Budget planning is proving challenging for the government as it looks to balance inflation and cost-of-living pressures with political promises and rapidly changing global uncertainty.
Speaking this week at Parliament House, Treasurer Jim Chalmers has asked Australians to be prepared for an unpredictable year ahead as he looks to hand down a "responsible" federal budget in three weeks' time.
"The consequences of this war in the Middle East are already serious, and there is still a risk that they become severe," he warned.
It's the fifth and most complex budget for Dr Chalmers, who acknowledged planning had been against the backdrop of "more than the usual amount of uncertainty in the global economy".
"It's been a pretty wild ride when it comes to developments in the war," he said. "It does feel like two steps forward one step back when it comes to these developments."
REA Group senior economist Eleanor Creagh says that the treasurer’s warning reflected one of the most volatile global environments in years.
REA Group senior economist Eleanor Creagh said Aussies face 'one of the most uncertain global environments in years'. Picture: Supplied
“The treasurer is right to highlight the high level of uncertainty; it’s one of the most uncertain global environments in years,” she said.
Households under pressure
For many households, that uncertainty is inevitably linked to interest rates. The next RBA meeting will fall on 5 May, only one week out from the budget. While economists are divided on where rates are headed, markets were pricing in a 69% chance of a hike as of 23 April.
"This budget will be a responsible budget,” Dr Chalmers said. “It will be focused on resilience and reform. There’ll be tax reform, there’ll be a productivity push, and there will be savings."
It comes after Reserve Bank deputy governor Andrew Hauser last week said the RBA is struggling to keep inflation stable while dealing with the global oil crisis.
Oil tankers passages through the Middle East remain obstructed and dangerous. Picture: Getty
Mr Hauser added the bank needed “rock solid support from governments at a time when [it is] going to be making hard decisions”.
“We don’t want to make the inflation challenge worse at the same time as we’re trying to help people with the cost of living," Dr Chalmers said.
All eyes on tax reform
Investors will be one group keenly awaiting what negative gearing and capital gains tax changes could lie in store as Dr Chalmers plans his budget.
“We’ve seen a recent pullback in investor searches, with softer sentiment in the face of tax policy uncertainty," Ms Creagh said. "We've also seen a pullback in searches from first-home buyers and owner-occupiers, but to a lesser extent.
“When it comes to the capital gains discount changes, the literature is pretty limited so far, and the policy design will matter as well.”
Ultimately, Dr Chalmers said the government is leaving its options open prior to the final budget.
“We’re obviously considering a whole range of changes in the tax system, but we haven’t changed those policies,” he said.
“We do think there is intergenerational unfairness in the tax system and in the housing market. We are working through a range of options to see if we can deal with them or address them in a responsible way.”
Treasurer Jim Chalmers says there is intergenerational unfairness in the tax system . Picture: NewsWire / Martin Ollman.
Interest rates in focus
As the budget approaches, Ms Creagh said the Labor Government will also be facing a challenging battle to try and close the lid on possible stagflation.
"Policymakers are trying to calibrate for an inflation shock and a growth slowdown simultaneously," she explained. "Interest rates are rising faster than expected this year, we've already seen two back-to-back rises with possibly two or three more to come.”
Creagh added that the oil price rises have come at an awkward time for the RBA.
One more rate rise from the RBA will reverse all of the easing of 2025. Picture: Getty
“It was already forecasting inflation to remain above target for a couple of years," she said. "We went into the Middle East crisis with inflation that had already moved higher in the back half of last year.
"Under these conditions, the RBA is going to have to lean on the inflation pressures that will come to fruition as a result of higher oil prices.”
With no immediate end in sight for the Middle East conflict, or knowledge of the aftershock, Ms Creagh said Australians will literally be paying the price for some time to come.
“From higher petrol prices to elevated construction costs, or even how much someone's paying for a coffee; the RBA will be watching those second order effects because that's really critical for inflation expectations,” she said.
“If inflation expectations de anchor or move higher, that would mean interest rates would have to stay higher for longer.”
Property prices soften
As Dr Chalmers looks to balance a rapidly changing needs among Australia's diverse population, war-induced interest rate rises are making waves in the domestic property market.
“We were already seeing price growth slowing, with a slowdown in most regions across the country in March," Ms Creagh said.
"More than three quarters of SA4 regions recorded a slowdown in dwelling price growth, and around one-in-six recorded small monthly price falls."
Aussies can expected a 10% reduction in borrowing capacity if rates followed the now projected path for the rest of the year, she added.
“That will obviously reduce how much potential buyers can pay and will increase mortgage servicing costs," she said.
Despite the predicted downturn in values, Ms Creagh added that underlying local factors should limit the scale of any major property price plummet.
“The housing market remains underpinned by home equity gains of recent years, resilient labour market conditions, and a chronic under supply, which will actually be exacerbated by higher interest rates and the oil price shock,” she said.
Home price growth is expected to be lower than in 2025. Picture: Getty
“New housing construction remains behind target and the increasing construction costs we'll see as a result of this crisis – on top of higher interest rates, which will increase financing costs for developers – will likely exacerbate pre existing undersupply issues.
"As a result, we'll probably see there’s a cushion on price falls but it’s unlikely we'll see very large price falls in the kind of 15-20% order.”
Dr Chalmers will hand down the budget on 12 May.
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