By Nick Mann | 14 December 2012

Saving up revenues from mining taxes when they are unusually high could help Australia to meet its spending commitments if commodity prices slump, the Organisation for Economic Co-operation and Development said today.

In its annual Economic outlook for Australia, the OECD also said that, in the event of a fresh global economic slowdown, the country should consider postponing its plans to post a budget surplus and instead increase state spending.

Australia’s booming mining sector has helped it to weather the global economic crisis, and the OECD expects growth to pick up this year from an average of 2.25% in 2010 and 2011 to 3.75%.

However, the next two years are expected to see growth fall slightly to around 3% as the government’s attempt to return to surplus dampens domestic demand and falling commodity prices impact on the demand created by investment in the sector.

With its strong reliance on commodity exports to Asia, Australia is also exposed to the risk of a substantial weakening of the economy in China and other Asian countries.  

While its low unemployment and export strength mean it is an ‘opportune’ time for the fiscal consolidation Australia is carrying out as it bids to return to budget surplus in 2012/13, ‘flexibility is required if negative risks to the outlook materialise’, the OECD said.

‘While monetary policy should be the first line of defence, if a new full-scale global crisis of a similar magnitude as in 2008/09 breaks out, fiscal expansion to support activity would be warranted,’ it explained.

This echoes the International Monetary Fund's annual review of the Australian economy in September, which concluded that the country’s public finances were in good enough shape to enable it to delay its planned return to surplus.

In its report, the OECD also advocated steps to ensure Australia achieves its medium-term debt reduction objectives and meets its spending commitments, even if revenues are hit by a slump in commodity prices.

 ‘The creation of a stabilisation fund would help insulate the budget from swings in resource-based revenues and thereby protect the economy from increasing volatility as it shifts to a greater dependence on the resource sector.

As well as enabling the government to accumulate mining revenues when they are ‘unusually high’, it would also delink public spending decisions from revenue changes caused by shifts in Australia’s trade balance, the OECD explained.

‘The issue is not only to use the unusual revenue windfall to raise national savings, but also to mobilise these resources promptly in a downturn,’ it added.