Federal budget 2024: Middle East, China issues could hit cost of living

Treasurer Jim Chalmers has warned the risk of all-out war in the Middle East could see inflation climb again, as he revealed the painful price Australia will pay from China’s slowdown.

China’s sluggish economy is blowing a multibillion-dollar hole in the federal budget as the risk of all-out war in the Middle East heightens fears that the cost of living could soar again.

The brewing perfect storm was forecast by Jim Chalmers after two days of meetings with foreign counterparts in Washington DC and ahead of what he said would be his toughest budget next month.

The Treasurer cautioned the government had to “do more with less”, meaning struggling households were unlikely to see sweeping cost of living relief as they also faced the prospect of a longer wait for interest rate cuts.

Dr Chalmers said while inflation had “come off really substantially” in Australia, a recent spike in the US – which put the handbrake on rate relief – showed it could “zig and zag”.

(L-R) Australia’s Treasurer Jim Chalmers with Britain’s Chancellor of the Exchequer Jeremy Hunt and US Treasury Secretary Janet Yellen following a meeting of the Five Eyes Finance Ministers at the Treasury Department in Washington, DC. Picture: AFP

He refused to weigh in on whether the Reserve Bank would similarly have to hold off on cutting rates but acknowledged the US situation was “a pretty heavy focus” of his talks because of the “implications for the global economy”.

The International Monetary Fund also warned the global fight against inflation had stalled and encouraged caution for central banks unwinding drastic post-pandemic rate rises.

Amid renewed hostilities between Israel and Iran, the Treasurer urged restraint to avoid what he said could otherwise turn into a “full-blown war” that would also drive up inflation again.

“The global economy cannot afford another spike in inflation which comes from escalation in tensions in the Middle East,” Dr Chalmers said.

(L-R) Treasurer Jim Chalmers, Britain’s Jeremy Hunt, US Treasury Secretary Janet Yellen, Canada’s Finance Minister Chrystia Freeland and New Zealand Finance Minister Nicola Willis in Washington, DC, on April 18. Picture: Olivier Douliery / AFP

Ahead of the Treasurer’s third budget, the “degree of difficulty” of which he said was higher than the first two, he warned China’s sluggish growth would severely dent revenue.

While China’s latest growth data was slightly stronger than the market expected, Dr Chalmers said it remained “relatively weak”, and that Treasury had forecast the next three years would be China’s weakest since its economy opened up almost half a century ago.

“To be really blunt about it, we won’t see anything like the revenue upgrades that we saw in the first two budgets in our third budget,” he said, pointing out that a fall in the iron ore price had already wiped $9bn from the budget bottom line this year.

“That is part of the reason why we need a slightly different fiscal strategy to try and do more with less.”

Treasurer Jim Chalmers in Washington DC this week. Picture: Supplied

Dr Chalmers said the government had to “finish the fight against inflation” – meaning any cost of living relief would have to be carefully targeted – while also spending its more limited revenue streams to accelerate flagging economic growth.

“Our budget will put a premium on responsibility and an emphasis on security,” he said.