Australia’s Budget to Stay in the Red Until the 2030s, Mid Year Outlook Shows

Spending on childcare and the NDIS continue to grow, even as tax revenue for the government increases.

Treasurer Jim Chalmers speaks in Question Time in the House of Representatives in Canberra, Australia on Nov. 4, 2025. Hilary Wardhaugh/Getty Images

Australia’s budget is expected to remain in deficit for at least the next decade, according to the government’s mid-year financial update.

The Mid-Year Economic and Fiscal Outlook (MYEFO), released on Dec. 17 by Treasurer Jim Chalmers and Finance Minister Katy Gallagher, shows deficits extending well into the 2030s, despite billions of dollars in extra tax revenue and repeated claims of fiscal restraint.

By 2025–26, gross debt is forecast to hit $993 billion, or 34.0 percent of GDP. Debt is expected to peak at 37.0 percent of GDP in 2030–31, before easing to 33.0 percent by 2035–36.

While the government has highlighted that the projected debt peak is lower than 2022 estimates, the broader trajectory remains unchanged: spending is growing faster than the government can realistically rein it in.

The deficit for 2025–26 has been revised down to $36.8 billion, $5.4 billion less than forecast before the election.

Across the four-year forward estimates, however, the cumulative deficit still stands at $143 billion, an improvement of just $8.4 billion.

Inflation Set to Rise Again

Inflation has again been revised higher with Treasury expecting it to average 3.75 percent this year, up from 3.0 percent, and for next year this will decrease slightly to 2.75 percent, compared with an earlier forecast of 2.5 percent.

Chalmers sought to play down the higher figures.

“As the [Reserve Bank of Australia] said… this might be due to temporary factors, removal of electricity rebates, volatile costs like travel and fuel,” he said, adding it remains to be seen “how much of it is ongoing.”

More Tax Revenue, Except Cigarettes

The update shows a $41.3 billion lift in tax receipts over the next four years compared with the March budget.

Personal income tax is expected to bring in $17.4 billion more, while company tax is forecast to rise by $12.4 billion, largely driven by inflation and strong private investment.

One major revenue stream, however, continues to slide.

Tobacco excise revenue has fallen sharply, down $2.1 billion this year and $8.1 billion over the forward estimates, as the illicit tobacco market expands under the weight of high cigarette taxes.

Chalmers rejected calls to cut tobacco taxes.

“We don’t believe a tobacco tax cut will fix the problem,” he said, adding the government had committed three tranches of $50 million each to boost enforcement.

“We have actually had some very encouraging raids, very successful raids in recent times.”

Savings Under Scrutiny

The government claims it has identified $20 billion in savings to prevent the deficit from blowing out further, but much of that figure reflects capped overspending rather than genuine cuts.

The two largest savings come from:

• $6.8 billion from cutting back on consultancy, travel, and non-staffing expenses in the public service; and
• $6.7 billion from capping the home battery subsidy scheme.

The battery program was originally budgeted at $2.3 billion but was on track to cost $13.9 billion. After being capped, it will now cost $7.2 billion, with the avoided overspend counted as a saving.

Child Care, NDIS Costs Go Up

Despite repeated assurances of restraint, the largest spending programs continue to expand.

Interest payments on debt are rising, alongside spending on the National Disability Insurance Scheme (NDIS), defence, hospitals, medical benefits and child care subsidies.

Childcare has now overtaken aged care as one of the five biggest pressures on the budget.

Gallagher defended the growth, saying uptake of early childhood education had exceeded expectations due to increases to taxpayer-backed support, including loosening the “activity test” for accessing government support, and guaranteeing three-days of childcare.

She described the guarantee as “essentially the next step” towards universal childcare.

Meanwhile, the NDIS, which costs about $52 billion a year, is forecast to grow at 7.6 percent, down slightly from 8.1 percent, but still above the government’s target of 5 to 6 percent to keep the scheme sustainable.

Even so, NDIS spending is expected to exceed forecasts by $1.1 billion this year and $2.3 billion over four years.

Treasury maintains overall spending growth remains under control, forecasting an average growth rate of 1.7 percent over the seven years to 2028–29, after spending rose 5.5 percent last year.

Later Chalmers conceded that “pressure on the budget is intensifying rather than easing.”

“We know with an ageing population ... increasing demands on services that come … it will require and it will receive our ongoing attention,” he said.

He said the government was grappling with about $35 billion in additional spending pressures.

New Spendings To Continue

The MYEFO also confirms several new or expanded commitments, including $1.1 billion for mental health, $233 million for the CSIRO, $435 million to boost the low-income super tax offset, and $98 million to fast-track trades training.

“We’ve made room for our priorities. We’ve made good on our promises,” Chalmers said.

The update also confirms $10 billion over eight years to support the construction of 100,000 homes for first-home buyers. The funding is held in a separate fund—$2 billion in grants and $8 billion in loans—meaning it does not count toward the headline budget balance.

Budget papers show 21,000 first-home buyers have already used the expanded 5 percent deposit scheme since October, signalling accelerating demand.

Security Funding Set Aside

The update also includes $104 million in the contingency reserve for security at Jewish sites and crisis services, following announcements earlier in the week by the prime minister.

The funding does not appear directly in the MYEFO tables since it was a last-minute addition, Chalmers confirmed.

Under pressure post Dec. 14 attack at the Bondi beach, Gallagher said the government had increased funding for national security agencies, but did not detail figures.

“We have worked with them to understand what the pressures are,” she said, citing defence, foreign affairs, ASIO and the Australian Federal Police, “And we have provided additional support.”