Budget to make tough calls as inflation risks rise: Chalmers

Treasurer Jim Chalmers says the Federal Budget being handed down in May will make some "tough decisions" as the Australian economy faces uncertain times ahead.

Chalmers says as the conflict in the Middle East continues, Treasury estimates inflation could peak in the "high fours or even higher" this year.

"These effects add a further quarter of a percentage point to headline inflation and double the negative impact on GDP," Chalmers says.

"In the short-term case, output would be 0.2% lower around the middle of this year but this gap would quickly close because the shock is short lived.  But the more prolonged scenario would leave a bigger scar."

Chalmers says capacity constraints on the supply side are expected to weigh on the economy.

"It's why our Budget preparations are focused on three ambitious reform packages. A savings package. A productivity and investment package. And a tax package as well," Chalmers says.

"These packages are being designed to work together. If the main constraint we are collectively facing is capacity, these packages will help expand it."

Chalmers says more savings will make room for private sector growth while building fiscal buffers, and productivity enhancing reforms should help boost supply, generate higher living standards and unlock more investment.

Chalmers says the government's aim is to help the economy grow without adding to price pressures.

Chalmers added tax reforms will focus on driving more productive investment while supporting budget sustainability and equity.

"Together, they will form a comprehensive supply side strategy. To expand capacity and boost resilience, lift potential growth and deliver higher wages, without more pressure on prices," he says.

Chalmers says he is committed to budget repair having already found $114 billion of savings and reprioritisations across seven budgets and mid-year updates.

"The budget is now more than $233 billion better than when we came to office and debt is $176 billion lower this year compared to the 2022 PEFO," Chalmers says.

"This means that debt is forecast to peak much lower - around 37% of GDP compared to the almost 45% we inherited."

However, Chalmers says that while good progress has been made, more needs to be done over the medium-term horizon.

"We're overhauling our approvals regimes, strengthening and streamlining our foreign investment regime and opened our Investor Front Door," Chalmers says.

"We're reforming the payments system, abolishing tariffs, cutting red tape and streamlining the National Construction Code.

"We're seizing the opportunities from net zero and the digital economy and investing in our human capital - with Free TAFE, the universities accord and fairer schools funding."

The Treasurer says the government will have a sharper focus on unlocking "productive investment", better regulation, faster approvals and more open trade.

"It will be all about three things, attracting and absorbing investment; making it easier to build and build faster; and cutting compliance costs where we can."

On tax reform, the Treasurer says it is an important part of the government's productivity agenda with a focus on cutting income tax rates, lifting thresholds, returning bracket creep and incentivising participation.

"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 says.

Chalmers added that the current tax system is "outdated" and weighs on younger Australians. He says reform would have a substantial focus "on our intergenerational responsibilities".

Chalmers says if the government "can afford to", it will look at tax reforms that could incentivise productive business investment.

Lastly, addressing the ongoing conflict in the Middle East, Chalmers says it was a stark reminder of how quickly the global economic outlook can change.

"It is adding to inflation risks, weighing on growth, and increasing already elevated uncertainty," he says.

"But it is also a stark reminder of why addressing our three key economic challenges is so urgent.  All this economic uncertainty and volatility is a reason for more reform, not less. It's a reason to go further, not slower.

"We have deep capital markets, a world-leading super system, abundant natural advantages in energy and resources, and a public balance sheet in far better shape than most of our peers. But we are not complacent about the risks in a global economy that is perilous and unpredictable. We will make hard decisions in May.  Our task is not just to respond to shocks, but to position Australia to succeed through them."

This article first appeared on Financial Standard

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