Australian Federal Budget 2024-25: Economic overview 

In the lead-up to this year’s Budget announcement, Treasurer Dr Jim Chalmers set broadly realistic expectations regarding economic conditions and growth forecasts. The Budget contains several new spending initiatives and the already announced income tax cuts, while projecting an overall surplus of $9.3 billion for this financial year, making it consecutive budget surpluses at the Federal level.

Large budget deficits are expected in the coming years, mainly on the back of new spending announced in this Budget with the Federal Government’s debt projected to increase to 21.9 percent by 2027-28. While this trajectory will be worth monitoring, the projected debt levels remain low compared to other developed economies.

The impact on inflation was also a key focus this year with some concerns that the Budget could add to inflationary pressures. The Budget forecasts the Consumer Price Index (CPI) to decline to 2.75 percent by 30 June 2025. This is lower than forecast by the Reserve Bank of Australia (RBA), although the difference appears attributable to the energy relief announcement as subsidies effectively reduce the CPI and the Government has estimated the energy relief to reduce recorded inflation by around 0.5 percent for this period. 

While it can be argued that higher Government spending - on top of already announced substantial income tax cuts - could add to inflationary pressures, we do agree with the Treasury’s outlook for a continued decline in overall inflation into the RBA’s 2-3 percent required band during the coming year.

Middle to lower income households stand to benefit from this year’s Budget due to the Stage three tax cuts, easing the tax burden for those in this category while also benefiting from spending measures announced in the Budget. Starting from 1 July 2024, the 19 percent tax rate will be reduced to 16 percent, and the 32.5 percent tax rate will be reduced to 30 percent, whilst the thresholds for the 37 percent tax rate will be increased from $120,001-180,000 to $135,001-190,000.

Other cost-of-living measures include:

• Changes to indexation methodology for student higher education debts such that indexation now references the lower of CPI or the Wage Price Index, to be applied retrospectively from 1 June 2023.
• Increase in the maximum rate of Commonwealth Rental Assistance by 10 percent.
• A $300 energy relief for all households and $325 for eligible small businesses.

Aimed at supporting industries to position Australia for future economic growth, this Act brings together several initiatives under a new ‘National Interest Framework’. This framework comprises two streams: ‘Net Zero Transformation’ and ‘Economic Security and Resilience,’ and includes support to:

• Solar panel manufacturing capabilities (called the Solar SunShot program), estimated to cost $1 billion over the medium term.
• Renewable hydrogen, including a Hydrogen Production Tax Incentive program, estimated to cost $6.7 billion over the medium term.
• A Critical Minerals Production Tax Incentive, estimated to cost $7 billion over the medium term.
• A $466.4 million investment in private firm PsiQuantum to build a commercial quantum computer in Brisbane.

The success of these initiatives will depend on the details, many of which are still being finalised, including what potential exists for private sector investment in these initiatives.  

The Budget has retained a focus on housing, with new initiatives announced, such as a further $1 billion of funding to State and Territory Governments for new housing and supporting infrastructure and allowing foreign investors to purchase Built-to-Rent developments for a lower fee.

A key challenge to the Government’s goal of building 1.2 million homes over a five-year period starting 1 July this year is the availability of labour. BuildSkills Australia estimates that an additional 90,000 construction workers will be needed, especially difficult given the current tightness of labour markets. To help meet this demand, the Government has announced 20,000 fee-free TAFE and pre-apprenticeship places. Additionally, the Government is fast-tracking visa applications to fill another 4,500 positions.

Concurrently, the Government is seeking to tighten immigration more broadly, with the Budget forecasting a decline in the net migration from an estimated 528,000 in 2022-23 to 255,000 by 2025-26. A key area has been stricter requirements for international students, with pledges to work closely with universities such that they increase the supply of student accommodation.

Overall, we view these initiatives as a positive step forward in relieving a key pain point for many Australian households -- the lack of housing stock. However, there is still significant progress needed to alleviate pressure in the sector.

A few other measures worth noting include:

• An additional $50.3 billion over the next 10 years in defence spending, a measured response to the rise in geopolitical tension in our region.
• Pledges to increase wages for aged care and childcare workers, having funded $11.3 billion to fund a 15 percent increase for the former.
• Extension of a $20,000 asset write off for small businesses, a likely welcomed relief with the number of company insolvencies having reached levels last seen in 2016.

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