Treasurer Jim Chalmers has revealed the federal budget will get a multibillion-dollar boost from higher commodity prices, despite growing concerns about the global economy and increasing pressures to meet unavoidable spending demands.
Chalmers also told business leaders in Canberra on Thursday the forecasts in his October budget around the nation’s migration intake had proved to be a substantial underestimate, as a net intake of more than 350,000 people will likely call Australia home this financial year.
Treasurer Jim Chalmers has told business leaders that higher commodity prices have boosted the budget bottom line but economic uncertainty and spending pressures are growing.Credit:Oscar Colman
Chalmers is 50 days away from producing the government’s second budget amid growing global economic uncertainty and the impact of a record 10 consecutive increases in Australia’s official interest rate.
Despite the economic gloom, prices for key Australian exports have remained high for much longer than had been expected in October and unemployment remains at near 50-year lows.
However, recent turmoil in the American and British banking sectors has prompted concerns that credit sources could tighten across the globe, hurting growth prospects and pushing up unemployment.
Chalmers said there would be a boost to government revenue due to higher commodity prices, but the budget still faced severe financial challenges.
“While our elevated commodity prices should provide another near-term boost to revenue, the budget still faces intensifying and compounding spending pressures from the big five pressures of interest costs, NDIS, aged care, health and defence,” he said.
“The combination of difficult global conditions and higher interest rates are still expected to slow our economy substantially over the next two years.
“The uncertainty and the volatility on markets is feeding into concerns about the global economy more broadly, with forces pushing and pulling the expectations in different directions as well, and this is the second influence on our thinking.”
In October, Chalmers forecast cumulative deficits over the next four years of $181.8 billion, a $42.9 billion improvement on what then-treasurer Josh Frydenberg had predicted in his pre-election budget.
Iron ore prices remain more than double those expected in the October budget, delivering extra revenue.Credit:Jacky Ghossein
The better outlook was due to higher commodity prices, a stronger jobs market boosting wages and lower than expected unemployment. The single largest improvement, worth $42.2 billion, was expected in the current financial year, with Chalmers forecasting larger deficits in 2024-25 and 2025-26.
He said the government would use the May budget to prioritise eight key areas. They included cost-of-living relief, investment in productivity enhancements on the supply side of the economy, funding national security priorities including the AUKUS security pact, and strengthening the care economy and essential services.
Chalmers said the budget would also seek to “break down barriers” to the full participation of women in the workforce, targeting entrenched inequality, and show restraint in spending areas by saving “most” of the extra revenue forecast to fill Canberra’s coffers.
The final priority would be fixing the “traps” left in the budget by the former government, with programs baked into the budget but with no funding allocated for future years.
Chalmers said the digital My Health Record system, worth almost $300 million a year and used by 23 million people, was only funded to the end of this financial year, with nothing set aside to maintain it.
“There will be billions of dollars of unavoidable spending where programs have not been budgeted for even though every single Australian would assume that they will continue indefinitely,” he said. “That will be a big spending item in the budget.”
Business leaders have been calling for the federal government to boost the nation’s intake of migrants, particularly skilled workers, to help deal with staff shortages around the country.
In October, Treasury expected a net 235,000 people to migrate to Australia. But Chalmers said this figure was now on track to be in the “mid-300,000s or more”.
He said more tourists, a faster return of international students and fewer Australians heading overseas than normal were also expected.
Despite the surge in migrants, he said the net intake of people from overseas would be lower than had been expected pre-COVID.
“What that means is that even with this big bounce in net overseas migration, we still haven’t caught up with what we lost in COVID and that’s why it will still take time to fill the gaps and the skills shortages that you’re all familiar with, and we’ve talked about on multiple occasions,” he said.
Chalmers also revealed Treasury was considering a change to the way commodity prices were forecast in the budget.
After Treasury forecasts for the Rudd and Gillard governments over future movements in commodity prices proved wildly optimistic, then-treasurer Joe Hockey moved to the long-run average price for key commodities to underpin key revenue forecasts.
These proved accurate for two years before prices, particularly for iron ore, lifted sharply and remained at elevated levels. Chalmers’ October budget is predicated on the spot iron ore price falling to $US55 a tonne and for thermal coal prices dropping to $US60 a tonne.
Iron ore this week edged down to $US128 a tonne, while thermal coal is almost $US140 a tonne.
Chalmers said Treasury was looking at ways to provide “credible but still conservative” forecasts for commodity prices.
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