How Trump and Alfred will both wreak havoc on budget the PM did not want to have

Donald Trump’s tariff war and flooding damage from ex-tropical cyclone Alfred will weigh on Jim Chalmers’ election budget with growing concerns they could stymie Australia’s economic recovery.

As the social services sector urged both parties to ditch their opposition to tax reform it says would make housing more affordable, the full impact of Trump’s tariffs – due to hit Australian steel and aluminium this week – has emerged as the biggest factor in Chalmers’ fourth budget.

US President Donald Trump and Prime Minister Anthony Albanese.Credit: Bloomberg, Getty Images

There are growing expectations the tariffs will drive America into recession and bring down the economies of other nations.

In the December mid-year update, the federal Treasury was unsure about the Trump tariff agenda. But since taking office, his plans have become clear including his early February announcement of a 25 per cent tariff on all steel and aluminium.

That tariff, which will hit almost $1 billion of Australian exports, is due to start Wednesday. Trump is also threatening to extend tariffs to most other goods including beef. Australian beef exports last year were worth $3.4 billion.

Consumer confidence and spending have fallen in the face of the tariff threat, which has forced economists to put the chance of a US recession this year at higher than one-in-five.

The Federal Reserve of Atlanta’s highly regarded measure of current GDP is forecasting the American to have contracted by 2.4 per cent, on an annualised basis, through the first three months of this year.

Speaking to Fox News at the weekend, Trump was asked if he was expecting a recession.

“I hate to predict things like that,” he said.

“There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”

Trump’s policy agenda, and the threat of a US recession, weigh on Treasurer Jim Chalmers’ federal budget.Credit: AP

The combined impact of Trump’s tariffs and a US recession are being carefully examined by Treasury as it pulls together its final forecasts for the March 25 budget. Both scenarios would have a direct impact on the federal budget bottom line due to a slowdown in demand for key Australian exports.

Reserve Bank deputy governor Andrew Hauser last week noted that while the direct impact of Trump’s tariffs on its imports would have a muted direct effect, Australia would face financial headwinds because of the way the country was integrated into the global economy.

“The bigger macroeconomic risk for us would be if the imposition of US tariffs on third countries triggered a global trade war that impaired our trade and financial linkages more broadly,” he said.

Credit: Matt Golding

There is also the linked threat of a slowdown in the economy of China that has, even before Trump’s tariffs on its exports into the US, shown signs of trouble. Data at the weekend showed prices down by 0.7 per cent in February, suggesting tepid spending by the country’s consumers.

Treasury is also working to determine the fallout from the flooding caused by ex-tropical cyclone Alfred, which is expected to have undermined key pieces of infrastructure across south-east Queensland into northern NSW.

Both the tariffs and floods are likely to force the government to downgrade its economic forecasts. It had expected the economy to expand by 2.25 per cent in 2025-26 after expanding by 1.75 per cent this financial year.

The budget will be used by Chalmers to focus on the government’s spending on housing. Since his first budget in 2022 housing has been a central theme, including an initial target of building 1 million homes.

But the Australian Council of Social Service (ACOSS) will on Tuesday release research advocating major changes to negative gearing and the capital gains tax concession in a bid to provide more funding for social and affordable housing.

The research found since the CGT concession was introduced in 1999 it had contributed to house price surges driven by investors. Four out of five investment loans are for existing properties rather than being used to build new stock.

It said the CGT concession should be halved, negative gearing ended over 5 years and discounts on capital gains enjoyed by superannuation funds. The extra revenue raised by the CGT and negative gearing changes would be used to build between 32,000 and 49,000 social and affordable homes over time.

Halving the CGT discount and limiting negative gearing would reduce home prices by up to 4 per cent.

ACOSS chief executive Cassandra Goldie said the nation’s “absurdly” generous tax breaks had super-charged the housing market.

“As long as our tax system encourages speculative investment in housing, the housing affordability crisis won’t be solved just by building more homes,” Goldie said.

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