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Budget warning for ‘young, old, rich and poor’ as China hurls multi-billion dollar spanner at cost-of-living relief

China is Australia's largest export market and the news from its economy is problematic, at best.

Treasurer Jim Chalmers is getting down and dirty in the preparation of his third budget, which he will deliver to the Australian Parliament on May 14. How the cost-of-living crisis will be handled very much comes down to this, but the risks to relief everyday Aussies may depend on are clear right now.

I recommend you watch the budget and the commentary afterwards to see what it means for the economy, you, your business, your family and Australia more broadly. It will cover a wide array of issues that impact every Australian, young, old, rich and poor.

The budget brings together the federal government’s many decisions on where to spend money, where to trim and end spending, what payments will be made to individuals and businesses, what taxes to collect and from which parts of society.

Jim Chalmers image with a hand showing dollar coins falling through on a background of blue torn paper and a newspaper.
Jim Chalmers is preparing to hand down his third budget, and Australian households wanting a big cash injection may be disappointed. (Yahoo Finance Australia)

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Everyone is impacted by these decisions and policies in one way or another, which is why the Chalmers’ budget and the decisions in it will be watched and analysed closely.

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For the current financial year 2023-24, the bottom line of the budget will be in approximate balance.

Rising wages and higher-than-forecast commodity prices, especially for iron ore, will provide a revenue boost which will be partly offset by a series of decisions that will add marginally to overall government spending.

For 2024-25, which is the focus of this budget, there is likely to be a small deficit of around $10 billion or 0.3 per cent of GDP, which is around half the size of the deficit expected at the time of the Mid Year Economic and Fiscal Outlook in December, 2023.

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Limiting the ability of the government to deliver a surplus will be materially slowed economic growth which will feed into upside estimates for unemployment and downside risks to inflation.

What is perhaps the greatest risk and difficult to anticipate is the health of the Chinese economy and the impact that will have on Australia’s export volumes and an array of critically important commodity prices.

Slowdown in China to impact the Budget

Much of the focus in the global economy at the moment is the resilience of the US economy and the resulting stubbornness of inflation. So significant are the moves that bond yields have sky-rocketed, stocks have dropped from record highs and the US dollar has surged. At the start of 2024, up to six interest rate cuts were prices into the US – now it is just two.

This is important but it overlooks what is happening in China, Australia’s largest export market and the supplier and exporter of a significant proportion of the world’s goods.

The news from the Chinese economy is problematic, at best.

While bottom line GDP growth is resilient at around 5 per cent, there are significant areas of excess capacity which bodes poorly for the economic outlook.

China is, as a result, experiencing a bout of disinflation, bordering on deflation with consumers prices flat and producer prices falling in annual terms. The central bank, the People’s Bank of China, has been easing monetary policy to address these disinflation problems.

China president inset over top of a flag and building and China currency.
The impact of China's slowing economy will trickle down to Australia's bottom line. (Getty)

For Australia and the upcoming budget, China is a critical element in terms of economic growth and exports. China takes approximately one-third of all exports with a concentration on iron ore and other commodities.

Indeed, one factor in the improved budget position and return to surplus in 2022-23 and broadly balanced budget in 2023-24 is the boost to export earnings, profits and tax paid to the government from highly profitable mining companies.

The slowdown in China has shown up in the price of iron ore which has fallen from a recent peak above US$140 a tonne to now be around US$100 to $105 a tonne at the time of writing.

What does this mean for me?

This, along with the slowdown in the Australian economy and the impact that has on government spending and overall tax receipts, has seen Treasurer Chalmers show caution in forecasting further surpluses in the next few years.

If China slows further and the iron ore and other commodity prices are dragged lower as a result, a budget surplus will be illusive.

This is the background for the Budget in May which will make the policy approaches in terms of major reforms, cost of living relief and other areas of spending difficult to achieve.

At the end of the day, the government wants to deliver a range of policy settings that help cash-strapped consumers in the short term, that implements reforms to make Australia more competitive over the lover run whilst keeping an eagle eye on the bottom line and, with a little luck and good management, delivers something close to a surplus, even a small one.

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