Federal Budget 2025-26: Economic outlook and investment implications 

• Following consecutive surpluses, this year’s Budget returns to a deficit of $27.6 billion but projected debt levels remain low compared to other developed economies 
• Cost-of-living relief measures include small tax cuts for all Australian taxpayers in both the 26-27 and 27-28 financial years and a 6-month extension of the energy rebate for eligible households and small businesses
• The government committed at least $1.2 billion to Ex-Tropical Cyclone Alfred recovery, with a short-term impact on growth and inflation.

Handed down just before a federal election, this Budget delivered few surprises. With the election due in May, potentially some election spending announcements are likely to be held back until the campaign begins.

In this year’s Budget announcement, Treasurer Jim Chalmers stated that the Australian economy has turned a corner despite a challenging environment. He acknowledged the challenges posed by rising trade barriers and geopolitical uncertainties, highlighting the need for responsible economic management.

Ex-Tropical Cyclone Alfred is projected to impact economic growth by up to 0.25% of quarterly GDP growth. The Budget also noted that the rebuilding effort is expected to contribute positively to GDP growth in subsequent quarters. However, the rebuild is expected to put upward pressure on building costs, and damage to farmland is expected to increase the cost of fresh produce.

Following consecutive surpluses, this year’s Budget returns to a deficit of $27.6 billion, with a forecasted $42.1 billion deficit for the 2026-27 financial year. Government debt is projected to increase to 23.1 percent of GDP by 2028-29. While this trajectory will be worth monitoring, the projected debt levels remain low compared to other developed economies.

The government now expects unemployment to peak at 4.25%, aligning with the Reserve Bank of Australia’s (RBA) current unemployment rate forecasts, but 0.25% lower than its mid-year forecast. Economic growth is expected to improve from next financial year, leading to what the Treasurer referred to as a ‘soft landing’ for the Australian economy. The Budget also expects inflation to be slight lower than the RBA’s current forecast, even after factoring in the higher-than-expected impact of ex-Tropical Cyclone Alfred.

All households and eligible small businesses will benefit from a six-month extension of the energy rebate, providing an additional $150 in relief. The rebate, introduced in the prior Budget to assist with cost-of-living pressures, was originally due to expire at the end of the 24-25 financial year. This extension is expected to cost $1.8 billion over the 25-26 financial year.

Additional cost-of-living measures include:

• Small tax cuts for all Australians in both the 26-27 and 27-28 financial years.
• A one-off reduction in all student loan debts, reducing student loan balances by 20%, removing $16 billion from student loan accounts.
• Lowering the maximum cost of medicines under the Pharmaceutical Benefits Scheme (PBS) from $31.60 to $25.
• Increasing funding for the Australian Competition and Consumer Commission by $38.8 million to crack down on misleading and deceptive pricing practices and unconscionable conduct in the supermarket and retail sector.
• Increasing the Medicare levy low-income thresholds, and a $7.9 billion funding boost for Medicare to expand bulk billing.

Following ex-Tropical Cyclone Alfred, the Government expects national disaster support costs to continue to rise to at least $13.5 billion. This Budget provides funding for immediate recovery efforts and allocates $1.2 billion for the rebuild following ex-Tropical Cyclone Alfred and other recent disasters. It also notes that the full fiscal cost of ex-Tropical Cyclone Alfred is not yet known but is expected to be substantial.

Further measures to assist in the recovery are:

• $15 million of support for early recovery efforts following ex-Tropical Cyclone Alfred.
• $200 million to support disaster resilience and risk reduction through the Disaster Ready Fund.
• Up to 13 weeks of income support through the Disaster Recovery Allowance.
• $80.6 million of support for primary producers, small businesses, community facilities and non-profits, after the North and Far North Queensland Tropical Low earlier this year.

The Budget provides substantial support for Australian businesses, including:

• $20 million to support Australian producers through the Buy Australian Campaign.
• $8 billion of additional investment in renewable energy and low emissions technologies.
• $13.7 billion in hydrogen and critical minerals production tax incentives.
• $1.5 billion in support for priority areas through the Future Made in Australia Innovation Fund, including $750 million for green metals, $500 million for clean energy technology manufacturing, and $250 million for low carbon liquid fuels.

A few other measures worth noting include:

• A new $1 billion fund to increase the supply of early childhood education and care.
• $3.6 billion to fund a wage increase for the early childhood education and care workforce.
• $1.5 billion for state and local government to fund housing projects.
• $7.2 billion for safety upgrades to the Bruce Highway and other infrastructure.
• New and amended listings on the PBS for contraception, endometriosis, and IVF.

Historically, the Budget has been a significant event for our domestic market, particularly in the bond market. However, the global influence of central banks, and other international market drivers - this year notably the impact of US tariffs on the global economy - means we expect the Budget to have minimal immediate impact on domestic markets.

The government’s inflation expectations are broadly aligned with the RBA’s current forecasts, with the extension of the energy rebate likely to delay the anticipated pickup in inflation by around six months. Economic growth is expected to improve from next year, also in line with the RBA’s current projections.

Debt projections in the Budget, although increasing over the forecast period, remain well balanced relative to the debt burdens of other developed economies.

Given the alignment between the government’s and RBA’s inflation forecasts, a significant immediate impact on government bond yields appears unlikely.

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