helped preserve the Australian economy’s competitiveness. However, this low level of taxation arguably creates bottlenecks in infrastructure development that have not been sufficiently addressed. Sydney and Melbourne are particularly exposed to infrastructure bottlenecks, although there has been a substantial surge in infrastructure investment in recent years (albeit mostly funded by state governments).
The tax system does very little to promote ecological sustainability. There are some tax offsets or credits intended to encourage rural property owners to improve the sustainability of their land use, but little else of note. There is no taxation of carbon emissions.
Citations:
Australia’s Future Tax System, Report to the Treasurer. Canberra: Commonwealth Government, 2009. Available from http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm.
Australian government ‘Re:think Tax Discussion Paper,’ March 2015: http://bettertax.gov.au/publications/discussion-paper/.
http://www.treasury.gov.au/Policy-Topics/Taxation/Pocket-Guide-to-the-Australian-Tax-System/Pocket-Guide-to-the-Australian-Tax-System/Part-1
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Net federal government debt rose from approximately 19% of GDP in 2019 to 25% in 2020 and is forecast to reach 45% in June 2022. While this increase is directly attributable to an appropriate fiscal response to the coronavirus pandemic, it nonetheless creates significant challenges for future fiscal policy sustainability. At the same time, Australia has significant infrastructure shortages, which would require additional government spending.
Over the longer term, the consensus is that Australia has a structural deficit. This means that, averaged over the business cycle, existing revenue streams will not adequately meet ongoing expenditure needs given current tax rates and expenditure levels. The reasoning is that commodity prices will not return to pre-2012 levels, and expenditure demands are projected to increase over coming years, partially due to an aging population. Prior to the pandemic, Australia’s population was continuing to grow, with immigration in particular helping to reduce population aging. However, population growth has been approximately zero in 2020 and 2021, and it is unclear how quickly immigration will pick up.
Citations:
http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australian-Infrastructure-Audit-Executive-Summary.pdf.
Net government debt: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202122/CommonwealthDebt
Over the longer term, the consensus is that Australia has a structural deficit. This means that, averaged over the business cycle, existing revenue streams will not adequately meet ongoing expenditure needs given current tax rates and expenditure levels. The reasoning is that commodity prices will not return to pre-2012 levels, and expenditure demands are projected to increase over coming years, partially due to an aging population. Prior to the pandemic, Australia’s population was continuing to grow, with immigration in particular helping to reduce population aging. However, population growth has been approximately zero in 2020 and 2021, and it is unclear how quickly immigration will pick up.
Citations:
http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australian-Infrastructure-Audit-Executive-Summary.pdf.
Net government debt: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202122/CommonwealthDebt
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
In November 2017, a report was released laying out a strategic plan to 2030 for optimizing investment in Australian innovation. The Australian government, in its May 2018 response to the report, expressed support in principle for most of the recommendations, but there has been little evidence of substantive policy change since then. The comparatively low quality of the infrastructure is the result of limited spending on its modernization. This reflects the preference of Australian society for moderate levels of taxation.
In the 2020-21 budget, the Morrison government introduced a new R&D tax incentive scheme effective 1 July 2021 that provides up to a 43.5% tax offset (reduction) on company R&D expenditures. It remains to be seen whether this leads to an increase in private sector R&D investment. The 2020-21 budget also provided for a AUD 1.5 billion Modern Manufacturing Strategy, the centerpiece of which is AUD 1.3 billion allocated to local manufacturers to help them “collaborate and build scale, commercialize their ideas and connect to global supply chains.”
Australia’s support for local manufacturing in six areas – resources and critical minerals, food and beverage, medical products, recycling and clean energy, defense, and space – is similar to the subsidy programs that other OECD countries have embraced.
Citations:
Innovation and Science Australia 2017, Australia 2030: prosperity through innovation, Australian Government, Canberra: https://www.industry.gov.au/sites/g/files/net3906/f/May%202018/document/pdf/australia-2030-prosperity-through-innovation-full-report.pdf
Australia’s Economic Accelerator To Propel Economy, https://www.pm.gov.au/media/australias-economic-accelerator-propel-economy
In the 2020-21 budget, the Morrison government introduced a new R&D tax incentive scheme effective 1 July 2021 that provides up to a 43.5% tax offset (reduction) on company R&D expenditures. It remains to be seen whether this leads to an increase in private sector R&D investment. The 2020-21 budget also provided for a AUD 1.5 billion Modern Manufacturing Strategy, the centerpiece of which is AUD 1.3 billion allocated to local manufacturers to help them “collaborate and build scale, commercialize their ideas and connect to global supply chains.”
Australia’s support for local manufacturing in six areas – resources and critical minerals, food and beverage, medical products, recycling and clean energy, defense, and space – is similar to the subsidy programs that other OECD countries have embraced.
Citations:
Innovation and Science Australia 2017, Australia 2030: prosperity through innovation, Australian Government, Canberra: https://www.industry.gov.au/sites/g/files/net3906/f/May%202018/document/pdf/australia-2030-prosperity-through-innovation-full-report.pdf
Australia’s Economic Accelerator To Propel Economy, https://www.pm.gov.au/media/australias-economic-accelerator-propel-economy
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
As a globally oriented country with a high degree of international economic integration, including financial market integration, Australia has a strong interest in promoting a stable, efficient and transparent international financial system. Australia displays a strong commitment to preventing criminal financial activities, including tax evasion. To that end, the government has information-sharing arrangements with a number of countries. However, Australia is a relatively small player in international finance and has a limited ability to shape the regulatory process within multilateral institutions.
Prudential supervision of Australian banks and other financial institutions is generally of high quality. While Australian banks appear to be stable, they have substantial exposure to real-estate lending. Fully 60% of the Australian financial system’s loan book is focused on real estate. A sharp decline in house prices would cause severe problems for the banking system. Motivated by widespread reports of unconscionable conduct by banks and other financial institutions, the federal government convened a Royal Commission of Inquiry in 2018, tasking it with looking into misconduct in the finance industry. The inquiry reported in February 2019, although few policy changes appear to have led from the report.
Australia has accumulated a high level of foreign debt, with net debt of over AUD 1.2 trillion. However, this is almost entirely private sector debt and is not considered a threat to Australia’s financial stability. That conventional assessment might be challenged in the event of a significant rise in interest rates, which is currently unlikely, but not entirely impossible.
Citations:
Michael Janda: Australia’s debt binge ‘coming to an end,’ says Bank for International Settlements. 25 June 2018. Available at https://www.abc.net.au/news/2018-06-25/australia-named-as-household-debt-problem-country/9905390
OECD: Households accounts, available at https://data.oecd.org/hha/household-debt.htm
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: https://webarchive.nla.gov.au/awa/20200605053315/https://financialservices.royalcommission.gov.au/Pages/default.aspx
Interest rates will be a touchy subject in an election year, https://www.afr.com/policy/economy/interest-rates-will-be-a-touchy-subject-in-an-election-year-20211220-p59j0x
Balance of Payments and International Investment Position, Australia, https://www.abs.gov.au/statistics/economy/international-trade/balance-payments-and-international-investment-position-australia/latest-release
Reserve bank keeps interest rates on hold and ends stimulus as Australian economy recovers, https://www.theguardian.com/business/2022/feb/01/reserve-bank-keeps-interest-rates-on-hold-and-ends-stimulus-as-australian-economy-recovers
Prudential supervision of Australian banks and other financial institutions is generally of high quality. While Australian banks appear to be stable, they have substantial exposure to real-estate lending. Fully 60% of the Australian financial system’s loan book is focused on real estate. A sharp decline in house prices would cause severe problems for the banking system. Motivated by widespread reports of unconscionable conduct by banks and other financial institutions, the federal government convened a Royal Commission of Inquiry in 2018, tasking it with looking into misconduct in the finance industry. The inquiry reported in February 2019, although few policy changes appear to have led from the report.
Australia has accumulated a high level of foreign debt, with net debt of over AUD 1.2 trillion. However, this is almost entirely private sector debt and is not considered a threat to Australia’s financial stability. That conventional assessment might be challenged in the event of a significant rise in interest rates, which is currently unlikely, but not entirely impossible.
Citations:
Michael Janda: Australia’s debt binge ‘coming to an end,’ says Bank for International Settlements. 25 June 2018. Available at https://www.abc.net.au/news/2018-06-25/australia-named-as-household-debt-problem-country/9905390
OECD: Households accounts, available at https://data.oecd.org/hha/household-debt.htm
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: https://webarchive.nla.gov.au/awa/20200605053315/https://financialservices.royalcommission.gov.au/Pages/default.aspx
Interest rates will be a touchy subject in an election year, https://www.afr.com/policy/economy/interest-rates-will-be-a-touchy-subject-in-an-election-year-20211220-p59j0x
Balance of Payments and International Investment Position, Australia, https://www.abs.gov.au/statistics/economy/international-trade/balance-payments-and-international-investment-position-australia/latest-release
Reserve bank keeps interest rates on hold and ends stimulus as Australian economy recovers, https://www.theguardian.com/business/2022/feb/01/reserve-bank-keeps-interest-rates-on-hold-and-ends-stimulus-as-australian-economy-recovers