The budget promises good news on inflation and interest rates – but there’s a flipside

“We need to engage in this inflation fight because it’s not finished yet, but we need to do that in a way that doesn’t smash the economy. It won’t be a slash and burn budget because people are doing it tough and the economy’s soft,” he said.

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“Our budget will be part of the solution to cost-of-living pressures, not part of the problem.”

A slowdown in economic growth would ordinarily push up the jobless rate. Figures this week are tipped to show unemployment, currently 3.8 per cent, will lift marginally to 3.9 per cent.

Chalmers said while jobs would continue to be created over the next year, the unemployment rate was likely to lift to 4.5 per cent.

The strong jobs growth of the past two years has contributed to the revenue windfall that helped Chalmers deliver a budget surplus in 2022-23, with expectations he will promise another one for the current financial year.

But shadow treasurer Angus Taylor said inflation had helped increase total personal income tax by 23 per cent under the Labor government.

He said a Liberal-led government would reduce inflation faster than the government, while it would also deliver more tax relief than the stage 3 tax cuts – worth $23 billion in 2024-25 – that begin on July 1.

“We said we’ll deliver a tax package before the next election, which is in keeping with the stage 3 tax cuts. And critical to that, critical to that, is making sure that we don’t see the insidious creep of income taxes,” Taylor told the ABC.

The government estimates that the cost of re-configuring the stage 3 tax cuts to their original form, which included the abolition of the 37 per cent tax rate, would cost the budget $38.9 billion over the forward estimates.

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Taylor said the Coalition, if it won the next election, would also restore accelerated depreciation for small- and medium-sized businesses, a measure that was reduced by Labor on coming to office.

Chalmers is expected to forecast a series of budget deficits from 2024-25 after successive surpluses.

Extra spending, particularly around the government’s Future Made in Australia policy, will be revealed on Tuesday night.

EY chief economist Cherelle Murphy said Chalmers should be focused on offsetting any new expenditure with cuts in other areas if it was going to reduce inflation.

“With inflation outside the Reserve Bank’s target band, the government cannot afford to let fiscal discipline slip,” Murphy said.

“This is especially so given $23 billion of tax cuts are already locked and loaded, additional spending has been announced for housing and state governments are providing billions of dollars in household handouts.

“Offsetting new spending with cuts elsewhere, at least over the next 12 months, is essential to keeping the fiscal envelope tight.”

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