2025-26 Federal Budget
Cost-of-living took centre stage in the 2025-26 Federal Budget, but the medium-term budget outlook is getting worse, not better.
The Federal Treasurer, Jim Chalmers, handed down the 2025-26 Budget on 25 March 2025. On the eve of a federal election, this Budget laid the foundations of the Government’s pitch for a second term in office.
Against that political backdrop, it was no surprise to see cost-of-living take centre stage, led by unexpected (though modest) cuts to personal income tax, and a widely telegraphed extension of the energy bill rebates through to the end of 2025.
The income tax cuts will reduce the lowest marginal tax rate from 16% to 14% over two years. A worker on average earnings will save $268 per year in 2026-27, rising to $536 per year from 2027-28. The energy bill rebate extension will give an additional $150 to all households and eligible businesses in the second half of 2025. Other spending measures included a two-year pause in the indexation of draft beer excise, and an $8.4 billion boost to Medicare over five years.
For individual households, the financial impact of these cost-of-livng measures may feel like a drop in the ocean. But in total, the policy decisions announced in yesterday’s Budget are set to cost $34.9 billion through 2028-29. Despite the weakness of Australia’s medium-term fiscal position, the means-testing of government handouts appears firmly out of fashion.
Tuesday's budget also confirms the economic tailwinds that delivered consecutive budget surpluses in 2022-23 and 2023-24 are mostly in the rear-view mirror.
A stronger near-term outlook for employment and wages growth is boosting the personal income tax take, and the government is collecting more revenue than expected from superannuation funds and company profits. Overall, parameter variations – changes in economic forecasts and other factors outside the government’s control – added $11.6 billion to the revenue over the four years to 2027-28.
But Treasury’s medium-term economic projections suggest the economy (in nominal terms) will be $14.9 billion smaller by 2027-28 than what was expected just three months ago when the 2024-25 Mid-Year Economic and Financial Outlook was released. The high commodity prices and strong inflation that drove major revenue upgrades in recent years are mostly missing from the outlook.
The underlying cash deficit is forecast to be $27.6 billion in 2024-25, or 1.0% of gross domestic product (GDP). But the rapid deterioration in the underlying cash balance doesn’t tell the full story of Australia’s budget challenge. A surge in ‘off-budget’ spending means the headline deficit is projected to hit $46.7 billion in 2024-25, or 1.7% of GDP.
Net debt, the simplest indicator of Australia’s fiscal trajectory, is forecast to rise from 19.9% of GDP in 2024-25 to 23.1% by 2028-29 and has been revised higher through 2034-35. That means the medium-term budget outlook is getting worse, not better.
A structurally sound budget is critical to maintaining Australia’s prosperity as global risks mount, and our spending requirements grow. It’s time to make some hard decisions about the right level of revenue and the right mix of taxes to pay for our government spending needs. Unfortunately, a serious discussion on these issues is still missing in action as the federal election draws near.
Chart 1: Underlying budget balance and net debt
This newsletter was distributed on 26th March 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Daniel Weber, Manager at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
