Spoils of Iran war to deliver Chalmers a budget boost
The Iran war is expected to bring a $36 billion windfall to Finance Minister Jim Chalmers, but increased spending on cost-of-living measures could derail efforts to re-settle the budget.
Although the ceasefire in the Middle East remains fragile, the disruption of key supply routes has caused prices of key commodities such as oil, gas and coal to soar.
Independent economist Chris Richardson says this is bad news for Australian families, but good news for the budget.
Mr Richardson predicts the taxman will generate an extra $9 billion in revenue in the current financial year compared to the government’s last forecast in December.
Over the next three years, the increase in income tax revenues due to higher commodity prices and higher inflation will provide an extra $27 billion in estimated revenue.
Mr Richardson said this would far outweigh increased spending on easing the cost of living, including fuel excise cuts previously announced in the May budget.
“At least the spending increases announced so far have been overshadowed by the inconvenient fact that the war is a money-maker for Australia’s federal budget,” he said.
“Partly because the war increases inflation (which essentially acts as a tax), but mostly because the war increases the price of the goods Australia sells to the world.”
Overall, the war’s impact on revenue and spending will improve profitability by about $30 billion over the four-year budget period.
Other factors increasing the tax take include the standard overperformance of commodity prices compared to the Treasury’s conservative estimates and a higher-than-expected immigrant intake of about 50,000 people.
Mr. Richardson said there was a strong tendency to avoid productivity-boosting budget surgeries, given that voters were already hurt by high inflation and that much-needed reform would create more losers.
But he urged the government not to squander the crisis.
“The key political test of the budget is how many people it is willing to inconvenience on its way to a better Australia,” he said.
The government has promised big spending cuts in the budget, as well as tax reform, to make the economy fairer for younger generations and encourage business investment.
Health Minister Mark Butler has not ruled out introducing means testing to help rein in the NDIS, one of the biggest pressures on the budget.
But the government’s efforts to slow overall spending have been undermined by efforts to ensure Australia does not run out of fuel shock in the Middle East.
To support supplies, the Commonwealth will undertake fuel cargoes; This means wholesale buyers Ampol and Viva can bid inflated rates and get refunds from taxpayers if prices fall and they make losses.
It’s unclear how big the call on the budget would be if prices collapse.
Dr Chalmers said the government was also looking to make big decisions in the budget as it looked to make Australia’s supply chains and economy more resilient.
“The budget will balance the pressures of the here and now with our obligations in an intergenerational sense, and that’s how we’re approaching this budget,” Dr Chalmers told politics at a bar event in Logan on Sunday.
He said the financial pain caused by the war in Iran would continue to impact the global economy and Australian households even if there was a permanent ceasefire.
“The risks are quite high and that is why we are approaching this oil shock and its aftershocks with a lot of hard work and humility,” Dr Chalmers said, adding that the budget would be about “fuel security, supply chain resilience and economic reform”.
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