2025-26 Federal Budget

2025-26 Federal Budget: A Tale of Two Budgets

In the near term, the key economic and fiscal aggregates in the 2025-26 Budget are largely unchanged from the last official update in December, and broadly in line with our own forecasts. The Budget suggests the economy has ‘turned a corner’ with growth strengthening and underlying inflation continuing to fall. The budget deficit in 2024-25 is expected to be $27.6bn before widening to $42.1bn in 2025-26. We do not expect the Budget to have a material impact on the expected short-term path of underlying inflation or interest rates.

Major Policy Announcements

Last year, the Budget was heavily focused on the Future Made in Australia policy. This year, policy announcements are primarily directed at reducing cost of living pressures.

The main surprise in the Budget came in the form of an income tax cut which lowers the marginal tax rate on the lowest tax threshold ($18,201 - $45,000) from 16% to 15% in July 2026 and then again to 14% from July 2027. This was the largest new policy in terms of the cost to the budget.

The next most significant measure in terms of impact on the budget bottom line was the $8.5bn uplift (over five years) in spending to support improved bulk billing rates. This had already been announced. These two policies account for ~75% of the additional spending decisions taken between The Mid-Year Economic and Fiscal Outlook (MYEFO) and the 2025-26 Federal Budget.

Focus areas

Cost of Living

$17.1bn over five years to deliver an income tax cut for all taxpayers. The marginal tax rate for the bottom tax bracket will be lowered from 16% to 15% from 1 July 2026 and then to 14% from 1 July 2027. This will provide an average wage earner with an additional $268 a year in 2026-27 and $536 a year in 2027-28.
$1.8bn to extend electricity rebates for six months. The Government anticipates this extension to electricity rebates to reduce annual headline CPI inflation by 0.5 percentage points in the fourth quarter of 2025.

Education

Pending successfully passing the legislation, the Government remains committed to cutting existing student debt by 20%. While the Government flags this is cost of living support, the impact is muted due to it reducing the amount of debt rather than providing extra money in the pocket of students.
The Government will increase the amount that people can earn before they are required to start paying back their loans from $54,435 in 2024–25 to $67,000 in 2025–26. This is ‘off balance sheet’ and so does not impact the underlying cash balance but will provide modest cost of living relief to recent graduates.

Health

$8.4bn over four years to increase doctor’s incentives to boost bulk billing rates in Australia. The policy aims to increase the proportion of doctor visits that are bulk billed to 9 in 10, assisting with the cost of living.
$689m on limiting the price of medicines on the Pharmaceutical Benefits Scheme (PBS) to less than $25 per script. This is another policy aimed at easing heath costs for individuals and reducing the cost of living for households.
$793m for women’s health initiatives including new contraceptive pills and menopause treatments being added to the PBS. Additional support for endometriosis patients is also included.

Industrial relations

There was a surprising policy reform included in the Budget that limits non-compete clauses in the hope of boosting wages and mobility. The policy is limited to low- and middle-income workers and Treasury estimate this could increase wages by 4% or $2,500 per year for affected workers.

Infrastructure

$7.2bn to upgrade the Bruce Highway, noting the project will not be completed until 2032 and much of the funding is not included in the forecasts for the next five years.
Overall, the Government has identified new infrastructure priorities that will add $1.8 billion to spending over five years, while also identifying around $4.6bn in payment reductions from within the infrastructure program, reflecting project slippage.

Small Business

The main announcement was that eligible small business will have their previous electricity rebate extended by six months, delivering an additional $150 in total. This will benefit around one million businesses and was announced in advance of Budget night.
The hospitality sector and alcohol producers will benefit from a pausing of indexation on draught beer excise and excise equivalent customs duty rates and by increasing support available under the existing excise remission scheme. The cost of these measures will be $165m over five years.

The main budget numbers

In 2025-26 the Budget estimates an underlying deficit of $42.1bn (1.5% of GDP). This is an improvement since the MYEFO estimate of $46.9bn and the May 2024 estimate of $42.8bn. Spending is expected to lift from 25.2% in 2023-24 to 27.0% in 2025-26 where it is expected to peak. The ratio peaked at 31.3% during Covid. Revenue as a share of GDP has fallen from 25.8% in 2023-24 to 25.3% in 2024-25 and is expected to lift to 25.5% in 2025-26. It is then expected to fall a little in 2027-28 and 2028-29 at 25.3% before lifting to 26.8% in 2035-36. In 2035-36 payments and receipts both sit at 26.8%, bringing the budget back to balance.

CBA's Chief Economist says:

The Budget delivers new cost of living relief to households, including tax cuts, without damaging the budget bottom line in the near term or adding to inflationary pressures. However, by spending, rather than saving, a projected windfall from a stronger economy, the budget position continues to deteriorate over the longer-term and becomes more vulnerable to external shocks.

Chief Economist, Luke Yeaman and his team unpacks the Federal Budget.

Read the full report

2025-26 Federal Budget