Treasurer Jim Chalmers to reveal higher budget surplus amid recession warning

Jim Chalmers will reveal a significantly higher surplus, amid a new warning Australia could face its second recession in three years.

Treasurer Jim Chalmers will reveal a “significantly better” fiscal position and higher 2022-23 surplus, while warning of a dramatic economic slowdown in a speech on Wednesday. Picture: Martin Ollman/Getty Images

Jim Chalmers will reveal the ­nation’s first surplus in 15 years will be significantly higher than forecast in the budget, as ­economists warn of a rapid economic slowdown that could trigger Australia’s second recession in three years.

The improvement in the 2022-23 bottom line is expected to be short-lived as stubbornly high inflation, deteriorating global conditions, successive rate hikes and flatlining productivity spark a sharp deceleration in economic growth.

While commodity prices and strong employment growth deliver a short-term sugar hit, economists are predicting that Treasury’s budget forecasts for economic growth and the cash rate were too optimistic.

With mortgaged households on course to dedicate a record share of their take-home pay to interest payments, the ongoing crunch on family finances from cost-of-living pressures will be reinforced in monthly inflation figures released on Wednesday.

Analysts predict that annual consumer price growth will drop from 6.8 per cent in April to about 6 per cent in May, with the cost of travel falling following the school holidays and petrol prices down.

Economists on Tuesday warned that wage-driven services inflation and climbing rental costs could prompt a 13th rate hike in just over a year when the Reserve Bank board meets next week.

Amid growing fears of a recession, Dr Chalmers on Wednesday will reveal the $4.2bn surplus forecast for 2022-23 will be higher.

Speaking at a Northern Territory Property Council breakfast in Darwin, the Treasurer will say a combination of export prices and a strong labour market means “we’re in a significantly better position than we forecast”.

The Australian understands key drivers of the improved budget position were lower payments, higher tax revenue and stronger commodity prices than forecast by Treasury in May. The government is returning the bulk of revenue upgrades to the bottom line.

The budget improvement to the end of May will be revealed in commonwealth monthly financial statements to be released on Friday but the government will need to wait a fortnight to finalise the final surplus position to June 30.

“We said in May that we expected all this (finding savings, returning additional revenue to the bottom line and restricting spending) to result in a surplus for 2022-23 – the first in 15 years,” Dr Chalmers will say.

“We were deliberately cautious and conservative, restrained and responsible when it came to this, given this history. I’m pleased to say that two days out from the end of the financial year, we’re still on track. In fact, we’re in a significantly better position than we forecast. I can reveal that we’re expecting the surplus will be bigger than forecast in May.”

Dr Chalmers will warn that economic growth will take a hit, plunging from 3.25 per cent to 1.5 per cent in 2023-24.

“We expect (inflation) to stay higher than we’d like, for longer than we’d like, but still tracking in the right direction,” he will say.

Inflation is due to fall from 7 per cent recorded in the March quarter this year to 3.25 per cent in 2023-24, before returning to the RBA’s target band the year after.

“The 400-basis-point increase in rates since before the election last year, is the most significant tightening cycle the RBA has ­undertaken since the inflation targeting era began – and this, along with global challenges, will significantly slow our economy,” Dr Chalmers will say.

Reserve Bank of Australia governor Philip Lowe and the RBA board will meet next Tuesday to determine whether households will be hit with a 13th rate hike in just over a year. Picture: Nikki Short/NCA NewsWire

NAB chief economist Alan Oster said a stalling economy virtually eliminated any hopes that the huge budget turnaround would be repeated in 2023-24, with the May budget anticipating a $13.9bn deficit in the coming financial year.

Mr Oster said year-average growth in the coming year would plunge to 0.5 per cent, down on the 1.5 per cent predicted in the May budget, which also assumed a peak in the RBA cash rate of 3.85 per cent. The cash rate sits at 4.1 per cent now with the prospect of more rises to come.

“We think the RBA will do a couple more rate hikes, and everything we see shows the economy is skidding to a halt now,” Mr Oster said.

He said his unemployment forecast of 4.6 per cent by the middle of next year suggested an additional 140,000 people on the dole. By the end of 2024 that number would swell to 240,000 as the jobless rate reached 5 per cent.

Independent economist Chris Richardson said any fiscal improvement would come from the “wriggle room” built into Treasury’s conservative assumptions, particularly around commodity prices and jobs growth. “It doesn’t enormously change the outlook – the story on the budget remains good now, challenging later,” Mr Richardson said.

“The good news we are getting in the budget remains driven by commodities and jobs. Commodity prices have actually fallen by a lot; it’s just they haven’t fallen below where the budget has them.

“I wouldn’t disagree that the economy will be worse than the budget had it. But it’s not yet clear that the budget will be that much worse.”

AMP Capital chief economist Shane Oliver said the economy would flatline through the December and March quarters, and that year average growth would come in under 1 per cent.

Dr Oliver estimated the odds were roughly even that the country could drop into its second recession in three years, which would further hit the budget bottom line. “It does look like Treasury’s (economic) forecasts are too optimistic,” Dr Oliver said.

“We see the risk of recession starting around late this year as now very high, at about 50 per cent. Consumer spending is almost certain to start going backwards later this year.”

After the Coalition accused the government of not doing enough to fight inflation in the May budget, Dr Chalmers on Wednesday will champion the government’s fiscal strategy for “rebuilding our buffers and taking more heat out of the economy just as it’s needed to combat inflation”.

While a number of analysts predict the RBA will hike to 4.35 per cent next Tuesday, financial markets only price in a 20 per cent chance, according to the ASX.