Treasurer Jim Chalmers is confident he can beat inflation in the near term while gearing up for growth in a low-carbon world in his government’s third budget.

A year ago, inflation was still running hot and the government was under pressure to support those hurting the most without pushing consumer prices up even more.

Fast forward to today and Treasurer Jim Chalmers’ dilemmas are still familiar but starting to shift, with inflation tamed – but not beaten – and economic activity slowing to a crawl.

He told AAP he remained “very focused” on pulling off a soft landing for the economy, which involves cutting inflation without causing a recession and the unemployment rise that comes with it.

Treasurer Jim Chalmers says his budget will help tackle inflation. Photo: AAP

Yet stalling progress on inflation has thrown a spanner in the works.

Consumer price growth as measured by the national statistics bureau clocked in at 3.6 per cent in the March quarter, a moderation from the 4.1 per cent annual growth in December but above expectations.

The numbers put the central bank board on high alert at the May monetary policy meeting as it discussed the case for another interest rate hike.

With mortgage holders already under immense financial strain from 13 interest rate hikes in the past two years, the federal government wants to avoid more tightening.

Preferably, it would like to see interest rate cuts, and sooner rather than later – ideally before the election in 2025.

Yet, on the other hand, households have been responding to elevated living costs, higher income taxes and swelling mortgage repayments by reining in spending, which has contributed to a sharp slowdown in economic activity.

A muted 1.5 per cent lift in gross domestic product was recorded in the year to December, according to the Australian Bureau of Statistics, with the quarterly pace of growth tapering off throughout 2023.

Dr Chalmers says the slowing economy means now is not the time for a “slash and burn” budget, even if inflation is still too high.

He is aware of the “cross-currents” buffeting the economy, with fighting inflation to be the focus of the “front end” of the budget.

The later years will prioritise bedding down the foundations for growth in the future, he said.

“This budget will help us get on top of inflation without smashing the economy.”

Economist Chris Richardson is keen for budget spending to not make inflation worse. Photo: AAP

The Opposition is not convinced it will rein in spending enough to manage inflation, with shadow treasurer Angus Taylor urging the government to “show the restraint that Australian households are being forced to commit to”.

Independent economist Chris Richardson said the politics of fighting price pressures was “diabolical” and had a more modest ask – “don’t make inflation worse”.

“That is, it should spend to protect the most vulnerable from the cost of living crisis, but also cut other spending and/or raise taxes to ensure that the budget doesn’t make inflation worse,” he said.

Extra “carefully calibrated” cost of living support has been flagged by the federal government, with extended energy bill relief and boosted commonwealth rent assistance likely candidates.

Yet the government says the stage three tax cuts will be the centrepiece of its cost of living response, and will start lightening the tax burden on individuals from July.

Longer term, the government plans to till the soil for growth via its wide-ranging Future Made in Australia industry policy, which involves incentives and subsidies to spur investment in clean energy projects and low-carbon industries.

What is known so far

The third federal budget under the Albanese government will be handed down on Tuesday and several spending and policy announcements have already been made.

THE BIG PICTURE

* A second surplus is still the goal in 2023/24

* The mid-year budget review had forecast a deficit of $1.1 billion for the 2023/24 fiscal year, narrowing from the $13.9 billion forecast in last year’s budget

* Revenue upgrades of about $25 billion are expected by Treasury over the five-year forecasting period. This is a smaller windfall than in the past two budgets but about 95 per cent of these tax upgrades will be banked

* About $1 billion in savings on consultants and contractors has been found

* The reworked stage three tax cuts will be the main source of cost of living relief but other targeted measures are expected

* Above-target but moderating inflation remains the primary economic challenge for the budget but the slowing domestic economy is also a priority

* Latest economic data points to ongoing tightness in the labour market and persistent price pressures

* A troubled Chinese property sector and geopolitical tensions in the Middle East and Europe are among the global challenges weighing on the budget

* Treasury has downgraded its forecasts for key economies, including China, Japan and the United Kingdom

* The government has again been under pressure to lift income support payments

MEASURES

* $3.25 billion for Victoria’s North East Link toll road

* $1.9 billion towards roads and rail projects across greater Western Sydney

* $50 million to extend the Canberra light rail network

* $33.5 million towards planning works to support the development of Westport, a future port in Kwinana, Western Australia

* $90 million package to train 20,000 bricklayers, plumbers and other tradies

* $100 million to create an Active Transport Fund to build more bicycle and walking paths

* $519.1 million for the Commonwealth’s future drought fund

* $160 million to set up a national firearms register

* $170 million to expand money laundering and terrorism financing rules

* A $925 million domestic violence response package to provide financial aid and support referrals for women looking to get out of dangerous situations

* $467 million for upgrades to the Bruce Highway in Queensland

* $249.7 million to upgrade the Australian Institute of Sport’s facilities in Canberra in preparation for the 2032 Olympic and Paralympic Games

* $13.4 million for upgrades of 21 remote airstrips

* $10 million for grants for volunteers working in their communities

* Student teachers, nurses and social workers will be paid during their compulsory work placements

* The HELP-HECS indexation rate has been capped to ensure indexation matches either the consumer price index or the wage price index

* Australian carers who receive government support payments will be provided better work flexibility

* Super is to be paid on government-funded paid parental leave

FUTURE MADE IN AUSTRALIA ACT

The Future Made in Australia Act involves deploying public funds to give viable zero carbon industries and businesses serving the national interest a leg up so they can attract more private investment.

More details are expected to be revealed in the budget but it encompasses a number of initiatives already, including:

* Nearly $1 billion for tech company PsiQuantum to build the world’s first fault-tolerant quantum computer in Brisbane

* The $1 billion Solar SunShot program aims to bolster the nation’s solar panel manufacturing capabilities

* $400 million in loans has been announced for Australian company Alpha HPA to develop a high-purity alumina facility in Gladstone, Queensland. Financing will, in part, come from the Critical Minerals Facility

* $185 million in loans have been conditionally approved for Renascor Resources to fast-track the first stage of a purified graphite project in South Australia

* $330 million towards nine clean energy and emissions-reduction projects has been allocated at heavy industrial sites nationwide via the $1.9 billion Powering the Regions Fund

* $566 million for Geosciences Australia to deliver a map of critical mineral and rare-earth deposits

* The government says its net zero industrial policy agenda has been underpinned by the national skills agreement, the National Reconstruction Fund, the establishment of the Net Zero Economy Authority, its Future Gas Strategy and its push to rollout renewables and spur innovation

Key short and long-term challenges

*Inflation that’s moderating but still too high

*Elevated interest rates and a risk they stay higher for longer

*A strong but softening jobs market

*Weak economic growth

*Lacklustre household spending

*Sluggish productivity growth

*An array of global economic challenges, including volatility in oil markets and a troubled Chinese economy

*Strong population growth, which adds to labour supply but is also extra demand for housing in a tight market

*Pressure to do more to prevent domestic violence

*Pressure to help low-income Australians with the cost of living, including lifting Jobseeker payments

*Climate change and the net zero transition

*An ageing population

*Rising geopolitical instability

—AAP