Lower iron ore prices and a slackening jobs market will weigh on the budget bottom line, the federal treasurer has warned ahead of the mid-year economic update.

Jim Chalmers has played down the size of revenue upgrades, citing structural challenges in the Chinese economy dragging down key commodity prices.

Iron ore prices were down 30 per cent since the start of the year, he told parliament on Wednesday

Much hope has been pinned on Chinese government stimulus measures turning around the major steel producer’s growth prospects.

Those tailwinds could be tempered by the heightened trade tensions the incoming Trump administration poses.

“There’s still a fair bit of data to land before MYEFO, including national accounts and tax collections, but Treasury’s latest estimate is that any upgrade will be a sliver of what we saw in those first four budget updates,” Dr Chalmers said.

The average revenue upgrade in the past four budget updates has been $80 billion.

Company tax receipts were expected to be pared back for the first time since 2020, Dr Chalmers said.

The Labor government’s updated budget and economic forecast will be released in December.

A jobs market “softening around the edges” would further weigh on budget revenues, with the income tax take likely to be lower and government support payments higher.

“In recent years, the resilience of the labour market has been one of the main reasons why revenue upgrades in budgets have been the norm,” Dr Chalmers said.

“But with the labour market softening around the edges, this trend is diminishing.”

Australia’s jobless rate has been gradually lifting and is now 0.6 percentage points above its low of 3.5 per cent in mid-2023.

At 4.1 per cent, it is still low compared to history.

The strength of the labour market and commodity prices have helped the government deliver back-to-back surpluses.

Dr Chalmers said the back-to-back surpluses were not driven by cyclical factors alone.

“Bringing down our debt burden is making a meaningful structural difference and so are our reforms to aged care and the NDIS,” he said.

Treasury’s economic forecasts are expected to look similar to those in the May budget, with growth slow in the near-term.

Improving household incomes are then expected to fuel a gradual recovery in the economy.

 

Poppy Johnston
(Australian Associated Press)