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Challenges mount as Labor prepares budget amid global pressures

By Jessica Penny
4 minute read

As Australia gears up for the May budget, Treasurer Jim Chalmers has shed light on the significant global economic challenges that are shaping the nation’s fiscal decisions.

Speaking ahead of next month’s federal budget, Chalmers emphasised the impact of key factors such as rising inflation, China’s economic slowdown, and fluctuations in commodity prices on Australia’s economic outlook.

While affirming the goal of achieving a budget surplus, Chalmers acknowledged the heightened challenges compared to previous budgets, conceding that “the degree of difficulty has increased”.

“Inflation in the US is going up, we’ve got recessions in some countries, we’ve got a substantial slowing in the Chinese economy, we’ve got all of the costs and consequences of these conflicts that we’re seeing in two important parts of the world as well. So all of this will be a factor on the budget and on our economy,” he said in an interview with the ABC this week.

Expanding on China’s decelerating growth and its implications for Australia’s economy, Chalmers pointed to current Treasury forecasts which project “growth with a four in front of it” for three successive years in China. This forecast indicates the slowest economic growth period in China since its liberalisation in the late 1970s.

“So we expect the Chinese economy to be a bit weaker for a bit longer and that has obvious consequences for us, for our economy, but also for our budget,” the Treasurer noted.

As the leading importer of Australian iron, weak sentiment in Chinese demand and ongoing market factors have already been raised as a concern for Australian exporters and the country’s budget outlook.

Namely, iron ore futures fell by 52 cents to reach a nearly 10-month low of $99.89 per tonne earlier this month, while Australian exports of the material increased.

This dip below the $100 per tonne threshold represented a more than 25 per cent decline from levels seen in January, when prices stood at over $130 per tonne.

To give a sense of what that means for the budget, Chalmers highlighted that this difference equates to some $9 billion in revenue, and approximately $35 billion in nominal economic activity.

“You can see why this is one of the reasons why we expect much, much smaller revenue upgrades in the budget than we’ve become accustomed to on the last couple of occasions. That demands a bit of a different approach to the budget and that’s what you’ll see on 14 May,” he conceded.

In addition to these global challenges, the Treasurer also highlighted domestic issues impacting the budget, such as cost-of-living pressures and a slowing domestic economy.

On inflation, Chalmers said that while it is moderating in Australia, it remains a major concern.

“We still expect inflation to moderate a bit more. It has come off really quite substantially since before the election and since the peaks in 2022, and that’s a good thing,” he said.

“But what we’re seeing in other countries like the US is that that moderation and inflation hasn’t been linear, it hasn’t been in a straight line, it can zig and zag and that’s why there will be ongoing vigilance in the budget when it comes to the fight against inflation, even as we recognise that the balance of risks are shifting a bit in our economy, global and domestic, and we can’t ignore that either.”

With the budget now less than a month away and with Chalmers having previously hinted that revenue upgrades in May will be more conservative than the initially projected $69 billion over four years, he assured that a surplus is “still our goal”.

“It’s a bit harder now because of the iron ore price and because of what we expect to see with the softening in the labour market but that’s still our goal and that’s because the first surplus that we delivered in 15 years, last year, was an important way to put downward pressure on inflation in our economy.”

“We’d like to have a second one if we can, we’re not there yet – the degree of difficulty has gone up a bit, but it’s an important way to put downward pressure on inflation. It’s not an end in itself, it’s how we engage in the fight against inflation and make our budget stronger in the context of this global economic uncertainty and fund our priorities,” he concluded.