Treasurer says budget must not take ‘path of least resistance’

The Treasurer has dropped a major hint on what Australians can expect from the imminent federal budget.

Jim Chalmers has foreshadowed a tight federal budget which will respond to the “intensifying” strains on both government spending and household budgets.

The Treasurer said Australia wasn’t immune to the very real prospect of a third slowdown in 15 years following the global financial crisis and Covid-19 pandemic.

“The third could be an inflationary shock and a hard landing brought about by rapidly tightening monetary policy,” Mr Chalmers said in a speech in Brisbane on Friday.

“This time our response will be more targeted, more measured and more supply-side focused so it isn’t counter-productive and doesn’t put extra pressure on the independent Reserve Bank of Australia.”

The RBA and other major central banks around the world have successively hiked interest rates over the past six months with what Mr Chalmers described as “blunt and brutal force” in a bid to counter soaring inflation.

Mr Chalmers is due to fly to Washington for a G20 meeting with finance ministers and central bank governors before he returns to Australia to deliver his first budget 18 days from now.

Treasurer Jim Chalmers has been floating the idea of amending the stage 3 tax cuts. Picture: NCA NewsWire / Gary Ramage

“The risk of major economy downturns is rising, not receding,” he told the Queensland government’s investment forum.

“And the impact this has on Australia’s economy and budget is hardening, not softening.”

Mr Chalmers said “no responsible government” could ignore the looming fiscal threats to public services and detailed the “big five” cost blowouts facing the government.

Over the next four years, hospital spending will increase by 6.1 per cent, aged care costs will rise by 5.5 per cent and defence spending will grow by 4.4 per cent.

National Disability Insurance Scheme spending is forecast to increase by 12.1 per cent per year over the same period.

And interest payments on government debt will rise by about 14 per cent a year.

Dr Chalmers said the federal government “must be serious about rebuilding our budget buffers”.

“The fiscal position we find ourselves in means that we will have to make some difficult decisions with this budget; difficult decisions for difficult times,” he said.

“The right calls for the right reasons, following the responsible path; not the path of least resistance.”

Prime Minister Anthony Albanese said before the federal election that Labor would keep the policy. Picture: NCA NewsWire / Gary Ramage

Mr Chalmers revealed Treasury has downgraded its forecasts for global growth by 0.75 per cent this year, a full percentage point in 2023 and 0.50 per cent in 2024.

Global economic activity is set to be $US2 trillion ($A3.1 trillion) lower by the end of 2024 than expected.

Mr Chalmers said business investment in Australia was now at its lowest levels since the early 1990s.

He announced on Friday he would set up a roundtable to encourage investment in priority areas such as clean energy and digitisation.

Mr Chalmers said some of Australia’s largest investors including major banks and superannuation funds would be represented.

The first roundtable will be held in November and focus on housing.

Mr Chalmers delivered his speech in Brisbane after a week in which he encouraged debate over the controversial third tranche of tax cuts.

The stage 3 cuts will be the biggest expense to the budget when they come into effect in 2024, with an estimated cost of $243bn over the next decade.

The policy will abolish the 37 per cent bracket that applies to income between $120,000 and $180,000 and means anyone earning between $45,000 and $200,000 will pay only 30 cents of every dollar they earn in tax.

The 45 per cent tax rate would shift from incomes of $180,000 or more to incomes of $200,000 or more.

Mr Chalmers has encouraged debate over whether Labor should break its promise and dump or amend the cuts, which critics say are not affordable or equitable and will cost more than $20bn a year.

Labor supported the Morrison government to legislate its three-tier tax relief package in 2019, with the party now divided over whether it should break its election promise to keep the cuts.

Labor said in July last year it would deliver the same legislated tax relief as the Coalition if it formed government.

Originally published as Treasurer says budget must not take ‘path of least resistance’