Middle East conflict will impact tax reform in May budget: Chalmers
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More news: The extent of tax reform Labor can deliver in its May budget will depend on fiscal considerations and international developments, according to Treasurer Jim Chalmers, with the focus of any reform giving clear attention to intergenerational responsibilities, signalling that capital gains tax reform remains a high priority.
In his pre-budget address in Melbourne on Thursday, Chalmers will outline three key reform packages across savings, productivity and investment, and tax, as key areas of focus for Labor as it prepares to deliver its budget.
Chalmers will state that tax reform will assist in driving more “productive investment, while supporting budget sustainability and equity, and helping to rebalance the system.”
He will note Labor’s plans to streamline tax returns with a standard deduction, implement tax breaks for small business and build to rent, and offering production incentives for critical minerals and hydrogen.
In addition to reforming the PRRT and multinational taxes and reforming the Low Income Superannuation Tax offset, Chalmers will explain that the extent to which Labor is able to include further tax reform in the budget “depends on fiscal considerations, international developments and Cabinet deliberations.”
Labor has ordered Treasury to analyse tax reforms including tightening capital gains tax arrangements, with Chalmers reinforcing the line that Labor is focused on improving intergenerational equity as many younger Australians feel locked out of the housing market.
Chalmers will clarify that any tax reform will be guided by principles, namely that the “outdated tax system” is weighing on younger Australians and future generations so any changes would have a “substantial focus on our intergenerational responsibilities”, Labor’s focus on “better incentivising productive business investment” and making the system simpler and more sustainable.
Acknowledging the conflict in the Middle East as a “stark reminder of how quickly the global economic outlook can change” which is adding to inflation risks, weighing on growth and increasing already elevated uncertainty. Chalmers will state that the “economic uncertainty and volatility is a reason for more reform, not less.”
Without offering details, Chalmers will also say that the government is “working on substantial savings options…addressing some of the fastest growing structural spending pressures and making difficult decisions in other areas.”
Prolonged Iran war threatens significant GDP hit: Chalmers
The news: War in the Middle East could cut GDP growth by up to 0.2 percentage basis points across Australia’s major trading partners, threatening to see domestic inflation rise above 5%, Treasurer Jim Chalmers warns.
He also warned of a domestic GDP hit, varying depending on the length of the conflict with a prolonged scenario leaving a “bigger scar”. Treasury estimates that a short-term conflict would have a 0.2% hit that could be recovered from quickly, but under a longer conflict GDP would be 0.6% lower in 2027 and even by 2029 would be “below where it would have been without the conflict”.
The context: Delivering his pre-budget address in Melbourne on Thursday, Chalmers will warn the oil disruption prompted by the war will be the “fifth shock” experienced by the global economy in recent decades. That list also includes the Global Financial Crisis, Covid pandemic, global inflation, and escalating trade tensions.
The treasurer will reveal details of two scenarios that his department has modelled after the outbreak of war, with a third scenario — which he described as “more drastic” — also under development.
A short-term scenario is based on the oil price staying at $100 per barrel for the first half of 2026, before returning to pre-conflict levels. The more prolonged scenario assumes the oil price will reach $120 per barrel in the first half of the year, and take three years to return to pre-conflict prices.
“While both scenarios could underestimate the cost, given where the oil price is and the uncertain duration of these events, they give us a sense of the second round impacts,” Chalmers will say.
“Even with these conservative assumptions, Treasury’s latest advice is [that] the war could cut GDP growth by up to 0.2 percentage points across our major trading partners.
“In both cases, inflation rises and growth is hit.”
While Treasury began modelling the impacts last week, its new model factors in lower global growth and higher LNG, coal and fertiliser prices.
Chalmers will reveal that the shorter-term model found headline inflation would peak ¾ of a percentage point higher. It would peak 1¼ percentage points higher under the more prolonged scenario.
He will say that means “the prospect of inflation peaking in the high 4s, or even higher, this year is very real”.
What they said: “In the short term case, output would be 0.2% lower around the middle of this year but this gap would quickly close because the shock is short lived,” Chalmers will say.
“But the more prolonged scenario would leave a bigger scar. There would be an immediate hit to output but it would build over time.”
The source: Jim Chalmers speech
