State budgets edge towards repair

State and territory budgets for 2025-26 reveal tentative progress in getting public finances back on track. Several states are forecasting improvements in their net budget positions. But spending continues to grow quickly, with question marks around governments’ ability to deliver planned restraint. Public debt across all jurisdictions is forecast to top $900 billion by 2028–29 – more than triple pre-pandemic levels – even after factoring in planned fiscal restraint. Given the interest bill, State Treasurers would no doubt have preferred a rate cut yesterday, and a few more going forward.

Recent improvements in state budget positions owe as much to good fortune as to fiscal discipline. Victoria is forecasting its first surplus since the pandemic this financial year, though it is smaller than forecast seven months ago. Windfall GST revenues have been largely allocated to new spending, and that new spending includes $11.1 billion for healthcare and $2.3 billion in cost-of-living support over the next four years.

Queensland’s new government is taking a different path, forecasting an $8.6 billion deficit this financial year. It has chosen to retain rebates and freeze taxes, despite a sharp fall in its GST allocation and a halving in coal royalties. The budget is then expected to return to balance by the end of the decade.

New South Wales is forecasting a $3.4 billion deficit in 2025-26, slightly worse than expected just six months ago. While GST revenue has been revised up in the short term, the state’s path back to surplus by 2027-28 depends on stronger GST growth and tight control over spending – both of which may prove difficult to sustain.

State budget challenges are not just cyclical – they’re structural. Governments are grappling with strong population growth, rising demand for services, and relatively narrow revenue bases.

Budget improvements going forward are based on keeping spending growth under control. One challenge here will be keeping public sector wage growth in check, especially as major enterprise bargaining rounds approach in health, education and transport.

Infrastructure cost pressures are also building, with the national infrastructure pipeline nearing $250 billion over the next five years. Grattan Institute analysis – using data from Deloitte Access Economics’ Investment Monitor database – shows one in four large projects exceed their budgets. This could potentially add billions in unplanned costs over the coming years.

While most budgets assume steady economic growth and stable labour markets, downside risks remain. Recent US tariffs have heightened global uncertainty. And while Australia’s direct exposure to the US is limited, any broader slowdown – particularly in China – could dampen demand for Australian commodities, with resource-dependent states in the north and west most exposed.

Despite stronger operating positions in some cases, debt continues to rise. State government gross debt has increased 150% since 2019 and is forecast to rise another 40% by 2028-29. Credit rating agencies have issued warnings, most notably for Victoria and Tasmania. Further downgrades would drive up borrowing costs and reduce fiscal flexibility.

Some of the most economically damaging taxes, such as stamp duties, are levied by state governments. Reforming them could provide a much-needed boost to productivity, but these changes are politically difficult and harder to implement when budgets are tight. Past reforms like the GST show that success often depends on governments having fiscal room to compensate those who lose out.

Repairing state budgets will take more than favourable forecasts. Governments must constrain new spending, improve efficiency, and prioritise high-impact investment. At the same time, long-overdue structural reforms must stay on the agenda.

This newsletter was distributed on 9^th July 2025. For any questions/comments on this week's newsletter, please contact our authors: 

This blog was co-authored by Sheraan Underwood, Associate Director at Deloitte Access Economics

Click on the links below to read our previous Weekly Economic Briefings:

• CFO Sentiment: Global uncertainty dents confidence (03 July)
• Deloitte Access Economics Business Outlook: Productivity promise (25 June)
  
• Tax in Australia: one more piece of sticky tape (16 June)
• Australia’s housing conundrum (11 June)