Despite the headwinds from the Middle East conflict and rising inflation, Australia's fiscal outlook has improved somewhat. Surging energy and commodity prices are a net positive for Australia, while a higher inflation and nominal growth backdrop also boost tax revenue for the government. Policy changes are also part of the picture. Measures to curb spending in the nation's disability insurance scheme make, by far, the largest contribution to reducing deficits; however, changes that make long-standing tax concessions less favourable to investors have taken the limelight in post-budget coverage.
The budget deficit in the current financial year (2025/26) is now on track to come in at $28.3bn or around 1% of GDP. That is an improvement from the $36.8bn deficit forecast back in the December update. Deficits through to 2029/30 (the forecast period covered by the budget) are expected to accumulate to $151bn all told, a $44bn reduction since the December update.
As has been the case in recent years, a broadening set of measures have fallen under 'off-budget' spending, essentially regarded as investment expenditure. Including those measures, the headline budget deficit (yellow line in chart below) is $47.9bn in 2025/26 and around $265bn across the forward estimates.
In the near-term, the economic outlook in terms of growth and the labour market is little changed - though inflation has been revised significantly higher to peak at 5%. That largely reflects the surge in global oil prices. The assumption for the Tapis oil price was raised to $100 per barrel from around $80 (in USD terms) forecast in December. Meanwhile, prices for key commodities (iron ore and coal) are likely to surprise typically conservative forecasts to the upside.
With the conflict driving higher energy and commodity prices, the terms of trade is now expected to rise by 4.5% this year, upgraded from a flat prior forecast. This boosts nominal GDP growth (6.75%) and will ultimately be a windfall to the government. Forecast company tax revenue has been raised by $10.5bn over this financial year and next.
However, with global growth slowing in 2026, these headwinds, as well as higher interest rates, will weigh on the domestic economy. Growth in 2026/27 was revised down by 0.5ppt to 1.75%. Those factors contribute to the forecast for inflation to cool rapidly, returning to the midpoint of the RBA target band.
The changes to the economic forecasts have boosted the fiscal outlook by around $37bn through the forward estimates. Policy decisions taken by the government add another $8bn over the period. Thos factors are behind the reduction in forecast deficits.
Regarding new policy, much of the limelight is around the changes announced to tax concessions on investments. From July 1 2027, negative gearing will apply only to newly constructed homes, while the government will remove the 50% discount that applies for capital gains tax, winding back the clock to 1999 where real gains on assets sold was taxed, attracting a minimum rate of 30%. These changes are forecast to net the government $3.5bn. Changes made to the NDIS are a far larger influence, expected to save the government almost $38bn - though over the next couple of years those savings will be outweighed by spending.
Overall, the policy and economic parameter changes stabilise government spending at 26.8% of GDP before declining over 2028/29 and 2029/30. But that will remain higher than government revenue, reflecting the structural pressures on the budget, still including the NDIS and other major areas such as aged care, child care, debt interest and defence spending.
Government net debt remains on a rising trajectory, forecast to lift from 18.8% of GDP in 2025/26 to 21.9% by 2029/30. Interest payments will lift to just below 1% of GDP over the coming years. The AOFM's issuance notice following the Budget has been estimated at $125bn in 2026/27, up from expected issuance of $120bn in 2025/26.
