Key Takeaways
- The Australian government is expected to announce a budget deficit of $42.2 billion in the upcoming mid-year budget update
- The government has already made difficult decisions, including ending the power bill subsidy, and more are expected in the mid-year budget update
- The Productivity Commission is set to deliver reports on ways to boost economic growth, including a potential cash-flow tax for all businesses
- There is growing pressure to reduce taxes on businesses to encourage investment and lift productivity
- The government is exploring ways to drive cost-of-living relief, including reforms to credit cards and digital wallets
Introduction to the Budget Update
The Australian government is preparing to release its mid-year budget update, which is expected to reveal a deficit of $42.2 billion. This forecast was made by Treasurer Jim Chalmers in March, and most analysts expect the deficit to be lower before growing again in 2026-27. However, Chalmers has downplayed suggestions that the upcoming budget update will be a "mini-budget", instead revealing that more tough decisions are on the horizon. The government has already made some difficult decisions, including ending the power bill subsidy, and Chalmers has hinted that there will be more to come.
Fiscal Policy and Productivity-Enhancing Policies
A substantial shift in fiscal policy and new productivity-enhancing policies are likely to be announced in the May federal budget for 2026-27, which Chalmers has described as the "main game". The government is under pressure to reduce taxes on businesses in order to encourage more investment and lift productivity. Chalmers has met with representatives from the Business Council of Australia to discuss ways to boost economic growth, and the Productivity Commission is due to deliver its reports on the issue soon. One of the most contentious suggestions from the commission is a cash-flow tax for all businesses, which has little support within the government or the corporate sector.
Tax Reforms and Budget Repair
Deloitte Access Economics has argued that the government should reduce the company tax rate to 20 per cent and offset it with a new super-profits tax, which would likely hit the resource and banking sectors. This move would aim to repair the budget and increase the speed at which the economy can grow without adding to inflation. The government has made a responsible decision by ending the energy subsidies, and Deloitte Access Economics lead partner Pradeep Philip has called for more tough decisions to be made. Philip believes that driving supply-side reforms and structural tax reforms, including a tax-mix switch, would be a better way to deal with the cost of living.
Capital Gains Tax Concession
Another area of interest is the 50 per cent concession on the capital gains tax for assets held for more than 12 months. A Greens-initiated Senate inquiry is examining whether the concession is adding pressure to the property market, and Deloitte Access Economics estimates that reducing the concession to 33 per cent would raise an additional $4 billion a year by the mid-2030s. This move would also reduce upward pressure on property prices, which is a major concern for many Australians. The government is likely to consider this option as part of its efforts to drive cost-of-living relief.
Credit Cards and Digital Wallets
The government believes that it can drive cost-of-living relief through reforms to credit cards and digital wallets. The House of Representatives’ economics committee will examine both areas in a short inquiry due to release a report by April. Committee chair Ed Husic has stated that the committee wants to ensure that the payment system is fair, accessible, competitive, and affordable, particularly in light of the sharp increase in online payments. This inquiry will provide an opportunity for a deeper dive into the issue and potential solutions.
Conclusion
In conclusion, the Australian government is facing significant challenges in managing its budget and driving economic growth. The upcoming mid-year budget update is expected to reveal a deficit of $42.2 billion, and the government has already made difficult decisions, including ending the power bill subsidy. The Productivity Commission’s reports on ways to boost economic growth are eagerly anticipated, and the government is under pressure to reduce taxes on businesses to encourage investment and lift productivity. The government is also exploring ways to drive cost-of-living relief, including reforms to credit cards and digital wallets. As the budget update approaches, it is clear that the government has a significant task ahead of it in balancing its budget and driving economic growth.
