Final Budget Outcome confirms stubborn government spending highs amid falling deficit

Released last Monday (28 September), the Treasury’s Final Budget Outcome has reported a $22.3 billion (or 0.8 per cent of GDP) final federal budget deficit for 2025–26.

While this came in lower than the forecasted $28.3 billion in the May budget and $37 billion in the December Mid-Year Economic and Fiscal Outlook (MYEFO), AMP has expressed concerns about the government’s spending habits.

“The problem is that the high level of public spending is contributing to capacity constraints in the economy and lower-than-otherwise productivity driving contributing to high inflation and rate hikes,” it said.

Despite this revenue improvement, AMP noted concern that Federal spending as a share of GDP rose to 26.9 per cent, the highest since the pandemic, and before then, since 1986–87.

In its outcome, the government projected a 26.6 per cent share, meaning that the outcome blew this out by 0.3 per cent, or $1.4 billion.

According to AMP, it said that this reflects real growth in spending over the past three years averaging 4.2 per cent per annum, and revenue as a share of GDP having risen by 26.1 per cent, which is the highest since 1986-87.

“[The revenue as a share of GDP] comprised the highest level of tax revenue as a share of GDP since the mining boom in the mid-2000s. With the boom in revenue, we should have a decent surplus.”

This follows the Actuaries Institute’s Intergenerational Equity Index: Spotlight on the Australian Tax and Transfer System report, which found that government spending has risen faster than taxes, in July.

This was calculated at $3.4 million in spending over the course of an average Australian’s life, compared with $2.5 million collected for each person.

In August, Treasury committed to providing advice for improvements to the tax system. With a focus on monitoring global and domestic developments, Treasury noted in its plan the renewed emphasis on productivity, competition and better regulation.

The outcome follows CommBank saying after the budget that although the changes will add “major improvements” to the nation’s longer-term fiscal position, more needs to be done to curb government spending over the next financial year.

“The economy is currently running above its speed limit, and all new spending adds to aggregate demand. Less spending would have given the RBA more breathing room, reducing the likelihood of further interest rate hikes if inflation remains high,” CommBank said in May.

Lower deficit than expected

Treasury posited that the lower deficit was due to a combination of lower payments and a better-than-expected outcome for receipts.

“The improvement was mainly due to stronger than expected revenue. Monthly data up to May had already indicated an improvement, so it was no surprise, and the $6bn difference is only 0.2 per cent of GDP and so is not significant in terms of the economic outlook,” AMP said.

Further, its Outcome noted growth of new business investment by 7.4 per cent in 2025–26 compared to the budget estimate of 4 per cent.

“These budget improvements reflect the government’s responsible economic and fiscal management,” Treasury said.

“We are still creeping into deeper budget deficits. That said, Australia’s budget deficit at 0.8 per cent of GDP is a fraction of those in the US, UK and France, which average around 6–7 per cent of GDP,” AMP said.