It looks like the 2026 federal budget will have to be prepared over the next fortnight with the Strait of Hormuz effectively closed, and the global economy in flux.
At least Treasury will be able to assume that the biggest single budget problem, the NDIS, has been fixed.
That’s the benefit of pre-budget announcements like last week’s proposed NDIS reforms: Treasury modellers can do the forward estimates on the basis that 160,000 people will no longer be on the NDIS, and the cost will be $15 billion a year less than it was when they last ran the numbers five months ago.
Whether health minister Mark Butler and NDIS minister Jenny McAllister can actually pull that off is neither here nor there — it’s announced, therefore it is, to paraphrase Rene Descartes.
That can’t be said of Donald Trump’s announcement on Truth Social over the weekend that the United States has “total control over the Strait of Hormuz.”
Maybe they do, maybe they don’t, but so does Iran.
We seem to have entered a sort of hostage/siege phase of this war, where Iran has taken the Strait of Hormuz hostage, and the United States has besieged Iran, or at least its ports. “It is “Sealed up Tight,” posted President Trump, “until such time as Iran is able to make a DEAL!!!”
The problem is that neither combatant is sufficiently hurting the other for a deal to be urgent enough for the rest of us.
The big question
Iran’s closure of the strait is not hurting the US directly at all. As Trump himself said: “The United States imports almost no oil through the Hormuz Strait and won’t be taking any in the future. We don’t need it. We haven’t needed it, and we don’t need it.”
Sieges only work, or don’t take a long time, if the enemy can be starved. America’s siege of Iran’s ports is painful, but Iran won’t starve.
Trump says Iran is losing $US500 million a day ($700 million) as a result of the blockade, but that is a big exaggeration.
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Before the war, Iran was selling 1.6 million barrels of oil a day for about $US65 a barrel, or a total of about $US100 million. Even at the current price, it would be only about $US150 million, but that’s hypothetical, and not what they’re “losing”, and while the lack of imports is also hurting, the total cost is nowhere near $US500 million per day.
Not that Iran can last forever, but an economic analyst and professor at Shahid Beheshti University in Tehran, Saeed Laylaz, told Agence France-Presse last week that “If the blockade lasts for more than two or three months, it can cause more damage”. He didn’t say Iran can’t survive more than two or three months, but only that it will cause “more damage”.
On the other hand, two or three months without any exports from the Persian Gulf would cause a great deal of damage to the global economy, probably a recession.
It’s not just oil and therefore the diesel and jet fuel needed for logistics and air travel, which is bad enough, but the price of plastic packaging is now increasing rapidly because naphtha is in short supply, and food prices are rising because of a collapse in the supply of urea fertilisers.
So the question for the treasurer, Jim Chalmers, and the treasury secretary, Jenny Wilkinson, is: if the Strait of Hormuz is still closed on May 12, when does the budget assume it will reopen?
A budget that doesn’t have the numbers
Trump said he would send his son-in-law, Jared Kushner, and a real estate developer named Steve Witkoff, back to the Serena Hotel in Islamabad to resume negotiations, but when the Iranians refused to negotiate while under blockade, he cancelled their trip. So with the clock ticking of the budget, there are no talks going on at all.
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Maybe they will turn up and negotiate, and maybe one side, or both, will fold within two weeks, but that seems very unlikely.
Much more likely is that on budget night, Treasury boffins will still have no idea what numbers to plug into their budget model for the oil price, gas exports, plastic and food prices, inflation, nominal GDP, and tax revenue.
In other words, this year’s budget will be a lot worse than “uncertain”, as Chalmers has been warning — it will basically be irrelevant, a sort of holding document pending another budget once the status of exports out of the Persian Gulf is settled.
With the hardline Revolutionary Guard Corps now in charge in Iran, and with power apparently split among 31 regional commanders, getting some kind of quick capitulation from Iran seems out of the question.
The most likely scenario is that Trump declares victory at some point and goes home, probably with the same deal that was signed in 2015, the one known as the JCPOA, Joint Comprehensive Plan of Action.
And a ceasefire without peace or stability
Iran would end up like the Korean Peninsula after the Korean War — that is, a ceasefire without peace. Like North Korea, Iran would go flat out to develop a nuclear bomb.
That would probably encourage others in the region to do the same, like Turkey and Saudi Arabia.
The Middle East would become an even more dangerous and volatile mess, with other Persian Gulf countries forced to pay Iran’s toll to export and import through the Strait of Hormuz. Global shipping would be destabilised, and the oil price would stay high.
The only scenario that would not mean higher inflation and lower economic growth — stagflation — is one in which the IRGC, the Islamic Revolutionary Guard Corps, quickly loses its grip on power and Iran’s military dictatorship ends. Right now, that scenario looks the least likely.
LoadingThe future is complex
Accompanying this oil shock (and gas, plastics and fertiliser shock) is a profound change in the way fiscal and monetary policymakers operate.
Recessions used to be seen as “cleansing” events, necessary to reset the economy and control inflation.
In 1979, Fed chairman Paul Volcker did not hesitate to crush the US and world economies to remove the inflation that had become embedded after two oil shocks in the 1970s. And Paul Keating will always be remembered for telling us in November 1990 that the recession, then underway, was the one we had to have.
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The Global Financial Crisis changed all that. The 2008 “great recession” (except in Australia) was caused by a collapse in demand, in turn caused by a financial crisis, not the sort of supply shortage of the ’70s or the terms of trade crisis of the late-’80s, so policymakers agreed that demand had to be supported in 2008/9, not retrenched.
Budget deficits exploded and interest rates were slashed, but after the crisis, government debt was not reduced and interest rates were not put back where they were, and in fact, when inflation stayed low after 2013, rates were cut below what they had been in the GFC.
The COVID pandemic saw a collapse in both supply and demand, but policymakers focused on boosting demand, cutting interest rates to zero and below zero, and pumping up fiscal support again.
That rejection of economic rationalism has since been reinforced by the rise of political populism, both left and right, as technocratic, administrative political classes try to hold onto power with fiscal generosity, while those countries that have succumbed to populism — like the United States — do the same, except worse.
It’s probably going too far to say that recessions have been abolished by political and economic elites, but central banks and governments are much keener to avoid them now than they were 30 years ago.
So if the Strait of Hormuz is still closed as April turns into May and then, God forbid, June and beyond, policymakers will have a tough decision.
They will face the clearest supply-side stagflation since the 1970s, and boosting demand with rate cuts and fiscal stimulus as they did during the GFC and pandemic would only make the inflation, and the eventual reckoning, worse.
Jim Chalmers might have to preside over another recession we have to have.
Alan Kohler is a finance presenter and columnist on ABC News, and he also writes for Intelligent Investor.