Budget update shows Australia’s deficit narrowing as economy strengthens

Deficit improves but challenges persist

The Mid-Year Economic and Fiscal Outlook for 2025–/26 issued by federal Treasurer Jim Chalmers and Finance Minister Katy Gallagher show Australia’s budget position has improved slightly, with the deficit for 2025/26 now expected to be $36.8bn instead of $42.1bn forecast in March. A stronger economy and higher tax receipts have helped, but spending pressures remain.

Revenue is projected to rise to $749.8bn, while government payments will increase to $786.6bn. Net debt is also lower than expected, at $587.5bn or 20.1 per cent of GDP.

“This is a modest improvement driven by better tax revenue and a stronger economy, but structural challenges like aged care and the National Disability Insurance Scheme will keep pressure on the budget,” said Belinda Allen, Commonwealth Bank Head of Australian Economics.

2026/27 MYEFO update

Inflation and interest rates in focus

Treasury’s inflation outlook has been revised up and is now expected to hit 3.75 per cent by June 2026, compared to a prediction of 3 per cent made in the March federal Budget. This means the Reserve Bank is still likely to raise interest rates in February to keep price growth under control.

Deficits are expected to stay above 1 per cent of GDP until at least 2028/29, signalling that fiscal repair to the Budget’s bottom line will be slow.

Labour market and household spending

MYEFO also shows unemployment edging up to 4.5 per cent by mid-2026, reflecting a higher participation rate. Wage growth is forecast to remain steady at 3.25 per cent, while household spending is expected to grow slightly faster than previously forecast.

New spending measures

The MYEFO update includes $9.1bn in extra payments this year and $31bn over four years. Key initiatives include mental health services, aged care, community infrastructure and support for industries such as steel and copper.

What is fiscal repair?

Fiscal repair refers to the government’s plan to improve its financial health over time. It means:

• Reducing deficits by spending less or raising more revenue.

• Managing debt so interest costs don’t spiral.

• Addressing structural pressures like aged care and the NDIS to stop costs growing faster than income.

It’s not about balancing the budget immediately but gradually moving towards a sustainable position without hurting economic growth.

Read Belinda Allen’s full analysis: 2025/26 Mid-Year Budget Update: Small improvement in deficit profile