Treasurer Jim Chalmers (Image from YouTube : Video uploaded by Sky News Australia)
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 withoutexcessive 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).
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 rulesto 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.”
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.”
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Critique: The Myth of Fiscal Space as a Constraint
Professor Holden frames "fiscal space" as a critical issue, implying that Australia’s ability to respond to economic shocks depends on keeping low deficits. However, this view ignores that Australia, as a currency-issuing nation, does not rely on borrowing to fund its spending. The real constraint is not the size of the deficit or debt but the availability of real resources (labour, materials, infrastructure capacity). The government can spend without causing inflationary pressures if there are idle resources.
Debt-to-GDP Concerns Are Misplaced
The article warns that net debt is set to rise from 32.0% of GDP ($881.9 billion) in 2024-25 to 35.7% of GDP ($1,136.3 billion) in 2027-28, portraying this as a risk. However, Australia's public debt is relatively low compared to other advanced economies. More importantly, since the government controls the currency its debt is issued, it can always meet obligations without default. The concern over "fiscal discipline" is a political choice rather than an economic necessity.
Flawed Focus on Fiscal Rules
Holden calls for reintroducing fiscal rules that cap government spending relative to GDP. This approach is problematic because it assumes government deficits are inherently bad rather than reflecting the necessary spending required to support employment, infrastructure, and essential services. Arbitrary spending caps could prevent the government from responding effectively to economic downturns or investing in long-term national priorities.
Contradiction: Cost-of-Living Relief vs. Fiscal Austerity
The article acknowledges the severe cost-of-living crisis—rising rents, high grocery prices, and increased energy costs—while arguing for fiscal restraint. If the government reduces spending to meet arbitrary fiscal rules, it will have less capacity to provide the relief needed to support struggling households. Fiscal austerity in the face of economic hardship is counterproductive and would likely worsen inequality.
Conclusion
The article promotes a neoliberal fiscal narrative prioritising deficit reduction over economic well-being. Rather than focusing on arbitrary debt targets, Australia should prioritise full employment, public investment, and economic resilience. If inflation is managed and resources are available, there is no financial limit to what the government can do to support its people.
Another lobbyist from the Chicago school of Economics, clinging to failed and society crushing neoliberal drivel.Those days are in their death throes,notwithstanding the clownish antics of the current Presidential mobster and his squillionaire chancers.
Back home,the current Liar of the Opposition courting the jewish vote with ethereal promises of trade with Israel.(Guardian)Closer ties with Israel would likely make us more attractive target for terrorists.Mr. tough on everything is in urgent need of a brain.
Will we have a budget which deals with the basic needs of all Australians?
Will we have a budget which ensures we have a health system that works for all Australians?
Will we have a budget which addresses the needs of the most disadvantaged Australians?
I think those are far more significant than some academic bean counter looking at % of GDP.
A couple of articles below this one refers to the employment situation in Australia... the lowest unemployment rate since the 1970's and rising wages. Surely the work this government has done, including the reduction of government debt needs to be highlighted again and again. Fuck the 'academic question', look at what is being done, look towards how the benefits of what is being done can be more equitably distributed.
Dennis Hay: Thank you for pointing out that "fiscal space" is a neoliberal invention, and that the good Prof. Holden holds firmly to those principles, even though he is a Labor supporter - which is worrying for those of us who have seen the folly of the neoliberal myth.
On a Liber...er, um...Labor note: Sigh, the donations where just to good to pass up?
https://www.theguardian.com/australia-news/2025/mar/19/albanese-to-rush-through-new-laws-to-protect-tasmanias-salmon-industry-from-legal-threat
GL,Albanese continues to confirm his unsuitability to be Prime Minister,or even someone who has a handle on current politics.PM Jim Chalmers (not Jim Hacker) should do a better job...or else.Little wonder we've got a total arsehole like Boofhead who's rated a chance..he's not.
I have a sneaking suspicion that the corporate moguls, that now control a vast and growing proportion of 'western' global wealth, obtained it by debt funding and continuous leveraging of whatever assets they had at their disposal. And maintained their control by propagating a myth of their infinite wisdom.
Yet now we know that their financial accumulations only got them so far, and that they would become stranded unless they extended their leverage into agglomeration with 'competitors' with the same problems. And so we see the advent of investment cartels and raiders and hedge funds - for all but themselves, as useful as tits on a bull.
They have all been shown to possess a hostile psychopathy. A hubris and fixation on their supremacy regardless of the availability or scarcity of resources other than financial leverage. So they invent markets via propaganda and threat.
Warriors of the past, through ineffective or corrupt governments have become enmeshed in the mythology of the corporate moguls, only to find themselves punch-drunk and disempowered by the ineptitude and fixations of those moguls.
The voters are sensing it, despite not being certain of its nature. Through the power of voters and the legislature, governments must exercise control over the moguls and punch-drunk old warriors, and reinstate resources and infrastructure control to the benefit of all people. To do this without crashing, it must first use its leverage to wrest otherwise dormant capital back from the moguls, then by regulation and judicious use of its fiat money power return equity to the people and bring the moguls and old warriors to heel.
The rise of the corporate moguls proves that the notion of 'fiscal rules' is a nonsense that none of them have given a second thought to, it's leverage that counts. And as for 'fiscal space', that is availed by merciless leveraging and agglomeration - something that governments are quite capable of on behalf of the people.
It's a tough task given a century of nationalist propaganda, and 50 years of commercial propaganda. It may be that Labor is wearing its 'hush puppies' whilst trying to achieve it. But far better than the LNP's ideological jackboots and coveralls issued by the old moguls and warriors.
At present T-Rump and his flunkies are showing us all the rolling devastation wrought by the jackboots and coveralls method - a regression to hocus-pocus and antediluvian blood-letting. Of course, given the opportunities afforded, the US corporate moguls are flocking to him to get him to extend their ability to extort.
As we have a federal election coming up, I'm just unleashing a few thought bubbles. I seriously hope we don't revert to the rabbit hole of jackboots and coveralls. Perhaps Labor can don alternately trainers and hiking boots.
We do not have clever predatory rich parasites, as the fat frau of the west, the large lump from Q'land and assorted lucky tech. types, media types, lack the maggoty mischiefmaking mastery of the Sucker, Bezos, Gates, Muskrat and many others who profit with relentless selfishness and bumchummery. Running the puppet Trump is sucker money, easy, for the backroom boys of USA corporate criminality. We can run modest deficits or surpluses if well related to earnings and printings, as long as people, executives and markets have faith in the money as a bond, a good faith promise. So the USA financed much of later W W 2 spending with printing money, for it was accepted and circulated immediately. It justifies and invents itself. Let us spend on essentials and perhaps tax a little more, especially the dodging bludgers, like Murdoch and the miners. The people assisted beneficially will impel economic growth better.