May budget set against backdrop of economic turmoil

Households struggling with the cost of living can expect more bread and butter commitments when the Albanese government hands down the budget.

Soaring inflation, here and around the world, has provoked central banks to start lifting interest rates hard and fast to take some heat out of their economies.

For Treasurer Jim Chalmers, who will hand down his second budget on May 9, these are challenging waters to navigate.

People are hurting from sky-high prices in the shops and more expensive mortgages, but too much cost of living relief could make inflation worse by driving spending.

The budget is also deep in the red - on track to hit $1 trillion next year - and the interest bill on government debt is one of the fastest-growing spending areas.

This, Dr Chalmers says, is limiting his ability to splash cash around.

The treasurer remains confident Australia can dodge a recession but the economy is likely to slow as higher interest rates make borrowing money more expensive.

Australia's economy is expected to grow by just 1.6 per cent this year before picking up to 1.7 per cent in 2024.

The treasurer has chalked up Australia's economic resilience to the rock-solid labour market, strong export prices and other advantages.

Australia's central bank, which looks to be nearing the end of its hiking cycle, is also hopeful it can stick its "soft-landing" and rein in inflation while avoiding a recession and keeping most people in their jobs.

Inflation remains stubbornly high - hitting seven per cent in the March quarter - but is most likely on its way down from the 7.8 per cent peak in the December quarter.

The Reserve Bank is hoping to brush the top of its two-to-three per cent inflation range by mid-2025, a more leisurely return to target than tolerated by other central banks but a pace it hopes will safeguard strength in the jobs market.

The unemployment rate has been lingering at near-50 year lows for months, holding at 3.5 per cent in March.

The number of jobless people is expected to drift up as higher interest rates do the intended but uncomfortable work of taking demand out of the economy. 

The RBA's best guess has the unemployment rate gradually rising to 4.5 per cent in mid-2025, the same point it hopes to have wrangled inflation back within the target range.

The central bank is aiming for a little cooling in Australia's red-hot jobs market to take the pressure off wages.

While the RBA is not against pay rises for workers, governor Philip Lowe has warned of a wage-price spiral, which is where pay rises chase prices.

However, the lacklustre 3.3 per cent lift in the December quarter wage price index largely nixed these concerns.

Under these economic conditions and budget constraints, the treasurer has little choice but to stick with his "bread and butter" mandate trotted out ahead of his first budget.

There will be some cost-of-living relief, such as energy bill subsidies and cheaper medicines, but households and businesses shouldn't expect much in the way of extra support.