Budget update to reveal Australia's fiscal fortunes

Extra spending is taking its toll on the federal budget's bottom line but a stronger-than-expected tax take should soften the blow when the treasurer releases his mid-year budget update.

Jim Chalmers has already revealed a $12.7 billion blowout in "unavoidable" spending, half of which was due to natural disaster relief proving more costly than anticipated.

The budget update on Wednesday will also spend billions on election promises the government wants to fulfil.

The majority of the $13 billion-odd set aside for campaign commitments will go to the states and territories to build up to 100,000 new homes exclusively for first home buyers.

"We anticipate a stronger Australian economy and higher iron ore prices have supported revenue to date in 2025-26, Commonwealth Bank Associate Economist Lucinda Jerogin said in a research note. "We estimate the underlying budget deficit will print at $32bn, a $10bn improvement from the forecast $42bn deficit in March."

$20bn in savings identified

To help make ends meet, Dr Chalmers revealed on Sunday he had booked $20 billion in savings across the next four years.

"We've now found savings in every single one of our seven budgets and budget updates," he told Sky News.

"This mid-year budget update will be defined by economic responsibility, just like the government is."

He downplayed expectations of fresh announcements, saying it "was not a mini-budget, there's not a lot of new stuff in there".

Dr Chalmers has already ruled out extending energy rebates beyond the current year, while changes to deeming rates will give a haircut to the pension payments of asset-holding retirees.

The squeeze is also on federal department spending, leaving the central question how it impacts the bottom line of government books.

Treasury forecasts updated

The budget documents will also include Treasury's updated forecasts for economic indicators such as inflation, unemployment and GDP growth.

They should include upward revisions to price growth after the inflation dragon came back to life in the September quarter.

Dr Chalmers has also said to expect an upward revision to business investment forecasts, from 1.5 per cent to 3 per cent growth this financial year, reflecting a stronger-than-expected build-out of data centres.

There is little other official economic data to expect in the coming week as Christmas approaches, but an updated reading on consumer sentiment is scheduled to be published this week. 

"It will be interesting to examine the effect of a more hawkish RBA board on consumer’s outlook, particularly given the surge in sentiment last month," Jerogin said. A sharp fall may suggest that the RBA's signalling about the possibility of rate rises was having an effect on economic activity, she said.

From markets a few months ago pricing in one or two more cuts in 2026, expectations are now for one or two rate increases from the RBA in 2026.

RBA officials Andrew Brischetto and Brad Jones will speak on Monday and Tuesday, respectively, although their addresses are not expected to shed new light on the direction of monetary policy.

In the US, markets closed down on Friday amid fears of a bubble in AI-linked stocks.