The mid-year budget update^[1] would normally be big news. But this week it’s been entirely overshadowed by the devastating Bondi terror attack^[2].

To discuss the government’s response to that deadly attack, as well as the outlook for Australia’s economy in 2026 and beyond, for our last podcast of the year we’re joined by Treasurer Jim Chalmers.

On the Bondi terror attack, Chalmers acknowledges the federal government needs to do more.

Even though the government has taken a number of steps to combat this hateful antisemitism, we know that there’s more work to do. There’s more to do with the envoy, Jillian Segal. There’s work to do to make sure that we are cracking down on antisemitism every way that we can. And we need to do that at the same time as we take other meaningful steps in areas like tougher gun laws.

And the point that I’ve been trying to make through the course of the week this is not an either/or: dealing with antisemitism, tightening our gun laws. We have a responsibility to do both simultaneously. And that’s the approach that we’re taking.

On the budget update, Chalmers says rising inflation^[3] is one of “the three big challenges” for Australia’s economy, along with the need to boost productivity and manage global economic uncertainty.

He says the government has been conscious of “not making this inflation challenge worse”, which could add pressure on the Reserve Bank^[4] to raise interest rates.

The issue with inflation is not government spending. That’s been made clear by the Reserve Bank [… which] has not mentioned public spending as a factor in their decisions for some time. And if the government’s budget is the key determinant of interest rate decisions, we’ve had three rate cuts this year, including two since the most recent budget […] What we see in [today’s] budget numbers is really progress on the first six updates we did: we’re always doing savings, we’re always trying to get things in much better nick.

On the rise of illegal cigarettes and plummeting tobacco excise revenue flowing into the budget, Chalmers dismisses calls to reduce that tax. Instead, he foreshadows the federal government will support greater crackdowns on organised crime and the illegal tobacco market.

We see this as a very serious challenge. We don’t dismiss or diminish this challenge from a law and order point of view, or from a budgetary point of view. We’ve provided an extra A$350 million for compliance and policing. There’s actually been some quite effective raids done in recent times; very encouraging to see the authorities doing some great work.

I don’t believe that if we unwound the last couple of excise changes that all of a sudden the difference between a legal packet of cigarettes and an illegal packet of cigarettes would be eliminated. And I don’t believe that would stop the crooks from being part of this industry. We see British American Tobacco and our opponents and others calling for a tobacco tax cut. I don’t think that’s the right way to go about it.

[…] What we hope will be effective is all of these extra resources being poured into compliance. I’m also prepared to say that […] we have been discussing next steps in this area to crack down on this illegal tobacco, which poses most importantly a risk to public health, but also a risk to the budget […] And the minister for home affairs, Tony Burke, we hope will have more to say about this before long.

Read more: Could making tobacco cheaper actually cut down smoking rates? We asked 5 experts^[5]

Looking ahead, Chalmers says ten priority areas^[6] from August’s economic reform roundtable^[7] will help shape next year’s federal budget.

Having just handed down the mid-year update an hour or two ago, I’m sort of reluctant to get too much into the detail of [next year’s] budget. But the roundtable will be one of the big influences on the budget […] We set ten directions out of the roundtable [… and] those directions will be really the main influence on the reform part of the budget in May.

He disputes that progress since the roundtable has been too slow, nominating reforms to Australian environmental laws^[8], releasing a new artificial intelligence plan^[9], reforming the construction code and other areas where changes have been made.

Read more: The clock is ticking on a golden opportunity for real change in Australia^[10]

Chalmers also talks up Australia’s opportunities in artificial intelligence, if we can get the balance right between ramping up AI and its potential risks – including for people’s jobs.

The AI revolution will be game changing, absolutely game changing. And what we’ve seen in recent data in our own economy is we’ve had now four consecutive quarters of productivity growth, at the same time as we’ve this enormous ramp up in investment in technology.

A big part of my day each day is dealing with interest which is being shown around the world in Australia as a place to build AI infrastructure, for example data centres. And so I think it’s an enormous opportunity for Australia […] The task for us is to maximise the upside of it, and to minimise the risks to people, including in the labour market.

MICHELLE GRATTAN, HOST: Jim Chalmers, before we get to the budget update, let’s just start with the aftermath of the Bondi massacre. Many people want a much broader response from the federal government than another round of gun reform, important as that might be, and you yourself, I think, have flagged that the government should do a lot more to deal with antisemitism. In general terms, what more might we see from the government to combat this?

JIM CHALMERS, TREASURER: Well, first of all, you’ve characterised my position correctly, Michelle, which is that even though the government has taken a number of steps to combat this hateful antisemitism, we know that there’s more work to do. There’s more work to do with the envoy Jillian Segal, there’s more work to do to make sure that we are cracking down on antisemitism every way that we can, and we need to do that at the same time as we take other meaningful steps in areas like tougher gun laws. And the point that I’ve been trying to make through the course of the week, this is not an either or dealing with antisemitism, tightening our gun laws, we have a responsibility to do both simultaneously, and that’s the approach that we’re taking now.

GRATTAN: Turning to your budget update, can you just briefly paint for us a picture of where Australia’s economic outlook stands at the moment, and more specifically, can ordinary Australians expect to be better off economically in 12 months’ time?

CHALMERS: I think the best way to understand where our economy is at is that we’ve made a lot of progress together as Australians the last few years, but there are still pressures on people, and there’s still a lot of global economic uncertainty, and so the mid-year budget update tries to forecast what the next year, what the next few years, will look like. And the economic data in recent times has been a mixed bag. We’ve had a couple of years now of real wages growth, but we have had inflation come in a little higher than people were anticipating in the most recent data and so the mid-year update tries to factor all of that in. What I would say to Australians is that even with this progress, we know that people are still under pressure, that’s why there are tax cuts coming so that you can keep more of what you earn. It’s why we’re boosting bulk billing and cutting student debt, because we know that even though inflation is much lower than what we inherited when we came to office, it’s higher than anyone would like, and that’s why we’re providing cost-of-living help in the most responsible way that we can.

GRATTAN: These figures show that the deficit this financial year is now projected to be nearly $37 billion. You’ve highlighted that the deficits across the forward estimates are a little better than projected at election time, but the budget is not forecast to get back into balance until the mid 2030s now, is this really good enough? And shouldn’t there, in fact, be more spending restraint to try to narrow that timetable?

CHALMERS: Well, let me put those numbers in a little bit of context, Michelle. I don’t quibble with the facts in your question, but this government’s delivered a couple of surpluses, we got last year’s deficit down considerably, and what we see in these mid-year update numbers is an improvement across the four years of the budget of almost eight and a half billion dollars. We found a heap of savings, we’ve banked the upward revisions to revenue and what that means is that we continue to make the budget stronger, we continue to get the debt down and provide for our promises and for some of these spending pressures as well. And there’s actually a feature of this mid-year update, which has never happened before. You might recall, Michelle that in the mid nineties, these mid-year budget updates came into being, and this is actually the first one ever, as far as we can tell, that’s had a combination of three things - the bottom line, getting better every year, debt getting better every year, and the government’s policy decisions making a positive contribution to the bottom line. Those three things have not happened simultaneously in any other mid-year budget update, as far as we can tell, and that makes it, by those measures, the most responsible mid-year update on record. We know there’s more work to do, but we have made a very substantial amount of progress in the budget. It is much, much better than what we inherited when we came to office three and a half years ago, but we know that there’s more work to do to make it more sustainable still.

GRATTAN: Now the update shows total payments are projected to grow from the late 2020s to the mid 2030s. What accounts for this?

CHALMERS: The way that we measure government spending is as a share of the economy, and that goes down over the forward estimates. I understand that your question is about the medium term, the 10 year projection, but what we’ve been able to do is we’ve got spending as a share of the economy was up near a third of the economy at its peak under our predecessors, we got it down near a quarter, it’s settled in the twenty-sixes, and it goes down over the forward estimates. Now some of the pressure on that medium term bottom line that we reported today in the mid-year update, one of the main reasons why it’s deteriorated a little bit is because we’ve made a sensible provision for the offer that we’ve put on the table for the states when it comes to hospitals funding. We’ve made a very substantial offer to the states, and that’s having an impact on the medium term forecasts, and that’s probably more than anything else, a big explanation for why the medium term is a little bit weaker than we would like.

GRATTAN: Now you have been trumpeting eight consecutive quarters of real wages growth, but these figures have that stopping and prices growing faster than wages until mid 2027 what’s gone wrong there?

CHALMERS: What we saw in the most recent data is inflation came in a bit higher than we’d like, still much lower than its peak and much lower than under our predecessors but we’ve said on a number of occasions now, it came in a bit higher than the Treasury or the Reserve Bank was anticipating and higher than we would like. So what that means is, when we came to office, real wages were falling badly. We’ve had these two years of consecutive annual real wages growth, that’s a good thing but obviously, if inflation is a bit higher, and wages growth, even though it’s still expected to be pretty strong, obviously, that has implications for real wages growth. The thing about the inflation forecast which makes it a bit less certain than usual, always uncertain to make these sorts of forecasts, but particularly at a time of global economic uncertainty, is that the Reserve Bank has said, and we have said it’s not quite clear yet how much of this recent tick up in inflation is permanent, and how much of it’s temporary. There’s temporary elements to it - the unwinding of electricity bill rebates, volatile items like travel and fuel impacting the quarterly numbers and the monthly numbers and so we don’t yet know how persistent this inflation challenge is, but what we do know in the forecasts is that whether it’s headline inflation or the way that Treasury measures the underlying inflation in our economy, on both measures, they expect it to come back to the Reserve Bank’s target band next financial year.

GRATTAN: Of course, only a few months ago, after the election, you were saying that your attention was shifting to productivity, although combating inflation was still important. So is that priority now slightly different? And is there anything in the budget update that you see as dampening inflation and inflationary pressures?

CHALMERS: On the last part of your question, managing the budget responsibly. The fact that we’ve improved the budget since the IMF said it was neutral and the OECD said that our budget settings were tightening, we’ve made the budget even stronger than that so that’s part of our effort to make sure that we are not making this inflation challenge worse. There are a whole bunch of ways it’s been really clear this year that the issue with inflation is not government spending. That’s been made clear by the Reserve Bank not mentioning in its public statements -

GRATTAN: It is disputed though I think, politically.

CHALMERS: The Reserve Bank has not mentioned public spending as a factor in their decisions for some time, and if the government’s budget is the key determinant of interest rate decisions we’ve had three rate cuts this year, including two since the most recent budget. But leaving that to one side for a moment, what we see in these budget numbers is really progress on - the first six updates we did, we were always doing savings, we’re always trying to get things in much better nick. The three big challenges we’ve got in our economy are inflation in the near term, the long standing productivity challenge and all of this global economic uncertainty. And from update to update, the balance of those three challenges shifts a little, but not a lot. The government’s been focused on all three things, really, throughout the life of this government, and what I said in the immediate aftermath of the eleciton I meant which is we can deal with these inflationary pressures at the same time as we recognise that the best way to build living standards long term is to make our economy more productive and more competitive. And so we’ve been working on all three fronts simultaneously. The resilience agenda is about making sure Australia is a beneficiary of all this churn and change we’re seeing in the world. The productivity agenda is about lifting living standards and wages over the medium term. And our approach to the cost of living and inflation is about recognising that even with the progress we made on inflation, we’ve got more work to do. And so there are elements of all three of those things in this mid-year update I released today.

GRATTAN: Now you’re budgeting for only a small increase in spending on public servants over the next four years. I just wonder, what are the implications of this? Will that mean quite low wage increases or some winding back in the size of the public service? And we did see reports recently of the government looking for a five per cent cut in the public service area. That doesn’t seem to be mentioned, as far as I can see in the update. What’s happened to that?

CHALMERS: Well, we think that the size of the public service is broadly right. The composition will change over time as the government’s priorities change. But as Katy Gallagher has said on a number of occasions, we think it’s broadly right right now. We’ve got an agenda to make sure that we are relying less on external labour and consultants and contractors and more on permanent public servants. But overall, in aggregate, we think that the numbers are broadly right. The work that we’ve commissioned with our colleagues and with their agencies and with their departments is about the May budget, and it’s not unusual for us to seek people’s views about their lower priority spending and where it can be redirected to higher priority areas or budget repair. But we’ve been very clear, and this has been mischaracterised a bit. We’ve been really clear that that’s not about asking departments to cut their staff by five per cent or even necessarily to cut their budgets by five per cent, it’s about saying to agencies, everyone’s got higher priority spending and lower priority spending. We need your help identifying what the lower priority spending is in case we want to decide to redirect that to higher priority areas. That’s not unusual. That’s just how you go about responsibly managing the budget.

GRATTAN: A few years ago, there was a prediction that by now the revenue from tobacco excise would be around $13 billion this financial year. In fact, now you’re forecasting only $5.4 billion a big, big hole there, and that, of course, is because we’ve seen this shift from people buying legal cigarettes to buying illegal cigarettes. And yet you say that you don’t want to change the excise trajectory to try and deal with this problem at least partially. Why is that?

CHALMERS: We see this as a very serious challenge. We don’t dismiss or diminish this challenge from a law and order point of view or from a budgetary point of view, we’ve provided an extra $350 million for compliance and policing. There’s actually been some quite effective raids done in recent times. Very encouraging to see the authorities doing some great work. I don’t believe that if we unwound the last couple of excise changes that all of a sudden the difference between a legal packet of cigarettes and an illegal packet of cigarettes would be eliminated. And I don’t believe that that would stop the crooks from being part of this industry. We see British American Tobacco and our opponents and others calling for a tobacco tax cut. I don’t think that’s the right way to go about it, and I don’t think it would be effective. What could be effective, and what we hope will be effective is all of these extra resources being poured into compliance. I’m also prepared to say that Katy Gallagher and I and Tony Burke and others in the Cabinet, we have been discussing next steps in this area to crack down on this illegal tobacco which poses, most importantly, a risk to public health, but also a risk to the budget. That’s the second most important impact of all of this. And so we’re looking for additional steps that we can take. We’re in discussions about that. And the Minister for Home Affairs, Tony Burke, we hope, will have more to say about this before long.

CHALMERS: Well, there are a lot of options on the table. I don’t want to front run the important work that Tony does with his state and territory colleagues, but we’ve shown a willingness to resource these extra efforts. We see it as the best way to crack down on what’s happening here, and when we get it right, it will have positive implications on the law and order front, but also the health front. And if we get those two things right, there’ll be budget consequences too.

GRATTAN: So additional steps in terms of tougher penalties or more resources?

GRATTAN: The economic roundtable seems a long time ago. It was just in August, but can you give us a bit of an update about where things are? Really we haven’t seen a huge amount, apart from the environmental Act, which is big but was obviously in the pipeline. Most of the announcements have been about cutting red tape, accelerating existing measures. Are you still aiming to get substantial reform out of this process, and will we see bigger measures in the May budget?

CHALMERS: I don’t like to disagree with you, Michelle, but I just can’t cop this characterisation of progress since the Roundtable. The progress has been very, very significant, very substantial. There’s been a mountain of work done already, and there’s more that we’re considering in the context of the May budget. But you mentioned the environmental laws that we fast tracked, that’s a very good development. We’ve released the artificial intelligence plan. We’re reforming the Construction Code. I’m about to hear back from the Council of Financial Regulators on the hundreds of ideas for better regulation in the financial sector. We’ve passed legislation in the Parliament for very substantial deregulation in the areas that we have responsibility for. I’ve been working with the states and territories on occupational licensing, national competition policy, reform of the Federation. There has been so much progress made. It’s one of the things I’m proudest of this year, that we didn’t waste the momentum or the consensus that we built at the roundtable. We know that there’s more to do, but I don’t think there’s any objective assessment of what’s happened the last few months which could conclude anything other than we have done justice to the discussions at the roundtable, the consensus and the momentum we built there. It’s all about making our economy more productive, more dynamic, more efficient, and I’m really proud of the steps that we have already taken, acknowledging at the same time that there’s more to do as well.

GRATTAN: What area would they go to in general?

GRATTAN: Are there any couple of big things that you’d point to that you’re working on in the context of the budget?

CHALMERS: Having just handed down the mid-year update an hour or two ago, I’m sort of reluctant to get too much into the detail of the budget, but the roundtable will be one of the big influences on the budget. I mean, certainly the work that we’ve done so far has been all about this productivity agenda. And we set 10 directions out of the roundtable. I won’t run through them all for your listeners right now, Michelle, but really, on every front, we’ve made a bit of progress, we’ve got more to do, and those directions will be really the main influence on the reform part of the budget in May.

CHALMERS: Well, clearly the issue here is organised crime. And clearly, the issue here is around compliance with our laws. If people want to pretend that this is only about excise, they can’t explain why, the excise went up by much more under our predecessors with our support - our predecessors jacked up the excise by more than we have in the last time they were in government and so primarily, this is a law and order issue. Primarily it’s a customs and policing issue, that’s how we see it. We are cracking down on it already, and we’re considering whether additional steps need to be taken. Primarily, we see this as a health issue. That means it’s a law and order issue, and it has implications for the budget, which we’ve acknowledged for some time.

GRATTAN: At the end of the roundtable, you were quite excited about the broad support for tax reform. Can we expect that you will turn your attention now, in this coming year to questions of tax reform.

CHALMERS: Well, that’ll be a matter for the Cabinet, we take these sorts of decisions collectively. That’s the type of government that the Prime Minister leads. But you’re right in saying that, I think that those three areas that the roundtable got around, which I announced an hour or so after the thing finished, I think those are the three most important areas. The three areas were a fair go for workers, including in intergenerational terms, a responsible way, if we can find it to encourage more investment in our economy, and then the simplification piece. And I think those three areas are broadly the right areas. Obviously, I’ll do work on each of them, and it’ll be a matter for the colleagues to consider in the course of the next six months or so.

GRATTAN: AI is obviously the big topic of the moment in many economic debates, its positives and its negatives. There have been some fears expressed that investment in the AI sector is overvalued, and that AI won’t bring as big a rise in productivity as was first hoped. What are your views on this? Are we, in fact, banking too much on the AI revolution?

CHALMERS: The AI revolution will be game changing, absolutely game changing. And what we’ve seen in recent data in our own economy is we’ve had now four consecutive quarters of productivity growth, at the same time as we’ve had this enormous ramp up in investment in technology and a big part of my day, each day, is dealing with interest which is being shown around the world in Australia as a place to build AI infrastructure, for example, and data centres. And so I think it’s an enormous opportunity for Australia, and already, we’re seeing the beginnings of that opportunity. The task for us is to maximise the upside of it and to minimise the risks to people, including in the labour market. So that’s the approach we’ve taken. My terrific colleagues, Tim Ayres and Andrew Charlton, put out our AI plan not that long ago. And so we are leading on this because we see it as a big opportunity. And more broadly, as you get towards the end of the year and you think about where the biggest opportunities are for Australia in the coming year and the coming years, that intersection of energy and technology, one of the reasons I’m so optimistic about the future of our country and its economy is I think we will get those two big questions right. We’ll get the energy transformation right. We’ll get the technological revolution right. And if we do, and when we do, I think that’ll set us up for the future. And you and I have talked before about the long sweep of our economy, and I really think the key to the coming years and the coming decades is AI and energy. We’ve got unbelievable opportunities as a country, and we intend to make the most of them.

GRATTAN: Now, just finally, as we finish up after what has been an incredibly big year, we know you always have things on the bedside table to read. So what are you going to be reading over the summer?

CHALMERS: I have this wonderful colleague called Nick Peterson who was working with us until recently, and he gave me the Simon Schama book called Citizens, which is the, basically the kind of people’s history of the French Revolution, so I’m looking forward to getting into that. Nick knows his stuff, and so he says that’s a great read, so I’m going to read that. One of the things I’ve been able to do this year, which is hard to kind of to explain in hindsight, given everything we’ve had on, but I’ve tried to read a bit more this year. I’ve tried to read a bit more fiction, a bit more classics, Grapes of Wrath, maybe, or something like that, something classic like that as well. And so I’m hoping to do a bit more of that. But I also want also want to get into this book about the French Revolution that Nick gave me.

GRATTAN: Jim Chalmers, we’re speaking at a very fraught time for our nation after the massacre of the weekend. We hope that it’ll be a very peaceful Christmas, though, for Australia, we hope that for your family too it’s a time of some rest. Thanks for being on our last podcast for the year. All best wishes for the New Year. That’s all for this final podcast.

References

1. ^{^} mid-year budget update (theconversation.com)
2. ^{^} Bondi terror attack (theconversation.com)
3. ^{^} rising inflation (theconversation.com)
4. ^{^} pressure on the Reserve Bank (theconversation.com)
5. ^{^} Could making tobacco cheaper actually cut down smoking rates? We asked 5 experts (theconversation.com)
6. ^{^} ten priority areas (theconversation.com)
7. ^{^} economic reform roundtable (theconversation.com)
8. ^{^} Australian environmental laws (theconversation.com)
9. ^{^} artificial intelligence plan (theconversation.com)
10. ^{^} The clock is ticking on a golden opportunity for real change in Australia (theconversation.com)