“The hardest thing in the world to understand is the income tax,” said Albert Einstein. And he should know. After all, tax is all relative.
Even minuscule tax cuts can mean big headlines. On this score, Treasurer Jim Chalmers can likely claim mission accomplished. Medicare and PBS prescription costs appear positively dull by comparison.
By the way, for context, we’re having some kind of election in May. In case you were wondering,
The looming global headwinds against which this budget takes place are also critical. Not only is a federal election merely weeks away, but the turbulence and unpredictability of the Trump administration’s aggressive unilateralism is yet to play out.
Tariff wars will wreak damage on Australian aluminium and beef exports. Australian universities face US funding threats. And markets are whispering that the “R” word – an American recession – is in the air.
Around the world and here at home, our government will always stand up for Australian jobs and Australian industries.
— Anthony Albanese (@AlboMP) March 12, 2025
The US decision to impose tariffs on Australian steel and aluminium as part of a global decision is unjustified.
As with the other products and resources that… pic.twitter.com/lMO7fB86NX
On Tuesday, Deutsche Bank's market survey showed economists now saw the likelihood of a US recession at close to 50%. US car finance repayment delinquencies are at close to 2008 GFC levels, and booked vacations and inward-bound tourism are also at 15-year lows.
The Federal Reserve has increased its inflation target from 2% to 2.8%. This raises the spectre of stagflation – a combination of low growth, high(er) unemployment and stubborn inflation, compelling central banks to keep interest rates higher for longer.
Even more ominously, Australia’s biggest customer – China – is even more exposed to Trump’s trade wars. Beijing’s attempts at stimulus have fallen flat, and falling US demand due to higher tariff walls will also dampen global iron ore, thermal coal and LNG prices, potentially affecting our resources revenues from our crucial Chinese markets, which account for about 36% of all Australian exports.
Fourth time’s the Chalm
It’s unusual for three-year governments to deliver four budgets, but Labor presented its own budget in October 2022, replacing the Coalition’s final budget in March 2022.
Treasurer Jim Chalmers has cast the 2025-26 budget as a “platform for prosperity during uncertainty”. A lot of alliteration in there.
Our economy is turning the corner and the credit belongs to Australians all over the country.
— Jim Chalmers MP (@JEChalmers) March 25, 2025
This Budget builds on all the progress we’ve made together.
We’ve come a long way, but there’s more work to do because people are still doing it tough. #auspol #ausecon #budget25 pic.twitter.com/SfG37lWyIj
A deficit was expected. First, having banked surpluses in the past three budgets, the Treasurer has delivered a deficit of $27.6 billion for 2025-26.
But if one includes off-book budget spending, there’s another $104b over the next five years. Debt is forecast to be $770b by 2028-29.
Windfall revenues from inflation – thus fuelling tax receipts – have blunted the current deficit. However, Chalmers defends current spending, arguing structural budget reform to address deficits will take a number of years. For example, NDIS expenditures are still growing, but less rapidly.
The Treasurer states that the Commonwealth’s debt position is $200b better than when the ALP entered office in 2022, but deficits will persist, and we won’t see a surplus for a decade, according to current Treasury forecasts.
Industrial disease
Unlike most election budgets, the government cannot unleash big-ticket items this time around. First, inflation has only just been contained, not beaten. About 85% of new jobs have been “manufactured” by the government over the past 12 months in the public service, or non-market/government sectors. That means jobs growth in areas such as NDIS, aged care and federally-funded infrastructure.
Speaking of infrastructure, the budget delivers $14.5b to Victoria – a potential wasteland for Labor – in infrastructure spending over four years.
Government capital expenditure drives GDP growth and keeps employment numbers buoyant, but it also “cushions” the labour market, as private-sector job creation has shrunk due to high interest rates.
You might say, “So what?” But the government cannot keep funding growth and jobs indefinitely. Ultimately, such capital expenditure, if sustained, becomes a structural element of the budget – meaning Treasury would be forced to keep borrowing and adding to federal debt and deficits to fund job creation.
That’s why the NDIS, which had previously ballooned without any semblance of a ceiling, has been curtailed. There are also budget items that are “off-book” or “hidden costs”, such as HECS discounting, which aren’t counted towards the budget’s bottom line.
Second, Treasurer Chalmers and the government cannot afford to appear profligate as an election looms. Damaging cost-of-living impacts upon virtually every socio-economic group. And this is why our next budget item is so modest.
Cuts like a knife
Treasurers love to pull rabbits out of a hat. Having spent several weeks hinting at no further tax cuts, Dr Chalmers produced … a tax cut. A modest one, to be sure. But no taxpayer is left behind; everybody gets one. And $5 per week is not going to scare the inflation monster.
The pitch is unashamedly targeting middle Australia. The lowest tax rate will fall from 16% to 15% in 2026, which will be reduced further to 14% by 2027. A worker on $79,000 per annum will receive a maximum cut of $536 by 2027. The cost of this largesse will be $17.1b in taxation revenue.
The politics of this are straightforward.
First, it will wedge the Coalition, compelling it to be Scrooge and oppose them or accept them. Shadow Treasurer Angus Taylor immediately rejected them.
Second, the cuts are a clever way of grabbing a headline. The amount is less important than the moniker of “tax cuts for all”.
Moreover, the ALP wants voters to think of the reconfigured 2024 Stage 3 tax cuts as delivering not just $50 per week, but $30,000 in tax savings over a decade to an average dual-income household.
The other point is that the new tax cut is partial recognition of former treasurer Josh Frydenburg’s termination of the Low and Middle Income Tax Offset (LAMITO) – which earned itself the brilliant epithet “Lamington”.
The Lamington was very popular, as it put $1500 per annum into low and middle-income earners’ hands. The Chalmers tax cut goes a small way towards filling that gap.
Ironically, Trump may unwittingly give us a bigger tax cut; by creating chaos and uncertainty, the US dollar has had its worst year since 2008. That has boosted US exports (and could blunt our exports, if the Australian dollar appreciates).
But a stronger Australian dollar – a maybe, not a certainty – against the greenback would also help overcome “imported inflation”, driving costs higher over the past two to three years, due to the robust US dollar.
Doctor, doctor
Chalmers trumpets that this is a budget about “cost of living” and “strengthening Medicare”. Labor has committed almost $700m to ensure PBS-listed medicines cost no more than $25 per script. The 2023 budget had already reduced the price of scripts from $42.50 to $30.
This is a difficult time for the PBS, as US Big Pharma and the Trump administration have directly attacked Australia’s PBS price-regulation model.
Both the ALP and Coalition have stated that the PBS will not be bargained away. An $8.5b initiative, designed to increase Medicare bulk-billing availability in clinics nationwide, was announced recently, with the Coalition matching the government’s commitment.
While we’re on health, fiscal revenues from tobacco have collapsed, due partly to the high rate of excise, combined with high demand for illegal chop-chop (which I have learned derives from a 19th-century industry term for illicit tobacco leaves). The solution is obvious – you all need to take up smoking.
School’s out
The government has committed to wipe 20% off HECS/HELP debts. This is a one-off measure, so if you’ve previously paid off your debt , this will not result in a rebate. The HECS/HELP measures cost the budget $3b and take effect from 1 June, 2025. The targeting of zoomers and Millennials with debt forgiveness is obvious – in two-party-preferred polls, voters aged 18-34 (especially) and 35-49 skew to the ALP, while the 50-64 and 65-plus age ranges favour the Coalition heavily.
Electric blue
Among the pre-budget announcements is a $150 power bill rebate, which will cost $1.8b. That might pay for your home heating bill for three weeks in winter. Or buy 30 heart-warming mochaccinos. You choose.
The government also has to wean households off gas and shift to solar, as shortages on the east coast loom over the next three to four years. Yes, this may mean more Queensland gas is imported into Victoria and NSW – or even import foreign gas.
Twelve months ago, I predicted that if Prime Minister Anthony Albanese did not address cost-of-living measures, he would be signing an agreement with the Greens after the next election.
The RBA has aided his chances – marginally – by grudgingly delivering a 0.25% rate cut in March. The central bank may deliver manna from heaven again in the form of a second rate cut in April. Maybe.
But in the meantime, we have modest tax cuts to bring us comfort through winter. After all, as one wag said: “Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.”
