The mid-year update (MYEFO) of Budget 2025/26 was handed down by Federal Treasurer Jim Chalmers in Canberra today. Australia's fiscal outlook has improved modestly since late March when the government delivered the budget it took to the May election at which it was returned for a second term. A revenue windfall has helped reduce forecast deficits to $143.2bn over the 4 years to 2028/29 from around $152bn previously.
According to MYEFO, government revenue is forecast to be notably stronger over the next 4 years than previously anticipated. Resilient economic conditions and elevated commodity prices are set to deliver the government a revenue boost, but spending is also expected to keep rising - reducing the impact of the windfall on the bottom line. All told, improvements to the deficit are a modest $5.4bn this year (-$36.8bn) and $8.4bn over the forward estimates to 2028/29 (-$143.2bn). That translates to deficits of just over 1% of GDP.
The chart below illustrates the key dynamics at play. Resilient economic conditions and elevated commodity prices deliver a windfall of $41.3bn over the next 4 years (green bars). The bulk of that is driven by a $36bn upgrade from personal income and company tax. However, a higher take-up of government programs and increases to other expenses are set to push up government spending over the next 4 years by $35.1bn (yellow bars). Meanwhile, new policy decisions included in MYEFO - mainly around tightening spending on consultants and changes to the home batteries program - improve the bottom line by a net $2.2bn (grey bars).
As is becoming increasingly well documented, the government is expanding its use of 'off budget' spending measures - the most notable recent example being the 20% reduction to student loans. Off budget measures are set to average $23.5bn per year over the forward estimates. As a result, the headline budget deficit (yellow line) is forecast to be considerably wider than the underlying deficit (green line).
In historical terms, government revenue (receipts) shown in the yellow line in the chart below is projected to run at elevated levels, at around 25-26% of GDP for the next few years. However, MYEFO reaffirms the budget faces significant pressure from rising costs in several areas (debt interest, NDIS, defence, hospitals, medical benefits and the Child Care Subsidy), while spending restraint is proving politically difficult in the current climate. The effect of this is that government payments at around 26-27% of GDP are set to outpace revenue, locking in the forecast deficits discussed earlier.
With a trajectory of forecast deficits, government net debt is projected to remain on the rise for the next few years. Net debt as a share of GDP is set to rise from 20.1% in the current financial year to 22.6% by 2028/29.
The key economic forecasts compiled by Treasury that shape MYEFO have not shifted significantly since the Budget was tabled in March - though there are some notable changes. The main shift is in the inflation outlook, which has been revised higher following the hot Q3 CPI report (see here). Headline inflation was marked up 0.75ppt to 3.75% for 2025/26 and then by 0.25ppt to 2.75% in 2026/27. In addition, commodity prices are seen remaining higher for longer, boosting the terms of trade and nominal GDP in the current financial year. These are all key factors behind the forecast boost to government revenue. Meanwhile, although slightly faster employment growth is now expected, the unemployment rate is anticipated to be 0.25ppt higher through this financial year and next.
Treasury has broadly retained its forecasts for global economic growth. The outlook for 3% world GDP growth in 2025 is the slowest since the early 1990s weighed by tariff-related factors; however, a modest recovery is set to take place from next year.
