Summary

This is clearly an election related budget – and probably one the Government wasn’t sure was necessary a few weeks ago – with further election related spending yet to come.

Accordingly, the measures contained in the Budget are mainly ones that have been signalled previously. The one surprise was an extra tax cut – essentially the Government lowered the bottom tax bracket from 16% to 14% over two years from July 2026. The expected other changes include the $7.9bn program to boost bulk billing (albeit mainly in the out years – with around $2.4bn in the next 4 years), the further extension of cost of living support – via an extension of the electricity subsidies to end this year (around $1.8bn). And the usual additional infrastructure spend (albeit mainly back ended and relatively moderate in terms of new near term promises). No new money for Defence over the 10-year program but around $1bn has been brought forward into 2026-27 and 2027-28 Budget years.

Overall, not a lot of new announcements by usual budget standards. However clearly there will be more spending in the election campaign. And clearly there are still real levels of uncertainty as to what will actually be delivered post the election.

Looking at the outlook, it is clear that this Budget sees some further deterioration in the headline budget position in the near term. While there is some improvement in the structural budget position beyond 2025-26, a structural budget deficit is expected to persist. There seems to be no attempt to start to return to Budget balance any time in the next decade – and certainly not, in the more meaningful, forward estimates period. Basically, the Budget is spending nearly everything that the economy gives them. This lack of progress in addressing the structural deficit comes at a time of increased uncertainty globally and likely lower commodity prices.

Economic outlook & implications

The global economy is still weak and geopolitical uncertainty is very high (especially Trump and tariff related). No one really knows what Trump will do and how others will react. Business and consumer confidence effects will be critical. Generally, we are just assuming that whatever Trump has announced will be enacted. That might take ¼ of a point off global growth (at 3% not necessarily terrible) and modestly increased inflation (Treasury at 3¼%).

Domestically, we still see growth increasing to around 2¼% (Treasury at 2½%) with unemployment around 4¼% over the next few years. So, our forecasts are broadly in line with what Treasury are expecting. We do see core inflation at around 2½% by mid 2025 – which is lower than the RBA expects.

The direct implications of the budget are minimal in our view. After a reasonable fiscal impulse in 2024-25 – where growth in the economy has been supported substantially by the public sector – the structural budget balance implies a relatively neutral impulse for 2025-26 and at a face value will be a drag on the economy the year after. The RBA will continue to focus on recovery in private sector growth and the wage pressure in the labour market with unemployment still relatively low. However, we see the RBA easing a further 25bps in May, and a gradual series of cuts taking the cash rate to 3.1% by 2026 contingent on inflation easing as we expect.

For further details, read the full report 2025-26 Federal Budget