Chalmers prepares for weak economy to hit budget bottom line

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Treasurer Jim Chalmers is open to running budget deficits to support the economy and make space for new cost-of-living relief aimed at university students amid more signs the nation will continue to struggle well into next year.

As Deloitte Access Economics warned economic growth would be tepid for the next four years, Chalmers on Monday said that the government's fiscal strategy had to change due to the changed economic outlook in Australia and overseas.

Treasurer Jim Chalmers says the budget will have to focus on both economic growth and bringing down inflation.Credit: Alex Ellinghausen

Chalmers became the first treasurer in 15 years to deliver a budget surplus for the 2022-23 financial year in what he described at the time as an important step towards reducing inflation pressure in the economy.

He said a second successive surplus remained the government's objective for the current financial year. In the mid-year budget update, Chalmers forecast a deficit of $1.1 billion for 2023-24 which was a $12.8 billion improvement on his May forecasts.

But large deficits for the coming two years worth a combined $54 billion were predicted for 2024-25 and 2025-26.

Chalmer said while the government had made "really substantial progress" in repairing the budget, it also had to balance that against the changed outlook for the economy.

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"The first surplus in 15 years, getting some of those annual bottom lines down from what we inherited, that's been part of taking the edge off inflation, that's been recognised by the ratings agencies and others. I think what's required here in our fiscal strategy is something a little more nuanced," he said.

"There was an almost sole focus on inflation in the first couple of budgets and in this budget, there will still be certainly in the near-term a primary focus on inflation, but as the balance of risks shifts in the economy and as the opportunity shifts in the world and in our own economy, then our fiscal strategy will shift a little bit with it."

The economy has struggled over the past 12 months, weighed down by high inflation, the Reserve Bank's increases to official interest rates and a rise in the general tax take on working Australians.

Deloitte Access, in its pre-budget economic outlook, has forecast the economy to grow by just 1.7 per cent through 2024-25 after 1.5 per cent growth in the current financial year. Beyond that, it is not expecting economic growth to surpass 2.2 per cent until 2027-28.

But it is forecasting inflation to fall back within the RBA's 2-3 per cent inflation target in the coming financial year, down to 2.7 per cent.

Deloitte partner and report lead author Stephen Smith said cost-of-living pressures were likely to ease over the coming 12 months but the economy would continue to struggle.

"The second half of 2024 will bring the revamped stage 3 tax cuts and gradual improvements

in real wages, much to the relief of households," he said.

"At the same time, the outlook for growth is clouded by fading business investment, a housing construction sector spinning its wheels and a global environment that's uncertain at best."

University students, stung by large indexation increases to their degree debts, could win some relief in next month's budget.Credit: Eddie Jim

The May 14 budget will confirm the government's revamped stage 3 tax cuts which begin on July 1, plus assistance for low-income earners and small businesses to deal with high electricity prices.

The government is under pressure to overhaul the indexation process for income-contingent loans for university students after a spike over the past two years due to elevated inflation. Teaching and nursing students carrying out unpaid work experience are also struggling to deal with cost of living pressures.

Chalmers signalled both issues could be addressed next month.

"Whether it's HECS relief or assistance for people on prac, on placements as they finalise their degrees, we are looking at both of these things for the budget," he said.

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The budget will also contain key elements of the government's "future made in Australia" package, with Chalmers rejecting claims that the extra spending in the policy would add to inflation.

He said the government was looking to support businesses to increase their investment in the country which would help reduce inflationary pressures. The timing of extra funding would also ensure the program did not add to inflation in the near term.

"There's been a little bit of rubbish, I think, said and written about the potentially inflationary impact of a Future Made in Australia. It assumes wrongly, that all the investment that we are contemplating hits the economy at once at the front end," he said.

"We care about not just the quantity of investment, but the quality of investment."

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