Treasurer Jim Chalmers Confronts Hard Trade-Offs as Oil Surges and Australia's Outlook Darkens

Australia's treasurer, Jim Chalmers, has little good news to offer voters as the economic outlook weakens. In a speech last week he suggested the economy would be "a bit better" in a year. By Friday he was acknowledging that Treasury officials are lowering their forecasts ahead of the December mid-year budget update, with slower growth and higher unemployment now expected.

The main driver is a widening conflict in the Middle East. Overnight, the global benchmark oil price rose to US$113 a barrel, close to its April peak of nearly US$120. Australian motorists are paying 60 cents more per litre than before the US and Israel attacked Iran. That adds $36 to the cost of filling a 60-litre tank, or $144 more per month for a family that fills up weekly, compared with February.

The risks may not be done. The New York Times reported overnight that the US and Israel have drawn up plans to resume attacks on Iran after the American midterm elections. Analysts at Westpac have outlined an escalation scenario in which oil heads toward US$150, a concern that echoes warnings the International Monetary Fund issued earlier this month. Such an outcome would have major consequences for inflation and interest rates, at a time when a fifth rate rise is possible on 3 November.

The global economy is also losing one of its few supports. Heavy spending on artificial intelligence has helped mask weakness elsewhere, but investors are now uneasy about a sharp rise in debt among companies racing to build the necessary infrastructure. That anxiety triggered another steep sell-off on Wall Street overnight. Community opposition to the datacentre build-out could slow the rush further, which may prove healthy over the long run but adds to short-term stress. Talk of a tech stock bubble is increasingly paired with talk of a bust.

For the Reserve Bank's Andrew Hauser, the combination of high inflation, low growth and rising unemployment is a central banker's "nightmare". It is also a difficult position for a treasurer who is increasingly unpopular and in need of a win with the public. "The pressures on people right now are very substantial and obviously that keeps me awake at night," Chalmers told Politico.

He said some of the causes lie beyond Canberra's control, while others the government can influence, such as providing cost-of-living help and managing the budget responsibly. But in many ways, he said, "we're hostage as well to decisions taken in DC or Tehran or in Eastern Europe about two wars which are pushing up inflation around the world and weighing on growth around the world."

Domestic factors are not helping. High government spending works against the inflation fight, a point the opposition raises at every opportunity. Productivity growth is, if not dead, then resting, which means the economy reaches its speed limit sooner and inflation runs higher at lower rates of growth. Even so, Chalmers is right that much is out of the government's hands, and his options for easing voter discontent are limited.

Each available option carries a cost. The government could cut the fuel excise again on a temporary basis to lower petrol prices, but the billions of dollars that would put in motorists' pockets would make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in the December update. That would assist the central bank but weigh on an already weak economy and push unemployment higher, and it is unclear that it would earn the government any credit.

This is what Hauser has called a "world of hard choices", where fixing one problem worsens another. It is a world Australians are becoming all too familiar with.