Jim Chalmers lays groundwork for additional government spending

Jim Chalmers has paved the way for additional government spending in the lead-up to the election, as he warned the mid-year fiscal update would show tepid economic growth figures.

Treasurer Jim Chalmers on Wednesday delivered his second ministerial statement on the economy. Picture: Martin Ollman/NewsWire

Jim Chalmers has paved the way for additional government spending in the lead up to the election, as he warned that next month’s mid-year fiscal update would show tepid economic growth and an end to the massive revenue upgrades benefiting previous Labor budgets.

In a speech to parliament on Wednesday, the Treasurer said ­increased public expenditure had protected the nation from ­recession, despite economists warning it was putting upward pressure on inflation.

“The economy has continued to grow, but barely … it would have been negative in the March and June quarters were it not for public final demand,” Dr Chalmers said.

Laying the groundwork for further expenditure, Dr Chalmers said next month’s budget update would show a “gradual recovery in the economy driven by rising real incomes thanks to our cost-of-living relief, jobs growth and progress bringing inflation down”.

“This is the soft landing we have been planning for and preparing for,” he added.

Opposition Treasury spokesman Angus Taylor disputed Dr Chalmers’ account of Labor’s achievements, accusing the government of “reckless” spending that was inflaming inflation.

“You don’t fight inflation with alliterated three-word slogans,” Mr Taylor said.

Following a string of big-spending state and federal budgets this year, public spending surged to a record high of 27.3 per cent of GDP as outlays increased across government social programs, including aged, child and disability care, and transfer payments rose. That compares with an average of 22.5 per cent of GDP recorded in the decade prior to the pandemic.

Additionally, the updated inflation projections would be broadly unchanged from May, Dr Chalmers said, which showed headline inflation of 2.75 per cent by mid-2026. However, that figure is significantly outpaced by the RBA’s forecasts, which estimate the consumer price index will be 3.1 per cent at that time.

Also contained within the mid-year budget update will be revised employment forecasts, with fresh job growth and participation estimates expected to outpace projections contained in the May budget.

The upward revision in Treasury’s employment forecasts comes as the Reserve Bank on Tuesday warned that the gradual loosening of the jobs market might have stalled, or was possibly reversing, as a suite of labour market indicators remained remarkably resilient and were defying sluggish economic growth.

RBA governor Michele Bullock has previously cited the ongoing strength of the job market as a source of inflationary pressure, and one of the primary reasons the central bank may be forced to ­resume its aggressive run of rate hikes.

While not projecting a downgrade to revenue windfalls, Dr Chalmers also signalled the federal budget is set to be deep in the red this financial year, with Labor already projected to deliver a $28.3bn deficit for the current ­financial year.

“In each of our four budget updates there were $80bn in revenue upgrades, on average. But with the labour market softening around the edges, this trend is diminishing,” he said.

“This has been compounded by structural challenges in the Chinese economy weighing on key commodity prices – iron ore prices are down 30 per cent since the start of the year.”

On Wednesday, futures for the key steelmaking ingredient traded at $US101.25 a tonne, still well ahead of Treasury’s indicative price forecast of approximately $US80 a tonne for the end of ­December.

Meanwhile, metallurgical coal spot prices, currently trading at $US201.50 a tonne, are tracking broadly in-line with Treasury’s forecasts released in the May budget.

But with commodity prices declining, the Treasury is for the first time since 2020 preparing to downgrade its forecasts for ­company tax receipt collections which were previously projected to total $139.1bn in the current ­financial year.