Australia has been encouraged to continue to switch to renewable energy as the war in Ukraine exposes risks to global energy security.
Most important points:
- The OECD says world growth will be 3 percent in 2022 instead of 4.5 percent
- It says global inflation will be higher than expected and more persistent
- It has encouraged Australia to continue to switch to renewable energy
The Organization for Economic Co-operation and Development (OECD) said the world is paying a “high price” for the war in Russia.
It said the war is a humanitarian disaster, killing thousands, displacing millions from their homes and triggering a cost of living crisis affecting people around the world.
It said the conflict had also exposed how energy security and climate mitigation were intertwined, and it urged governments to “shift up a gear” to accelerate the global transition to renewable energy.
It encourages Australia to make further investments in its transmission networks to support the transition to renewable energy.
OECD says inflation will be higher and more persistent, with slower growth
The OECD has its latest economic outlook on Wednesday.
It lowered its forecast for global growth this year and doubled its inflation forecast as the world’s economies have been hit by more shocks in recent months as the war in Ukraine continues.
It estimated that world growth would now be 3 percent by 2022 – down from the 4.5 percent forecast in December.
It projected inflation in OECD countries to reach an average of nearly 9 percent this year, which is double what it had previously expected.
It said inflationary pressures worldwide were likely to be stronger and longer-lasting than expected, making the world’s economic recovery more complicated and fraught.
“There have been several significant changes in the global economic environment in recent months, including the global spread of the Omicron variant of the SARS-COV2 virus and greater-than-expected continued inflationary pressures, prompting a more rapid adjustment of monetary policy in a number of major economies than previously expected,” the report warns.
“The biggest change, however, is the economic impact of the war in Ukraine.
“The war in Ukraine has dashed hopes that the inflation wave experienced across much of the global economy in 2021 and early 2022 would wane rapidly.
“The added impetus to food and energy prices and the worsening supply chain problems imply that consumer price inflation will peak later and at higher levels than previously anticipated.”
The agency said this additional negative supply shock was not expected and that household incomes rose more slowly than global prices, exacerbating the deterioration in real disposable household income, already underway in many OECD economies.
“The upcoming EU embargoes on coal and oil imports from Russia are likely to push global energy prices further in the coming year, keeping inflation on track for longer,” the report said.
The OECD said the war in Ukraine, combined with China’s zero-COVID policy, had put the global economy on a course of slower growth and rising inflation — a situation not seen since the 1970s.
Rising inflation, largely driven by sharp increases in the price of energy and food, is creating hardship for low-income people and raising serious food security risks in the world’s poorest economies, it warned.
Australia encouraged to continue to switch to cleaner energy
As for Australia, the OECD said the Reserve Bank should continue to raise interest rates this year.
The RBA this week raised its target for the spot rate by 0.5 percentage points, bringing the target to 0.85 percent — well above most economists’ expectations.
Significant further monetary policy tightening is needed to contain the rise in inflation, the OECD said.
The economic agency also reiterated its position that Australia would benefit from an official review of its monetary policy framework.
“The review process should be transparent, involve consultation with relevant stakeholders and have a broad scope, possibly including a review of the central bank’s mandate, policy tools, methods of public communication, recruitment processes and internal structures,” it said.
The OECD also urged Australian governments to continue to switch to renewable energy.
“Given the energy security risks highlighted by the war in Ukraine, the transition to renewable energy generation should be further encouraged, along with further investment in the transmission network,” it said.
It noted that the former Morrison regering government temporary reduction in fuel tax would end on September 28, driving petrol prices for Australian motorists even higher.
It said that if the Albanian government wants to introduce several cost-of-living measures after September 28, the measures should “be more targeted at low-income households” and be implemented in a way “that does not distort price signals”.
It also said the current recovery would also be a good time to reduce Australia’s heavy reliance on personal income taxes, which made public finances even more vulnerable to an aging population.
“In addition, consideration should be given to increasing or broadening the base of the goods and services tax, reducing tax benefits for private pensions, reducing the capital gains tax cut and further replacing the stamp duty with a recurring land tax,” it said.
“Such reforms would result in a more sustainable tax base.”
However, Treasury Secretary Steven Kennedy said on Wednesday that the projected improvement in Australia’s Commonwealth budget balance (over the medium term) was heavily dependent on income tax hikes.
“Inflation and real wage growth will result in higher average personal income tax rates over time,” Dr. Kennedy said:†
“Unless other taxes or revenues rise, there is little prospect of sufficient fiscal space to return it to taxpayers in the form of tax cuts.
“This would increase average personal tax rates to record levels, increasing the tax burden on wage earners and wage earners.”
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