CANBERRA, Australia (AP) — Australia’s new government released plans Tuesday for more spending on families, the elderly, defense and its Pacific neighbors as the country braces for an economic slowdown due to rising interest rates, inflation and disastrous floods.

Treasurer Jim Chalmers delivered his center-left Labor Party’s first annual budget for the fiscal year that began in July. It is the first budget in nine years by a Labor government and comes as Australia contends with unprecedented levels of debt that has mounted during the COVID-19 pandemic.

Chalmers said rising inflation was the primary influence on his economic blueprint. Inflation is forecast to peak at 7.75% by December and remain higher for longer than had previously been expected.

“It’s framed against a backdrop of a complex combination of a serious economic downturn overseas, damaging and devastating natural disasters here at home, war in Europe, a slowdown in China brought about by COVID — all of these issues combining at once,” Chalmers told reporters.

“We are still optimistic about the future of our economy and the future of our country, but there is no use pretending that we don’t have some difficulty to navigate in the near term,” he said.

To get the budget measures through Parliament, compromises may be required.

The previous conservative government had forecast in its last budget in March a deficit of 78 billion Australian dollars ($49 billion) for this fiscal year.

The new government’s forecast more than halves that to AU$36.9 billion ($23.3 billion), thanks mainly to extraordinarily high prices for commodities including iron ore and coal. But deficits are expected to rise again as commodity prices normalize.

The economy is forecast to grow 3.25% in the current fiscal year before plummeting to 1.5% in 2023-24 — one percentage point lower than was projected in March — as rising interest rates hit consumer spending. Growth is then forecast to creep up to 2.25% in 2024-25 and to 2.5% the following year.

Chalmers said a weakening of household spending was “a very concerning development” and inevitable after six consecutive monthly interest rate hikes so far this year.

When the central bank lifted the benchmark cash rate by a quarter percentage point to 0.26% in May, it was Australia’s first rate hike in more than 11 years. The bank lifted the rate to 2.6% at its October meeting and said rates would continue to rise, prompting economists to warn of a recession.

Australia’s gross debt as a share of GDP is forecast to reach 37.3%, or AU$927 billion ($586 billion), by the end of the current fiscal year and to continue to rise through the decade.

The proposed budget would help families cope with higher costs by increasing subsidies for child care and phasing in an increase in paid parental leave from 18 weeks to 26 weeks by 2026.

The government says such spending on families increases the productivity of parents.

Standards and staffing levels will be raised in homes for older people, who will also benefit from higher subsidies for medicines by up to AU$12.50 ($7.90) for each prescription.

Defense spending was exempt from budget cuts, increasing by 8% in the current fiscal year to above 2% of GDP with plans to remain at that level or above for years to come, government documents said.

Australia will announce in March what type of nuclear-powered submarine it wants manufactured as part of a partnership( struck with the United States and Britain last year known as the AUKUS agreement. Money to build the new submarine fleet is not yet allocated.

The proposed budget earmarks AU$213 million ($135 million) for additional defense spending on the Ukraine over five years. Australia is currently the biggest contributor to the Ukraine war effort outside NATO, having provided AU$500 million ($316) in weapons and equipment.

The Labor government has promised closer relationships with its Pacific island neighbors after China signed a bilateral security pact with the Solomon Islands early this year that raised fears a Chinese naval base might be established in the South Pacific.

The budget proposes an additional AU$900 million ($570 million) in aid for the Pacific region and AU$470 million ($297 million) for Southeast Asia.

Australia’s economic plight has been worsened by months of rain that has flooded much of the country’s southeast, hurting farm export earnings and adding to inflation due to fruit and vegetable shortages.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Follow @ktar923