After two consecutive surpluses the budget has moved into deficit. The budget papers show a forecast deficit of $A27.6 billion (1 per cent of GDP) in 2024–25 and $A42.1 billion (1.5 per cent of GDP) in 2025–26. The budget is forecast to remain in deficit until the middle of the next decade.
In aggregate there is little change to the key budget numbers relative to those contained in the December 2024 mid-year economic and fiscal outlook (MYEFO).
A new tax cut for all taxpayers from July 1, 2026, forms the centrepiece of the budget. When fully implemented in 2027–28, the average taxpayer will be $A536 better off a year. The size and start date mean the tax cuts are within the envelope of the fiscal easing ANZ Research expected in the budget over the next few years.
As a result, there is no direct impact on ANZ Research’s forecasts for near-term growth, trimmed mean inflation or the official cash rate. ANZ still expects one more rate cut from the Reserve Bank of Australia in August, although global uncertainty could see additional easing (especially if it spills over into local consumer and business confidence).
Other key policy measures include an extension of energy bill cost-of-living relief to the end of the calendar year (at a cost of $A1.8 billion), as well as a range of measures in the health portfolio (the bulk of the cost relates to Medicare), with a total cost of $A2 billion in 2025–26 and $A2.7 billion in 2026–27.
In aggregate, the cost of net policy decisions has been offset by parameter and other variations. A stronger-than-expected economy will lift revenues, while on the expenses side, there are a range of lower-than-expected payments.
The budget papers project that the fiscal position will return to balance in 2035–36. An increase in receipts as a share of gross domestic product (GDP) beyond the forward estimates period will close the gap.
Expectations
Relative to ANZ Research’s expectations, the fiscal position is forecast to be weaker in the final years of the forward estimates. This likely reflects the tax cut - which was not anticipated - steadily increasing in cost over time.
That said, across 2024–25, 2025–26 and 2026–27, the amount of net new spending is, in aggregate, consistent with ANZ Research’s expectations. There is a little less in the first two years and a little more in 2026–27 than we expected.
While the impact of policy decisions in 2027–28 and beyond is a little larger than ANZ Research expected, that time horizon is sufficiently far into the future to not impact any views over 2025 and 2026.
Net debt is estimated to increase from $A556 billion in 2024–25 (19.9 per cent of GDP) to $A714.1 billion (22.7 per cent of GDP) by the end of 2027–28, versus $A708.6 billion in MYEFO. The increase in net debt relative to MYEFO reflects the mechanical impact of lower yields increasing the value of existing bonds and “a change in Future Fund investments, loans and placements”.
Gross debt is estimated to be $A940 billion (33.7 per cent of GDP) at the end of 2024–25, rising to $A1,223 billion in 2028–29 (36.8 per cent of GDP).
Treasury’s inflation forecast is likely to be of interest to markets. Treasury is forecasting headline inflation of 2½ per cent in the second quarter of 2025, and 3 per cent in the second quarter of 2026. This compares to the RBA’s forecasts of 2.4 per cent and 3.2 per cent, respectively.
ANZ Research does not view the differences in 2026 as material, given the length of the forecast horizon, and note the increase in headline inflation reflects the mechanical impact of cost-of-living relief measures rolling off. For that reason, trimmed mean inflation is likely to remain the key focus for monetary policy over 2025 and 2026.
Adam Boyton is Head of Australian Economics at ANZ
This is an edited version of the ANZ Research report “Australian Federal Budget 2025-26”, published March 25, 2025
