Australian Treasurer Jim Chalmers unveiled the 2025-26 federal budget on Tuesday, highlighting tax cuts and cost-of-living relief as the government gears up for an anticipated federal election. The new round of tax cuts, set to benefit all workers, builds on previous tax relief introduced in mid-2024. For average earners, the tax cut will be A$268 (US$168) in 2026-27, rising to A$536 per year from 2027-28.

Despite solid economic recovery, low unemployment, and stable commodity prices, the budget forecasts significant deficits. The projected deficit for 2025-26 is A$42.1 billion, with net government debt rising to 23.1% of GDP by 2028-29, up from 19.9% currently. Increased spending on health, aged care, infrastructure, disability services, and defense is adding strain to the government’s fiscal outlook. Additionally, A$1.2 billion has been allocated for disaster relief in Queensland and northern New South Wales following Cyclone Alfred.

To ease cost-of-living pressures, the budget includes A$1.8 billion in electricity price subsidies, aimed at reducing household energy costs and curbing inflation. However, the Reserve Bank of Australia (RBA) may see this as a concern, as new spending and income tax cuts could fuel inflation, delaying further interest rate cuts. The budget forecasts below-trend GDP growth of 2.25% and inflation at 3.0% in the year to mid-2026, near the upper limit of the RBA’s target range.

Despite these challenges, the job market remains strong, with unemployment expected to stay at 4.25% through mid-2026. Treasurer Chalmers struck an optimistic tone, stating that “inflation is down, incomes are rising, unemployment is low, and growth is picking up momentum.” However, global risks loom large, particularly with President Trump’s escalating trade war affecting Australia’s steel, aluminum, and pharmaceutical exports.

Looking ahead, Australia’s economic outlook is tied to global stability, with the budget forecasting global growth at 3.25% over the next three years—the slowest pace since the 1990s. Uncertainty over U.S. tariffs, inflationary pressures, and fiscal sustainability will be key challenges for policymakers in the months ahead.