The government should immediately reverse its decision to raise the GST rate, the Reserve Bank of Australia has said.
The RBA said it had not made a formal recommendation yet to the government on what action to take.
But it said it believed the Government’s actions, including the tax increase, would reduce the economy’s capacity to absorb external shocks.
The bank has urged the Government to consider other ways of reducing Australia’s debt load, including reducing its public debt or raising revenue.
It is also urging the Government not to raise capital gains tax, which has been the Government of Prime Minister Tony Abbott’s main tool to boost the economy.
The decision to increase the GST will have a major impact on the business and housing markets, particularly in the housing sector.
The Government’s decision to move up the rate by two percentage points was taken after the Reserve bank warned that it could lead to a sharp rise in the debt load.
That was before the Australian dollar slumped.
“It will lead to an acceleration of growth that is very difficult to predict,” the RBA’s chief economist, Chris Williamson, said.
“We would have thought that this is the moment to have a discussion on how to get this economy back on track.”
The RBS, the world’s largest central bank, has warned the Government against raising the rate, arguing that it would put pressure on the banking system and raise interest rates.
The Federal Government has already said it will cut its forecast for inflation in the second quarter.
The ABS has said that inflation is expected to be 1.3 per cent in the year ahead, well below the 2.3-per-cent forecast of the Reserve’s inflation index.
The Australian Bureau of Statistics has also forecast that the Australian economy will expand 1.7 per cent this year, well above the 2 per cent growth expected by the RBS.