Australia’s budget has finished about $6 billion better off in the 2025/26 financial year, the government will reveal as it braces for a damaging interest rate rise.

Treasurer Jim Chalmers and Finance Minister Katy Gallagher will tout their fiscal credentials when they release the final budget outcome on Monday, but they will also face difficult questions about a darkening economic outlook.

Gallagher confirmed the improvement to the underlying deficit, which was projected to be $28.3 billion in the May budget.

It’s still a good deal worse than the previous year’s final budget outcome, which put the deficit at just under $10 billion for 2024/25.

With deficits projected for another decade, and mortgage holders bracing for another Reserve Bank rate hike on Tuesday, Gallagher was forced onto the back foot to defend the role of government spending on inflation.

“We’ve found savings, including savings in an ongoing sense, to make sure that where government investment is happening, that it’s not adding to the inflation challenge in our economy,” she told ABC Radio National.

“But there is a war in the Middle East, and that war is having impacts not just at the petrol bowser, but across the board. The sooner that war ends, the better.”

With inflation stubbornly above the RBA’s 2 to 3 per cent target band, the Middle East oil shock is set to keep price pressures elevated for longer.

Brent oil futures lifted to $US106 a barrel as peace talks between the US and Iran hit another snag.

The shutdown of Saudi Arabia’s East-West pipeline, higher Chinese imports and softer exports from non-OPEC countries have further weakened the supply picture, said CBA head of commodities Vivek Dhar.

“If global oil and refined product inventories do deplete, Brent oil futures risk surging as high as $US150 a barrel to induce uncontrolled demand destruction (ie where high prices reduce demand) in emerging and developing Asian economies,” he said.

Each $US1 dollar increase in the Brent oil price roughly translates to a 1c increase in fuel prices at the bowser.

Those higher servo costs will likely nudge headline inflation from 3.5 to 4 per cent by the time the Australian Bureau of Statistics reports on Wednesday.

The US, Europe and Japan have all hiked interest rates due to rising fuel prices since the RBA met in August.

Hawkish comments from governor Michele Bullock and other top RBA officials in recent weeks have emphasised that the bank is losing patience with inflation and is likely to follow.

The bank’s board is widely expected to lift the cash rate to 4.6 per cent when it wraps up its two-day meeting on Tuesday – the highest level in 15 years.

Liberal MP Zoe McKenzie sought to pin the inflation spike on government spending, despite growth in public demand moderating in recent years.

“The rest of the world is not experiencing the inflation that we are experiencing here at home,” she told News24.

“The average Australian household with a mortgage is already having to find more than $30,000 a year in after-tax dollars just to meet the interest payments on their mortgage.”

While drivers despair at the pump, auction clearance rates, a leading house price indicator, slumped to a 10-week preliminary low of 50.3 per cent on Sunday, according to housing data firm Cotality.

Median property prices nationwide have slumped 3.6 per cent since March’s cyclical peak as the removal of tax concessions in May’s budget combines with three consecutive rate hikes to cripple buyer confidence.

While Bullock has stressed interest rate decisions are not designed to target house prices, economists have linked lower house prices to consumers tightening wallets across the board, tugging inflation down.

–AAP