• Combined Federal and state fiscal policy settings for 2025-26 are broadly neutral, a step down from the fiscal stimulus seen in 2024-25.
• Budget forecasts suggest that fiscal policy could turn contractionary in 2026-27, but this is being driven by what looks like an implausible slow down (to near zero) in state spending growth. It is likely that future policy decisions will add to spending (and the deficit).
• State budget projections point to state infrastructure programs peaking in 2025-26. However, the trend has been for the size of state programs to be revised up, and the peak year pushed out, although there are signs governments have become more conscious of the need to prioritise projects and to contain costs.
• The move from fiscal stimulus to more neutral settings in 2025-26 reinforces our view that the appropriate path for monetary policy is for it to move to around neutral. We expect the RBA to make three further 25bp cuts, taking the cash rate back to 3.1%.

For further details please see NAB Economic Update – 23 July 2025