Budgets are built on forecasts. But whatever Chalmers predicts, it keeps getting worse

Treasurer Jim Chalmers faces unprecedented challenges in preparing Australia’s upcoming budget amid escalating global uncertainty caused by the war in Iran. Originally intended to be a pivotal fiscal plan following Prime Minister Anthony Albanese’s re-election, the May 12 budget must now navigate the economic disruptions triggered by the conflict, particularly volatile energy prices and supply chain risks. Chalmers, returning from International Monetary Fund meetings in Washington, warned that the war’s fallout is complicating economic forecasts, which underpin the budget’s assumptions on inflation, growth, and unemployment. The conflict’s impact on oil prices has been dramatic, with prices swinging between $86 and $100 per barrel within days due to tensions around the Strait of Hormuz, a critical global shipping route. This volatility has forced Treasury to prepare multiple economic scenarios reflecting both optimistic and pessimistic outcomes depending on the war’s duration and resolution. Chalmers emphasized that the government has limited control over these external shocks, and the budget’s final shape will depend heavily on how quickly global conditions stabilize. Economic experts have expressed concern about the risk of stagflation—a combination of rising inflation and slowing economic growth—emerging in Australia. HSBC’s chief economist Paul Bloxham highlighted that Australia’s economy, operating near full capacity, is particularly vulnerable to sustained fuel price increases, which could entrench higher inflation expectations. This situation complicates the government’s efforts to implement long-delayed reforms in taxation and housing markets, as the budget must balance fiscal responsibility with economic support amid uncertain global conditions. The May 12 budget will therefore be a critical test of the Albanese government’s ability to manage competing pressures: delivering necessary economic reforms while mitigating the risks posed by geopolitical instability. The government’s approach to these challenges will have significant implications for Australia’s economic trajectory in the near term, shaping growth prospects and inflation dynamics against a backdrop of global uncertainty.