Australia could be pushed to the brink of recession, with inflation surging past 7%, if the oil crisis sparked by the Middle East conflict worsens dramatically, according to new Treasury modelling released in the federal budget. The budget papers reveal the scale of economic damage caused by the US and Israel’s war on Iran, including worst-case scenarios of oil prices reaching $200 a barrel.
The federal government now expects inflation to peak at about 5% in the June quarter, driven by the closure of the Strait of Hormuz disrupting global fuel supplies. This forecast assumes oil prices remain around US$100 a barrel until the end of next month before falling to US$80 by year-end. However, Treasury has modelled a more severe scenario where oil peaks at $200 a barrel in the September quarter, not falling to $80 until mid-2029, pushing inflation to 7.25% by December.
Treasurer Jim Chalmers said in his budget speech that while Australia would avoid a recession under the worst-case scenario, the economy would shrink in the September quarter. He described the assessment as a “forecast rather than an undertaking”, conceding the economy was “hostage to developments” overseas. The International Monetary Fund has warned that further escalation could trigger a worldwide recession.
The budget sets aside $11.9bn over five years to shore up fuel supplies, including increasing national reserves to a 50-day supply. The decision to halve fuel excise and pause the heavy vehicle road user charge for three months will cost $2.9bn. The government has also revised up petroleum resource rent tax receipts by $1.6bn over five years due to higher oil prices, though revenue from the 40% profits tax is expected to decline after 2026-27.
Chalmers noted that Australia did not start the war and has no control over when it will end, in a thinly veiled reference to US President Donald Trump’s unpredictability. The budget did not include a new tax on gas exports, after Prime Minister Anthony Albanese shelved the idea to avoid antagonising Asian trading partners supplying petrol and diesel.
