Treasurer Jim Chalmers to lower deficits amid cabinet frustration over Michele Bullock’s warning
Treasury Secretary Jim Chalmers will pledge a modest deficit reduction next week to counter accusations that Labour’s spending record is driving up interest rates, amid cabinet disappointment over Reserve Bank governor Michele Bullock’s warning about aid.
The memo confirmed that Chalmers would project an improvement in the budget’s bottom line over the next four years, a day after Bullock opened the debate by saying state and federal stimulus could pressure him to raise rates for a fourth time this year.
The slightly improved forecast is expected to be moderate, according to sources familiar with the final stages of preparation of the financial document.
In his mid-year update, which comes after years of near-record spending under Labour, Chalmers forecast cumulative deficits of $143.3 billion between 2025-26 and 2028-29, with debt expected to surpass $1 trillion by the end of this year.
Part of the recovery will come from a decision to recover most of the tax windfall brought on by rising commodity prices and inflation triggered by the war against Iran. This will provide extra income in the near term, but by the end of the decade commodity prices are expected to be lower, dealing a small blow to the budget.
Labor announces budget saving initiatives; the biggest of which is the overhaul of the NDIS worth up to $35 billion over four years. There will be further cuts to infrastructure, agriculture, domestic violence and ministerial spending.
“You’ll see the net budget position actually improve over four years rather than going backwards,” Chalmers told Sky News, insisting the government would save more than it spends.
Announcing the third consecutive interest rate increase this week, RBA Governor Michele Bullock underlined that the government’s aid to households will increase demand at a time when the bank is trying to ease the tension in the economy.
Government sources said ministers were upset with Bullock’s decision to weigh in on the public debate at such a sensitive moment. On the morning of the press conference, he reported: Australian It has sparked speculation about a possible $300 tax cut ahead of what Labor has described as its most significant budget to date.
Some senior MPs believe Bullock is using a narrative that is damaging to Labor, resurfacing anger some members of the government feel towards the independent bank.
Friction between the RBA and this surfaced when Chalmers said in 2024 that former bank governor Phil Lowe’s interest rate hikes were “crashing the economy”. Lowe’s was criticized for keeping rates too low for too long and then promising that rates would stay low.
Bullock’s remarks that state and federal budgets should match the bank’s contractionary stance are supported by mainstream economists. He has previously appeared to avoid weighing in on debates over government spending levels, a key point in the dispute between Labor and its political opponents.
The bank executive did not hold press conferences after bank board meetings before February 2024. Reforms to the bank, supported by Chalmers and promoted by a special series on monetary policy in this imprint, allowed the manager to explain his decisions in press conferences. Most central banks in the world hold press conferences.
While the governor suggested the bank might not raise interest rates without a war against Iran, he said inflation was too high even before the conflict.
“When governments spend a lot of money and we face capacity constraints, they need to think about whether there are ways that can help with the inflation problem,” Bullock said.
“Personally, I think the treasurer is focused on this, privately and publicly. But it’s not just the federal government. It’s the state governments as well.”
His statement forced Prime Minister Anthony Albanese and Chalmers to defend the budget’s key economic settings before it is officially unveiled on Tuesday.
“The Governor was asked a hypothetical question, based on all this budget speculation, about how the bank would evaluate if a bunch of extra stimulus was pumped into the economy by the government,” Chalmers said Wednesday. “And he gave a hypothetical answer to that question.
“The problem is that the budget will not provide much extra stimulus to the economy.”
Albanese dodged a question about Bullock’s remarks and blamed only the war for the latest rise in inflation, which the bank expects to reach 4.8 percent by June.
“We, as always, are aware of the need for a responsible budget. In the last fifteen years, since I answered your questions, my government has produced the only budget surplus seen,” Albanese said.
The Prime Minister also dismissed a series of questions about his election promise that he would not fix negative gearing, which the government plans to overhaul next week.
Asked about his frustration at being repeatedly asked to reject changes during the election campaign, Albanese told reporters “they will have every opportunity” to scrutinize the government’s decision-making when the budget is announced next week.
“And I would like to point out that over time I have seen a number of conflicting statements about what is in the budget,” he said, before suggesting that journalists had ignored the government’s fuel security announcement, which he said tabloid readers were more interested in.
Financial markets expect the Central Bank to raise interest rates again this year. This will take the cash interest rate to 4.6 percent, the highest level in 14 years. However, as the same markets believe the RBA will consider interest rate cuts in the second half of 2027, the likelihood of further interest rate distress is also decreasing.
The value of the potential tax offset will likely be around $3 billion and may not kick in until next year. Independent economist Chris Richardson says that as a rule of thumb, $7 billion in additional government spending equates to an interest rate increase of about 25 basis points, meaning the tax offset will have a relatively small impact.
Shadow treasurer Tim Wilson did not take questions about whether the opposition would support further tax cuts in next week’s budget, but said his default position was to support tax cuts.
He said any tax cuts would likely be wiped out by inflation from government spending.
“They offered tax cuts before, then got wiped out by inflation because they couldn’t control their spending addiction,” he told Sky News.
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
Paul Sakkal is the Chief Political Correspondent. He has previously covered Victorian politics and won the Walkley award as well as the 2025 Press Gallery Journalist of the Year award. Contact him securely on Signal @paulsakkal.14.Connect with: X or email.
