Trump’s tariffs cast $1.25 billion shadow over Victoria’s budget

A major economic downturn fuelled by US President Donald Trump’s trade wars could deliver a $1.25 billion hit to Victoria’s budget in one year, alternative government modelling shows.

State Treasury is forecasting a rebound in household spending and real wage growth this financial year, but last week’s budget papers also detail the significant risks to the economy associated with tariffs imposed by Trump.

Budget analysis highlights potential impacts of the US trade wars on Victoria’s bottom line.Credit: Marija Ercegovac

The United States is Victoria’s second-biggest global customer for goods, narrowly behind China, making up 17 per cent of exports in this category last year.

Out of about $6 billion in exports to the US in 2024, pharmaceuticals and beef were the two biggest categories by value of goods shipped.

Victoria’s real gross product is forecast to grow by 2.5 per cent in 2025-26, but this figure could have been higher if the budget wasn’t expecting net trade to detract from the result. The growth of imports into Victoria is expected to exceed the growth in exports as agricultural shipping declines from record levels.

In the 2023-24 financial year, Victoria ran a significant trade deficit. It imported $123.9 billion in goods and exported $37.6 billion, according to the Department of Foreign Affairs and Trade.

In sensitivity analysis in the recent budget papers, Treasury modelled alternative scenarios that could throw out the budget’s forecasts.

The analysis shows that if local spending does not grow as expected, and international growth stalls by as much as 1 per cent, Victoria would suffer a $1.25 billion loss to its revenue.

The government considers this scenario less likely than the economic conditions forecast in the budget papers, but the analysis highlights potential impacts of the 2025 US trade wars on Victoria.

“Risks to the Victorian outlook from global conditions have increased amid a highly uncertain global backdrop,” the budget papers say.

Beef exports are one of Victoria’s biggest goods markets with the US. Credit: Bloomberg

“Recent policy announcements have already had an impact on confidence, which could lead households and businesses to delay spending and investment decisions and amplify the effects of changing trade policies on global and domestic activity.”

Victoria has relatively modest direct exposure through its exports, the budget papers say, but the indirect consequences of sustained tariffs could be larger through their effects on global growth and Victoria’s other trading partners.

The US has imposed a 10 per cent baseline tariff on most imported goods. Most Australian products are subject to this tariff, with some limited exceptions and a higher charge on steel and aluminium.

“Beyond the effects on global trade, the US’s policy announcements could also affect consumer and business confidence, which could lead households and businesses to delay spending and investment decisions. If that occurs, these confidence effects would amplify the economic effects of weaker global trade,” the budget papers say.

In Treasury’s modelling of a worst-case scenario, global demand for exports would be 1 per cent lower than forecast coupled with sharp falls in confidence that weigh down investment and consumer spending.

If this occurred, the government is forecast to lose $1.25 billion from its bottom line in 2025-26, endangering Victoria’s expected $600 million operating surplus, the first since before the pandemic.

Another $564 million could be lost over the forward estimates, with most of the damage to the budget happening in the first two years.

By comparison, last year’s budget papers modelled a domestic slowdown and forecast a $600 million hit to the budget over four years.

In a more positive scenario modelled by Treasury, a higher-than-expected recovery in household spending in 2025-26 would add an extra $975 million to government income that year, adding up to $1.9 billion in extra revenue across the forward estimates.

Speaking about the budget on Tuesday, Treasurer Jaclyn Symes said the government was looking at the impact of tariffs on pharmaceuticals and beef, but a lack of confidence across other countries would have the biggest impact on the economy.

“Instability can lead to people being cautious about the decisions and the investments that they make, and so it’s actually the ramifications of the decisions, as opposed to the decisions themselves, that we’ll keep a close eye on,” she said.

The government is spending $35 million on programs to boost exports and support businesses with international trade. Another $18.1 million will maintain the state’s global network of trade and investment offices.

A further $627 million is put towards delivering the Economic Growth Statement, a policy document released in late 2024 which sought to improve private-sector confidence by promising reforms such as streamlining of regulators.

Symes said the Victorian Chamber of Commerce and Industry and had told her that 5 per cent of their members exported, but many more had the capacity to do so, and Australia and Victoria’s reputation as a stable place to do business could encourage this.

Paul Zalai, director of the Freight & Trade Alliance and secretariat of the Australian Peak Shippers Association, said it was impossible to predict the full impact of US tariffs because the goalposts kept moving.

“Shipping demand to the US is fluctuating weekly, with vessels and equipment being scheduled inconsistently. This volatility disrupts supply chains globally and creates uncertainty for Australian traders,” he said.

Zalai said it was vital that Australia diversify its trade partnerships.

“We must actively pursue emerging markets across Asia and urgently finalise a free trade agreement with Europe,” he said.

“Even with success in these areas, we are still vulnerable to global shipping disruptions. However, there are pressing domestic issues well within our control.”

Adding to concerns for Victorian farmers are drought conditions across parts of the state.

The Allan government has announced an expanded support package for farmers, but the sector is calling for more, and some have lashed the government for increasing its levy on emergency services.

Hamish McFarlane, director of Te Mania Angus in south-west Victoria, said although drought conditions remained the biggest issue for the industry, Victoria needed to maintain a relationship with the US because of America’s high demand for secondary cuts.

“They’re big consumers of beef, and they’ve got to get it from somewhere ... We need to have a ready outlet for that portion of the animal, and that’s why I think we need to keep very, very much on side with them,” McFarlane said.

Victorian Farmers Federation president Brett Hosking agreed weather conditions were the biggest concern for farmers, but US tariffs had also caused anxiety.

“Markets as a rule of thumb do like certainty, and so do we as farmers, because it gives us something that we can actually budget our production on,” he said.

Key strengths of the Victorian economy highlighted in the budget include low unemployment, the state’s skilled workforce and the diversity of its economy.

The unemployment rate is forecast to rise to 4.75 per cent in the next financial year, but this remains below the long-term average before the pandemic.

A state government spokesperson said: “With a growing economy, higher wages a healthy labour market and strong economic outlook, we’re focused on creating secure jobs and more opportunities for Victorians wherever they live.”

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