Independent Australia
10 Jun 2025

Despite global headwinds, Labors steady hand is quietly steering the Budget toward a decade of repair and resilience, writesStephen Koukoulas.

IF YOU ARE worried about the Federal Governments budget position, your concerns are misplaced.

TreasurerJim Chalmersand Finance MinisterKaty Gallagherare the custodians of the Federal Budget and in the last three years where they have been in charge of government finances, they have reduced net government debt, delivered twobudget surplusesand slashed the budget deficits that were part of the lastCoalition Budgetdelivered by then TreasurerJosh Frydenbergin March 2022.

Labor has done this while delivering a wide series ofpackagesthat have eased cost of living pressures, cut income taxes and ramped up spending in areas neglected for many years, especially gender equality, the energy transition of Australia and even defence.

For the next term of the Albanese Government, Chalmers and Gallagher are set to continue what will be a decade-long program to repair the budget wreckage that was the benchmark of consecutive Coalition governments from 2013 to 2022.

Labors win is good news for the economy

The new Labor Government can now push forward with more economicallyresponsible reforms forAustralians.

How the budget deficit/surplus unfolds

The drivers of the budget bottom line and whether there is a surplus or a deficit boil down to three basic inputs:

• how much the Government spends (health, education, pensions, defence, interest on existing debt, to name a few);
• how much the Government collects in tax and other revenue (income and company tax, fringe benefit tax, excise on tobacco, petrol and alcohol, to name a few); and
• the strength in global and domestic economies. A period of unexpected global economic weakness due to a policy change in the U.S. or China or geopolitical issue, for examples, would harm Australian commodity prices and exports, dampening corporate profits, employment and tax revenue for the Budget.

This background is important in assessing the task ahead for the Federal Budget over the next few years.

Taking the last issue first, that of global growth and changes in commodity prices, both the International Monetary Fund (IMF)and theOrganisation for Economic Co-operation and Development (OECD)have recently issued forecasts for a major downgrade to the economic outlook for the world economy.

If this softer outlook comes to pass over the next 12 months, there is likely to be a downgrade to the Governments tax revenue estimates relative to the most recent budget figures. This should not be of any serious concern, given the starting point for the Budget of a small budget deficit over the next two years.

These budget headwinds will likely be short-lived and replaced with what will be a likely cyclical pick-up in global growth from the middle of 2026, which will work in the other direction and provide a boost to revenue.

Where the Treasurer and Minister for Finance have control is decisions on tax and spending.

Budget success is helping the economy

The upcoming Federal Budget will be a testament to the Labor Party's success as economic managers, repairing much of the damage done by the previous Coalition Government.

The election campaign saw a range of policies outlined that were generally budget neutral that is, the revenue raised from changes to spending and tax was broadly offset by decisions on increased spending and lower taxes.

It is important to note that government policy evolves as social and economic circumstances change. The Government has already indicated that it will be pursuing a raft of fresh policy changes on housing, education, tax, productivity and others during this term. It is too early to make an assessment of the impact of these changes on the Budget bottom line, but it is reasonable to expect the effects to be relatively minor on that front.

Can the RBA help in budget repair?

One vital reason why the Australian domestic economy has been so weak in the past two years is the stance of monetary policy set by the Reserve Bank of Australia (RBA).

On its own admission, the RBA has had monetary policy at a restrictive level. In simple terms, this means that interest rates are at a level that feeds into lower spending, investing and overall economic activity. This has undermined domestically driven company profits, wage growth and consumer spending, all issues that have placed downward pressure on government tax revenue.

With the RBA already starting what is looking increasingly like an aggressive interest rate cutting cycle in February, with more interest rate cuts to come to a point where monetary policy is set to an accommodative level that supports spending investment and wages growth, late 2026 and 2027 are likely to see an economic pick up that will support government revenue inflows.

As they frame the next instalment of budget settings, in the lead into the mid-year budget update which is scheduled for late 2025, Chalmers and Gallagher will be alert to holding on to any windfall losses or gains as they did in 2023 and 2024 to minimise the size of the budget deficit and to set the scene for a possible return to budget surpluses in 2027 and 2028, in time for the next federal election.

Either way, the Budget is in sound shape and set to remain that way, or even improve, over the next few years, even if the immediate outlook is fragile.

Stephen Koukoulasis one of Australias most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister.You can follow Stephen/X@TheKouk.

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