Budget improves by billions, but petrol pain about to grow

Billions of dollars have been wiped from the budget deficit and government debt thanks to the ongoing strength of commodity prices and the nation’s jobs market, but consumers face more pain as the war against Iran risks a fresh spike in petrol prices beyond $2 a litre.

Weeks after Treasurer Jim Chalmers delivered the budget in which he forecast the just completed financial year would show a $28.3 billion deficit, Treasury believes it will be closer to $23 billion.

It is well short of the $49.6 billion deficit that Chalmers forecast for 2025-26 when he delivered his first budget in October 2022.

Despite the improvement, the deficit remains a substantial increase over the $10 billion shortfall recorded in 2024-25 and a modest improvement over the $31.5 billion deficit forecast for the current financial year.

The better deficit has contributed to a smaller-than-expected amount of government debt. Gross debt finished the financial year at $971.4 billion, about $10 billion lower than had been forecast in the budget.

But the budget would have to improve markedly to avoid gross debt going through the $1 trillion mark as expected this financial year.

Chalmers took credit for the smaller deficit, saying the government had saved upward revisions to revenue collections.

“This improvement in the bottom line is another powerful demonstration of our responsible economic management,” he said.

“We’re finding savings, banking upwards revisions to revenue, restraining spending, and we’re addressing structural pressures in the budget and that’s all making a meaningful difference.”

But Opposition Leader Angus Taylor said the government had led Australia into an economic crisis with a collapse in living standards that was the largest in the developed world.

“That’s the ability of people to pay for what they’re used to buying with their pay packets. The purchasing power of their pay packets has gone backwards faster than any other developed country in the world,” he said.

The budget’s improved condition could be undone by the resumption of hostilities between the United States and Iran.

The price of Brent crude, which had fallen to $US71.80 ($102.70) a barrel at the start of the month, climbed back over the $US90 a barrel mark on Monday.

Movements through the Strait of Hormuz, which had approached their pre-war level just a fortnight ago, have collapsed and analysts are arguing the key waterway is now effectively closed. The Islamic Revolutionary Guards Corps claimed on Monday that two oil tankers had exploded in the strait.

The lift is starting to feed into petrol prices across the country.

The Australian Institute of Petroleum reported on Monday that the average metropolitan price for unleaded petrol reached 171.6¢ a litre last week, a 4¢ increase over the past seven days.

Since the start of the month, the price of unleaded has increased by 15.1¢ a litre.

That includes the halving of the federal government’s reduction in fuel excise, suggesting petrol prices will continue to climb through the rest of the month. The government’s reduction in excise is due to end on August 2.

NAB senior economist Taylor Nugent said the increase in Brent crude was occurring just as excise was returning to its pre-war levels.

He said unless there was a rapid change in the global energy market, retail petrol prices would be back above $2 a litre “within a couple of weeks”.

Unleaded petrol is about $1.70 a litre in both Sydney and Melbourne. The last time it was above $2 a litre was in mid-April, after peaking at about $2.50 a litre at the end of March when the Strait of Hormuz had been closed for almost a month.

Nugent said a surge in the oil price would be a complication for the Reserve Bank, which next meets on August 10 and 11. Financial markets put the chance of a rate rise at next month’s meeting at less than one in five.

“We continue to expect the RBA will remain on hold as elevated inflation risks are balanced by an outlook for below-trend growth as higher rates and the slowdown in the housing market flow through to activity,” he said.

“But higher oil and refined product prices in the past week or so are a reminder that inflation risks remain elevated.”

It’s not just petrol prices. LNG prices have jumped to almost $US21 per million British thermal units (MMBtu) over concerns access to gas out of the Middle East will be restricted due to the increase in hostilities. Before the war, LNG was priced at about $US11.50 MMBtu.

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