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Treasurer Jim Chalmers has revealed the federal budget will get a multibillion-dollar boost from higher commodity prices while reassuring Australians the nation’s banking system will withstand growing financial tensions out of the United States and Europe.
But Chalmers on Thursday said despite the lift in revenue, the budget faced growing pressures to meet unavoidable spending demands while the global economic outlook was becoming more difficult.
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
He also told business leaders that 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 would probably call Australia home this financial year.
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 is 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 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.”
To deal with the concerns about the financial system, the Australian Prudential Regulation Authority has intensified its supervision of the nation’s banking sector. That has included analysing in real time data from banks such as money movements.
Banking regulators in Australia have increased their scrutiny of the financial system in the wake of the concerns over Credit Suisse.Credit:Billy H.C. Kwok
Chalmers said regulators would continue to closely monitor market developments in Europe and the US, including the collapse of Silicon Valley Bank and UBS’ takeover of Credit Suisse.
“While we’ve seen some strains in global funding markets, our domestic funding markets continue to function well,” he said.
“We’re not immune from volatility in global financial markets but Australians should be reassured that our banks are well regulated, well capitalised and highly liquid and are in a better position than most to deal with these disruptions.”
The budget is expected to reveal forecasts showing the economy slowing due to the weight of cost-of-living pressures and higher interest rates. This week, National Australia Bank economists forecast GDP per person would probably turn negative this year and next.
There are some signs that higher interest rates are starting to bite. On Thursday, Fitch Ratings’ measure of debts covering vehicles showed an increase in arrears in the December quarter, albeit from very low levels.
The 30-day arrears rate increased to 1.14 per cent, up by 0.19 percentage points, while the number of loans at least 60 days behind rose by 0.07 percentage points to 0.58 per cent.
“The cumulative impact of the rate rises is expected to lead to further increase in arrears in coming quarters, although the increases are coming off record low arrears in 2022,” Fitch said in a statement.
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.
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.
The treasurer 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.
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.
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