The Federal Government has overseen a swing back to deficit for FY2025 and through all of the ten-year forecast period. 

This is despite a stronger than expected labour market and higher than expected commodity prices that have helped the budget position significantly. 

The Government now forecasts the budget balance in FY25 will be a deficit of $27.6 bn. FY26 is expected to show a deficit of $42bn driven by a selection of pre-election sweeteners announced in and ahead of the budget.

Indeed, since the budget update only three months ago, pre-election policy decisions taken by the Albanese government have worsened the budget bottom line by $34.9 billion over four years for initiatives such as more Medicare bulk billing and energy bill rebates.

The outyears show stubborn budget deficits, reflecting structural spending pressures such as the NDIS, defence, aged care and health. After a Covid induced surge, government spending as a percentage of GDP now appears to be stuck at a record high of 27% compared to a historical trend closer to 24%.

The spending spree has been masked by a significant revenue boom from soaring personal income tax payments and taxes on corporate profits due largely to resilient export prices for iron ore, coal and gas. 

The enhanced revenue take of 25% of GDP has kept the cash budget balance respectable at ~1% of GDP, however Australia’s revenue luck will likely run out at some point risking a deterioration in the budget balance.

As expected, the Budget paints a picture of an economy slowly recovering from a sluggish phase. In the near-term, economic growth is expected to be weaker than the Government previously expected. Growth in GDP for the 2024-25 financial year is expected to be 1.5%, less than the 2% in the 2024 Budget. Cyclone Alfred is estimated to have lowered GDP growth by 0.25%. In contrast, employment growth is now expected to be stronger, and the unemployment rate lower, than in the previous Budget. But the revisions to the Budget forecasts for the subsequent financial year, 2025-26, are relatively small. Growth is expected to slowly pick up with inflation returning to the RBA's inflation target in 2026-27.

The extension of the electricity rebates to the end of 2025 will delay the tick up in inflation that occurs when the subsidy (supposedly) comes to an end and electricity steps back up to its unsubsidised price (the subsidy was scheduled to end mid this year). This sees inflation temporarily above the RBA's 2-3% target band, however the RBA will look through these movements and so there should be no direct implications for monetary policy.

The Government has been less successful in bringing down Net Overseas Migration than it had anticipated. Admittedly, there are many elements to migration that are out of the Government's control, including the pace of departures, the take up of visas issued, and movements of New Zealanders. Over the year to June 2024, net migration was 40,000 stronger than the Government's previous forecast, while the forecast for the current financial year has been revised up by 75,000. The issue of strong net migration and the impact on housing will not be going away anytime soon. 

While the cash budget position has slipped to a moderate deficit, broader measures of the Australian Government budget position show a materially larger deficit, than the 'quoted' cash balance. 

A headline cash deficit of $65.2 billion (2.3 per cent of GDP) is estimated in 2025–26, compared to the quoted budget deficit of $42bn.

There is an increasingly long list of specialist Investment Vehicles which invest in projects that are expected to deliver “public value” and a “financial return” to taxpayers. For example, Clean Energy Finance Corporation (CEFC) loans and equity investments impact the headline cash balance but not the underlying cash balance. 

Over the five years to 2028-29, the cumulative “quoted” deficit is forecast to be $179.5 billion. The government’s finances are significantly deeper in the red once so-called “off budget” spending is included, resulting in a cumulative headline deficit of $283 billion.

This actual fiscal position accords much more closely with the rise in federal government debt since 2022. Australian Government gross debt is expected to continue to increase sharply ahead, from $940bn (or 33.7% of GDP) in 24/25; to $1,022bn (or 35.5% of GDP) in 25/26 and then jumps further to a record high level in 28/29 of $1,223bn (or 36.8% of GDP). 

The peak (in 28/29) is higher than expected in MYEFO (in 27/28) of $1,161bn. Gross debt in 25/26 increases by a sizeable $82bn y/y, which is arguably the 'truest' measure of the 'fiscal impulse', as this shows a significantly larger impact than the budget deficit. Meanwhile, net debt also increases sharply from $556bn, or 19.9% of GDP in 24/25; to a record level in 28/29 of $768bn, or 23.1% of GDP.

The more positive interpretation of this build in government debt is that it is still relatively low by global standards. However, Australia’s “least-worse” status is not exactly a ringing endorsement of Australia’s current fiscal strategy (figure 4)

With an election just weeks away, this was not expected this to be a fiscally tight budget. Given so many Budget details are now released to the media in the weeks leading up to the Budget, the surprise was the announcement of a tax cut. The lowest tax rate (applying to income from $18,201 to $45,000) will be reduced to 15% in July 2026, and 14% in July 2027, from the current rate of 16%. This tax cut at the bottom end of the tax brackets will provide a proportionately larger tax cut for low-income workers, although the full tax cut of $536 per year applies to anyone earning at least $45,000. The total cost of the tax cut will be $6.7 billion in 2026-27. The Coalition have announced that they will oppose the tax cuts. 

Other key spending measures

Most other spending initiatives had been announced in recent weeks. These include additional funding for Medicare ($8.5b), increased wages for aged care workers ($2.6b), additional funding for the Clean Energy Finance Corporation ($2b), the extension of subsidies on electricity bills ($1.8b) and funding for states for public hospitals ($1.7b). 

Overall, the Budget trends look more stimulatory for demand than previously and moderately inflationary despite the governments claimed inflation reduction efforts. We don’t expect significant near-term implications for markets but the structural implications of structurally stubborn spending across a broad front (including an increasing amount of spending “off balance” sheet) are somewhat worrying.