The ongoing conflict in the Middle East is poised to push Australia’s inflation rate above five percent, according to Treasurer Jim Chalmers. He argues that the current turmoil underscores the necessity for ambitious budget reforms. New scenarios from the Treasury warn that rising oil prices and broader disruptions could increase costs and slow economic growth, potentially leaving Australia’s economy smaller for years if the conflict persists.
In a speech scheduled for Thursday in Melbourne, Mr. Chalmers will outline how the upcoming May federal budget will address the crisis, focusing on “substantial” savings, productivity, and tax changes aimed at creating a fairer system for younger Australians. An advance copy of the speech, seen by the ABC, reveals Mr. Chalmers’ emphasis on the need for more reform amidst rising global volatility.
Impact of Middle East Conflict on Inflation
The Treasurer highlighted that the Treasury has modeled both a short-term and a “more prolonged” scenario for oil prices, with a third, more drastic possibility still under development. The first scenario assumes oil prices will remain at $100 per barrel until mid-year before gradually returning to pre-conflict levels by December. The second scenario projects a peak of $120 per barrel, with a recovery period extending over three years.
Under these scenarios, inflation is expected to peak 0.75 percent higher in the short-term scenario and 1.25 percent higher in the prolonged one. “It means the prospect of inflation peaking in the high fours or even higher this year is very real,” Mr. Chalmers stated.
“In the short-term situation, Australia’s economic output, known as Gross Domestic Product (GDP), would be 0.2 percent lower around mid-year, but recover ‘quickly’. In the second scenario, Treasury estimated GDP would be 0.6 percent lower in 2027.”
The government plans to address fuel security and the broader impacts of the Middle East conflict during a national cabinet meeting with state premiers, territory chief ministers, and Prime Minister Anthony Albanese on Thursday morning.
Spending Cuts and Budget Reforms
Mr. Chalmers stated that the government’s budget preparations are centered on three “ambitious” reform packages: savings, productivity, and taxes. These reforms are designed to work in tandem, with savings intended to “make even more room” for private sector growth and reduce the budget deficit.
The Reserve Bank’s recent decision to increase the cash rate to 4.1 percent was influenced by higher-than-expected private sector spending. The Coalition has linked this to government spending, arguing that Labor must cease “pouring” public funds into the economy.
Shadow treasurer Tim Wilson criticized the current approach, stating, “What we need is a treasurer who’s going to take responsibility, control spending, and make sure that he’s not actively stoking an inflation agenda, as he is right now, because Australians are paying it through $27,600 a year more on the average mortgage.”
Mr. Chalmers contended that the government has already made significant progress on budget sustainability since taking office, citing $114 billion in savings and reprioritizations. However, he acknowledged the need for further action over the next four years and beyond, signaling that “substantial savings options” are being developed for the May budget.
Tax Reforms and Intergenerational Fairness
On the productivity front, Mr. Chalmers noted that the government is working to unlock investment in housing, the net-zero energy transition, and AI infrastructure. Tax reform is also a key component of Labor’s productivity agenda.
“We are working on more tax reform in the budget — how much we can do in May depends on fiscal considerations, international developments, and cabinet deliberations,” he said. The Treasurer emphasized that tax policy would be guided by principles focusing on intergenerational fairness, noting that the current system disproportionately affects younger Australians and future generations.
“Any changes would have a substantial focus on our intergenerational responsibilities,” Mr. Chalmers said. “Reform will also focus on better incentivizing productive business investment, but only if we can afford to.”
The Senate committee’s recent report on the capital gains tax system suggests potential changes to reduce discounts that currently favor investors over homeowners.
Global Economic Uncertainty and Australia’s Response
Mr. Chalmers argued that the Middle East conflict illustrates how rapidly the global economic outlook can shift. “But it is also a stark reminder of why addressing our three key economic challenges is so urgent,” he said. “All this economic uncertainty and volatility is a reason for more reform, not less. It’s a reason to go further, not slower.”
He asserted that Australia approaches these challenges from a position of strength, with a robust labor market, a world-leading superannuation system, and abundant natural resources. “But we are not complacent about the risks in a global economy that is perilous and unpredictable,” he added.
The Treasurer concluded by stating that the government’s task is not only to respond to economic shocks but to position Australia for success amidst them. “It will be an ambitious budget because ours is an ambitious government, and this is an ambitious country,” he said.
