Budget to prioritise savings over spending amid inflation concerns
Billions of dollars of extra revenue from high-priced commodities such as oil and gas due to the war against Iran will be saved rather than spent as the Albanian government tries to quell inflationary pressures that will force the Central Bank to raise another interest rate.
Chancellor of the Exchequer Jim Chalmers and Chancellor of the Exchequer Katy Gallagher have signaled they are concerned that a loosening of fiscal budget constraints could drag the Reserve into even tighter monetary policy settings; next week’s budget will include more savings than new spending.
Private analysts estimate that the war could bring a windfall of $15 billion to $30 billion from this fiscal year to 2027-28 due to its impact on commodity prices and inflation. Chalmers said revenue will likely be stronger in the near term, but will decline as war and the global economy decline.
But all the extra income from the economic windfall will be saved and the cash will be poured into minimizing the budget deficit, which is expected to fall slightly from $36.8 billion this financial year to $34.3 billion in 2026-27.
The move to bag all windfalls underscores the government’s forecast of $38 billion in savings over four years after overhauling the NDIS and removing extra help for older Australians to afford private health insurance.
These savings, which will be the lion’s share of the cuts announced in the May 12 budget, will go towards repairing the budget’s lower line and extra spending in other areas such as defence, welfare, oil consumption cuts and natural disasters.
The government has come under criticism for its level of spending, which is expected to reach 26.9 percent of GDP this fiscal year. Apart from the pandemic, this is the highest share of government spending since 1986-87.
The budget is expected to confirm that the share of spending in the economy will remain below 27 percent.
Gallagher said the government was committed to maintaining the profitability of the budget.
“We’re ensuring every dollar we save helps fund the services Australians will rely on now and in the future,” he said.
“Savings get harder to find every year, but that hasn’t stopped us from acting responsibly, as we have done with every budget update since the 2022 election.”
In his speech on Monday, shadow treasurer Tim Wilson will argue that the government’s weak budget policy since taking office in 2022 has raised average tax rates on workers and fueled inflation, forcing the Reserve Bank into interest rate adjustments costing borrowers an extra $24,000 a year.
He will tell the Australian Chamber of Commerce and Industry that the government has created a class of Australians who have kept Labor in power and are focused on securing power rather than improving the nation.
As a sign of his own economic agenda, Wilson would say that society and good economic policy favor self-starters who aspire to own a home and have a family while running their own business.
“Australia needs a budget that builds an economy that rewards contribution, restores integrity and expands opportunity. We need a budget that improves living standards by supporting self-starters and small businesses,” he will say.
“We need a budget that will restore Australia’s security to re-industrialise through domestic industry and defence.”
Key elements of the budget and broader macroeconomic environments will be briefed to the Central Bank, which begins its two-day meeting on Monday. Financial markets see the probability of a third consecutive interest rate hike as 75 percent.
Another quarter point increase would raise the cash interest rate to 4.35 percent. Repayments on a $600,000 mortgage will increase by a total of $300 per month since early February.
At its meeting in mid-March, the bank’s board was split five to four in favor of raising the cash interest rate to 4.1 percent. At the time, Gov. Michele Bullock said the divide was largely over the timing of the next rate hike.
AMP deputy chief economist Diana Mousina, who expects the bank to raise rates again on Tuesday, said the RBA’s tightening of monetary policy was not necessarily a “done deal”.
“The risk of another rate hike is that it could push interest rates back to their post-Covid highs and weaken growth at a time when the private sector is recovering,” he said.
“This is on top of the increase in fuel prices, which we estimate is worth about one interest rate increase. [0.25 per cent]. Fundamentally, the RBA board needs to weigh whether upside inflation risks are a bigger problem than the slowdown in economic growth.“
The bank is expected to release its own model of how war and high oil prices will affect the economy and inflation.
Last week the Bank of England announced its analysis of how the British economy would cope with an oil price between US$100 and US$130 per barrel.
This analysis showed that the UK’s official interest rate could be increased from 3.75 per cent to 5.25 per cent to cope with high inflation. While inflation falls rapidly, the economy could enter a recession with unemployment rising to 6 percent.
The Bank of England kept interest rates steady, as did the central banks of the United States, the European Union, Canada and Japan. Everyone was worried about the inflationary impact of the war and how it might also lead to a decline in economic growth.
In mid-March, Chalmers released Treasury analysis showing that if oil peaked around $100 a barrel before falling mid-year, inflation would rise by about 0.75 percent, while economic growth would fall by 0.2 percentage points.
This was six weeks ago. Brent crude oil has been trading above $100 since April 22, and analysts now expect it to remain above that level into the second half of 2026.
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
