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The 2025-2026 Federal Budget
March 2025

Posted by Greg

In Summary: Implications for Investors and the Economy

The Federal Budget is a pre-election budget designed to address key voter concerns, particularly cost-of-living pressures. The government has significantly increased spending, with expenditures rising by nearly 2 percentage points of GDP (approximately $100 billion) over two years. This increase will support economic growth, business activity, and household finances. However, the full implementation of the proposed measures will depend on whether the government secures re-election in the upcoming May elections.

Cost of Living Relief

Recognising the financial strain on households, the budget includes small but unexpected tax cuts. Starting in June 2026 and June 2027, the lowest tax rate for earners between $18,201 and $45,000 will be reduced from 16% to 15% and later to 14%. Additional spending measures include a six-month extension of subsidies for energy bills, as well as a multitude of spending initiatives across a broad range of areas.

Economic Growth and Budget Position

The budget forecasts a deficit of $27.6 billion (1% of GDP) for the current fiscal year, slightly better than the previously estimated $28.3 billion deficit. However, next year’s deficit is projected to rise to $42.1 billion (1.5% of GDP), reflecting increased spending and income tax cuts. While these figures appear large, they remain relatively modest compared to Australia’s $2.8 trillion economy and in contrast to the U.S., which has been running deficits exceeding 6% of GDP.

The structural budget deficit, illustrated in the chart below, is estimated at nearly 1.5% of GDP, compared to a previously reported small surplus. This deficit results from sustained spending programs, including defence, healthcare, and aged care. The additional spending is expected to be financed by a forecast rebound in real economic growth.

Structural Budget Balance

Employment and Migration

The government forecasts a steady unemployment rate of 4.25% for the next 30 months, which may be an optimistic assumption given global uncertainties. The budget also projects a slowdown in net overseas migration, declining from 335,000 this year to 225,000 by 2026-27, which could constrain economic growth.

Key Support Measures for Businesses

Government Forecasts, Inflation and Interest Rates

The Government’s economic forecasts closely align with those published by the Reserve Bank of Australia (RBA) in its February Statement on Monetary Policy. Both projections suggest a soft landing for the economy, with inflation easing, allowing for modest interest rate cuts that, in turn, support a reacceleration of economic growth and a sustained low unemployment rate.

The additional government spending is not expected to significantly impact inflation, which is already moderating. However, it could influence the RBA’s decisions regarding interest rate cuts. Inflation is expected to return to target six months earlier than projected, which should support a more stable economic environment.

If the current government is re-elected, the likelihood of multiple rate cuts diminishes as spending places upward pressure on inflation. Conversely, an opposition victory, accompanied by spending cuts, could lead to more aggressive rate reductions.

Market Implications

While Australian budgets typically have limited direct effects on financial markets, tax and spending initiatives can influence specific sectors. The increased government spending in this budget will likely support economic growth.

For investors, the budget presents a mixed outlook:

Conclusion

This budget reinforces the government’s commitment to addressing cost-of-living pressures, supporting key industries, and maintaining economic stability. However, the fiscal outlook remains sensitive to election results, global economic conditions, and inflation trends. While the budget provides short-term economic support, longer-term structural challenges, including budget deficits and global trade uncertainties, remain key considerations for investors.

Disclaimer and Credits

This content has been produced by Economist, Ivan Colhoun and Quilla Consulting.

Quilla Consulting Pty Ltd (Quilla) holds AFSL 511401. This document provides general advice only and not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting or making any investment decision, you should consider your personal financial situation or needs, consult a professional adviser, and consider any applicable disclosure documents. 

Information in this document is based on sources believed to be reliable, but Quilla does not guarantee its accuracy. All opinions expressed are honestly held as at the applicable date. Neither the information, nor any opinion expressed, constitutes an offer, or invitation, to buy or sell any financial products. Quilla does not accept any liability to any person or institution who relies on this document and the information it contains and shall not be liable for any loss or damage caused to any person in respect of this document and the information it contains.

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