If you think the budget is about tidy numbers with easy wins, think again. Jim Chalmers is about to deliver a midyear outlook that foregrounds restraint, not fireworks, and the message may feel more like steadying the ship than grandiose reform. He’s set to reveal a multibillion-dollar improvement in the federal budget, yet the deficit is still projected to almost quadruple to $36.8 billion in the current financial year.
Chalmers has earned a reputation as a master of expectations management, and this Myefo will be less about triumph and more about explaining how the Albanese government plans to keep spending pressure in check. Katy Gallagher joins him in presenting a picture of fiscal prudence, even as spending pressures continue to rise.
In his statement accompanying the figures, the treasurer argues that, despite the hurdles, the overall bottom line improves relative to earlier forecasts. The new deficit estimate is about $5.4 billion better than Treasury’s pre-election outlook, but it remains significantly larger than the $10 billion shortfall recorded in 2024-25. After two consecutive years of surpluses, Commonwealth finances slipped back into the red last year. The latest projection for 2025-26 forms part of a modest $8.4 billion improvement across the four-year period ending in 2028-29.
The Myefo preview shows a government bracing for tough choices, with any good news largely confined to a marginal improvement in the deficit. We already know that household energy bill rebates will not be extended, staying true to the government’s pledge that those measures were temporary. Chalmers has warned of $35 billion in spending pressures, including an extra $6.3 billion for natural disaster relief, $3 billion more for age pensions, and $2.1 billion more for military superannuation benefits.
Saving efforts continue to rely on reducing reliance on consultants, contractors, and labour hire, to the tune of $6.8 billion as part of about $20 billion in total expected savings announced with the Myefo. Departments are also being asked to find up to 5% in savings by reprioritising programs before the May budget.
Beyond the headline numbers, several policy moves are already shaping the fiscal picture. The government plans to inject an additional $5 billion into its cheaper home battery scheme, while tightening rebates for larger and more expensive battery systems amid a cost blow-out. Treasury had pegged the policy cost at about $2.3 billion over five years to mid-2030, but funding was projected to run out within a year if not addressed.
As usual, commodity prices have remained higher than Treasury’s “conservative” projections, which tends to push actual tax receipts higher than anticipated, particularly in company taxes. Economists therefore expected the current-year deficit to be smaller than earlier predictions, though not dramatically so.
The broader outlook remains bleak, with Treasury officials projecting a decade of deficits and a mid- to late-2030s return to balance that hinges on modest expense growth and a heavier tax burden on workers. In short, this is an era of structurally higher government spending, and the question remains: how will the government fund it?
Answers aren’t expected on Wednesday. If the mood isn’t inspirational, Labor’s approach is at least practical and stable, and the party has positioned itself as the better economic manager in voters’ minds—a strategic edge it’s keen to protect. The renewed inflation pressures of the past few months deepen the value of fiscal caution, as the government aims not to aggravate the problem further.
Financial markets and several economists now anticipate the Reserve Bank could raise rates, potentially as soon as February, if the summer data worsens. The Coalition is ready with a counter-narrative that Labor’s “spendathon” is to blame, and an early-2026 rate rise could narrow the window for meaningful May budget maneuvers.
Chalmers has recently received the Productivity Commission’s five final reports on how to retune Australia’s economic engine, and with 25 parliamentary sitting days left before those findings are public, the elephant in the room remains: will the government couple budget discipline with a credible long-term reform agenda? For now, the focus is squarely on prudence, even as more reforms and fiscal strategies linger to be unveiled.
