This is a responsible budget that responds sensibly to inflation and weak productivity, but it stops short of the deeper tax and climate reforms needed to reshape the economy.

This budget has had to respond to very challenging times.

Inflation was too high and the Reserve Bank started to lift interest rates in February. That was because, even before the start of the Iran war, the RBA thought that aggregate demand in Australia was already starting to exceed the economy’s productive capacity. But since then, the closure of the Strait of Hormuz has made inflation so much worse.

In March, less than a month after the Iran war started, the annual increase in Australia’s consumer price index was 4.6 per cent, compared to 3.7 per cent in February. This is way outside the Reserve Bank’s inflation target of 2-3 per cent. Furthermore, while the future will be very uncertain as long as the war continues, we can be reasonably certain that inflation will get worse before it gets better.

Equally important, productivity growth has been much lower for the last 15 years or so, and productivity has not risen at all in the 2020s.

As productivity is the main determinant of real wages and living standards, it is therefore not surprising that with no productivity growth the cost of living has become the number one political issue.

But it is difficult for the budget to respond directly to the cost-of-living issue without making inflation worse. That is why the Reserve Bank Governor, Michelle Bullock, warned that any cost-of-living relief in this budget should be tightly targeted to those who are experiencing the greatest cost-of-living pressures.

The economic outlook and budget priorities

The global oil price started the year around $US60 and has now been above $US100 for the bulk of the past two months. Treasury’s central forecast is that headline inflation in Australia will be 5 per cent through the year to the June quarter 2026, and that growth in the economy will slow from 2¼ per cent to 1¾ per cent in 2026-27. Unemployment is expected to stabilise at around 4½ per cent and solid wage growth is expected to continue.

Treasury also presents a more severe scenario where the oil price peaks at $US200 and takes three years to fall back down. We would still avoid a recession, but unemployment would spike to pre-pandemic levels and inflation would peak above 7 per cent.

In response the Treasurer, Jim Chalmers, has brought down what he declares is an ambitious budget, with........

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