Treasurer Jim Chalmers has stoked expectations for a dramatic acceleration in Reserve Bank interest rate cuts, pointing to financial market bets that there could be a 50 basis point reduction next month if fallout from the global trade chaos intensifies.
Speaking as turmoil on currency, stock and bond markets up-ended the federal election campaign, Mr Chalmers insisted Australia’s economy was well placed to weather the tariff shock.
“But we still do expect Australian GDP to take a hit and we expect there to be an impact on prices here as well,” he said.
“I don’t predict or pre-empt those decisions, but the market is certainly now expecting multiple interest rate cuts over the course of the year, beginning in May.”
Opposition Leader Peter Dutton also leapt on the financial market volatility saying if there was to be a global recession, including in the United States, “we don’t want a Labor-Greens government in charge in Canberra”.
“It will be a disaster for retirement plans, for the economy. Big spending by the Labor-Greens government is inflationary, and Australian families, if they vote for Mr Albanese, will get higher interest rates, higher electricity prices, higher gas prices,” he said.
Donald Trump with a chart listing some of the tariffs the US will impose on other countries. (Reuters: Carlos Barria)
Treasury on Monday released modelling of US President Donald Trump’s tariff policy overhaul with a warning that it could lead to further market instability that could derail economies around the world.
“Ongoing uncertainty in relation to trade hostilities and associated volatility in financial markets will weaken consumer and business confidence, which will have implications for consumption and business investment, including in Australia,” Treasury officials wrote in the Pre-election Economic and Fiscal Outlook.
The Trump administration last week announced it would hit almost every nation in the world with tariffs of between 10 per cent and 50 per cent, triggering a range of retaliatory actions led by China’s imposition of a 34 per cent impost on US goods.
After two days of market declines, Australia’s stock exchange continued to swing as investors struggled to gauge the extent of economic damage caused by Mr Trump’s tariff assault.
Questions over Australia’s economic resilience
The disruption, which comes less than two weeks after the federal budget, has triggered fresh questions about Australia’s economic resilience and whether there’s enough room in the budget tank for potential stimulus measures.
Unlike in the lead-up to crises in 2008 or the 2020 pandemic when the federal budget was either in or heading towards surplus, today’s forecasts are for growing budget deficits.
Treasury, in the PEFO, said Mr Trump’s self-proclaimed “liberation day” tariff wave was bigger than anticipated in the March 25 budget.
“The potential magnitude and persistence of the economic effects of these announcements has resulted in greater-than-usual uncertainty around the outlook,” the department said.
Ongoing declines in oil prices and iron ore would mean the government’s forecasts for tax revenue would need to be revised downwards, it suggested.
Speaking in Melbourne, Prime Minister Anthony Albanese said the uncertainty created by Mr Trump’s tariff moves demonstrates the need for stable government.
“You can’t afford to have a government that is a shambles and doesn’t know what it’s doing from day to day,” he said after Mr Dutton dumped his policy to force public servants to work from home five days a week.
“You need considered orderly government with competent ministers that know what they’re doing, that set-up Australia as best as possible,” he said.
“You can’t change global events, what you can do is prepare.“
The PEFO — which is required by law within 10 days of an election being called and is written without input from political masters — predicts the underlying deficit will hit $42.2 billion in 2025/26 or $65.2 billion with “off-budget” spending included.
Deficits are forecast until 2035-36, with gross debt rising to 37 per cent of gross domestic product in 2030.
Spending will out-pace revenue for much of the next decade, according to the Treasury, with receipts hitting 26.8 per cent of GDP in 2035-36.
Payments will be 27 per cent in 2025-26, holding close to that level through the next decade.
Mr Chalmers said Mr Dutton posed an “unacceptable risk” to the budget.
“I invite you to compare and contrast the methodical and considered way that we have managed the budget and the economy over the course of the last three years with what we’ve seen from Peter Dutton and the Coalition today,” the treasurer said.
“There could not be a worse time to risk wages and tax cuts and secret cuts in a world which is this uncertain.”
The treasurer said the decline in the Australian dollar on Monday was a reflection of market expectations.
“The next Reserve Bank interest rate cut in May might be as big as 50 basis points.”
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