Budget 2025: An Unexpected Budget in an Uncertain World

This week’s budget wasn’t supposed to happen. The smart money had expected a federal election on 12 April, ruling out the theatre of a March Budget night. But Ex-Tropical Cyclone Alfred intervened, Treasurer Jim Chalmers got to hand down his fourth budget this week, and I got to spend a Canberra evening in budget lock-up.

Meanwhile, the economic and political context for the budget was being reshaped by another force of nature in the form of US President Donald Trump. The second Trump administration has already shaken the global trade and security orders, sending indicators of economic and trade policy uncertainty soaring, US share prices tumbling and allies scrambling over the past few weeks.

Despite this dramatic backdrop, expectations for the budget-that-nearly-wasn’t were relatively low and few surprises were expected. The Treasurer had confirmed that Budget 2025 would be reporting a deficit for the current fiscal year and the government had already made a series of pre-budget fiscal announcements including: $8.5 billion to expand access to Medicare bulk billing; a $1.8 billion extension of the energy bill rebate scheme in the form of an additional $150 in relief for every household plus one million small businesses; $0.7 billion to lower the cost of medicines under the PBS; a 20 per cent write down of student debt; an acceleration of already-planned defence spending; and a broadening of the government’s existing help-to-buy scheme. Add in the incentive to keep at least some powder dry for the election campaign, and that didn’t seem to leave much for budget night.

In the event, the Treasurer was able to announce a surprise in the form of modest tax cuts targeted at the lowest tax band. Those tax cuts, combined with the other announcements noted above, are part of the first of the Treasurer’s declared five priorities for Budget 2025: Helping with the cost of living, Strengthening Medicare, Building more homes, Investing in education, and Making the Australian economy stronger, more productive and more resilient.

But what else did we learn from Budget 2025?

We’re heading back into the red

Perhaps most importantly, Budget 2025 confirms that the brief interlude of budget surpluses is over.  For the 14 years between 2008-09 and 2021-22, Australia’s underlying cash balance was in deficit. The Treasurer managed to break this run for two years with back-to-back surpluses. But that brief fiscal interregnum is over, ‘normal’ budget service has resumed, and the red ink is flowing once again. The underlying cash balance will be in deficit to the tune of $27.6 billion (one per cent of GDP) in 2024-25 and this is forecast to increase to $42.1 billion or 1.5 per cent of GDP in 2025-26. Across the five years of the forward estimates to 2028-29, the cumulative deficit is projected to be $179.5 billion.

Granted, compared to the December 2024 Mid-Year Economic and Fiscal Outlook (MYEFO), the underlying cash balance has improved by a cumulative $1.6 billion over the five years of the forward estimates. But note that this is due to a $36.4 billion improvement in the bottom line due to parameter and other variations. Then note that most of that improvement has been offset by policy decisions taken by the government, which together have increased the deficit by a cumulative $34.9 billion relative to the position last December.

The underlying cash balance only tells part of the story

As is increasingly the case in ‘modern’ budgets, the underlying cash balance only tells part of the story. Recent years have seen the emergence of a significant gap between the underlying and headline cash balance, where the difference equals so-called ‘Net cash flows from investments in financial assets for policy purposes.’ This captures the impact of policy decisions that are funded not by direct government payments but instead by alternative financing measures including equity investments, loans, and guarantees.

According to Budget 2025, the deficit on the headline cash balance in 2024-25 is now estimated at $46.7 billion. That’s more than $19 billion larger than the deficit on the underlying cash balance. In 2025-26 the headline cash balance is forecast to reach $65.2 billion or about 2.3 per cent of GDP – adding about 0.8 percentage points of GDP to the ‘traditional’ deficit measure.

The Budget delivers some modest tax relief

Prior to Budget 2025, the government had been taking some heat over Australia’s rising tax burden – a particularly touchy issue during a cost-of-living crisis. Budget 2025 sees budget receipts as a share of GDP rise from 25.3 per cent in the current fiscal year to 25.5 per cent next year and then remain at over 25 per cent across the rest of the forward estimates. Within that total, tax receipts as a share of GDP are forecast to increase from 23.1 per cent this fiscal year to 23.5 per cent next year and then peak at 23.6 per cent in 2026-27 in the forward estimates (although note that according to the medium-term projections they will have risen to 24.9 per cent of GDP by 2035-36).

The tax measures announced in Budget 2025 will deliver a new tax cut worth up to $268 for every Australian taxpayer in 2026-27 and worth up to $536 in 2027-28, relative to 2024-25 tax settings. The combined impact of these tax cuts together with the previous and much larger (amended Stage 3) tax cuts is projected to keep the tax to GDP ratio at or below 2023-24 levels out to 2029-30. Perhaps a sign here that criticism of budgetary over-reliance on the combination of income tax and bracket creep has started to bite.

Expenditure pressures remain persistent

Turning from the revenue to the expenditure side of the budget, past outings have highlighted the growing spending pressures associated with six key policy areas plus a rising debt service burden. Aside from the latter (see below), the fastest growing major budgetary payments are spending on the NDIS, defence, hospitals, payments, medical benefits, aged care, and the Child Care Subsidy.

Budget 2025 still reckons that all these payments will continue to grow faster than the overall economy as measured by nominal GDP over the budget’s medium term. That said, relative to the MYEFO, growth projections have been pared back somewhat for hospitals, defence, the NDIS and the Child Care Subsidy.

More red ink means more debt, and more debt service payments

Inevitably, the renewed flow of red ink has implications for the stock of public debt. Australia’s general government gross debt is now forecast to rise from $940 billion (33.7 per cent of GDP) in 2024-25 to $1,022 billion (35.5 per cent of GDP) in 2025-26 and then to keep on rising in dollar terms over the forward estimates to $1,223 billion (36.8 per cent of GDP) in 2028-29. Looking further out, Budget 2025 assumes that debt as a share of GDP will peak at 37 per cent by June 2030 before falling back to 31.9 per cent of GDP by June 2036.

Relative to many other advanced economies, that still represents a modest debt burden. But it does imply a significant and (in the near-term) rising debt service cost. Growth in interest payments is expected to average 9.5 per cent per year over the budget projection period while total interest payments as a share of GDP are estimated to rise from one per cent in 2025-26 to a peak of 1.6 per cent of GDP in 2032-33.

A soft landing for Australia, despite high levels of global uncertainty

One final point. While both the Treasurer’s speech and the budget papers are careful to acknowledge the highly uncertain global environment, international economic developments are not yet seen as dire enough to threaten a soft landing for the Australian economy. Instead, according to the projections presented in Budget 2025, real GDP growth is expected to pick up into next year and the unemployment rate is projected to peak at just 4.25 per cent. Inflation is also forecast to return to target, with the government’s energy bill relief estimated to provide a helping hand in terms of the headline CPI rate through to the end of this year.

Summing up an ‘accidental’ budget

For the government, much of the focus of Budget 2025 has been on item one of the Treasurer’s five priorities: providing cost of living relief. No doubt, the government will be hoping that tax cuts, energy bill relief, student debt forgiveness and a range of other measures will prove persuasive and help assuage at least some of the anti-incumbency backlash that has swept the world over the past year.

Yet when set against the dramatic changes in the international environment, the budget’s larger ambition is modest at best. Perhaps that’s inevitable given how quickly the global environment has turned, how recently the government’s own plans have changed, and the prospect of a closely fought election. Still, Budget 2025 mostly leaves to the future the challenge of making sure that the economy is fiscally seaworthy enough to navigate safely the storms currently shaking our international economic and geopolitical environment.