Treasurer Jim Chalmers has delivered the Federal Budget 2025-26 – the Government’s fourth since taking office.
While the last two budgets have delivered a surplus of $15.8b and $9.3b respectively, spending pressures – including the recent economic impacts of Cyclone Alfred, a $1.2b recovery effort – made a third surplus unlikely, with the Government confirming a $27.6b budgetary deficit for 2024-25, forecasted to increase to $42b in 2025-26. In fact, a decade of deficits is forecasted in the forward estimates, while gross debt for 2024-25 remained at $940b, a $177b decrease from the $1.1t forecasted in 2022 (rising to $1.22t by 2028-29).
In the weeks preceding, Treasurer Jim Chalmers noted spending would be subdued in this budget, as most of the Government’s policies were already announced in the preparation for an election. Prior to the budget being delivered, the Government unofficially launched its election campaign by announcing an $8.5b Medicare overhaul, including increasing bulk-billing and establishing more Medicare Urgent Care Clinics.
However, structural challenges persist, including defence, aged care, health, interest on debt and the $47.2b National Disability Insurance Scheme, which experienced a nearly 20 per cent increase in costs last year and is expected to reach $63b by 2028-29. Additionally, the ageing population presents further difficulties, with projections indicating that by 2063 there will be almost two older individuals for every five working-age Australians, and a shrinking pool of revenue to support an ageing population.
With interest rates starting to ease after being reduced by .25 basis points in February for the first time in four years, cost-of-living is the highest priority for the Government this budget. While inflation is moderating at 4.1 per cent, and underlying inflation now in the RBA’s target range rapidly rising prices for groceries, electricity and consumer goods have put a dent in voter confidence. With a pending election, the budget remained one of the Government’s last chances to convince voters of their fiscal management strategies.
While energy prices were forecasted to rise exponentially with the Government’s energy bill subsidy due to end, this has been has extended this with an additional $1.8b as part of this year's budget for both small businesses and households. With the costs of doing business remaining high, products and services will continue to be expensive. If the Government supports business and keeps material and business costs in check, this cost-saving will flow to the individual.
This budget was delivered against a backdrop of global instability, which may add to cost-of-living concerns – with the Treasurer even referencing ‘uncertain times’, ‘volatile’, and ‘unpredictable’ in his speech. US tariffs imposed on many of Australia’s key trading partners and supply chains will likely affect Australian businesses and the wider economy, while the stock markets have been volatile in recent weeks due to global trade instability and uncertainty. It’s against this backdrop that the Treasurer focused on local industry, by renewing commitment to a Future Made in Australia. With all these challenges, this renewed focus on supporting Australian manufacturing is to be applauded.
The recent tariff escalations are likely to create challenges for Australian industries, particularly retail and manufacturing with supply chain issues and price increases across the board, which will in turn affect product pricing, sourcing decisions, and overall supply chain strategies for businesses reliant on US trade. However, there are still many opportunities for Australian businesses even during such a dynamic and volatile trading environment.
Australia needs corporate concessions back on the agenda, by virtue of necessity with the current global dynamics. With support and incentives for businesses to innovate and create efficiencies, we will see our local markets developing, more local products, and increased productivity and efficiency gains. Australian businesses will struggle to operate in the global economy due to global dynamics and instability without support and incentives from the Government.
So how can Australian business support themselves in lieu of Government support? Improving manufacturing operations by finding efficiencies and cost-cutting measures can help, as does looking into government grants and R&D incentives to develop innovation for your business. There were no remarkable announcements this evening; perhaps more will be revealed for businesses during the election campaign.
Australia’s structural deficit, alongside an overreliance on both personal and company income tax for revenue is increasingly becoming an issue, with almost half of government revenue coming from personal income taxes. By 2060, personal income tax revenue is projected to make up an unprecedented 58 per cent of government revenue.
Last year’s $15.8b surplus was largely attributable to population growth and the resulting bump in corporate tax, income tax, and bracket creep, a ‘hidden tax’ eroding Australian’s take home pay. Unless we see cuts in spending or an even higher increase in company profits, addressing bracket creep would put a dent in the budget in the billions. Previous governments have done little to address this issue, and it is now becoming urgent due to increased structural spending for things like aged care, defence, and NDIS.
Adding to Australia’s structural deficit is so-called ‘off-budget spending’, a concept that started in the 2008-09 budget which successive governments – on both sides of the aisle – have continued to use. Billions of dollars of spending are labelled as ‘investments’ or assets and are not included in the budget deficit calculations, however still act as debt that Australians end up paying for.
Off-budget spending is projected to account for $180b by 2028. Costs that have been included in off-budget spending over the years include the $1.3 billion NBN, the $2.2 billion National Reconstruction Fund, the $18.5 billion Clean Energy Finance Corporation, and is likely to include the waiver of $16 billion in student loan debts. In essence, it is likely that our actual debt is greater than what’s reported by virtue of these announcements.
On the other hand, federal GST collections from the states have been declining. With some states negotiating more favourable allocations and consumers buying more GST-free items, federal GST revenue hit a record-low 13.4 per cent in 2023-24. Shifting the tax burden by cutting income tax rates, while increasing GST from 10 per cent to 15 per cent would assist in the overreliance on income tax revenue.
Any way you look at it, tax reform is necessary, but the question remains – who will introduce it?
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