2025-26 Federal Budget

On Tuesday the 25th March 2025, the Federal Treasurer, Jim Chalmers handed down the 2025-2026 Federal Budget with updates to key economic forecasts.

From personal and business tax to banking, infrastructure, health, climate change, and more, the Federal Budget has implications for every corner of the Australian economy and our position on the global stage.

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. 

Thanks to Commonwealth Bank for this information.

The information presented on this blog are extracts from an Economic Insights report and provides only a summary of the named report. Please use the link provided to access the full report, and view all relevant disclosures, analyst certifications and the independence statement.