Australia’s economy faces significant uncertainty amid the ongoing conflict in the Middle East, Treasury Minister Jim Chalmers cautioned during the federal budget presentation on Tuesday. While the government projected resilience against recession even under heightened oil prices, it acknowledged that international developments would heavily influence economic outcomes.

Chalmers outlined two potential scenarios related to oil price fluctuations resulting from the conflict. In the baseline projection, oil prices would remain near $100 per barrel until the end of next month before gradually declining to around $80 by mid-2024. Under this scenario, inflation is expected to peak at 5% around midyear, with economic growth slowing to 1.75%, a reduction of about half a percentage point. A more severe scenario envisions oil prices surging to $200 per barrel and taking three years to subside, which would drive inflation above 7% and cause a spike in unemployment. Despite this, Chalmers asserted that Australia would avoid recession even under such stress.

The government’s relative economic strength is partly derived from its status as a major exporter of liquefied natural gas (LNG) and coal, sectors benefiting from elevated global energy prices amid the crisis. However, Australia’s limited domestic petrol reserves present vulnerabilities. In response, the government has allocated AU$10 billion to build a strategic fuel reserve and increase onshore diesel and jet fuel supplies to cover 50 days of consumption. Additionally, a mandate commencing next year will require that 20% of Australia’s gas exports be reserved for domestic use to ensure energy security.

The federal budget shows improvement of AU$45 billion since December’s mid-year update, with the deficit forecast to decrease by AU$2.8 billion to AU$31.5 billion in the coming year. The government plans to cap real growth in spending at an average of 1.5% and has implemented AU$63.8 billion in savings measures, roughly half stemming from restrictions on access to a national support program for disabled Australians. To help households facing higher fuel costs, 13 million workers will receive an annual payment of AU$250 as part of efforts to offset price pressures.

Another significant aspect of the budget is a controversial reform of housing policy aimed at addressing home affordability challenges, which Prime Minister Anthony Albanese described as locking many young Australians out of the "great Australian dream" of homeownership. The government is ending the practice known as negative gearing—which allows investors to offset rental property losses against other income—except for newly built homes. Negative gearing currently applies to about 1.3 million properties and has been criticized for inflating house prices, which have risen approximately 400% since 1999, outpacing income growth by a factor of two.

The government estimates the negative gearing reform will enable roughly 75,000 Australians to purchase homes, increasing homeownership rates by about one percentage point. This policy shift marks a change from last year’s election commitment when Albanese had pledged to maintain the system to avoid disenfranchising older generations perceived to have benefited most. The prime minister also acknowledged concerns from older Australians worried about their grandchildren’s ability to enter the housing market.

Opinions on the reform’s impact vary. Lawrence Uren, associate professor of economics at the University of Melbourne, estimated that negative gearing costs the government less than AU$10 billion annually in foregone revenue, despite being linked to housing transactions valued at around AU$700 billion. He suggested the changes would have limited effect on housing prices but might assist a small number of households in transitioning from renting to ownership, while potentially leaving some renters worse off.