Treasurer Jim Chalmers will promise a modest reduction in deficits in next week’s budget in an attempt to counter accusations that Labor’s spending record has pushed up interest rates, amid frustration in the cabinet over Reserve Bank governor Michele Bullock’s warning on handouts.
This masthead has confirmed Chalmers will forecast an improvement to the budget bottom line over the next four years, a day after Bullock sparked debate by saying state and federal stimulus could exert pressure on her to raise rates for a fourth time this year.
The slightly improved forecast is expected to be modest, according to sources familiar with the final stages of preparation of the fiscal document.
In the mid-year update, which came after years of near-record spending under Labor, Chalmers forecast cumulative deficits of $143.3 billion between 2025-26 and 2028-29, with debt expected to soar past $1 trillion later this year.
Some of the improvement will come from a decision to save most of the tax windfall raised by soaring commodity prices and inflation triggered by the war against Iran. That will deliver extra revenue in the near term, but by the end of the decade, commodity prices are expected to be lower, delivering a small hit to the budget.
Labor has announced budget saving initiatives, the largest of which, an overhaul of the NDIS, is worth up to $35 billion over four years. There will be more cuts in infrastructure, agriculture, domestic violence and departmental spending.
“You’ll see that the net budget position actually improves over the four years rather than goes backwards,” Chalmers told Sky News, insisting the government would save more than it spent.
In announcing a third consecutive interest rate hike this week, RBA governor Michele Bullock made the point that government handouts to households would drive up demand at a time when the bank was trying to take heat out of the economy.
Sources in the government said ministers were irritated with Bullock’s decision to weigh into the public debate at such a sensitive moment. On the morning of her press conference, reports in The Australian sparked speculation over a possible $300 tax offset ahead of a budget that Labor is framing as its most important to date.
Some senior MPs believe Bullock played into a damaging narrative for Labor, resurfacing the bitterness some members of the government feel toward the independent bank.
Friction between the RBA and that also bubbled to the surface when Chalmers said in 2024 that former bank governor Phil Lowe’s interest rate hikes were “smashing the economy”. Lowe was criticised for keeping rates too low for too long and then promising rates would stay low.
Bullock’s remarks about the need for state and federal budgets to match the bank’s contractionary stance is supported by mainstream economists. She has previously appeared to avoid weighing into the conversation on government spending levels, which is a key point of dispute between Labor and its political opponents.
The bank governor did not deliver press conferences after meetings of the bank board before February 2024. Reforms to the bank championed by Chalmers, and spurred on by a special series on monetary policy in this masthead, allowed the governor to explain decisions in press conferences. Most central banks around the world conduct press conferences.
While the governor suggested the bank may not have increased rates without the war against Iran, she said inflation was too high even before the conflict.
“When governments are spending a lot of money and we’re running up against capacity constraints, then they do need to think about whether or not there’s ways they can help the inflation problem,” Bullock said.
“I personally think that the treasurer, privately and publicly, is focusing on that. But it’s not just the federal government. It’s the state governments as well.”
Her statement forced Prime Minister Anthony Albanese and Chalmers to defend the budget’s key economic settings before its formal release on Tuesday.
“The governor was asked based on all of this budget speculation, a hypothetical question about how would the bank consider if there was a whole heap of extra stimulus pumped into the economy by the government,” Chalmers said on Wednesday. “And she gave a hypothetical answer to that question.
“The issue is the budget won’t be pumping a lot of extra stimulus into the economy.”
Albanese ducked a question on Bullock’s remarks and blamed the recent spike in inflation, which the bank expects to hit 4.8 per cent by June, solely on the war.
“We as well are very conscious about the need for a responsible budget, as we always have been. My government has produced the only budget surpluses that have been seen since I’ve been answering questions from you over the last decade and a half,” Albanese said.
The prime minister also dismissed a series of questions about his election promise not to tinker with negative gearing, which the government is planning to overhaul next week.
Asked about his frustration during the election campaign when he was repeatedly asked to rule out changes, Albanese told reporters they would “have every opportunity” to delve into the government’s decison making when the budget is revealed next week.
“And I note that over the period of time I have seen a number of contradictory statements suggesting what is in the budget,” he said, before suggesting that reporters were ignoring the government’s fuel security announcement, in which he said tabloid readers were more interested.
Financial markets expect the Reserve Bank to deliver one more rate rise this year. That would take the cash rate to a 14-year high of 4.6 per cent. But the chance of even more interest rate pain is receding with the same markets believing the RBA will be considering rate cuts in the second half of 2027.
The potential tax offset would likely be worth around $3 billion, and may not kick in until next year. Independent economist Chris Richardson says a rule-of-thumb is that $7 billion of additional government spending equates to about one interest rate hike of 25 basis points, meaning the tax offset would have a relatively minor effect.
Shadow treasurer Tim Wilson would not be drawn on whether the opposition would back further tax relief in next week’s budget, but said his default position was to support tax cuts.
He said any tax cut would likely be wiped out by inflation caused by the government’s spending.
“They have offered tax cuts before, they’ve then been wiped with inflation because they can’t control their spending addiction,” he told Sky News.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.
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.