The Australian government is urged to consider raising its current tax levels, which at present are below the international levels, the Organization for Economic Cooperation and Development (OECD) said.

In a report released today, the OECD said the best way for the Australian government to reverse a budget deficit is widening its GST on mining and even food-two of the country's top consumer staples-- that have been generating robust growth for Australia's economy.

Although it gives credit to the strategies made by the Australian government that allowed it to narrowly escape the financial crisis, the OECD criticised the country's policies, which can affect its future growth/

The Paris-based organisation, in particular, singled out the compromise agreement announced by Prime Minister Julia Gillard with the mining industry on the minerals resource rent tax in advance before the elections dismayed OECD, "as this sets the bar in implementing lower taxes on minerals, which it describes as likely to remain much lower than before the mining boom.''

It further noted that limiting the new tax only to two commodities - coal and iron ore - would possibly undermine the incentives facing other resource projects regardless of their merits.

The OECD also recommends that a separate fund be created exclusively for mining taxes similar to those created by Chile and Norway to shield the government revenues of possible mineral price declines.

Migration and inflation

It further advises the Reserve Bank of Australia to make use of interest rates to lessen the impact of inflation.

"The slack in the economy is rapidly disappearing as unemployment is nearing its natural rate," the Paris-based OECD said in a report today. The Reserve Bank of Australia "should remain vigilant" and "tighten policy if demand pressures on productive capacities intensify," it said.

Australia's economy is seen expanding 3.3 percent this year and accelerating to 3.6 percent in 2011, the OECD said.

"Competition for existing labor supply could generate important wage pressures as employment rates are already high" in the mining states of Queensland and Western Australia, the OECD said. The central bank must "ensure that inflation expectations stay well anchored."

Prime Minister Julia Gillard's government should keep "an open, demand-driven immigration policy" that lets migrants "continue to play a key role in meeting rising labor demand, and in alleviating skill shortages," the OECD said.