Prime Minister Anthony Albanese will override scepticism among his own MPs and plough billions into the Suburban Rail Loop even as inflation fears and war-fuelled building costs force the Albanese government to pull back on road and rail projects.
Spending in the $120 billion federal infrastructure pipeline will be slowed down in the budget, according to five sources familiar with final deliberations of Labor’s budget razor gang. Ministers are aiming to pare back near-record spending to deal with inflation that was running hot even before the war in Iran.
Jarring with Labor’s hunt for savings is Albanese’s focus on funding Melbourne’s 90-kilometre Suburban Rail Loop, an orbital rail line that will reshape Melbourne’s middle-ring suburbs into high-rise hubs.
Albanese is expected to promise new federal funds before the budget on May 12. Victorian and federal sources said the Commonwealth would pledge between $2.5 billion and $4 billion, several billion less than Victorian Premier Jacinta Allan asked for in a series of meetings with Albanese.
The war in Iran has increased already-elevated construction costs, and the government expects to pare back spending and potentially delay some projects. It is hoping to take heat out of the economy and counter criticism from economists and the opposition that the government has fuelled higher interest rates, likely to rise again next week.
The move could also help free up resources to build more homes. The government will fall about 200,000 homes short of its aim to build 1.2 million homes by the end of the decade on current expectations. Housing Minister Clare O’Neil warned this week that the war’s impact on construction costs could result in 33,000 fewer homes being built over the next three years.
Labor has not committed to banking savings worth more than what it adds to spending in the May 12 budget, which Albanese and Chalmers have described as their most important to date.
After Labor spent at near record levels last term, the cabinet’s razor gang has been holding intense, hours-long meetings. Ministers are being informed of cuts and restrictions in their portfolios as Chalmers aims to produce a tough budget that delivers tax and productivity reform. State spending on infrastructure has been blamed for contributing to high inflation.
Sources said Labor ministers, including Infrastructure Minister Catherine King, had previously expressed scepticism or caution about the merits of the Suburban Rail Loop, a project first proposed by former Victorian premier Daniel Andrews before the 2018 state election.
MPs, including King, have been worried that the project may suck up the whole infrastructure budget and deprive other projects. Labor MPs from Victoria are also worried about the SRL, as is Victoria’s Deputy Premier Ben Carroll.
King supports the funding of the project despite having run a critical eye over Victoria’s arguments for building it. The veteran minister from Ballarat is a member of the same left faction as Albanese, who is a self-proclaimed infrastructure buff.
Since 2021, Allan and Andrews have been asking the Commonwealth to fund a third of the $34.5 billion Suburban Rail Loop East section from Cheltenham to Box Hill. The $34.5 billion estimate was drawn up in 2019, and estimates for the later sections vary wildly.
So far, only $2.2 billion of federal funding has been provided under the stipulation that it was for “no regrets” items such as land acquisition and improvements to utilities, leaving a $9.3 billion shortfall.
Albanese is spearheading another project, High-Speed Rail from Sydney to Newcastle, that would cost up to $90 billion and has been judged as unrealistic by transport policy thinkers. The federal government is also committed to funding the Western Sydney International Airport.
The prime minister has previously vetoed colleagues on gambling reform, environmental laws, census questions, mandatory jail terms for hate crimes, and expanding the size of parliament, exerting his authority to manage political problems.
“SRL is the only project Victoria wants money for,” said one well-placed Labor source, explaining the prime minister’s decision-making.
“There are holes in the ground now, and so the view is this thing must be funded even if a bunch of Labor people believe it’s a dud. Jacinta [Allan] is tied to the SRL and Albo is loyal to Labor governments, so it will get funded.”
Albanese made the surprise announcement in November that his government would make a further contribution to the rail loop in the budget. He said the Commonwealth had received further information from the Allan government since Infrastructure Australia’s assessment, though this has not been made public.
King’s absence from a press conference with Allan and Albanese at the time raised eyebrows among Labor MPs.
King said in a statement to this masthead that the SRL was “a city-shaping project and our investment to date reflects its importance in supporting Melbourne’s growth”, pointing to Infrastructure Australia’s recent commendation of the project.
A Victorian government spokesman said they were “very pleased with conversations we’ve been having with the prime minister”.
The rail loop has been a contentious idea since its inception. Its proponents view it as a visionary project that will create density in middle-ring suburbs such as Ringwood and Clayton, turning them into thriving hubs.
Its critics, who have included federal and state oppositions, have derided the project as a pre-election thought-bubble from Andrews that is unaffordable and takes money away from strained schools and hospitals.
Early last year, Infrastructure Australia described the SRL’s benefits as “overstated”, said its cost estimates were “low confidence”, and talked up “exit strategies”. In a reversal, the independent infrastructure advisory said in March this year that the SRL was a priority and should be funded.
An investment case found that SRL East and a second underground line in Melbourne’s north could deliver a positive return on investment once delivered. The government has refused to do a separate business case on SRL East.
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Paul Sakkal is Chief Political Correspondent. He previously covered Victorian politics and won a Walkley award and the 2025 Press Gallery Journalist of the Year. Contact him securely on Signal @paulsakkal.14.Connect via X or email.