Chalmers Confirms Treasury Cuts as Oil Hits US$113

Treasurer Jim Chalmers confirmed on Friday that Treasury officials are lowering economic forecasts ahead of the December mid-year budget update. The revision reflects expectations of slower growth and higher unemployment, a shift from his comments last week when he suggested the economy would be "a bit better" in a year.

The primary driver of the downgrade is a widening conflict in the Middle East. The global benchmark oil price rose to US$113 per barrel overnight. This figure is close to the April peak of nearly US$120. Australian drivers now pay 60 cents more per litre than before the US and Israel attacked Iran. That price increase adds $36 to the cost of filling a standard 60-litre tank. For a family that refills weekly, the cost is $144 more per month compared with February.

Risks to the outlook may increase further. The New York Times reported overnight that the US and Israel have drawn up plans to resume attacks on Iran after American midterm elections. Westpac analysts outlined a scenario where oil prices reach US$150. This mirrors warnings issued by the International Monetary Fund earlier this month. Such an outcome would impact inflation and interest rates. A fifth rate rise is possible on 3 November.

Global economic supports are also weakening. Heavy spending on artificial intelligence has masked other weaknesses, but investors are now anxious about rising corporate debt for infrastructure. This anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to datacentre construction may slow the build-out. Talk of a tech stock bubble is increasingly paired with predictions of a bust.

Reserve Bank Governor Andrew Hauser described the combination of high inflation, low growth, and rising unemployment as a central banker's "nightmare." Chalmers acknowledged the pressure on voters. "The pressures on people right now are very substantial and obviously that keeps me awake at night," he told Politico. He noted that the government is "hostage" to decisions made in Washington, Tehran, and Eastern Europe regarding two wars.

Domestic factors compound the issue. High government spending works against the inflation fight. Productivity growth is stagnant, meaning the economy reaches its speed limit sooner. Chalmers has limited options to ease voter discontent. Cutting the fuel excise would lower petrol prices but make it harder for the Reserve Bank to rein in inflation. Alternatively, large spending cuts would assist the central bank but weigh on an already weak economy. The government faces a set of hard choices where fixing one problem worsens another.