Besa - a big thanks to you and your team for the opportunity today, for getting everyone together here in Melbourne, and for the introduction just now.
At the outset we acknowledge the traditional owners - their elders, customs and culture.
I'm an enthusiastic supporter of the work of the ABE.
And I'm grateful to 36 of you for participating in a number of roundtables with market economists we convened at Treasury at the start of March.
Those discussions shaped the thinking I want to share with you today and they'll help shape the Budget too.
There won't be many pre‑Budget speeches this year.
I've chosen this audience for the main one because you think deeply and objectively about the issues I want to cover, you're focused exclusively on the economics not the politics, and because you'll have tough but insightful questions to help us tease out the issues more.
I can't tell you today what the final design of the Budget will be.
Not because I don't want to!
But because it isn't finished yet.
Even though we've already spent very long hours in the Cabinet room, for months, we haven't taken the main decisions yet and hostilities in the Middle East give us good reason to be as flexible as we can as late in the process as we can.
Conflict in the Middle East
That conflict is a defining influence on global growth and inflation this year, and that's why it will be a defining influence on the May Budget.
We've already seen 4 major shocks over the past 2 decades - the GFC, a major pandemic, a global inflation shock, escalating trade tensions - and this oil shock could become the fifth.
The oil price has risen 80 per cent since January, and disruptions in the Strait of Hormuz are driving up prices for commodities like fuel and fertiliser as well.
This is adding upward pressure to global inflation, interest rate expectations and bond yields, while international equity markets and sentiment more broadly have fallen.
Treasury has been constantly monitoring and modelling potential impacts of this war.
We have been considering 2 scenarios, with a third more drastic one also under development.
In the shorter term scenario, the oil price stays at $100 per barrel for the first half of this year and then gradually returns to pre‑conflict prices by the end of the year.
The more prolonged scenario has the oil price reaching $120 per barrel in the first half of the year and then takes 3 years to get back to its pre‑conflict price.
While both scenarios could underestimate the cost, given where the oil price is and the uncertain duration of these events, they give us a sense of the second round impacts.
Even with these conservative assumptions, Treasury's latest advice is the war could cut GDP growth by up to 0.2 percentage points across our major trading partners.
In both cases, inflation rises and growth is hit.
Compared to the first time Treasury ran these models last week, the newer results incorporate broader impacts such as lower global growth and higher LNG, coal and fertiliser prices.
These effects add a further quarter of a percentage point to headline inflation and double the negative impact on GDP.
Headline inflation would peak ¾ of a percentage point higher in the short term scenario and 1¼ percentage point higher in the prolonged one.
It means the prospect of inflation peaking in the high 4s or even higher this year is very real.
In the short term case, output would be 0.2 per cent lower around the middle of this year but this gap would quickly close because the shock is short lived.
But the more prolonged scenario would leave a bigger scar.
There would be an immediate hit to output but it would build over time.
Treasury estimates that GDP would be 0.6 per cent lower in 2027 and even by 2029 would still be below where it would have been without the conflict.
Around half of the impact to GDP is due to the impact of higher oil. The other half is due to broader consequences.
Treasury, with other agencies, is continuing to undertake detailed modelling and scenario planning on industry and supply chain impacts.
This work is informing a coordinated response across the Cabinet, and now the National Cabinet.
Our immediate priority is Australia's fuel security.
That's why we are making more supply available for industry and households, managing our reserves responsibly and we're helping to keep fuel flowing to the regions.
We're also empowering the ACCC to help ensure households and businesses are paying fair prices at the bowser.
And we are preparing for the risk of more prolonged disruption, including through work with international partners, to help insulate more fuel‑exposed industries like farming, transport and mining.
The Prime Minister and Minister Bowen will have more to say about our plan for fuel security in the coming days.
Three major challenges
The war in the Middle East is the most pressing problem confronting the global economy.
But it reinforces - rather than replaces - the 3 core challenges shaping this Budget.
Let me be blunt.
Before this war, inflation was already too high.
Productivity growth had been too weak for 2 decades.
And while the global economy was muddling through, and Australia had held up remarkably well, the global environment was already highly volatile.
Developments in the Middle East make addressing these 3 challenges even more urgent, not less.
This conflict is not the only major challenge we face in our economy, but it exacerbates the others.
It's adding to inflation when it is already too high, intensifying uncertainty when it is already elevated, and straining our productive capacity when it is already close to its limit.
I want to spend the bulk of my remarks today on these 3 challenges and the role of the Budget in addressing them.
I'll outline what the key influences on the budget will mean for our forecasts, what the key policy packages will be, and why.
But first I want to acknowledge we're approaching these challenges from a position of relative strength.
Strong fundamentals
We have faster growth, stronger jobs growth and lower debt than every major advanced economy.
Across the OECD's 38 members, we have the 11th lowest tax‑to‑GDP and the 6th lowest spending‑to‑GDP.
Our labour market has held up remarkably well and more than 1.2 million jobs have been created since we came to office.
New data out today shows unemployment remained historically low at 4.3 per cent, with 49,000 jobs created in February.
Unemployment has averaged below 4¼ per cent for the past 4 calendar years for the first time in more than half a century.
Wage growth has been above 3 per cent for 3 and a half years, the longest consecutive run in more than a decade and a half.
The recent National Accounts were also encouraging.
Annual growth in our economy was 2.6 per cent, an almost three‑year high.
And they confirmed that the main story in our economy in 2025 was the private sector‑led recovery.
We have seen a big and broad turnaround - showing up in household consumption, business investment and dwelling investment.
As the RBA said this week 'private demand strengthened substantially more than was expected in mid‑2025'.
Last year, annual private demand growth more than tripled, public demand growth more than halved.
This private sector growth has been welcome, but it's also come with a confronting truth.
Even with public demand contributing less, faster than expected growth in private investment and GDP growth a whiff above 2 per cent brought unwelcome inflationary pressures.
In other words, it didn't take much for the private sector rebound to come up against supply constraints sooner than we expected, and sooner than we wanted.
Supply side emphasis
Which brings me to this year's interim Budget forecasts.
Every year for a Treasurer, the budget process kicks off formally more or less in the same way and very soon after the release of the December update.
Around Australia Day, Treasury briefs on budget forecasts - which can jump around a bit as more data lands through to May.
This year there were unwelcome but unsurprising changes on the demand side.
Even before the conflict, near term inflation was going to be revised up closer to 4 per cent, broadly in line but perhaps a little lower than the Reserve Bank's outlook.
The growth forecasts were being dragged down by a higher exchange rate and changing market expectations for interest rates in the near term, reflecting softer consumption and a smaller contribution from net exports.
But this year there's been a much bigger focus on the supply side, and that's mirrored in our policy deliberations.
I think the most consequential shifts in Treasury's interim forecasts go to capacity.
Since the end of last year and the beginning of this year Treasury has revised its assessment of the output gap.
While it previously believed there was spare capacity in the economy -
Now it judges that slack has tightened up.
The output gap has closed.
This is a significant change, due to cyclical and structural factors.
Cyclical factors include the impact of the pandemic on recent productivity outcomes and some recent easing in the participation rate.
Treasury has also updated its structural view of the 3 Ps - productivity, population and participation.
It is maintaining its 1.2 per cent long term productivity growth assumption but it has changed how we get back there.
When we came to government, I accepted Treasury's advice to downgrade the assumption from 1.5 to 1.2 per cent.
That was necessary at the time, after the worst decade for productivity growth in 60 years, but it was rare.
It recognised we had a longstanding challenge, one familiar to our global peers.
Australia's two‑decade productivity average is higher than most major advanced economies and despite a welcome recent tick‑up in last year's data it has, like other countries, slowed over time.
Treasury thinks there is now more uncertainty over the long term direction of productivity than there has been in the past.
There are downside risks, including climate change and rising barriers to trade, but there could also be significant upsides from AI and technological developments.
Pandemic‑related and broader cyclical volatility has also made underlying trends harder to interpret.
While Treasury will retain its long term productivity assumption in this Budget, it will make some near term adjustments.
Previously, it expected productivity to return to trend within 2 years.
Now it expects that convergence to take closer to 5, in line with other key long‑run assumptions.
Population dynamics are also evolving.
Net overseas migration is 45 per cent below its peak, but Treasury expects the fall to be more modest over the forecast period, mainly due to lower than expected departures.
Treasury's fertility assumption will also be revised down to reflect lower expected births, in line with international trends.
At the same time participation is expected to edge higher over the next couple of years - led by women and older workers.
Altogether, it means Treasury has changed its view of potential growth in the near term.
This change alone means GDP is now likely to be a quarter to half a percentage point weaker in the middle years of the forward estimates.
A small change in a forecast, but it tells a bigger story.
Not primarily a demand story, but a supply one.
A story which brings together the combined challenges of inflation in the near term, productivity in the medium term, and global uncertainty all around us -
Explains why our economy is running close to its speed limit, but still only growing with a 2 handle -
And which is the primary determinant of the economic strategy at the core of the Budget in May.
Three reform packages
Capacity constraints on the supply side bring together our 3 main challenges and they unite our policy strategies as well.
It's why our budget preparations are focused on 3 ambitious reform packages.
A savings package.
A productivity and investment package.
And a tax package as well.
These packages are being designed to work together.
If the main constraint we are collectively facing is capacity, these packages will help expand it.
More savings to make even more room for the private sector to grow, while building fiscal buffers.
Productivity enhancing reforms to boost supply, generate higher living standards and unlock more investment in the process, to help the economy grow without adding to price pressures.
And tax reform to drive more productive investment, while supporting budget sustainability and equity, and helping to rebalance the system.
Together, they will form a comprehensive supply side strategy.
To expand capacity and boost resilience -
Lift potential growth -
And deliver higher wages, without more pressure on prices.
Budget repair
We've already made a lot of progress in all 3 of these areas since we came to office.
We've made $114 billion of savings and reprioritisations across 7 budgets and mid‑year updates.
That's $16 billion on average each update - or the amount spent on the childcare subsidy each year.
It compares with an average of around $3 billion in the 7 updates before that.
We've banked about 7 in every 10 dollars of upward revenue revisions.
Real spending growth now averages 1.7 per cent, compared to a pre‑COVID average of 3.2 per cent.
We've got spending as a share of the economy down from almost a third at the peak of the pandemic to closer to a quarter.
The budget is now more than $233 billion better than when we came to office and debt is $176 billion lower this year compared to the 2022 PEFO.
This means that debt is forecast to peak much lower - around 37 per cent of GDP compared to the almost 45 per cent we inherited.
While we have made good progress, we need to do more in the forwards and over the medium term horizon.
We're working on substantial savings options for this Budget.
This will build on the savings we've made to date, addressing some of the fastest growing structural spending pressures and making difficult decisions in other areas.
Productivity
We have also made a lot of progress on our five‑pillar productivity agenda across dynamism, skills, net zero, and the digital and care economies.
Over the past year, productivity has lifted 1.0 per cent in annual terms, above the 20‑year average.
In the market sector it has picked up for 5 consecutive quarters and is now growing 1.5 per cent in annual terms.
We don't get carried away with volatile quarterly movements, they're welcome but not enough.
Same for the welcome rebound in business and dwelling investment at the end of 2025.
The cost of low investment over a much longer period of time has been cumulative.
Capital deepening in the market sector has slowed over the last decade compared with the decade before, and the productivity gap that emerged between our top firms and the rest in the early 2000s has persisted.
That's why we are implementing a sustained and substantial effort to reinvigorate Australia's productivity and unlock investment in key areas.
Building better and faster is a key focus of our work with the states and the private sector.
Especially when it comes to advancing 3 of our key priorities:
Our target to build 1.2 million homes.
Our net zero target, which Treasury estimates will support an 80 per cent increase in investment by 2050.
And our AI plan, which will require significant investment in infrastructure.
Our productivity agenda is broad and we are building on it.
We're revitalising National Competition Policy and rolling out funding from our $900 million National Productivity Fund.
We're overhauling our approvals regimes, strengthening and streamlining our foreign investment regime and opened our Investor Front Door.
We're reforming the payments system, abolishing tariffs, cutting red tape and streamlining the National Construction Code.
We're seizing the opportunities from net zero and the digital economy and investing in our human capital - with Free TAFE, the universities accord and fairer schools funding.
What comes next will have a sharper focus on unlocking productive investment, better regulation, even faster approvals, more open trade, skills, and ensuring Australia captures the upsides of AI.
It will be all about 3 things:
Attracting and absorbing investment.
Making it easier to build and build faster.
And cutting compliance costs where we can.
Tax reform
Tax reform is an important part of our productivity agenda and we've made substantial progress already.
Cutting income tax rates, lifting thresholds, returning bracket creep and incentivising participation.
Our tax cuts will reduce the average tax rate for a worker on average earnings from 21.9 per cent in 2023-24 to 20.8 per cent in 2027-28.
In fact, the average tax rate for that worker is not expected to exceed 2023-24 levels until after mid‑2031.
Hours worked are expected to increase by 1.3 million hours per week as a result, equivalent to more than 30,000 full time jobs.
We're also simplifying tax returns with a standard deduction, implementing tax breaks for small business and build to rent, and production incentives for critical minerals and hydrogen.
Reforming the PRRT and multinational taxes so the biggest companies are paying a fairer share.
Reforming the Low Income Superannuation Tax Offset and reducing tax breaks for those with balances over $3 million to make the super system fairer from top to bottom.
We are working on more tax reform in the Budget - how much we can do in May depends on fiscal considerations, international developments and Cabinet deliberations.
Any reform would be guided by some clear principles.
Firstly, we recognise an outdated tax system is weighing on the opportunities faced by younger Australians and future generations.
So any changes would have a substantial focus on our intergenerational responsibilities.
Second, we are focused on better incentivising productive business investment, if we can afford to.
And third, making the system simpler and more sustainable.
Reflections on reform
Let me finish on this note.
The conflict in the Middle East is a stark reminder of how quickly the global economic outlook can change.
It is adding to inflation risks, weighing on growth, and increasing already elevated uncertainty.
But it is also a stark reminder of why addressing our 3 key economic challenges is so urgent.
All this economic uncertainty and volatility is a reason for more reform, not less.
It's a reason to go further, not slower.
The strategy I've outlined today is calibrated for this kind of environment.
A supply‑side strategy to lift the speed limit of the economy and make it more resilient.
To create room in the budget.
To expand capacity.
And to make our tax system stronger, fairer and more sustainable.
So we can sustain stronger growth without adding to inflation.
And build an economy that is more resilient in a more volatile world.
We approach these challenges from a position of strength.
Our labour market is the envy of the world.
We have deep capital markets, a world‑leading super system, abundant natural advantages in energy and resources, and a public balance sheet in far better shape than most of our peers.
But we are not complacent about the risks in a global economy that is perilous and unpredictable.
We will make hard decisions in May.
Our task is not just to respond to shocks, but to position Australia to succeed through them.
To make Australians beneficiaries, not victims, of all the churn and change we see around the world.
It will be an ambitious budget because ours is an ambitious government, and this is an ambitious country.
And with that, I look forward to your questions.
