The economic backdrop for Federal Budget 2025
The economic backdrop for Federal Budget 2025
With inflation rates globally trending toward their targets, advanced economies (as defined by the World Bank) across the world have begun to see the easing of monetary policy by central banks. Since Australia’s inflation has fallen to the target range of 2-3%, the key focus of Federal Budget 2025 is the nature and timing of the announced government spending, as the RBA considers its approach to interest rates. The lack of stability in commodity prices and uncertain global trading conditions will put understandable pressure on the Government's spending decisions.
Current domestic economic conditions
Economic activity in Australia has remained weak throughout the year, with year-end GDP growth well below initial estimates.
Despite an increase in consumption and real disposable income, partially driven by the Stage Three tax cuts, the RBA indicates that this is yet to translate into economic growth. Meanwhile, the Government remains upbeat about the strength of the Australian economy, expecting a “soft landing” and rebounding growth to 2.5% by 2027.
This softening in economic growth did not translate into weaker labour market conditions, with the unemployment rate recorded at 4.0% at the end of December 2024 and forecast to reach 4.25% from 2024-25 to 2026-27. Strong employment data is expected to continue in the short term.
Whilst headline inflation eased off the back of the Government’s subsidies to households, it is expected to increase in the September 2025 quarter as some of these rebates unwind.
Notwithstanding the above, the Australian economy appears to have turned the corner and is arguably well-placed to navigate turbulent global conditions.
Economic outlook
As a small, open economy, Australia is exposed to the risk of an increase in global trade restrictions, particularly commodity prices.
The impact of tariffs on steel and aluminium imports announced by the new US administration on iron ore and bauxite prices is uncertain but likely small. However, the general uncertainty of the US imports regime and potential changes to global trading conditions off the back of US tariffs is likely to have a negative short to medium impact on the Australian economy. Regardless, the GDP growth is forecast to increase throughout 2025 to 2.4% by the December quarter, reflecting the estimated historical trend growth rate. It is expected that this uptick will flow through to tighter labour market conditions and sustain some upward pressure on inflation.
BDO comment
With inflation moderating to within the Government’s target of 2-3% due to restrictive monetary policy measures, many economists predict that more cash rate cuts are on the horizon.
However, the Government has presented a budget focused on offering rebates that ease short-term cost-of-living pressures, aimed at increasing household consumption and ultimately stalling further disinflation.
If the cash rate follows the market path, the RBA expects underlying inflation to be slightly above 2.5%, which is approximately the midpoint of the target range.
This forecast indicates that the RBA is cautious about easing monetary policy too soon, and the interest rate cuts welcomed by the public in February 2025 are not representative of future respite for Australians.
The lack of stability in the global trading system, led by the new US administration’s tariff announcements, as well as falling commodity prices, will likely upset Australia’s economic growth in the short to medium term, which cannot be corrected by the Government’s measures or spending. As such, there should be no surprise that the budget is back in the red.