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Tax cuts are coming, but not soon, in a cautious budget

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Today’s budget is a cautious and responsible response to the cost-of-living pressures facing voters.

As noted ahead of budget night, many of the major spending initiatives had already been announced.

But, in the only major surprise, there are income tax cuts for all income taxpayers. Even if we need to be patient. The new tax cuts only start in July 2026, with a second round in July 2027.

And as Treasurer Jim Chalmers himself said, they are “modest” cuts. A worker on average earnings will receive A$268 in the first year, rising to $536 in the second year.

Combined with the government’s first round of tax cuts in last year’s budget, this will add up to $2,190 per year in 2027.

The cost to the budget of the latest tax cuts in 2026-27 will be $3 billion, and over three years will be $17.1 billion. The cuts still need to pass parliament.

But calls by economists such as Chris Richardson and Ken Henry for major tax reform have not been heeded. Major reforms inevitably create losers as well as winners. So, big changes were never likely just weeks before an election.

And there is still bracket creep (increases in tax revenues as taxpayers move into higher tax brackets) over the next decade. Total tax receipts are projected to rise from 25.3% of gross domestic product (GDP) in 2024-25 to 26.8% in 2035-36. This will do most of the work in the very gradual windback of the budget deficit.

How concerned should we be about the budget moving into deficit?

In the first back-to-back surpluses for almost 20 years, there were budget surpluses in 2022-23 and 2023-24. This year we are returning to deficit and further deficits are expected for about a decade. Should we be alarmed?

A balanced or surplus budget is not necessarily a good budget. What we want is a budget appropriate to current economic conditions and sustainable in the long run.

The Australian economy has only been growing modestly in recent years and is forecast to grow 1.5% in the current year. Inflation is near the target range in underlying terms. So, a modest deficit is not unreasonable.

The longer run projections show a very gradual return to balance. But this assumes no recession and no further income tax cuts, for a decade. It might be better to rebuild the fiscal position more quickly so as to be better placed to provide fiscal stimulus in the event of a global recession or another pandemic.

‘A new world of uncertainty’

As Chalmers said, we are in a “new world of uncertainty” with “the threat of a global trade war”. The volume of Australian exports is forecast to only expand by 2.5% in 2025-26 and 2026-27, but it could be lower.

In February, the Reserve Bank forecast headline inflation would rebound above the 2% to 3% target range when the electricity rebates expired. The extension of the rebates in Tuesday’s budget as well as the reductions in the price of prescription medicines will help keep inflation below 3%. Headline inflation is forecast to improve to 2.5% in 2026-27.

In the December 2024 budget update, the unemployment rate was forecast to be around 4.5% in mid-2025 and stay around that level for the next couple of years. Given the unemployment rate was steady at 4.1% in February, the reduction to 4.25% seems plausible.

What will it mean for interest rates?

One reason the government went for a modest tax cut rather than a wild “cash splash” is it did not want to undermine the narrative there will be future interest rate cuts by stimulating household spending too much.

If households were given immediate cash to spend, this could drive up inflation.

The Reserve Bank is unlikely to change interest rates at its April 1 meeting. But it would be very unhelpful for the government’s electoral prospects if the minutes showed the central bank had become more concerned about inflation and less likely to cut interest rates at future meetings.

The Reserve Bank is unlikely to feel this budget contains enough government spending to boost economic activity in the near term and therefore change its view on the economic outlook.

So, a further interest rate cut remains possible at the bank’s following meeting on May 20.

And any further relief on interest rates would be welcomed by households – as well as whoever might be in government by then.The Conversation

John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Inflation rise reduces chances of Reserve Bank rate cut

Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs

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Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs

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In Short:
– Rate cut likelihood by the Reserve Bank has decreased due to a rise in annual inflation to 3.2 per cent.
– Significant price increases in housing, recreation, and transport are raising concerns for the Reserve Bank.

The likelihood of a rate cut by the Reserve Bank has decreased significantly after a surge in annual inflation.

The Australian Bureau of Statistics reported that inflation for the year ending September rose to 3.2 per cent, reflecting a 1.1 per cent increase.

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Trimmed mean inflation, a crucial measure for the Reserve Bank, was recorded at 1 per cent for the quarter and 3 per cent for the year. The bank anticipates inflation to reach 3 per cent by year-end, while trimmed mean inflation is expected to slightly decrease.

The quarterly rise of 1.3 per cent in September exceeded expectations. Governor Bullock noted that a deviation from the Reserve Bank’s projections could have material implications.

Financial markets reacted promptly, with the Australian dollar rising against the US dollar, while the ASX200 index fell.

The most significant price increases were observed in housing, recreation, and transport, indicating widespread price pressures that concern the Reserve Bank.

Despite the unexpected inflation rise, some economists believe the Reserve Bank may still consider rate cuts in December, viewing current price spikes as temporary due to the winding back of subsidies.

Economic Pressures

Broad-based economic pressures suggest that the Reserve Bank may not reduce interest rates at its upcoming meeting. Analysts highlight the need for ongoing support for households facing cost-of-living challenges.


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Wall Street hits record highs on low inflation

Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision

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Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision

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In Short:
– U.S. stocks rose to record highs on Friday due to lower inflation and strong corporate earnings.
– Key earnings reports from major companies are expected next week, influencing market trends.
U.S. stocks rose to record highs on Friday due to lower-than-expected inflation data and positive corporate earnings.The S&P 500 and Nasdaq achieved their largest weekly gains since August. The Dow saw its biggest jump from Friday to Friday since June.

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The Labor Department reported that the Consumer Price Index was slightly cooler than analysts’ predictions, easing concerns about inflation impacts from tariffs. This development suggests a likely interest rate cut by the Federal Reserve at its upcoming meeting.

Ryan Detrick from Carson Group noted the positive inflation news may facilitate forthcoming Fed rate cuts. Despite the ongoing government shutdown affecting data releases, this CPI report provided much-needed clarity.

Earnings reports are continuing, with 143 S&P 500 companies having reported results. Growth expectations for third-quarter earnings have risen to 10.4%. Detrick indicated a strong opening to the earnings season with a significant percentage of companies exceeding expectations.

This coming week, key earnings will be reported from Meta Platforms, Microsoft, Alphabet, Amazon, and Apple, alongside industrial companies like Caterpillar and Boeing.

The Dow rose 472.51 points to 47,207.12. The S&P 500 increased by 53.25 points to 6,791.69, while the Nasdaq gained 263.07 points, reaching 23,204.87.

Alphabet gained 2.7% following a deal expansion with Anthropic. Coinbase saw a 9.8% increase from a JPMorgan upgrade. In contrast, Deckers Outdoor’s shares fell 15.2% after lowering sales forecasts.

Market Trends

Advancing stocks on the NYSE outnumbered decliners by 2.18 to 1. The S&P 500 had 34 new highs, with the Nasdaq recording 124.

Trading volume was 19.04 billion shares, lower than the average of the past 20 days.


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US stocks face tests from Tesla, Netflix earnings

US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data

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US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data

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In Short:
– Earnings reports from Tesla and Netflix might affect U.S. stock performance next week amid high inflation concerns.
– Increased market volatility arises from U.S.-China trade tensions and fewer S&P 500 stocks in an uptrend.
This coming week, earnings reports from companies including Tesla and Netflix are anticipated to impact U.S. stock performance.
Investors are also awaiting delayed U.S. inflation data, which could test market stability as it remains near record highs.Recent trading activity has shown increased volatility, influenced by ongoing U.S.-China trade tensions and concerns regarding regional bank credit risks. The CBOE volatility index has seen a rise, indicating increased market uncertainty.

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The S&P 500 entered its fourth year of growth amidst these fluctuations, having previously experienced a period of calm. Experts suggest market risks are intensifying as valuations reach peak levels.

Market Volatility

Concerns regarding U.S.-China trade relations escalated last week when the U.S. threatened to raise tariffs by November 1 over China’s rare-earth export policies. President Donald Trump is scheduled to meet with President Xi Jinping in two weeks to discuss these issues.

Despite these challenges, major stock indexes gained ground over the week, with the S&P 500 up 13.3% year-to-date. However, a noticeable decline in the number of S&P 500 stocks in an uptrend raises caution among investors about underlying market weaknesses.

The upcoming third-quarter earnings will be closely monitored, especially as the government shutdown halts economic data releases. Companies like Procter & Gamble, Coca-Cola, RTX, and IBM are due to report. The delayed U.S. consumer price index is also expected to provide crucial insights ahead of the Federal Reserve’s monetary policy meeting on October 28-29.


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