Chalmers threads budget needle with difficult economy

Knitting together the many threads of a budget is never easy but the Albanese government has a tough job with a slowing economy and an election on the horizon.

A year ago, inflation was still running hot and the government was under pressure to support those hurting the most without pushing consumer prices up even more.

Fast forward to today and Treasurer Jim Chalmers' dilemmas are still familiar but starting to shift, with inflation tamed - but not beaten - and economic activity slowing to a crawl.

Treasurer Jim Chalmers in his office.
Treasurer Jim Chalmers says his budget will help tackle inflation. (Lukas Coch/AAP PHOTOS)

He told AAP he remained "very focused" on pulling off a soft landing for the economy, which involves cutting inflation without causing a recession and the unemployment rise that comes with it.

Yet stalling progress on inflation has thrown a spanner in the works.

Consumer price growth as measured by the national statistics bureau clocked in at 3.6 per cent in the March quarter, a moderation from the 4.1 per cent annual growth in December but above expectations.

The numbers put the central bank board on high alert at the May monetary policy meeting as it discussed the case for another interest rate hike.

With mortgage holders already under immense financial strain from 13 interest rate hikes in the past two years, the federal government wants to avoid more tightening.

Preferably, it would like to see interest rate cuts, and sooner rather than later - ideally before the election in 2025.

Yet, on the other hand, households have been responding to elevated living costs, higher income taxes and swelling mortgage repayments by reining in spending, which has contributed to a sharp slowdown in economic activity.

A muted 1.5 per cent lift in gross domestic product was recorded in the year to December, according to the Australian Bureau of Statistics, with the quarterly pace of growth tapering off throughout 2023.

Dr Chalmers says the slowing economy means now is not the time for a "slash and burn" budget, even if inflation is still too high.

He is aware of the "cross-currents" buffeting the economy, with fighting inflation to be the focus of the "front end" of the budget.

The later years will prioritise bedding down the foundations for growth in the future, he said.

"This budget will help us get on top of inflation without smashing the economy."

Economist Chris Richardson.
Economist Chris Richardson is keen for budget spending to not make inflation worse. (Lukas Coch/AAP PHOTOS)

The Opposition is not convinced it will rein in spending enough to manage inflation, with shadow treasurer Angus Taylor urging the government to "show the restraint that Australian households are being forced to commit to".

Independent economist Chris Richardson said the politics of fighting price pressures was "diabolical" and had a more modest ask - "don't make inflation worse".

"That is, it should spend to protect the most vulnerable from the cost of living crisis, but also cut other spending and/or raise taxes to ensure that the budget doesn't make inflation worse," he said.

Extra "carefully calibrated" cost of living support has been flagged by the federal government, with extended energy bill relief and boosted commonwealth rent assistance likely candidates.

Yet the government says the stage three tax cuts will be the centrepiece of its cost of living response, and will start lightening the tax burden on individuals from July.

Longer term, the government plans to till the soil for growth via its wide-ranging Future Made in Australia industry policy, which involves incentives and subsidies to spur investment in clean energy projects and low-carbon industries.