Politically savvy yet economically sustainable: While that’s how most commentators framed Budget’25, what came as a surprise to most was the absence of any “chocolates” - hitherto unannounced sweeteners - kept up Labor’s sleeve to be pulled out of the budget hat post-election - which is expected to be called this weekend.
According to Shane Oliver chief economist at AMP, Budget ’25 is primarily aimed at getting the Labor government re-elected.
Secondly, adds Oliver, Budget ’25 provides more cost-of-living support and shores Australia up ahead of Trump’s tariffs and trade wars.
“It further cements bigger government and structural budget deficits for the medium term,” says Oliver.
Budget paper commentary expects no significant impact on Australia’s GDP from Trump’s tariffs.
However, Brendon Rynne chief economist at KPMG reminds the market that the great unknown is the individual company impact and any knock-on effect on the local economy.
“Our analysis suggests that of all the tariffs that have been announced to date the potential is for Australian GDP to be about 0.2% lower than it otherwise would be,” says Rynne.
Return to deficit
Overall, the new Budget ’25 measures are expected to result in a return to a deficit of $27.6 billion this financial year and $42.1 billion next year.
“When you look at the forward estimates, the structural budget balance remains in deficit all the way out to the mid-2030s," says Rynne.
“The only reason it’s coming back closer to levels of balance is because we’re increasing our tax receipts from around 25% of GDP to 26.5% of GDP and that’s all bracket creep.”
Rynne also notes the long-term implications of the deficits forecast in Budget ’25 include the narrowing of Australia’s tax base as the population ages, which creates challenges without meaningful tax reform.
Surprise tax cuts
While most of yesterday's budget details were known to the market ahead of last night’s announcements, tax cuts took commentators by surprise.
This year’s budget included $17.1 billion in tax cuts over the next four years, cutting the 16% tax rate to 14%.
At first blush, Oliver sees Labor’s announced tax measures as underwhelming, offering less than “a sandwich & milkshake” amounting to $5.15/week from July 2026 and $10.3/week from July 2027.
While KPMG tax partner, Kaylene Hubbard suspects tax cuts risk being gobbled up by bracket creep, she says the bigger issue is the absence of any follow-on tax reforms.
Interestingly, 66% of those who dialled into KPMG’s budget update this morning believed corporate tax reforms were critical to encouraging mid-market businesses to invest.
Tax aside, one line item that also surprised the market last night was measures to boost prefabricated housing.
While Hubbard views these measures as good, she notes they’re unlikely to be enough to hit what are seen as heroic assumptions of 1.2 million new homes being built over a 5 year target.
Business support measures
Apart from extending electricity rebates for another six months at $150 for small businesses (costing $1.8 billion) Budget ’25 was light on business support measures.
All commentators would have liked to see more incentives in Budget ’25 for mid-market businesses to invest. They all pointed to the need for more corporate tax reform and broader business support measures.
Meanwhile, tax evaders, scammers and consultants, with more measures to curtail them, are seen as Budget‘25 losers.
As previously announced, the Australian Tax Office (ATO) will receive $1 billion of additional funding with the stated aim of collecting an additional $3.2 billion in revenue.
According to Craig Emerson of Emerson Economics, the ATO’s emphasis is likely to be less on tax avoidance and more focused on detecting tax-free companies.
But one of the great unknowns for business, adds Rynne is the labour fallout - notably access to skilled labour - from new immigration measures.
The Government now sees net immigration of 335,000 this financial year (MYEFO was 340,000), falling to 225,000 in 2026-27, taking population growth down to around 1.2% from 2.4% in 2022-23.
Also absent from Budget ’25 says Rynne were measures to improve Australia’s dismal productivity, with businesses, especially service organisations – accounting for 75% of Australian businesses - being swamped with red tape.
Budget weaknesses
Business support measures aside, Oliver agrees that cost-of-living measures will lower measured inflation.
However, he says the shift from surplus to deficit and average 5.5% year-on-year projected growth in Federal spending to 2028-29, makes the Reserve Bank’s (RBA) job harder.
“ We don’t think it precludes more rate cuts, but it means rates will be higher than would otherwise have been the case,” says Oliver.
Other flaws highlighted by Oliver in Budget ’25 include:
Structural deficits. He says the ratcheting up of spending on temporary revenue windfalls (amounting to over $300bn for the current Government) leaves the budget vulnerable to a reversal of the windfalls.
Reliance on bracket creep to boost revenue beyond 2028-29 and return to surplus. Oliver believes the rising burden on Millennials & Gen Z is unfair and unrealistic.
Off-budget spending. Oliver sees this a big issue as governments have been allocating increasing spending as "off-budget" on the grounds that it’s an “investment”.
Bigger government. Spending as a share of GDP is settling well above that seen pre-pandemic, locking in big government which Oliver believes risks slowing productivity growth.
More protectionism. While “made in Australia” is popular, Oliver notes its reliance on protectionism and government picking winners has been tried and failed in the past. This has had a long-term cost to productivity & living standards.
Productivity. Despite the rhetoric, Oliver says there is not really much to improve Australia’s poor productivity performance.
“This needs urgent reform in terms of tax, competition, the non-market services sector, industrial relations and energy generation,” says Oliver.
Key budget measures
- $17.1 billion in tax cuts over the next four years, cutting the 16% tax rate to 14%.
- $7.9 billion on Medicare to boost bulk billing, $1.8 billion for public hospitals, $644 million for new urgent care clinics & $793 million for women’s health.
- More money for infrastructure including $7.2 billion for the Bruce Highway, along with various other road and rail projects.
- More cost of living relief including extending electricity rebates for another six months at $150 per household and small business (costing $1.8 billion) and $689 billion to lower PBS drug prices from $31.6 to $25.
- $800 million to raise the income and price caps for the Help to Buy shared equity scheme (although it remains capped at 40,000 places over four years) and $54m for pre-fabricated and modular homes.
- $1.2 billion extra for disaster relief and rebuilding after Cyclone Alfred.
- Another freeze on deemed rates & a two-year freeze on beer indexation.
- Subsidies to help industries affected by Trump’s tariffs, support for the Whyalla steel works and $20 million for a “Buy Australian” campaign.
- Spending of $1.5 billion over five years on “decisions made but not yet announced” allowing for more election promises.
