Budget blues as Jim Chalmers says Australia’s economy is ‘hostage’ to Middle East decisions

Australia’s economy is being held hostage to “decisions taken in Washington and Tehran”, Jim Chalmers has lamented as he warned there was still a risk of severe economic consequences from the war in the Middle East.

The Treasurer flagged billions of dollars in cuts to the NDIS as the main saving in next month’s make-or-break budget as he sketched out his thinking after returning from talks with international counterparts in Washington.

He’s expecting higher inflation, slower growth and higher unemployment in the months ahead.

And he talked down predictions from some, including prominent economist Chris Richardson, that the Government could reap some $30 billion in windfall revenue.

But the uncertainty around the forecasts is so severe that Treasury is looking at including discussion of a doomsday scenario in the budget papers.

“We have learned not to get too carried away with each piece of news from Middle East, whether it’s good or bad; we work through a whole range of contingencies in a considered and methodical way,” Dr Chalmers said on Monday morning.

“If you think about the last few days, it’s been a pretty wild ride when it comes to developments in the war in the Middle East… It does feel like two steps forward and one step back when it comes to these developments.

“And if there’s one prevailing vibe that comes from the international colleagues, it’s really, I think, a sense of frustration about how long this war in the Middle East has been playing out, and what that means for the global economy and for everyone’s domestic economies as well.”

HSBC’s Australia chief economist Paul Bloxham warned there were tricky choices ahead of policymakers.

“As we see it, Australia is also less well placed to deal with this ‘stagflationary’ (or negative supply) shock than many other countries, because even before the global energy shock has arrived, inflation is already too high,” he wrote in a note to clients.

“Australia faces a stagflationary shock, and we expect that outright stagflation is a rising risk. The aim for policymakers ought to be to keep it brief.”

A separate budget note from e61 chief executive Michael Brennan said Australia’s fiscal position was “increasingly uncomfortable” and there was “a clear sense that our future options are rapidly narrowing”.

“The Federal Government faces twin dilemmas: high inflation, but an increasingly shaky outlook for growth; and near-term revenue gains, but intensifying public pressure for cost-of-living relief,” the non-partisan economic think tank concluded.

Opposition Leader Angus Taylor said the solution had to be cutting government spending.

“(Stagflation) has been made inevitable by almost four years now of failed policies,” he said.

“We need to see a budget that turns that around, a budget that restores Australians’ standard of living, that protects our way of life, and is honest and transparent.”

The big pieces of the budgetary puzzle are starting to fall into place, including the $53 billion boost to defence that Richard Marles announced last week, and a major cut to the NDIS.

Dr Chalmers and Health Minister Mark Butler will detail the NDIS plan to State and Territory counterparts on Tuesday afternoon before Mr Butler unveils it publicly at the National Press Club on Wednesday.

The disability insurance scheme has blown out massively from Labor’s original vision, to the point where Dr Chalmers said that it was “growing too fast for Australians to afford”.

The Government has more than halved the growth rate from the 22 per cent it was at in 2022, but wants to claw it back further to 5-6 per cent.

It would still be one of the fastest-growing programs in the budget.

“Our highest priority in the NDIS is providing a high standard of support and care, and that means we need to be able to pay for it,” Dr Chalmers said.

“This has been a really big part of our pre-budget deliberations. It is easily the most important part of the savings package that we will present on budget night.”

The Coalition has said it will work with the Government to contain NDIS growth and make sure the scheme is sustainable for the long-term — a position leader Angus Taylor reiterated on Monday.

But the Greens declared it a “moral failing” that the Government was looking to cut the NDIS but not hiking taxes on gas exports.

“I think most Australians will be revolted that this Government would rather let the gas giants get away with mega profits and make savings off the back of disabled Australians,” the minor party’s leader Larissa Waters said.

The Greens are leading a new inquiry into gas taxes, due to report a few days before the Budget, and want to see a 25 per cent tax imposed on exports.

Multiple ministers have confirmed there have been discussions internally about options for potential taxes.

Former WA minister Bill Johnston has told the inquiry any move that cut Australian gas exports would be playing into the hands of Russian leader Vladimir Putin, and that it was a “colonial attitude” to argue that Asian countries couldn’t choose their own pathway to net zero.

Resources Minister Madeleine King has also been publicly mounting arguments against such a move.

Her Cabinet colleague, Industry Minister Tim Ayres, declined to give his view on Monday.

“The best thing to do is for us to work on those issues carefully with the industry and make announcements when the time is right,” he said.

Cabinet’s expenditure review committee is also considering options to reshape the capital gains tax discount and negative gearing, as part of a focus on intergenerational fairness.

That includes the potential to reset the system to where it was before John Howard’s changes in 1999, meaning property investors would only be able to get a tax break equal with inflation changes when they sold up.

Dr Chalmers said everyone would have to wait until Budget night on May 12 to see where this landed.

“We have been really upfront for some time now in saying that we do think that there is intergenerational unfairness in the tax system and in the housing market — I think the housing market is where some of those intergenerational issues are most obvious,” he said.

“We are working through a range of options to see if we can deal with them or address them in a responsible way.”

Mr Taylor said he’d heard “about three thought bubbles a day on what the Government might do on housing” and called for lower migration and a boost to supply to tackle the problem.

The Finance Brokers Association of Australia argued the capital gains tax and negative gearing changes would discourage investors and push up rents.

“While I commend the Government for wanting to open up more housing, these changes will disadvantage the very people it seeks to help — younger Australians, as well as many other people on lower incomes,” interim chief executive Peter White said.