Federal budget 2025: Nation sinks deeper in red as Labor pitches for votes

Treasurer Jim Chalmers after delivering the budget. Picture: AAP

In its statement of risks in the budget papers, the Treasury did not mince words about the serious fiscal difficulties facing the nation. It listed changes to the outlook for domestic and global growth and inflation, volatility in global commodity prices, impacts from rising trade tensions, instability stemming from conflicts in Europe and the Middle East, and the challenges associated with the transition towards net-zero emissions. When Australians’ living standards are falling, as the OECD noted recently, economic growth, fuelled by private investment and productivity improvements, would be our nation’s best defences against future pain. Catering to voters’ hip-pocket sensitivities in pre-election budgets is nothing new. The last budget of any government’s term is rarely the best time to propose significant reforms. Jim Chalmers’ fourth budget, however, had a shorter-term focus than most, lacked ambition and appeared to show little confidence in the underlying strength of the nation’s private enterprise economy. We are deeply in the red and heading for increasing debt. Across time, such lack of ambition will come at a high price to this and future generations. On the basis of what the Treasurer delivered, his claim that the economy had “turned the corner” was misplaced. It raises the question – in what direction, better or worse?

Forget jokes about milkshake and burger tax cuts under a previous government. Dr Chalmers’ new tax cuts – one of his few surprises – will hardly buy a cup of coffee when they kick in next July, much less make a dent in bracket creep. When fully implemented after two years, they will give average earners $536, about $10 a week, in their pockets. Despite Dr Chalmers saying the tax cut “top-ups” would take the tax rate down to its lowest level in more than a half-century, it was a limited, populist and very modest effort. Those at whom it is aimed may not be easily impressed.

While Labor is attempting to wedge the Coalition, which will deliver its tax policy soon, the modesty of what Dr Chalmers is offering creates an opportunity for Peter Dutton and Angus Taylor, who have focused on the issue of bracket creep. Calling Labor’s tax cut a “cruel hoax” that would be opposed by the Coalition, Mr Taylor on Tuesday night set the stage for a competing tax policy from the Dutton opposition, and an election fight over the issue.

That is a key issue for PAYE earners on all income levels. Treasury estimates that bracket creep will swallow up Dr Chalmers’ latest tax cuts too, by 2031-32. The opposition needs to do better on tax reform and could be rewarded if it does – provided it can match meaningful tax relief that encourages hard work and personal initiative with necessary spending cuts. It has shown little aptitude on that score so far.

Spending restraint clearly was not Dr Chalmers’ objective. He pressed ahead with Labor’s enlargement of the government footprint, especially through the so-called care economy – a euphemism for extra service spending. Starting now, taxpayers will provide an additional $2.6bn to fund pay rises for aged-care nurses. Funding pay rises for care economy workers, regardless of whether they are employed in the public, not-for-profit or private sectors, has been part of the Albanese government’s modus operandi from day one. Dr Chalmers’ short-term election fix also included increasing the Medicare levy low-income thresholds for more than a million Australians – a pitch to hard-pressed householders in marginal outer suburban seats where Labor will be under threat.

Budget spending on the National Disability Insurance Scheme across the forward estimates underlines why the costs of the scheme, which is essential to the welfare of disabled Australians, needs to be brought under control to make the scheme sustainable. The NDIS is expected to cost $52.3bn in 2025-26, rising to $63.6 in 2028-29, with the budget baking in an 8 per cent cost growth (more than double inflation) across the next four years, when it is expected to cost taxpayers $230bn. It remains a serious fiscal risk and the issue of eligibility criteria, with the states taking on more responsibility for problems such as children with mild autism, needs to be tackled sooner rather than later.

The government’s lack of longer-term vision was evident in the sphere where more government investment is most needed – defence, where Labor remains reticent to invest. The case for lifting spending to 2.5 per cent and later 3 per cent of GDP is clear. It is essential because as the nation’s strategic circumstances continue to deteriorate we have a critical shortage of military hardware, especially missiles and drones. Labor, however, has provided for defence spending to grow beyond 2.3 per cent by the early 2030s. That commitment is untenable given Australia’s security needs. At a United States Studies Centre conference in November 2024, former Defence Department head Dennis Richardson and former defence force chief Sir Angus Houston said the defence budget should be lifted to 3 per cent of GDP. Moving towards that level, however, would necessitate slowing spending in other spheres, on many who could afford to pay more of their own way.

That was clear in the budget speech, when Dr Chalmers highlighted pre-election sweeteners: another $150 in energy rebates, not means tested, for every household and small business; bulk billing 90 per cent of GP visits by the end of the decade, also not means tested, at a cost of $8.5bn (and matched by the Coalition); cutting the price of medicines by reducing the cost of a PBS script from $31.60 to $25; and cutting student loans by 20 per cent at a cost of $19bn for three million Australians and reducing the minimum repayment threshold and repayment rates. At a time of fiscal pressure, that is a direct reversal of the HECS reforms to higher education funding introduced by Labor in the Hawke-Keating years.

After two surpluses, achieved on the back of strong terms of trade, Dr Chalmers has budgeted for a deficit of $42bn for 2025-26, with no date, plan or credible pathway proposed for a much-needed return to surplus. That omission creates a dispiriting picture. In a nation richly endowed with resources that remain in strong demand around the world and an educated, skilled workforce, it suggests Labor has run up the white flag on initiating the productivity reforms that would grow the economy to produce the necessary revenue to reduce and eliminate deficits in coming years. It also makes a sacred cow of social spending, implying that it cannot be scaled back – even temporarily – for the sake of the national interest. Net debt in 2026 is forecast to be $620.3bn, or 21.5 per cent of GDP, rising to $768.2bn in 2028-29 – 23.1 per cent of GDP.

It is also deeply concerning that if the Treasury predictions are correct, the nation’s fiscal luck could be about to fade. The budget papers assume that prices for iron ore, metallurgical coal and thermal coal will decline from elevated levels to the end of the March quarter 2026. If so, the government should not waste any opportunity to foster the all-important resources sector, such as pushing ahead with approvals for vital projects including Woodside’s North West Shelf gas project extension. This is no time to allow green and red tape to stymie development. Growth and profitability in the non-government, non-resources sector also will be increasingly important in delivering strong revenue returns to government. The budget offered no provision, now or into the future, unfortunately, to incentivise private sector investment through more competitive company taxes or other initiatives.

If Australians are to avoid paying a high price for Labor’s lack of ambition in this budget, whichever party wins the May election will need to foster business investment and development to ensure the bulk of future jobs are created not through extra government services and handouts but through the productive economy. Limited as they were, two industrial relations changes in the budget were a step in the right direction. Reforming non-compete clauses in workplace contracts should improve productivity and bring much needed flexibility to industrial relations that has been straitjacketed in Labor’s first term by a return to the workplace rigidities of the past. The debt and deficit figures, and the demands on taxpayers because of an ageing population, however, underline why workplace relations need to be freed up to maximise productivity and fund sustainable wages growth.

In splashing more than $17.8bn in tax cuts and Medicare levy exemptions for low-income earners, Dr Chalmers is thinking no further than the election, due in May. This was always going to be a budget of short-term political fixes and it ushers in a decade of deepening deficits. Reform was never going to be its hallmark. But looking ahead, it is devoid of even medium-term proposals to produce the structural budget repair that the economy needs. The Opposition Leader is unlikely to propose difficult reforms in his budget reply. And despite endorsing Labor’s big-spending promises on Medicare, Mr Dutton’s numbers must add up to accommodate his ambitious nuclear energy policy. But the government has left the stage wide open for Mr Dutton to produce a coherent plan to foster productivity and growth if Australians are to avoid a high price for short-term populism.