Federal Budget 2025: Labor promises tax cuts on eve of Election but deficits soar

The Government has announced modest tax cuts for every Australian in a pre-Election Budget focused on assuaging voters with cost-of-living relief at a time of rising global uncertainty.

But Treasurer Jim Chalmers also handed down books that have entered the red with a $42.1b deficit and debt projected to exceed $1 trillion in the 2025-26 financial year.

On the eve of the Federal Election, the Government will be counting on voters overlooking forecasts of a decade of deficits by adding $17b in tax cuts to already announced sweeteners that include $1.8b in energy bill relief, a beefy 8.5b fund to expand Medicare bulk-billing and more affordable housing.

The plan, against a backdrop of global turmoil from ongoing conflict in the Middle East and Europe, slow growth in China, and a potentially turbulent trade tariff war, will see every Australian taxpayer receive two rounds of tax cuts on top of relief already being rolled out since July 2024.

According to Treasury figures, the tax cuts will not kick in until next year when every Australian taxpayer, regardless of income, will receive a cash boost of up to $268 in 2026-27, followed by up to $538 in 2027-28 – all relative to 2024-25 tax settings.

The combined relief is expected to deliver an average cut of $2,458 in 2027-28, which translates to around $50 per week.

“These additional tax cuts are modest but will make a difference,” said Dr Chalmers, arguing that the financial relief became more “meaningful” when combined with earlier tax reductions and the splurge of additional polices to help with a further $150 energy bill rebate and lower healthcare costs.

“We do understand there is always appetite for more tax relief,” he said, while adding the Government had to operate with “substantial fiscal restraint.”

Dr Chalmers spruiked the policy as being hand-in-hand with unprecedented reforms to non-compete clauses that were holding back millions of workers from transferring to other businesses or starting their own ventures.

The Treasury calculates this will lift affected low- and middle-income workers’ wages by up to four per cent or $2,500 a year.

“We think the best defence against all this global uncertainty is to rebuild incomes, so topping up the tax cuts is an important part of this,” Dr Chalmers said.

The tax to GDP ratio would come down from 23.7 per cent to 23.1 per cent, “comfortably” below the cap demanded by the Coalition, the Treasurer pointed out.

With unemployment now expected to peak lower, at 4.25 per cent, maintaining more people in work and allowing them to keep more of what they earned was key to rapidly rebuilding living standards, Dr Chalmers argued.

The Budget reveals that inflation is now expected to be 2.5 per cent by the middle of this year, a quarter percentage point lower than forecast at MYEFO, and now sustainably back in the Reserve Bank’s target band six months earlier than anticipated.

Dr Chalmers insisted Labor’s Treasury team had concentrated on economics, not politics, while preparing the books.

He denied the Government had set out to neutralise the Opposition on the campaign trail, telling reporters in Canberra that the rare fourth Budget of the Government’s term had focused on finding savings and keeping the wheels of economic reform turning.

While the new tax measure may only make a small dent in household debt, the optics of the move, just weeks before a Federal Election in May raises the stakes for the Coalition, who have so far hedged on promising lower income taxes, to match the policy.

Opposition Leader Peter Dutton, who will deliver his Budget reply on Thursday, has kept any major new cost-of-living plans close to his chest, despite disquiet within his own ranks about the lack of clearly defined economic offerings to the public so close to the poll.

He is expected to double down on accusations of Labor spending fuelling inflation figures and his assertion, repeated to colleagues in party room on Tuesday, that “Australians know that the Coalition are better economic managers.”

In a pre-budget pep talk, Mr Dutton told fellow MPs that “history shows time and again, that after Labor create havoc with the economy, the Coalition has always got the country back on track, and we’ll do it again.”

Ahead of the Budget unveiling, Angus Taylor, said the first test would be to restore living standards for Australians who were facing a “lost decade,” accusing the Government of a “tax grab” and wasteful spending.

The tipping of the books from surplus to deficit this year, with cumulative deficits for the four-year forward estimates period now at $151.9b, much higher than the $112b in last year’s Budget, will be an obvious line of attack in the Coalition campaign.

The Budget is not expected to return to balance until 2035-36, despite Dr Chalmers’ insistence that the economy has “turned a corner.”

Economic growth is forecast to be 2.25 per cent — the same as in MYEFO — but it is expected to pick up to 2.5 per cent by 2026-27.

But while the Budget is unlikely to wow the public, Dr Chalmers believes it showcases the Government’s economic management credentials with the books “in better nick” than under the previous Coalition administration.

The Treasurer highlighted debt and deficit figures as lower than Treasury forecasts during the 2022 election campaign but also glossed over last year’s figures that gross debt as a share of GDP would peak at 35.2 per cent compared to this year’s revised 37 per cent.

The budget has confirmed that gross debt for this financial year will be $940 billion, lower than the $1.1 trillion forecast in 2022, and, said Dr Chalmers, $177b less than inherited from the Coalition.

Despite the deterioration in the budget bottom line in the past year, the Treasurer argued that Labor had overseen the “biggest ever fiscal improvement in a single term”, with the Budget $207b better off.

“This means we will avoid around $60b in interest costs over the decade,” he said, pointing to 94b in savings since coming to power, and $2b in the current Budget.

Dr Chalmers’ said his “platform for prosperity in a new world of uncertainty” highlighted Australian “exceptionalism” as other major countries struggled with slow growth.

In a Budget designed to woo voters with a $25 cap on PBS medicines, a $2.6b fund for aged care nurses, a $793m investment in women’s health and a raft of infrastructure projects, the Prime Minister will be hoping for a popularity bounce before calling the poll.

“This will be a Budget that builds on the foundations that we’ve laid over the last three years. Building a stronger economy, reinforcing the need for stronger Medicare, helping Australians with cost-of-living pressures while building Australia’s future,” he said.