If Australia wants to improve productivity it must shift towards a greater dependence on indirect taxes like the GST and improve childcare.
That's the view of the Organisation for Economic Cooperation and Development, warning in its latest Economic Outlook that annual Australian growth is unlikely to recover to three per cent until 2017, at which time the jobless rate would still be six per cent.
It says tax reform would strengthen the "framework for growth".
The OECD sees tackling tax breaks on superannuation and capital gains as important.
It also believes increasing and broadening the GST and at the same time lowering distorting income and transaction taxes "would significantly improve the growth-friendliness of Australia's tax system".
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The Paris-based institution says declining mining sector investment and weak global commodity prices continue to weigh heavily on growth.
However, the depreciation in the Australian dollar is providing support, while there are positive signals from business confidence, profits and credit growth in non-mining sectors.
But it also warns that a strong El Nino weather event is likely to increase drought conditions and reduce agricultural output, although this may also mean fewer tropical cyclones and therefore less disruption to mining.
The OECD's latest forecasts are based on the Reserve Bank's cash rate remaining at two per cent before rising in the final three months of 2016.
However, recent prudential banking measures have reduced housing market risks, allowing room for a rate cut should there be a deepening economic downturn, it says.
The federal government also has room to stimulate the economy if needed as it has only a moderate debt burden.
"Nevertheless, medium term fiscal planning must remain strongly committed to putting the debt-to-GDP ratio on a downward track," it says.
OECD'S LATEST AUSTRALIAN FORECASTS
GROWTH
2014 2.7 pct (actual)
2015 2.2
2016 2.6
2017 3.0
CPI
2014 2.5 pct (actual)
2015 1.6
2016 2.1
2017 2.5
UNEMPLOYMENT
2014 6.1 pct (actual)
2015 6.2
2016 6.2
2017 6.0
