Australia must focus on fiscal space in the 2025-26 Budget to manage rising debt and future economic and geopolitical challenges. Fiscal space refers to a government’s ability to spend in response to economic shocks without jeopardising long-term stability. It allows for emergency support during crises like recessions or global downturns without excessive borrowing or harsh austerity measures. As the Australian federal government prepares to hand down the 2025-26 Budget next week, Scientia Professor Richard Holden from the School of Economics at UNSW Business School has warned that rising deficits threaten this flexibility. After major spending during the COVID-19 pandemic, he said restoring fiscal discipline is crucial to ensuring the Australian economy can respond effectively to future economic shocks. “Since 1996, Australia has had fiscal rules. Both sides of politics, including governments under Kevin Rudd, Julia Gillard, and then Kevin Rudd again, had fiscal rules that said we would not spend more than this percent of GDP, and that forces a kind of discipline. And those were thrown out in early 2020, and I think the question is whether they're going to come back,” said Prof. Holden, a leading Australian economist, speaking at an e61 and UNSW Sydney policy research partnership launch. He told delegates that the upcoming budget must include enough fiscal space to cushion against potential economic shocks, and he didn’t hold back in his analysis. “I worry it has something to do with the people who are in politics,” he said. While acknowledging that Australia still has good politicians, he questioned whether the political system is attracting the best and brightest in the way it did during the reformist Hawke-Keating era (from 1983 to 1996). How much is the Australian government in debt? The latest data shows net debt is forecast to increase from 32.0% of GDP ($881.9 billion) in 2024-25 to 35.7% of GDP ($1,136.3 billion) in 2027-28. This substantial debt level underscores the urgency of reinstating fiscal rules to ensure economic resilience against future shocks. But the Australian government’s rising debt burden isn’t just about the sheer size of the budget deficit – it’s about the government’s ability to manage it. “I was asked the other day, what are the two things you'd love to see in this budget? And I said, I'd love to see the treasurer stand up and say, I'm going to re-establish the fiscal rules. "And we're not going to go back to that percentage right away, but over the course of the next parliament, during the time that I'm treasurer, over the next three years, we're going to go back to that level of fiscal discipline. and we're going to re-establish the rule,” he said. “And the second thing is, we're going to... index our tax brackets to GDP. That means there is no bracket creep. And if there is no bracket, you can't be a lazy government, a lazy treasurer. Those two things together demand and force fiscal discipline.” “Because without it, I think we'll sort of, you know, hope for the best, not plan for the worst, sort of hope for the best and plan for the best, and it probably won't turn out very well.” Fiscal space and Australia’s cost-of-living crisis Soaring rents, high grocery prices, and rising energy bills continue to drive cost-of-living pressures for Australians, making the 2025-26 budget a crucial moment for relief. With Treasurer Jim Chalmers set to announce a deficit of $26.9 billion, the government must balance financial support with fiscal responsibility. A deficit occurs when spending exceeds revenue, adding to national debt – the total amount owed over time. Sustainable measures, such as targeted subsidies or tax reforms, are essential to easing household strain without deepening Australia’s fiscal challenges.Prof. Holden warned that ongoing primary deficits, where the government is borrowing not just to cover spending but also to pay interest on existing debt (which recently increased by $4.5 billion, from $48.1 billion to $52.6 billion for 2026-27), signal a worrying trend. Without fiscal space, he said the government has limited capacity to provide relief for households struggling with the cost-of-living crisis. This lack of flexibility makes it harder to implement effective support measures, such as targeted financial aid or social welfare programs, that can directly alleviate the pressure on everyday Australians. To restore fiscal discipline and ensure long-term economic stability, Professor Holden argued that clear spending limits are essential – limits Australia had in place prior to the pandemic but abandoned in response to the economic crisis. Prof. Holden said: “I will note that in each of the last two major crises, COVID and the 2008 financial crisis, we spent more – 10% of GDP – to buffer those shocks. And we need to have what David and Christina Romer called ‘fiscal space’ in order to do that. If you don’t have that fiscal space, you can get very, very bad outcomes.”
