By James Glynn


SYDNEY--Australian Treasurer Jim Chalmers has framed the center-left Labor government's 2024-2025 budget around the themes of cost of living relief, income tax cuts and the tantalizing prospect of a fall in mortgage interest rates by early next year.

With an election expected in early 2025, the budget narrative is aimed squarely at winning votes even as the economy slows in line with falling consumer spending, as households confront huge mortgage repayments and the biggest cost-of-living surge since the 1980s.

Chalmers announced a budget surplus for the fiscal year ending June 30 this year of 9.3 billion Australian dollars (US$$6.15 billion), the second surplus in a row, but pointed to a significant deterioration in the budget's bottom line over coming years, as the economy remains sluggish and unemployment rises to around 4.5% next year from below 4.0% currently.

The size of the budget deficit is forecast to peak at A$42.8 billion in the year ending June 30, 2026, or at 1.5% of gross domestic product.

Embedded in the government's economic forecasts is a prediction that inflation would fall back to within the target band of 2% to 3% by the end of this year, which if achieved would likely pave the way for the Reserve Bank of Australia to cut interest rates before the election.

However, the RBA itself is far less upbeat on inflation, saying just a week ago that a return to the inflation target wouldn't come until the end of 2025, implying that interest rate cuts are unlikely to be delivered until after the election.

RBA Gov. Michele Bullock warned after the central bank's policy meeting that upside risks to inflation remain, adding that the policy-setting board actively considered raising interest rates for a 14th time in the last two years.

Bullock will have her eye on the budget, especially the degree to which the government bolsters spending and on rebates designed to offset soaring electricity costs and a record increase in rents.

Many economists reject the government's view that electricity and rental rebates will take pressure off inflation long term, and have warned about the impact of income tax cuts that are due to be delivered midyear, injecting around A$20 billion worth of stimulus into the economy.

The forecasts for significant budget deficits over coming years highlight the amount of pressure on the budget coming from ballooning expenditures in areas such as aged care, a national disability insurance scheme, health and defense.

The government is also keen to boost the wages of workers in areas like childcare, while a decision is also due soon on how much to raise the basic wage.

Economic growth is expected to be weak at around 2.0% in 2024-2025, accelerating to just 2.25% in 2025-2026, according to the budget papers.

The government is also spending more in the area of new housing to help offset a critical shortage of homes that is acting to drive up house prices, putting a new home beyond the reach of many buyers.

The budget also details plans by the government to build 1.2 million houses over the next five years.

All this is occurring against an extremely uncertain global backdrop, with China's faltering property sector mixing with ongoing concerns about supply chain security and wars in Gaza and Ukraine, the government said.


Write to James Glynn at james.glynn@wsj.com


(END) Dow Jones Newswires

05-14-24 0610ET