Treasurer Jim Chalmers is aiming to hand down his first budget on October 25 after providing an economic update to the parliament when it returns in July.
Dr Chalmers told a conference hosted by Sky News and The Australian he expected interest rate rises would dampen activity in the economy while affecting house prices and savings.
They would also disproportionately affect the lowest income earners, he told Australia’s Economic Outlook 2022 conference on Wednesday.
“All of this will flow through to the budget,” Dr Chalmers said.
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“They will put significant pressure on a budget that already has its share of difficulties, including a relatively significant structural deficit, and now with those higher borrowing costs,”
His comments came after the Reserve Bank of Australia raised the cash rate by a larger-than-expected 50 basis points at its monthly board meeting on Tuesday, and warned that further increases would be needed to contain inflation.
Dr Chalmers also warned there wouldn’t be “automatic upgrades” to the budget.
“Commodity prices are helping but some of the other upgrades are not necessarily eventuating,” he said.
“We have got a lot of pressures that weren’t in the budget that we inherited, like some of the ongoing costs with COVID-19.”
Business Council of Australia chief executive Jennifer Westacott said budget repair is important, as this allowed the government to respond to the coronavirus.
“But we have got to do that in a way that’s about growth,” she told the conference.
“I don’t think you cut your way out of this, you have got to grow your way out of this.”
Treasury secretary Steven Kennedy told a separate conference significant medium-term spending pressures have emerged over the past two years.
“This will see spending remain at a higher level than pre-COVID,” Dr Kennedy told a Australian Business Economists lunch in Sydney.
He said spending commitments in areas including disability support and aged care are also putting sustained pressure on the budget.
At the same time, the tax system is coming under pressure, while productivity and real wage growth has been weak for more than a decade.
Even so, Dr Kennedy said providing higher quality aged care and disability services is improving the lives of many Australians.
“It is within our control to maintain this improvement while reducing pressures arising from poorly designed policies,” he said.
“We will need a tax system fit for purpose to pay for these services, that appropriately balances fairness and efficiency.”
He believes this is achievable, and improving the quality and efficiency of government services and steadily improving regulatory systems “we can contribute substantially to productivity growth”.