Economic outlook bottom line takes $108.5bn hit from weakened Chinese economy

The flow-on effects to Australia from a weakened Chinese economy will cause a hit totalling more than $108.5bn over the next four years due to downward revisions in company tax credits and weakened iron prices, Treasurer Jim Chalmers has warned.

As the government prepares to release its Mid-Year Economic and Fiscal Outlook on Wednesday, Dr Chalmers warned that company tax receipts will be downgraded for the first time since 2020.

The move will cost the budget’s bottom line $8.5bn in the four years to 2027-28.

Mining exports have also been revised downwards by more than $100bn in the same period due to China’s weakened economy and struggling property market, which has reduced demand and prices for Australian iron ore.

Dr Chalmers said Wednesday’s update will show the clear “flow on” effects of challenges in the Chinese economy.

“The global economy is uncertain, the global outlook is unsettling and that’s weighing heavily on our economy,” he said.

“Pressures on the budget are intensifying, global volatility is a big part of the story and you’ll see that in the mid-year update.

“We’re getting the budget in much better nick and building up Australia’s buffers to manage global uncertainty but we’re not immune from challenges coming at us from around the world.”

In analysis released by ING this week, commodities strategist Ewa Manthey wrote that prices for iron ore have fallen by more than 20 per cent in the year to November, with the trend likely to continue into next year.

ING has predicted iron ore prices will trade at between US$90 a tonne to US$100 a tonne throughout 2025, down from US$144 a tonne at the beginning of 2024.

“China, the world’s biggest consumer of iron ore, has continued to act as a drag on demand this year. A broad economic slowdown and, in particular, the crisis in the property sector have weighed on iron ore and other industrial metals,” Ms Manthey wrote.

“China’s new home starts – the biggest steel demand driver – have continued to fall, now down more than 20 per cent year-to-date. This should continue to suppress steel demand in 2025.”

Wednesday’s budget update will also be impacted by increases in spending across Medicare, early childhood education, natural disasters, as well as an added $1.8bn in processing claims for veterans due to a backlog inherited by the Coalition government.

Dr Chalmers warned that while upward revisions to payments for veterans was “one of the very big estimates variations in the budget, it’s not the only one”.

Speaking on Sunday, Dr Chalmers also could not be drawn on whether the total $122.1bn in forecasted deficits to 2028-29 detailed in this year’s budget would increase, admitting there would be some “slippage” in some years.

Dr Chalmers is set to announce the new members of Reserve Bank boards, which have been separated into two committees for governance and setting rates.

While the changes are not slated to start until March 1, an announcement could occur as early as Monday but definitely by the end of the week.

He confirmed no members would be “sacked” in the transition, with existing members given the choice to serve on the committee of their choosing.

However Shadow Treasurer Angus Taylor has argued the reforms to split the board should not have occurred, with the Coalition abandoning bipartisan support on the legislation earlier this year.

“I think anything other than taking the existing board and transitioning it to the new board is, I would say, political,” he told Sky News.

“It’s a sack and stack strategy, as I’ve said all the way along. That’s been the politics of this issue all the way along.”