A quick look at the Federal Budget’s key initiatives

With an election in the offing, the 2025-26 Federal Budget was always going to be more of a political document than an economic one. So it came to pass.

Inevitably, it sought to address a key sore point for voters: the rapid increase in everyday costs over the past 2-3 years. And it tried to do this without blowing a hole in the Budget. Hence, why the Treasurer Jim Chalmers has sold the measures as “modest but meaningful” relief for households.

The key surprise from the Budget was a promise to deliver personal tax cuts for all Australians. Most of the other measures were announced earlier.

Let’s look in more detail at the key Budget initiatives:

Cost-of-living relief

Tax cuts: the marginal tax rate for the bottom tax bracket will be lowered from 16% to 15% from 1 July 2026 and then to 14% in 1 July 2027. It will give an average wage earner an additional $268 a year in 2026-27 and $536 a year in 2027-28. The measure is expected to cost $17.1 billion. Here’s how it will look for each tax threshold:

Figure 1: Changes in tax rates. Source: Australian Treasury, Firstlinks

Energy bill relief: every household to get $150 off their power bills over the next two quarters.

Health

More bulk billing: incentives for doctors to increase bulk billing, costing $8.5 billion over four years.
Cheaper medicines : Pharmaceutical Benefits Scheme (PBS) medications will be capped at $25 each, down from $31.60.
Public hospital funding: a one-off injection of $1.8 billion to public hospitals nationally.
Urgent care clinics: 50 new Medicare Urgent Care Clinics to open across the country.

Housing

Help buying a house: an additional $800m will go towards expanding the Help to Buy scheme by increasing the income caps for eligibility to $100,000, from $90,000, and $160,000, from $120,000, for single and joint applicants, respectively. Under the Help to Buy Scheme, the Government provides first home buyers with between 30-40% of the purchase cost of a property, with only a 2% deposit required from a buyer. It’s capped at 10,000 places per year.

Childcare

Three day guarantee: most families will receive three days of subsidised childcare per week from January 2026, at a cost of $427 million.

Education

Student debt cut: those with HECS and HELP debts will see a 20% reduction in what they owe.
National school funding: a plan to fully fund public schools in line with the 2011 Gonski review recommendations, costing $406 million over the next four years.

Infrastructure

Bruce Highway upgrade: Queensland’s major highway gets a $7.2 billion redevelopment.
Melbourne Airport Rail link: an upgrade to Sunshine station will cost $2 billion.

Communications

NBN expansion: 622,000 premises will get full fibre access to the NBN, costing $3 billion over seven years.

Savings

$2 billion in cutbacks: there are cuts to consultants to Government and “reprioritising” spending.

Deeming rates

Another freeze to these rates.

One important thing to note from the Budget was a ‘non-announcement’. There were no changes to the proposed revenue that the Government is expecting to raise from the proposed $3 million superannuation tax. This would suggest that it’s still on Labor’s agenda, should it win the election.

But the Division 296 bill is still in the Senate currently, and if the election is called before the measure is passed, the bill will lapse and it will need to be reintroduced in Parliament after the election.

Economic assumptions

The Government forecasts a pick-up in economic growth, despite current uncertainty from Trump’s tariff measures. It predicts GDP growth will increase from 1.5% this financial year, to 2.25% next year, and 2.5% and 2.75% in the 2027-28 and 2028-29. These forecasts, especially in later years, look a stretch given the tepid growth of recent years.

The Government sees inflation remaining in the 2-3% target range, helped this year by energy subsidies reducing CPI by around 0.5%.

It’s marginally reduced unemployment forecasts to 4.25% going forward.

And, interestingly, there are large falls expected with immigration numbers in coming years. The Government expects net immigration of 335,000 this financial year to drop to 225,000 in two years’ time. If right, that would mean population growth would fall to 1.2% in 2026-2027, from a peak of 2.4% in 2022-2023.

The Government has kept its medium-term iron ore price assumption at $US60/tonne. With iron ore are closer to $US100/tonne, this remains a source of potential upside for Budget revenue over the next few years.

Budget position

Over the past two years, the Government has delivered two consecutive Budget surpluses, thanks to extra revenue from tax receipts due to higher employment and better-than-expected commodity prices.

The Government forecasts that the surplus will disappear and there’ll be deficits equivalent to 1% of GDP in 2024-25 and 1.5% in 2025-26. That’s primarily down to the conservative iron ore prices assumed, as well as the increased spending initiatives.

Economists have bemoaned the forecast of deficits for the next decade as well as the increased spending as part of that. Indeed, spending is expected to rise by 8.7% in 2024-25 and by an average 5.5% over the five years to 2028-29.

The economists have a point, to a degree. However, the deficits are still relatively low and Australia’s debt-to-GDP also remains healthy when compared to other OECD countries.

Impact on investors

The main takeaway from this Budget for investors is that the tax cuts and other initiatives may boost consumer spending. That could help retailers and other companies on the ASX exposed to domestic spending.

Of course, the big shadow looming over this Budget and markets is the impact that Trump’s tariffs will have on global trade and economic growth.

My two cents

I’m not as concerned as most about the deficits. Yes, we’ve had good times which have brought in higher-than-expected revenue and it would be good to put more aside for a rainy day. But the deficits are still relatively small and manageable.

A much bigger issue is that the Budget doesn’t do anything to promote business and economic growth. Business growth is the backbone of the economy. Without it, there are less jobs, less taxes and less money to pay for public goods and services. And a lack of business investment is the key reason why Australia’s real GDP growth has stalled over the past decade.

Earnings growth for ASX 200 companies has also flatlined during the past three years because costs have risen more the revenues. To address this, we need to cut red tape, reduce energy prices, keep wages growth in check, and promote innovation and research and development.

This article first appeared in Firstlinks, a Morningstar Australia publication.