High inflation hovers over Labor's second budget

Inflation may have lost some of its sting but it's still high enough to have the Albanese government walking a thin budget line.

After hitting a likely peak of 7.8 per cent in the December quarter, inflation as measured by the consumer price index is now on its way down.

But at seven per cent, it's still uncomfortably high and putting the federal government in the tricky position of wanting to provide some cost-of-living relief to vulnerable households without fanning the inflation fire.

This is no easy task, but the treasurer says the almost $15 billion in cost-of-living relief contained in the May budget has been carefully calibrated and targeted to have a minimal impact on inflation. 

This notion has been queried by some economists, who argue any government funds that end up in people's pockets leads to more spending and added inflationary pressure.

The budget will contain up-to-date forecasts for inflation and while they are yet to be revealed, the treasurer says it will come down faster and deliver a boost to real wages sooner. 

While wages have been lifting relatively quickly, rising prices have eroded these gains and led to massive declines in real wages.

Updated employment figures leaked ahead of time also suggest the labour market is more resilient than predicted earlier.

Treasury now expects the unemployment rate to be 3.5 per cent in the June quarter of 2023 and 4.25 per cent in the June quarter of 2024 - an improvement of a quarter of a percentage point in both years.

Fresh economic growth forecasts will also be unveiled on Tuesday evening. 

Based on the Reserve Bank's latest economic forecasts, the economy is looking weaker than thought earlier, with growth of just 1.25 per cent expected over the year to December.

As well as inflation, the federal government is also looking to repair the budget position.

Thanks to higher commodity prices, economy-wide inflation and strength in the labour market, the government is on track to deliver its first surplus in 15 years.

Treasurer Jim Chalmers will announce a slim $4 billion surplus forecast on Tuesday night, along with smaller deficits over the next few years.

"The improvements you'll see in the budget are a direct and deliberate result of the Albanese government's approach to substantial near-term boosts to revenue," Dr Chalmers said.

Shadow treasurer Angus Taylor said a "drover's dog" could have delivered a surplus with record revenue flooding in.

"Labor should focus on not just delivering one surplus but maintaining it over the forward estimates as well," he said.

"The only way this government can do that is by putting the interests of Australians first and resisting traditional Labor principles of higher taxes and higher spending."