Treasury has largely declared victory in the protracted battle to tame inflation without tanking the economy, with the budget papers predicting the country will complete its “soft landing” by the middle of this year.
The latest forecasts show the rate of underlying inflation – taking into account the flattening effects of energy rebates – will be “sustainably” within the Reserve Bank’s 2-3% target range by June and six months earlier than expected.
It is a story Jim Chalmers has been keen to sell as he attempts to convince voters not to dwell on what has been a difficult three years.
“The intersection of inflation down, wages up [and] tax cuts … is driving the recovery in household incomes and living standards, and that’s feeding this broader recovery in the economy,” the treasurer told Guardian Australia.’
Headline inflation is now expected to be 2.5% in the year to June – a quarter of a percentage point lower than forecast in December.
In a prediction that will add to calls for another interest rate cut at the central bank’s meeting next week, the budget papers show unemployment is set to remain at about 4.25% over the coming years, rather than rising to 4.5%.
The jobs market again outperformed expectations, helping to swell the government’s coffers, but not by enough to meaningfully improve the bottom line over the coming years.
The budget predicts a string of deficits stretching for a decade, starting at a slightly larger $27.6bn estimated underlying cash deficit for 2025-26. The deficit will then expand to $42.1bn in 2026-27, before averaging about $36bn over the following three financial years.
In contrast to previous budgets where Labor has banked the vast majority of revenue upgrades, the Albanese government’s final budget before the election shows only a $1.6bn improvement in the expected bottom line over the five years to 2028-29.
While Chalmers has been careful not to declare mission accomplished in the battle against inflation, the budget papers reinforce his narrative that the economy has “turned the corner”.
The government can point to inflation more than halving since it took office in 2022, but the high cost of living – including essentials such as groceries, insurance, rents and electricity – remains a defining issue for the budget and the upcoming election.
The 2025-26 budget remained squarely focused at delivering cost-of-living relief to as many Australians as possible.
after newsletter promotion
In addition to a previously announced $8.5bn boost to Medicare and an additional $1.8bn in energy bill relief, Labor delivered a surprise $17.1bn in tax cuts by reducing the lowest rate from 16% to 14% over two years, starting from mid-2026.
Chalmers said the decision to delay the start of tax cuts to next year in part reflected a wariness about the risk of reigniting price pressures.
“On the timing, we are doing what we can afford,” he said. “We want to make sure that the tax cuts we commit to, we are doing that in a responsible way. And we are sequencing it so they come in the middle of next year when the expectation is that inflation will be sustainably within the band.”
After successfully navigating the post-pandemic inflationary surge, Australia now faces the risk of a global trade war that may define the global economy over coming years.
In a worst-case scenario where the US imposes a 25% import tariff on all “‘durable” goods such as steel and aluminium, and then the world retaliates with similar taxes, modelling in the budget papers finds the hit to Australia’s GDP by 2030 would be 0.2% of GDP.
Despite this relatively sanguine estimate, Guardian Australia understands Treasury officials remain deeply concerned about the threat to the global economy from rising protectionism.
“Cost-of-living pressures are still there, although easing in welcome and encouraging ways. But also there’s global economic uncertainty,” Chalmers said.
“So the best way to deal with those two things simultaneously: first of all, rebuild living standards and incomes, as we are doing. And secondly, make our economy more resilient (via measures such as) future made in Australia, competition reform, all of those pieces.”
