Australia's budget deficit: What boards need to prepare for

Australia's fiscal history proves external shocks have repeatedly upset expectations and transformed the government's debt and deficit projections. 

Australia's Parliamentary Budget Office (PBO) has produced regular medium-term fiscal assessments since its first report on the 2015-16 federal budget outlook. The latest, the 2026-27 Medium-Term Budget Outlook considers the outlook after Budget 2026. Each report starts with the current Commonwealth budget's forward estimates and projects the key fiscal aggregates into the medium term. Together, they recount recent fiscal history, highlighting the critical role external shocks have played in shaping debt and deficits.

The first big external disruptions this century predate the PBO, which started operations in 2012. The 2000s saw Australia's fiscal position benefit from the earlier Hawke-Keating reforms and a positive global shock as the China boom boosted commodity prices, corporate profits and tax receipts.

From 2002-03 to 2007-08, the Commonwealth ran surpluses on the underlying cash balance (UB), allowing Canberra to eliminate net federal government debt by 2005-06. Treasurer Peter Costello declared 21 April 2006 "Debt-free day". But the global financial crisis (GFC) meant debt-free Australia proved short-lived. The GFC transformed the fiscal outlook. The UCB fell into a 2.1% of GDP deficit in 2008-09, moving deeper into the red the following year at 4.2%. It wouldn't return to surplus until 2022-23. Positive net debt had returned by 2009-10 and, at 19% of GDP in 2018-19, was still rising on the eve of the COVID-19 pandemic.

Post-GFC fiscal repair was a key theme of that first 2015-16 Outlook. The PBO expected the UCB to return to surplus by 2019-20 and remain in the black through to 2025-26. Net debt was projected to peak at 18% of GDP in 2016-17 before declining to 7.1% by 2025-26.

By the 2019-20 Outlook, the picture was little changed.

A first surplus was still expected in 2019-20 and projected to expand, reaching 1.6% of GDP by 2029-30. Although net debt was now projected to peak a little higher (19.2% of GDP) and later (2018-19), the prognosis stayed positive, with it expected to fall to 1.6% of GDP by 2029-30.

Granted, this was predicated on above-trend economic growth and continued spending restraint, despite growth already proving harder to come by in recent years. The PBO worried fiscal restraint might "be increasingly difficult to maintain... given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus".

Then came COVID

Instead, COVID upended everything. The 2020-21 Outlook highlighted its "profound impact" and "the largest deterioration in the Commonwealth government's fiscal position since the Second World War" with "historically high" deficits and debt.

Rather than an impending surplus, the UCB deficit was projected to balloon from 4.3% of GDP in 2019-20 to 11% in 2020-21, and to remain deep in the red into the medium term. Net debt was expected to surge to more than 44% of GDP by 2024-25 and stay above 40% into the 2030s. A modest consolation was that historically low interest rates limited the accompanying impact on debt service.

After the initial shock, the next three PBO assessments were more upbeat as the economy enjoyed a strong recovery and budget revenues benefited from rebounding commodity prices. That giant deficit was gradually downgraded to a less dramatic 6.4% of GDP, implying a lower trajectory for net debt. Hence, by the 2023-24 Outlook, the PBO was cheering "improved budget balances, lower debt levels and lower interest payments over the medium term". The UCB was expected back in balance by 2033-34

The 2024-25 Outlook reported projections little changed from the previous year, but pushed the return to surplus out to 2034-35, signalling yet another move in the anticipated trajectory of budget repair. The 2025-26 Outlook confirmed that shift, reporting a modest deterioration across most aggregates, with the UCB no longer expected to return to surplus by the end of the medium-term projections.

However, new things were going wrong on the fiscal front.

Since 2022-23, higher inflation and interest rates, triggered by post-COVID reopening and later Russia's invasion of Ukraine, had lifted borrowing costs, turning interest payments into the budget's fastest-growing major payment item over the medium term. NDIS, defence and aged care were costing more than expected. And in 2022, in belated recognition of the economy's waning dynamism, the government had downgraded its estimates of Australia's long-term productivity growth – and future revenue growth with it.

Right here, right now

Which brings us to the latest PBO assessment. The 2026-27 Outlook is cheerier than the 2025-26 version, with the UCB now expected to return to balance from 2034-35. Smaller near-term deficits deliver a lower debt trajectory, helping offset yet another rise in the cost of government borrowing. This time, the improvement reflects higher commodity prices linked to the Middle East conflict, plus Budget 2026's changes to the NDIS and tax settings.

That leaves Australia on a fiscal trajectory considerably better than the one the PBO envisioned in 2020-21 after the initial COVID shock, but considerably worse than the trajectories expected in either the 2015-16 Outlook or the PBO's immediate pre-pandemic assessment.

A critical lesson from this fiscal history is that external shocks have repeatedly upset expectations, transforming debt and deficit projections. Given our current shock-prone international environment, smart fiscal policy should prepare for more of the same. The 2026-27 Outlook offers warnings, pointing to uncertainties around the current Middle East conflict and the looming costs of climate change.

A second lesson is that not all fiscal challenges are external. Lower productivity growth and spending overshoots have also been part of the story.

Here too, the 2026-27 Outlook highlights risks, including the budget's persistent over-reliance on personal income taxation and bracket creep, rising state debt as a federal budget risk and the potential fiscal costs of radical changes to migration policy.

This article first appeared as 'Back to the future' in the Oct/Nov 2026 issue of Company Director Magazine.