On Monday, the government announced the final budget outcome for the 2025-26 financial year. The deficit was $22.3 billion, $6 billion better than the $28.3 billion estimate in the May budget. Receipts were $4.6 billion higher than expected, helped by stronger returns on superannuation and investor income rather than wages or mining revenue. Outlays were $1.4 billion lower, with underspending in aged care, the Pharmaceutical Benefits Scheme and child care. Tax receipts reached 24.1 per cent of GDP, a near-record haul that has intensified scrutiny of Labor's fiscal management.
Treasurer Jim Chalmers used the announcement to push back against suggestions the government was fuelling inflation, pointing instead to the Middle East conflict. “The fact that we have a war in the Middle East [is] pushing up global oil prices and pushing up prices at the petrol bowser,” he said. “We have an inflation challenge in our economy not because unemployment is too low but because the price of petrol is too high and we've got other inflationary pressures. I'm reluctant to blame the workers of this country for our inflation challenge.”
Mr Chalmers said the conflict was making an existing inflation problem worse, and conceded the benefits of productivity measures would take years to flow through. “The best way to describe the inflation challenge right now is that we have an inflation challenge in our economy, made much worse by the war,” he said. He declined to predict the Reserve Bank's decision, but said there was a near-universal expectation of higher rates globally and potentially in Australia. Headline inflation is currently 3.5 per cent, and Wednesday's figures are expected to show it rising on petrol prices.
The Reserve Bank board meets on Tuesday. All four major banks expect a 25 basis point increase to 4.6 per cent, which would be the fourth hike this year and the highest cash rate in 15 years. The Commonwealth Bank said in a client note that it now expected an increase at the September meeting, having previously predicted November, citing oil prices and the Middle East conflict. Governor Michele Bullock said last week the jobless rate may need to rise as high as 5 per cent, from 4.6 per cent, to take heat out of the economy.
Shadow Treasurer Tim Wilson attacked Mr Chalmers' framing. “Inflation junkie Jim is always looking for someone else to blame when he's asked about his spending addiction, Iran, international events, AI, and now he's trying to bully the RBA because they're telling him he needs to go cold turkey,” he said. Mr Wilson called the budget announcement a “desperate attempt to distract Australians from the prospect of three more interest rate rises” and said the hike would push many families and small businesses “over the edge”.
Government spending rose as a share of GDP to 26.9 per cent, though reports differed on the previous figure, with some putting it at 26.2 per cent and others at 26.6 per cent. Real spending growth slowed to 4.3 per cent from 5.5 per cent. Mr Chalmers acknowledged more work was needed to contain spending, while describing the Middle East war as “absolutely disastrous” for family budgets.
The political fight comes as Labor MPs grow uneasy about rising rates and inflation, and two years after Mr Chalmers clashed with the bank by accusing it of “smashing the economy”. The treasurer said Australians would be “apprehensive” about the board's deliberations, and Prime Minister Anthony Albanese also blamed global inflation as the primary issue driving up interest costs.