INTERNATIONAL Monetary Fund (IMF) believes that thorough tax reforms are the key to rejuvenation of Australian economy.

In its recent concluding statement on 2015 Article IV Consultation with Australian authorities, IMF says “Though politically challenging, a comprehensive tax reform could both increase growth and generate revenue over time to help return the budget to surplus. A comprehensive and decisive package would be needed to deliver tangible results. The ongoing Tax and Federation reviews provide the opportunity to craft such a package.”

According to the Statement, the package should herald a shift towards more efficient and simple taxes. It should prevent a large share of individual taxpayers from facing higher tax rates through unchecked bracket creep (which would affect those on lower and middle incomes most).

IMF has also pitched for reduction in the corporate tax rate to international levels, apart from mooting elimination of stamp duties and minor taxes.

The revenue forego due to these initiatives would be offset by broadening the base of the GST and possibly raising the rate-while at least fully compensating those on lower incomes-and relying more on a broad-based real estate tax and excises.

The proposed package should also provide for fairness in tax system. As noted in the Statement, “A number of measures, such as reducing the concessional treatment of superannuation contributions and earnings for those on higher incomes, and the discount on capital gains, would be important for fairness. They would also enhance revenue and could improve housing affordability and financial stability.”

IMF believes that adjusting any of these policies would need careful calibration and phasing, and should be introduced in tandem with the measures to enhance efficiency.

It has called for adjusting of federal fiscal relations to facilitate tax reforms. It notes: “There are many options-one could be for States to receive higher GST revenue and autonomy in return for greater spending responsibilities. This could also help increase spending efficiency.”

According to the Statement, economic activity should gradually pick up and narrow the output gap, supported by strong resource exports, accommodative monetary policy, and rising confidence over the next couple of years.

It continues: “But over the medium term and without reform, growth is likely to converge to a slower potential rate, reflecting less capital accumulation and only modest productivity growth. This lower potential would still mean income growth in line with other advanced countries, but significantly slower than Australians have been used to over the last two decades. Slower growth would also make fiscal consolidation more difficult.”

Australians have enjoyed exceptionally strong income growth for the last couple of decades. But the waning of the resource investment boom and the recent sharp fall in the terms of trade have brought this to a halt.