INFLATION’S HIT TO BUDGET; NEW TAX PUSH

Inflation, higher spending impact budget outcome

Higher payments have eaten into the Federal Budget’s bottom-line prospects, against a backdrop of rising inflation. The Federal Government’s Mid-Year Economic and Fiscal Outlook forecasts a budget deficit of $36.8 billion for 2025-26, down from the $42.1 billion deficit predicted in the March Budget. While tax receipts have been revised up by $15 billion, the government has lifted spending by $9 billion, including in meeting election commitments in housing and renewable energy. Inflation as measured by the Consumer Price Index is forecast to hit 3.75 per cent this fiscal year, but then ease to 2.75 per cent in 2026-27. Gross debt is forecast to surpass $1 trillion in 2026-27. Treasury’s MYEFO papers say Australia’s level of gross debt is around 34 per cent of gross domestic product, while in comparison, gross debt in each of the US, the UK and Canada exceeds 100 per cent of GDP.

Primary residential tax breaks worth $60 billion - Treasury

Capital gains tax exemptions for residential property ownership account for $60 billion of revenue foregone in 2025-26, according to latest Federal Treasury figures. The Tax Expenditures and Insights Statement says that in addition to the main residence CGT exemption, including for the discount component, rental deductions are estimated to be $29.2 billion. Concessional taxation of employer superannuation contributions is valued at $29.45 billion, and of superannuation earnings, at almost $26 billion. Total superannuation-related concessions and exemptions add up to more than $66 billion, according to the Treasury paper.

Gas exporters face domestic reserve obligations

Gas exporters will be required to reserve between 15 and 25 per cent of gas production for the domestic market, under a domestic gas reservation scheme proposed by the Federal Government. Climate Change and Energy Minister Chris Bowen, together with Resources Minister Madeleine King and Industry Minister Tim Ayres, said that under the preferred export approval model, exporters would need to meet domestic supply obligations first. They said the reservation scheme would be designed to increase domestic supply as existing contracts expired, to drive downward pressure on prices. The Government said it would consult with industry and international partners on design of the scheme, intended to start in 2027.

Slash company tax for smaller firms, says Productivity Commission

Meanwhile, the Federal Government’s chief economic advisory body has recommended major tax reforms for the corporate sector, including a lower company tax and a new net cashflow tax, in a bid to lift national productivity. The Productivity Commission has recommended moving to a hybrid corporate tax system, combining a lower company income tax of 20 per cent for businesses earning up to $1 billion, and a tax rate of 28 per cent for larger firms.  In addition, all companies would be subject to a net cashflow tax of five per cent for all companies. The PC’s recommendation is included in the final reports of its ‘five pillars’ of productivity inquiries. According to the PC reports, the proposed reformed tax system would increase GDP by just over $13 billion, or by 0.7 per cent. Current rates of company tax in Australia range from 25 to 30 per cent.

Western Australia leads population growth

Australia’s population grew 1.5 per cent, to 27.6 million people, in 2024-25, with net overseas migration accounting for 73 per cent of annual population growth. Figures from the Australian Bureau of Statistics show annual net overseas migration of 306,000 as at June 30, well down from the annual peak of 556,000 in the September quarter of 2023. Western Australia recorded the nation’s highest rate of population growth, at 2.2 per cent, and Tasmania the lowest, at 0.2 per cent. Victoria recorded annual growth of 1.8 per cent, to hit the mark of seven million, but New South Wales, with 8.6 million, is easily Australia’s most populous state.

Iron ore to again dominate export earnings, as LNG tipped to fall

Resource and energy commodities are tipped to bring in $383 billion in export earnings to Australia in 2025-26, just below 2024-25 levels, according to latest official forecasts. The Department of Industry, Science and Resources’ December edition of Resources and Energy Quarterly says that iron ore is expected to remain Australia’s largest earner, with $116 billion of export earnings in 2024-25 and $114 billion in the current year. Gold earnings are forecast to rise by 47 per cent to $69 billion in 2025-26 and reach $74 billion in 2026-27, driven by higher volumes and prices. Energy exports, however, are expected to decline, with export earnings of liquefied natural gas (LNG) tipped to fall from $53 billion in the current financial year to $47 billion in 2026-27. Both lithium and critical minerals are expected to record higher export earnings, rising to $6.8 billion and $14 billion respectively by 2026-27.