Treasurer warned of economic turmoil ahead of budget

Treasurer Jim Chalmers has been warned that increased tensions in the Middle East, weakness in the Chinese economy, and global market volatility will lead to greater economic uncertainty at home ahead of the May budget.

Just four weeks out from Labor’s third federal budget, a Department of Treasury briefing note – obtained by this masthead – said the economic environment remained fragile amid record gold prices and a surge in oil costs due to geopolitical uncertainty.

Treasurer Jim Chalmers said increasing geopolitical tensions make the government’s budget planning trickier.Credit: Alex Ellinghausen

Chalmers is travelling to Washington late next week for International Monetary Fund, World Bank and G20 finance minister spring meetings. The global economic uncertainty will be front and centre in those talks – and one of the major forces shaping the May 14 budget.

“It’s clear that geopolitical tensions have ratcheted up further in recent weeks, and that complicates the path ahead for our economy and our budget,” he said.

“Conflict in the Middle East, weakness in the Chinese economy, and volatile international markets all heighten the risks for the global economy, and we will not be immune from any further deterioration.”

This week, the Expenditure Review Committee will spend two days finalising the big details of the budget before the treasurer heads to the US.

Despite Australia being within reach of a second surplus, the Treasurer has repeatedly warned that any additional cost-of-living support unveiled on May 14 would not involve major cash splashes, as the government seeks to balance efforts to lower inflation with support for households.

Despite inflation edging closer to the Reserve Bank’s target range of 2 to 3 per cent, the Treasury briefing note highlighted that there was ongoing economic uncertainty that could affect Australia.

Treasury said geopolitical tensions were affecting oil prices and investor behaviour. The department said the record high gold prices showed there was strong demand for safe assets in a volatile time.

“Geopolitical tensions have supported flight‑to‑quality demand for gold, which has increased by almost 10 per cent over the past month and by 18 per cent since mid-February,” the briefing said.

There are fresh concerns that Iran is preparing to retaliate against Israel following the death of senior Iranian officers, and the Treasury briefing noted that concerns of a potential broadening in the conflict and disruption to oil supply saw benchmark oil prices recently reach six-month highs.

That in turn has helped drive fuel prices back towards record highs, AMP chief economist Shane Oliver said.

“Higher oil and hence petrol prices are an obvious threat to the economic outlook as they add to inflation and act as a tax hike on consumers leaving less to spend on other things,” he said.

IMF managing director Kristalina Georgieva last week said the global economic environment was becoming more challenging.

“The global environment has become more challenging. Geopolitical tensions increase the risks of fragmentation of the world economy,” she said in a speech at the spring meetings in Washington.

“And, as we learned over the past few years, we operate in a world in which we must expect the unexpected.

“The sobering reality is global economic activity is weak by historical standards. Prospects for growth have been slowing since the global financial crisis. Inflation is not fully defeated.”

Georgieva also urged central banks to carefully weigh decisions on interest rate cuts and to resist calls for early cuts. For governments, she said fiscal prudence would be key in the coming few years.

Ahead of his Washington trip, Chalmers reiterated the government would have to be careful in its budget management.

“These warnings from Treasury and the IMF underscore the importance that next month’s budget is carefully calibrated to the evolving economic circumstances,” he said.

The federal government is “within striking distance” of a second surplus this year, thanks to a $62 billion tax windfall from workers and companies, heaping pressure on Labor to provide more cost-of-living support for households struggling with ongoing pressures.

Prime Minister Anthony Albanese in January announced major changes to the stage 3 tax cuts to deliver more relief to middle-income Australians.

Last month, Chalmers cautioned ministers and voters not to expect big-spending surprises in the May budget beyond that announcement, as commodity prices were softening and the economy had continued to weaken, warranting careful budget management.

In his pre-budget speech to the Committee for Economic Development of Australia in March, the treasurer said there would be some additional support, but it would be targeted, responsible and affordable.

“There will not be big cash splashes in the budget, simple as that,” he said.

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