Jim Chalmer’s "ambitious" budget carried an uncomfortable assumption buried in its forecasts, predicting that oil prices will stay where they are, or fall. The Treasury modelled an escalation scenario, where oil prices would reach $200 per barrel by the end of the year and only fall to $80 per barrel by 2029. But, the government’s base case assumes the conflict will gradually resolve from mid-2026.
Simply, the Treasurer is effectively betting that conflict in the Middle East doesn’t get worse.
The Budget forecasts assume that inflation will return to its target of 2-3% but there is a clear worst-case scenario that will seriously impact Australians. If the conflict escalates further, their modelling suggests that inflation reaches above 7% and unemployment 5% - levels we have not seen since COVID. Collectively these figures would force the RBA to hike rates further, adding more pressure to mortgage holders and pushing Australia’s economy near a recession.
Despite modelling this nightmare scenario, the government didn’t meaningfully restrain its spending. In 2026-27, the deficit is expected to widen, with new policy decisions adding a net $6.5bn in spending. Economists viewed this budget as “neutral-to-mildly expansionary”, reflecting that the government is set to spend more than they receive. Clearly, this stance will do little to help the RBA’s battle against inflation and only opens the door to further rate hikes.
Hopefully the base case holds. But the budget is depending on the decisions made between Iran and the US, which has been anything but predictable so far.
