Falling iron ore prices, rising unemployment dampen hopes of May budget cash splash

Low but rising unemployment and plunging commodity prices could mean less room for cost of living relief come the May budget.

Households holding out for additional cost of living relief in the May budget are set to be disappointed after Treasurer Jim Chalmers hosed down expectations of a cash splash due to weaker revenue windfalls.

Speaking in a pre-budget address in Sydney on Thursday, Dr Chalmers said any further support for households would not be anywhere near the same size as the multi-billion dollar stage three tax cuts.

“We are already providing a tax cut to every taxpayer, and a bigger tax cut to more workers, we need to be upfront and say that any additional help will only be a fraction of that,” Dr Chalmers told a business luncheon hosted by the Committee for Economic Development of Australia.

Treasurer Jim Chalmers has told CEDA there won’t be a big new cost of living package in the budget. Picture: Christian Gillies / NCA NewsWire

“Any extra help will be targeted, responsible and affordable. There will not be big cash splashes in the budget, simple as that.”

Dr Chalmers warned that while the Albanese government was still aiming for a second straight surplus in May, revenue upgrades to the upcoming budget will likely be far smaller than in previous years due to falling commodity prices and a softening of the jobs market.

In each of Labor’s first two budgets, the bottom line has benefited from more than $100bn in revenue upgrades as soaring commodity prices and near-record low unemployment bolstered the government’s tax take.

“This year, we won’t see anything like that,” Dr Chalmers said.

“In fact we are even looking at much less than the $69bn we booked in the latest mid-year budget update.”

With tax revenue pouring in at a slower rate, the government may therefore have less scope to offer cost of living relief and other handouts in the May budget.

In his address, Dr Chalmers cited the recent fall in the iron ore price, which he said was around 20 per cent lower than 12 months earlier, as a key driver of falling tax receipts.

After holding steady on Tuesday, iron ore futures tumbled on Wednesday with prices sliding too $US104.55 a tonne – a near seven month low.

In mid-February, prices for the key steel ingredient were fetching more than $US130 a tonne.

Commonwealth Bank commodity analysts tip that iron ore prices will ease even further, falling below $US100 a tonne, due to soaring inventories and weak demand from China’s toxic property sector.

However, despite the pessimistic outlook, the iron ore price remains well above Treasury’s own forecasts of $US60 a tonne by the September quarter.

Thermal coal prices were still in line with Treasury forecasts, Dr Chalmers said, however they remained about a third lower than this time last year.

Iron ore prices have slumped from over $US135 a tonne at the start of the year to below $US105 a tonne – a near seven month low. Picture: Supplied.

Dr Chalmers also pointed to signs of weakening in Australia’s jobs market, which will also cap tax receipts and force increased spending on social services.

“While the labour market is still pretty resilient, it’s now softening so we won’t get the very substantial revenue upgrades we’ve seen from outperforming expectations here,” Dr Chalmers said.

After reaching a near record low of 3.4 per cent in 2022, the jobless rate has slowly edged up in recent months, reaching a two-year high of 4.1 per cent in January.

Meanwhile, hours worked and job vacancies have fallen from their record highs, as the economy softens under the pressure of the Reserve Bank’s aggressive run of interest rate increases.

The treasurer said the stage 3 tax cuts package was the biggest cost of living commitment for the government. Picture: NCA NewsWire / Christian Gilles

Treasurer Jim Chalmers gave an overview of the government's fiscal strategy and economic road map at the CEDA event. Picture: NCA NewsWire / Christian Gilles

‘Shooting for a second surplus’

Despite the headwinds facing the budget, Dr Chalmers told CEDA members on Thursday that the government is still “shooting for a second surplus”.

However, the Treasurer is also faced with the competing challenges of ensuring the budget does not add to inflation, while also providing enough fiscal support to keep the economy from tipping into a recession.

“There will still be a primary focus, but not a sole focus, on inflation,” Dr Chalmers will say.

“There’ll be revenue upgrades, and we’ll bank what we can from them.

“The three biggest drivers of our thinking about this third budget are global uncertainty, persistent cost-of-living pressures, and slowing growth.”

The Mid-Year Economic and Fiscal Outlook released in December, showed the forecast federal budget deficit had been slashed to a razor-thin $1.1bn, all but guaranteeing the Treasurer would deliver back to back budget surpluses.