Australia will bank windfall as China wobbles, treasurer says

AUSTRALIA will save an unexpected windfall in commodity prices rather than risk spending it and adding to inflation, Treasurer Jim Chalmers said, as concerns grow in Canberra about the economy of its largest trading partner China.

Chalmers will unveil his first budget on Tuesday (Oct 25) night, where he will balance delivering on Labor’s spending promises from their May election win, while revealing a worsening economic forecast, including higher rates of inflation for longer than expected.

In a Sunday interview with Bloomberg, Chalmers said he would be banking much of the revenue boost from rising commodity prices rather than spending it, adding he wanted to avoid worsening inflationary pressures. The Treasury will revise up tax receipts by more than A$100 billion (S$90 billion) over forward estimates.

“We can’t assume that that revenue will be there forever,” Chalmers said at Parliament House. “It goes nowhere near making up for some of the big persistent structural spending pressures on the budget.”

The budget will show inflation peaking in the December 2022 quarter at 7.75 per cent as expected, but it is now likely to remain higher in the coming years than previously forecast. At the same time, unemployment is due to grow at a faster rate in the 2023-24 financial year, rising to 4.5 per cent on average due to a slowdown in global growth and rising interest rates.

China’s Covid slowdown

Chalmers said he was “concerned” about the worsening slowdown in China, adding their strict Covid-Zero approach had consequences for Australia. Asked about China’s huge influence on Australia’s economy, He said since he took the economic levers in May, he had been discussing with business leaders a “rethink about making sure our markets are diverse”.

“So I work very closely with our big employers and our big exporters to make sure that they’ve got the mix right. China is an important economic partner. There’s no use pretending otherwise,” he said. Chalmers said the “numbers are pretty clear” that China will be Australia’s largest trading partner for some time.

On Australia’s foreign policy, Chalmers said it was a “crucial time” to invest in Pacific nations, adding there is “a lot of work to do in the Pacific”. The treasurer didn’t say exactly how much would be in the budget for the Pacific, but acknowledged it would be around A$1 billion. 

“We have all of this geopolitical uncertainty,” he said. “They are important partners and we want Australia to be their partner of choice, and we’ve said that quite openly.”

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‘Put roots down’

The treasurer said he wanted to float major reforms to the economy in his first term in office, both on revenue and expenditure, but said this budget would just “put the roots down” for later policy shifts. 

The fiscal blueprint will aim to crack down on multinational tax avoidance to boost the government’s bottom line, but Chalmers assured international business leaders that Australia was still a safe place to invest.

“We’ve got a lot going for us in Australia,” he said.

After a series of interest rate increases in 2022 led to rapid declines in house prices, the Reserve Bank of Australia was criticised by economic leaders for underestimating the fiscal challenges facing the country. Chalmers has commissioned a review into the central bank, but wouldn’t comment if he would reappoint governor Philip Lowe when his current term ends in 2023.

“I have a mountain of respect for him. He’s had to work with his board to make some very difficult decisions,” Chalmers said. “So I don’t take shots at him. I don’t second guess him. I don’t preempt this decision around his reappointment.” BLOOMBERG