Chalmers reveals Alfred’s damage to the budget, inflation and growth

Cyclone Alfred will punch a $1.2 billion hole in the federal budget while posing a threat to inflation, Treasurer Jim Chalmers is warning as he and the Coalition come under pressure to boost the economy’s speed limit by embracing politically contentious reforms from tax to home construction.

Amid new forecasts suggesting a fall in revenue will contribute to larger budget deficits and more debt, Chalmers will use a speech on Tuesday to reveal Alfred – which hit south-east Queensland and northern NSW a week ago – will also slow an economy that is already struggling to grow.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers during a visit to the Logan disaster management centre during Alfred.Credit: Getty Images

Chalmers, who will release the earliest budget in Commonwealth history on March 25, had forecast a deficit of $26.9 billion for this financial year, slipping to $46.9 billion in 2025-26.

But in his speech he will reveal early Treasury estimates the cyclone will cut a quarter percentage point from overall economic growth and increase inflation pressures.

The impact to the budget will be larger, as the government provides direct financial assistance to thousands of people and supports the reconstruction of infrastructure such as roads and bridges affected by the cyclone.

“I expect that these costs and these new provisions will be in the order of at least $1.2 billion, a substantial amount of money and that means a big new pressure on the budget,” he will say.

“At (the mid-year update), we’d already booked $11.6 billion for disaster support nationally over the forward estimates. With all of this extra funding we expect that to rise to at least $13.5 billion when accounting for our provisioning, social security costs and other disaster-related support.”

Locals Cade Wenngren and Samantha Stubbs inspect the beach erosion along the Gold Coast shoreline that was hit hard by Tropical Cyclone Alfred.Credit: Justin McManus

His speech follows work from the Grattan Institute and e61 think tanks, whose policy ideas have been embraced by governments and oppositions over recent years, calling on the major political parties to map out new ways to lift living standards which face further deterioration without change.

Grattan chief executive officer Aruna Sathanapally said the winner of this year’s election would have to be bolder.

She said a vast array of changes were needed to lift productivity and increase the pace at which the economy could grow. These include tax reform, an overhaul of interstate skills recognition, more incentives for states to lift home building rates, improve school performance and the prevention of problem gambling.

Among its specific proposals, Grattan said the GST deal for Western Australia, on track to cost $60 billion over 11 years, had to be changed, the petroleum resource tax should be reformed and more value of the family home should be included in the age pension test.

“If governments over the next decade were to tackle a reasonable number of the reforms we recommend, it would transform the lives of Australians, with higher incomes, less poverty, better-quality and more efficiently delivered services, a cleaner environment and a stronger democracy,” Sathanapally said.

According to e61, the imperative for substantial reform has intensified because of the fragmentation of the global order. The threat of tariffs from the Trump administration, and the use of them to force changes in areas such as national security and tax, could be unfavourable for Australia.

In work done with the University of NSW, the think tank found five key areas – a new global order, Australia’s dependence on high population growth, lifting productivity, restoring the sustainability of the budget and improving intergenerational equity – had to be the focus of the political system over coming years.

Jim Chalmers delivering his mid-year budget update in December last year. His 2025-26 budget is expected to show a deterioration in the nation’s bottom line.Credit: Alex Ellinghausen

Michael Brennan, chief executive officer former Productivity Commission chair, said the world was going through a period of stark political and strategic disruption as politicians faced these challenges without ready-made solutions.

The report warns one of the biggest issues remains the state of the budget.

“The current political approach by all sides has been to lock in ongoing spending and hang on to bracket creep and upside surprises in iron ore prices to boost revenue. This is likely far from the optimal policy mix,” it found.

The think tanks’ reports were released as Deloitte Access Economics warned next week’s budget will show a slight improvement but a deficit approaching $50 billion next financial year.

Between now and 2027-28, the budget will be cumulatively $13.1 billion worse off due to lower revenues and extra spending.

Net debt, currently around $541 billion or 19.6 per cent of GDP, is forecast to climb to $747 billion or 23.9 per cent of GDP by 2027-28.

Report co-author Cathryn Lee said the government had benefited from an average $84 billion increase in revenue over the forward estimates. This, however, had turned into a revenue writedown just as the political pressure to increase spending had intensified.

“The economics is not aligning with the politics. The fiscal challenges facing the current government will be inherited by any incoming government,” she said.