Australia 'won't be spared' from economic shock of Middle East war, says Treasurer

Treasurer Jim Chalmers has warned the global economy is facing a ”very serious and dangerous time” with the International Monetary Fund this week predicting that a prolonged conflict in the Middle East could trigger a global recession.

The IMF also revised its economic growth projections for Australia, with Australia’s national GDP growth rate now expected to come in at 2 per cent in 2026, down from 2.1 per cent in the previous forecast. For 2027, GDP growth is now expected to be only 1.7 per cent, down from 2.2 per cent.

In a recent press conference, Chalmers said while Australia was better placed than many countries to deal with the impacts of the conflict, it would ”not be spared from the fallout of this very substantial economic shock”.

”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,” he said.

”We are expecting in our own economy, in our own forecasts, for our economy to slow, and we are expecting inflation to be higher as a consequence of this war in the Middle East.”

The Treasurer said the government would be carefully considering the impact of inflationary pressures and slower growth on Australia as it prepares this year's budget.

”[This] Budget will be a responsible budget, and it will be focused on resilience and economic reform,” he said.

”It will balance the pressures of the here and now coming at us from the other side of the world with our intergenerational obligations to lift the speed limit on the economy and make it more productive, to make our budget more sustainable over time, and to also make sure that our economy and our budget is fairer in intergenerational terms.”

Chalmers said the budget would strike the right balance between ”near-term pressures and intergenerational obligations”.

”I’m confident that this budget, which will be focused on fuel security, supply chain resilience and economic reform, will balance those key considerations.”

The IMF warned that the war in the Middle East is putting pressure on people, firms, and countries at a moment when public finances are already strained by long-term issues.

”Higher energy and food prices, tighter financial conditions, and greater uncertainty are once again prompting calls for fiscal support,” it said.

”In shaping their responses to this shock, countries will need to carefully consider the balance between protecting the most vulnerable and preserving market price signals.”

IMF’s latest Fiscal Monitor warned that with debt already elevated in many countries, fiscal policy must respond cautiously by providing support where needed without pushing public finances closer to the brink.

”Before the war, public finances were already stretched. The pandemic, the 2022 energy and food price shock, and rising trade disruptions left governments with higher debt, weaker buffers, and delayed adjustment,” it said.

”Even when economies recovered, fiscal positions did not. Global growth was robust in 2025, yet there was no meaningful progress in repairing budgets. In many countries, deficits stayed high, debt kept rising, and interest bills grew rapidly.”

The IMF said the numbers for the global fiscal deficit were stark.

”The global fiscal deficit remained at 5 per cent of gross domestic product in 2025. Gross public debt rose to 94 per cent of GDP and is projected to reach 100 per cent by 2029 – one year earlier than expected just a year ago,” it said.

”Public finances in many countries are weaker than before the pandemic. Interest spending has climbed rapidly, from 2 to nearly 3 per cent of GDP in only four years. At the same time, the gap between countries’ medium-term fiscal plans and what would be needed to stabilise debt globally has widened.”

The IMF said that in the current environment, every choice on revenue and spending by government will have more lasting consequences.

”Fiscal and monetary policies should be tightly coordinated. Emergency spending shouldn’t create new aggregate demand, so that support measures don’t undermine central banks’ efforts to contain inflation,” it said.

The bank warned that short-term shocks must not distract from the larger task at hand.

”Restoring fiscal resilience requires credible medium-term consolidation. This means concrete measures and realistic sequencing, not distant or shifting targets.”

”Spending pressures need to be confronted directly, inefficiencies reduced, and competing demands reconciled. On the revenue side, broadening tax bases, streamlining exemptions, and strengthening tax administration can raise revenues even in constrained settings.”