$9.3 billion: Chalmers lands the surplus double in third budget

Treasurer Jim Chalmers will forecast a second successive surplus – of $9.3 billion – in Tuesday’s budget, which will promise nationwide cost-of-living relief without fuelling inflation while trying to reshape the economy with its Future Made in Australia industry package.

After producing a record $22.1 billion surplus in their first budget, Chalmers and Finance Minister Katy Gallagher will unveil a $10.5 billion improvement in the budget bottom line from what they were forecasting in the mid-year update and a $54 billion turnaround on what was expected at the 2022 election.

Treasurer Jim Chalmers at a meeting of Labor MPs on Monday, ahead of delivering his third budget.Credit: Alex Ellinghausen

But the surplus is expected to disappear in the coming financial year as a forecast fall in commodity prices, a softer jobs market and a slowdown in wages reduce tax receipts.

Just three other treasurers – Peter Costello, Paul Keating and Frank Crean – have delivered successive surpluses since 1970.

Chalmers said a second surplus was a “powerful demonstration” of the government’s economic management, but it had not come at the expense of supporting those struggling with high inflation or mapping out a new direction for the economy.

“The forecasted surplus has come on top, not at the expense, of helping those doing it tough. The budget will ease cost-of-living pressures, not add to them, and incentivise investment in a Future Made in Australia,” he said.

Chalmers will argue the deterioration in the budget between 2024-25 and 2026-27 is due to “unavoidable spending”. He and Gallagher are expected to point to necessary expenditure in areas ranging from upgrading the myGov services portal to ensuring a palliative care program for the aged sector continues.

But the budget will also contain direct cost-of-living relief to people on fixed incomes to deal with high energy bills, plus the rejigged stage 3 tax cuts worth more than $23 billion that start from July 1.

The centrepiece will be the Future Made in Australia policy that will include tax concessions, direct subsidies and grants aimed at new industries, which the government argues will provide long-term economic and environmental benefits to the country.

Already it has pledged $1 billion in government support for a quantum-computing facility in Brisbane and $1 billion towards a solar panel plant in NSW’s Hunter Valley.

Prime Minister Anthony Albanese said the budget reflected Labor’s values.

“It is a Labor Party budget through and through because it is a budget for every Australian, not just some. New investments in Medicare and the health system, more help for households doing it tough, more homes in every state and territory,” he told Labor MPs on Monday.

“The decisions that we make in this decade will set Australia up for the decades ahead, and that is what a Future Made in Australia is about. Making sure that we seize the opportunities that are there.”

The budget will also contain extra infrastructure spending, including $3.25 billion towards Melbourne’s north-east road link, $1.15 billion for a Sunshine Coast rail link and $1.9 billion for a series of projects across western Sydney.

Parts of the government’s universities accord will be confirmed, including a plan to change the indexation arrangements for Higher Education Loan Program debts that will cost $3 billion.

Extra money will be set aside to help victims of domestic violence, the full cost of paying superannuation on paid parental leave will be revealed, while the instant asset write-off scheme for small businesses will be extended for another year.

A key aspect will be the budget’s impact on inflation.

Illustration by Matt Golding

The RBA last week held official interest rates at 4.35 per cent but forecast inflation was likely to rise from 3.6 per cent to 3.8 per cent through the second half of this year. It is not expecting to have inflation back within its target band until the second half of next year.

Its forecasts, however, did not consider any policies that will be announced by Chalmers in his third budget on Tuesday night.

The treasurer will reveal that inflation could fall to the target band by the end of this year, and be down to 2.75 per cent by the middle of 2025 as the government’s various cost-of-living measures take the edge off expected price increases. The Reserve Bank is forecasting inflation to still be at 3.2 per cent in June next year.

There are growing signs of the impact on the economy of past Reserve Bank rate rises. The Commonwealth Bank’s household spending insights index, released on Monday, showed a 1 per cent fall in April.

Spending lifted in non-discretionary areas such as education and utilities, with households cutting expenditure on food, hospitality, recreation and transport.

It is not just households feeling the pinch. National Australia Bank’s closely watched monthly business survey showed firms winding back employment plans and expectations about the economy through April. Forward orders fell, while there was a moderation in costs for both labour and inputs.

NAB chief economist Alan Oster said the report pointed to a step-down in economic activity and overall inflation.

“Overall, these signs of slowing activity and easing costs support the outlook for gradual improvement in inflation from here, but how quickly this occurs remains to be seen,” he said.

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