Treasurer to deliver 'ambitious' tax package to address rising economic pressures

Treasurer Jim Chalmers has shed light on some of the reforms he plans to unveil in this year's Federal Budget as the government grapples with increased inflation pressures and constrained growth.

In an address to the Australian Business Economists last week, Chalmers said the government was currently dealing with a number of major economic challenges that would shape the direction of this year's budget.

The Treasurer said the government was currently considering three ambitious reform packages to address issues such as high inflation, low productivity growth, and capacity constraints. These include a savings package, a productivity and investment package and a tax package.

The savings measures, he said, would make more room for the private sector to grow while building fiscal buffers.

Chalmers said the productivity-enhancing reforms would boost supply, generate higher living standards, and unlock more investment in the process, helping the economy grow without adding to price pressures.

The third package, focused on tax reform, would be aimed at driving more productive investment, while supporting budget sustainability and equity, and helping to rebalance the system, he said.

The Treasurer said that while the government was working on more tax reform in the budget, how much it can do will depend on fiscal considerations, international developments and Cabinet deliberations.

"Any reform would be guided by some clear principles. Firstly, we recognise an outdated tax system is weighing on the opportunities faced by younger Australians and future generations, so any changes would have a substantial focus on our intergenerational responsibilities," he said.

"Second, we are focused on better incentivising productive business investment, if we can afford to.

"And third, making the system simpler and more sustainable."

Chalmers said the conflict in the Middle East and its broader impact on commodity prices were one of the most pressing issues for Australia's economy and were also exacerbating other underlying issues.

Disruptions in the Strait of Hormuz and their impact on commodity prices, he said, were driving pressure on global inflation, interest rate expectations and bond yields, while equity markets and sentiment had broadly fallen.

Treasury has modelled two potential scenarios for the impacts of the war in the Middle East, with a third, more drastic one also under development.

"In the shorter term scenario, the oil price stays at $100 per barrel for the first half of this year and then gradually returns to pre‑conflict prices by the end of the year," said Chalmers.

The more prolonged scenario has the oil price reaching $120 per barrel in the first half of the year and then taking three years to get back to its pre‑conflict price.

In both these scenarios, Chalmers warned that inflation would rise and growth would be hit.

"Headline inflation would peak three-quarters of a percentage point higher in the short term scenario and 1 and quarter percentage point higher in the prolonged one.

"It means the prospect of inflation peaking in the high 4s or even higher this year is very real."