Economists warn of dark days ahead as Jim Chalmers concedes budget won’t be as planned before war in Iran

Economists warn life is going to get much tougher for Australians before there’s any improvement, as Jim Chalmers concedes the budget he’ll hand down in less than a month isn’t the one he wanted before the war in the Middle East began.

The Treasurer and Energy Minister Chris Bowen left the door open to extending the three-month halving of the fuel excise.

But the Government is also weighing up warnings from the International Monetary Fund that there’s a high risk of a global recession and that untargeted cost-of-living support could worsen this by pushing up inflation just when households can least afford it.

A second IMF report, released overnight, said the Middle East War had added new fiscal pressures “to an already strained global landscape”.

It forecasts that global public debt will be the same size as GDP by 2029, a year earlier than previously expected, with structural weaknesses in budgets around the world.

But Dr Chalmers said the IMF rankings also confirmed that Australia was well placed to confront the global volatility.

A “podium finish” of the third-best budget position in the G20 put Australia ahead of advanced economies like Germany, Japan, the UK and US.

Prime Minister Anthony Albanese, in Brunei for talks to guarantee fertiliser and fuel supplies, said that from his discussions with world leaders, “there is a great deal of consternation, understandably, about the impact that this Middle East conflict is having”.

“You can’t take that much supply out of global supply without having consequences for the global economy,” he said.

Truckies have warned they won’t be able to keep up operations beyond six months if high fuel prices persist, while Virgin has followed Qantas in announcing fare hikes and cuts to routes.

Energy Minister Chris Bowen said those kinds of decisions by businesses were based on soaring fuel prices, not shortages.

The last of the shipments of fuel to pass through the Strait of Hormuz before the war is expected to arrive in Australia this weekend, the Financial Times reported, meaning that beyond this, securing ongoing supplies is likely to become far more expensive.

Export Finance Australia sealed deals with smaller importers IOP and Park, who largely supply fuel to the regions, to underwrite their cargo purchases, Mr Bowen announced on Wednesday.

It already has similar arrangements in place for Ampol and Viva, although they are yet to buy any fuel under the agreement.

The high costs of fuel, transport and fertiliser arising from Iran’s stranglehold and now the US blockade on the Strait of Hormuz are also affecting everything from food prices to construction.

A majority of businesses are absorbing those costs for now, but Australian Chamber of Commerce and Industry boss Andrew McKellar said they were under significant pressure.

Economist Luke Hartigan says those effects could linger for the rest of the year, and possibly longer depending on when the conflict ends and how long it takes to re-establish safe shipping.

“There’s only bad, and worse,” the University of Sydney senior lecturer said of the possible scenarios ahead.

Unlike the inflation spike after the pandemic – sparked by shortages of goods that couldn’t be imported without flights, combined with pent-up demand from people who had saved stimulus money during lockdowns – this was “just oil” but that was a product whose impact was felt everywhere.

Dr Hartigan said there would effectively be a double whammy for the Australian economy as the fuel crisis dragged on.

“It could have, first, the effect that they just don’t have the money to spend, and now there’s this pessimism with consumers so they’re more likely to tighten their purse strings, just fearing what’s going to happen in the future,” he said.

“People tend to batten down the hatches, so they may stop spending in other areas, discretionary – so going out to cafes, going on holidays, things where they feel like they can tighten their purses and maybe start to save it more.”

Dr Chalmers acknowledged the IMF was “sounding the alarm on some pretty severe scenarios” for the global outlook.

“This is a very serious, very dangerous time for the world. Australia is better placed and better prepared than a number of other countries, but we won’t be spared the fallout from this very substantial economic shock,” he told reporters at Brisbane Airport ahead of flying to Washington DC for meetings with the IMF, World Bank and G20 counterparts.

“From an economic point of view, the end of the war can’t come soon enough. But even when the strait is properly reopened, and even when the hostilities formally end in an enduring way, we still expect the consequences of this war in the Middle East to be felt for some time.”

Opposition Leader Angus Taylor said the IMF report “tells us what we already knew: inflation is out of control, interest rates are going up, not down”.

“We need a budget that is going to turn that situation around, that is not going to fuel inflation, that is going to bank the windfall,” he said.

Some $30 billion more in tax take will flow into government coffers because of the war’s impact, independent economist Chris Richardson has estimated.

Dr Hartigan said the Government must resist the temptation to spend all this.

The Budget, which will be handed down on May 12, is still being shaped because of the enormous global uncertainty.

Dr Chalmers said it “won’t be identical to the budget that we were planning in February”.

Prime Minister Anthony Albanese and his Treasurer have indicated there will be some further cost-of-living support in the event of a prolonged war, beyond the three-month halving of fuel excise currently in place.

Mr Bowen said the fuel excise level would be re-evaluated down the track – noting it had only been cut for a fortnight – and defended it as “100 per cent the right thing for the Government to do” despite the IMF criticism.

“We’ll see how we’re going in three months, but you know, it’s a good thing it will apply for that three months,” he said.

Dr Chalmers is also eyeing tax reform, productivity boosts, and savings.