Deloitte Access Economics' Budget Monitor

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7 December 2025: In 2022-23 and 2023-24, rebounding economic conditions allowed the government to deliver not one, but two, budget surpluses. Neither of those surpluses had been widely anticipated, but they were achieved because revenue ‘surprises’ in those years were mostly saved rather than spent.

Now, despite inflation having decelerated from its post-pandemic heights and the pace of growth gradually grinding higher, conditions are proving more challenging for the budget. Escalating spending pressures and an outdated tax system are expected to mean budget deficits as far as the eye can see.

It is imperative that greater attention be paid to government expenditure, particularly through the systematic adoption of program and policy evaluation to amend, continue, or discard programs based on their efficacy. In addition, a careful root and branch review of expenditure responsibilities between the Commonwealth and the States and Territories is long overdue.

Critically, a focus on well-considered tax reform that turns deficits into surpluses, boosts productivity and growth, and enhances equity in our tax system is needed. Done well, reform of the tax system can put Australia’s fiscal settings in a much healthier position.

According to the December 2025 edition of Deloitte Access Economics’ biannual Budget Monitor, the 2025-26 underlying cash deficit is projected to come in at $38.9 billion, slightly better than the $42.2 billion result forecast in the April 2025 Pre-Election Economic and Fiscal Outlook.

However, on Deloitte Access Economics’ numbers, the gap between revenue and spending is forecast to worsen over the forward estimates, resulting in an underlying cash deficit of $44.6 billion in 2028-29, compared to the official forecast of $37.0 billion.

Releasing the December 2025 edition of Budget Monitor, Deloitte Access Economics Partner and report co-author Stephen Smith said: “The two consecutive surpluses – the first in 15 years – are rapidly becoming a distant memory and significant deficits are now entrenched. Over time, the gap between revenue and spending is expected to widen.

“The single notable revenue-raising policy change taken to the May election – the proposed taxing of unrealised gains on large superannuation balances – has been watered down. Meanwhile, an unwelcome re-acceleration of inflation has erased any hope of a Christmas interest rate cut and has lifted cost-of-living back up the list of concerns facing the electorate.

“That may make the optics of not further extending energy bill relief to households – which are currently due to expire in December – too politically unpalatable to ignore, therefore adding another item to spending.”

Adding to the list of budget challenges is the fact that the previous run of large revenue writeups is likely to be over – at least for now.

Deloitte Access Economics Partner and report co-author Cathryn Lee said: “Deloitte Access Economics still expects revenue to outperform official forecasts, but the extent of those revenue upgrades will be much smaller compared to the first few budget updates issued by this Government.

“Without large revenue upgrades, sound management of government spending will be needed to tame growing deficits.”

On the outlook for spending, the 2025-26 Budget set a high bar. As the Treasurer noted in his speech on budget night, the 2025-26 Budget included a forecast for payments growth to average 1.7% per year to
2028-29 in real (inflation-adjusted) terms. For context, excluding the period affected by the COVID-19 pandemic, average annual real payments growth this century has been closer to 3.4%.

Cathryn Lee said: “Consistently holding spending growth at half the historical norm will be a challenging exercise, even more so when considering that much of government spending is related to services, such as health and care services, which are recording rapid price rises.

“What matters now is disciplined, long-lasting action to improve the budget bottom line, including tighter spending controls paired with reforms to the tax system.”
 

Five policies to fix the budget balance and improve prosperity

With the Federal Budget firmly in structural deficit, even at a time of relative economic stability, the case for major economic reform has never been clearer.

This edition of Budget Monitor features an analysis of five tax reforms that would help to close the budget deficit, improve the intergenerational equity of the tax system, and facilitate stronger productivity growth.

Overall, the combined package of reforms analysed in this report would add an average of $57 billion per year to the underlying cash balance over the next decade.

Stephen Smith said: “Recent editions of Budget Monitor have made the case for tax reform to tackle Australia’s economic and budget challenges. And while the Government has commendably turned up the volume on economic reform since the 2025 election, we are yet to see the talk turned into action.

“The Federal Budget is over-reliant on income tax for revenue, a situation which disproportionately benefits older and wealthier Australians at the expense of younger working people. With political pressures likely to see migration fall, young Australians may have to bear more of this burden than they already do.

“Deloitte Access Economics has not softened its view that Australia needs major economic reform to address the structural budget deficit, improve the equity and efficiency of the tax system, and lift the economy’s potential growth rate by sharpening the incentives for productivity growth. We must be bold and open the debate on the appropriate taxation of capital and wealth.”

1. Simplifying the personal income tax system and indexing the tax brackets to inflation

Deloitte Access Economics has modelled a simplification of the personal income tax system. The proposal would increase the tax-free threshold for individuals to $33,000 from the current $18,200 (or around $23,000 when including the low income tax offset).

A single marginal tax rate of 33% would apply to income from $33,000 to $330,000. One additional marginal rate of 45% would apply to income over $330,000. These new income tax brackets would have their thresholds indexed to grow at 2.5% per year, broadly in line with CPI inflation.

Smith said: “These reforms would remove the disincentive to work that comes from having a tax-free threshold well below the point at which someone no longer qualifies for income support. They would also nullify 'bracket creep', which stealthily increases personal income tax each year."

The indexing of the personal income tax thresholds comes with an important caveat: it is expensive. While it is good policy and has broad support across economists and policy analysts, the cost of indexing the tax thresholds would compound each year relative to a base case in which the average effective tax rate continues to creep higher. The annual cost of this reform is estimated to reach $54 billion per year after 10 years and continue to rise from there.

While there are strong economic and fairness arguments for indexing the income tax thresholds, it would be an expensive and structural change to the budget’s tax base. Implementing this policy would require a commitment to longer term reforms – including measures to slow spending growth or unearth new sources of revenue – beyond what has been considered in this edition of Budget Monitor. In the absence of these reforms, indexation would pose the risk of a significant long-run deterioration in the budget position.

2. Harmonising the company tax rate at 20% for all companies, while introducing a new tax that only applies to ‘super profits’

Australia’s statutory company tax rates (which are 30% for medium and large companies and 25% for small companies) are high by global standards.

Deputy Governor of the RBA Andrew Hauser recently noted that Australia ‘screams investment potential’, with an abundance of resources and skilled human capital, a strategic location in the Asia Pacific, a huge domestic savings pool, low public debt and strong institutions. And yet, business investment fell from an average of 14.1% of GDP in the decade to 2014-15 to 11.7% in the decade to 2024-25. At least in part, investment is being held back by relatively high company tax rates.

Reforming business taxes needs to strike a balance between boosting business investment, while limiting the damage to an already strained budget position. This could be done by cutting the company tax rate to a globally competitive rate of 20% for all companies, while introducing a new tax on ‘super profits’ (defined as any after-tax profits that exceed a return on capital of more than 5% over the ten year government bond rate).

Smith said: “A lower company tax rate would increase the after-tax returns on ‘normal’ profits, making Australia a more attractive destination for global capital. A super profits tax could raise more than enough revenue to offset the reduction in company tax, at a lower economic cost.”

3. Increasing and broadening the GST, alongside a commensurate increase in welfare payments

The GST is one of the most efficient taxes levied by the Commonwealth. That makes it the leading candidate for raising the extra revenue required to close the budget’s structural deficit – assuming the additional revenue raised could be kept by the Federal Government, rather than distributed to the states and territories.

Increasing the GST rate to 15%, while broadening the base to include all foods and education, could raise an average of $90 billion per year over the decade to 2035–36, making it by far the largest revenue raising measure in this suite of policies. The revenue would enable compensation to be provided to lower-income households to ensure they are adequately compensated for this increase in a regressive tax.

Smith said: “Deloitte Access Economics’ estimate that increasing government support payments by a total of $31 billion per year would – on average – leave the bottom 40% of households by income no worse off as a result of the combined changes to the GST and personal income tax schedule.”

4. Reducing the capital gains tax discount from 50% to 33%

A reduction in the CGT discount is a policy proposal that has been pitched consistently in recent editions of Budget Monitor. It would help to improve the budget balance, improve equity in the tax system, and tackle some of the distortions in Australia’s challenged housing market.

Smith said: “While the logic behind Australia’s CGT discount is sound, the size of the discount is too generous. While it makes sense to compensate investors for the effect of inflation, the 50% discount does a bad job of approximating the actual effect of inflation. A CGT discount of 33% would more accurately account for the effect of inflation.”

5. Introducing a broad-based, low-rate inheritance tax.

Deloitte Access Economics estimates that a 10% tax on inheritances, with a tax-free threshold of $100,000 and an exemption for those who inherit a principal place of residence, would raise an average of $3 billion per year over the decade to 2035-36.

Smith said: “Inheritance taxes are commonplace in other jurisdictions including the United States, the United Kingdom and much of Europe.

“Wealth taxes are a way to repair the budget, help all Australians share in the asset price windfall that has flowed to older generations over the last 40 years, and help to prevent inequality from cascading through future generations.

“The intergenerational inequities that will result from clinging on to the current tax system are clear. As debt mounts, and the reliance on personal income tax rises, the fiscal burden will disproportionately fall at the feet of younger, working age Australians.

“If not now, when?”