Australia’s final 2025–26 budget outcome was slightly better than forecast. Still, the improvement comes against a much larger backdrop: government debt approaching $1 trillion, ongoing inflation pressures, higher interest rates, and households facing increased financial pressure.

In this episode of The Account Rant, Latitude Accountants CEO John Saade sits down with Catarina Santini to examine what the numbers really mean for Australians.

The discussion covers the $22.3 billion budget deficit, the $971 billion gross government debt position, stronger-than-expected tax revenue, government spending, tobacco excise receipts, household taxation, mortgage costs, property prices and the financial burden potentially being passed to younger Australians.

The key question is not simply whether the latest deficit was better than expected. It is who ultimately pays for Australia’s growing government debt?

Australia’s Final Budget Outcome

The 2025–26 final budget outcome recorded a $22.3 billion deficit, which was around $6 billion better than forecast.

The improvement was supported by stronger revenue, including additional receipts from investors, businesses, superannuation funds and individuals.

According to the discussion, some of the additional revenue came from foreign exchange-related gains and higher individual tax receipts.

However, a smaller-than-expected annual deficit does not mean Australia has eliminated its broader debt problem.

Australia’s gross government debt has reached approximately $971 billion, bringing the total close to the trillion-dollar mark.

A Smaller Deficit Does Not Mean Lower Debt

There is an important distinction between the annual budget deficit and total government debt.

• Budget deficit: The amount by which government spending exceeds revenue during a financial year.
• Government debt: The accumulated amount the government owes over time.
• Interest costs: The ongoing cost of servicing that debt.

A $22.3 billion deficit is therefore only one year’s result. It does not represent the total amount owed by the government.

Where Did the Extra Revenue Come From?

The better-than-expected budget outcome was partly supported by stronger revenue from taxpayers and businesses.

The episode highlights additional revenue from:

• Investors
• Businesses
• Superannuation funds
• Individual taxpayers
• Foreign exchange-related gains
• Other stronger-than-expected receipts

For households, however, stronger tax collections can create a more complicated question.

If government revenue increases because Australians are paying more tax, a better budget result does not necessarily mean households themselves are financially better off.

This was one of the central issues raised by John Saade and Catarina Santini during the discussion.

Government Spending and the Cost of Underspending

The final budget figures also showed areas where government spending came in below expectations.

A notable example discussed was aged care, where spending was reportedly around $1.4 billion below budget because providers were unable to deliver services at the anticipated rate.

From a purely accounting perspective, lower spending can improve a budget result.

But there is another side to the equation.

If services were not delivered because there were insufficient providers or capacity, the lower expenditure does not necessarily represent an efficiency gain. It can instead indicate that some Australians did not receive services that had originally been expected.

Other areas, including defence, health and transport, were reported as being over budget.

This highlights why looking at the headline deficit alone does not provide the complete picture of government finances.

Tobacco Excise Revenue and Australia’s Illicit Market

One of the more striking figures discussed in the episode was the decline in tobacco excise revenue.

Tobacco excise receipts reportedly fell by around $4 billion, with illicit tobacco activity identified as an important factor behind weaker collections.

This raises an interesting issue for policymakers: what happens when taxes on a product become sufficiently high that consumers increasingly seek alternatives through illegal markets?

The economic consequences can extend beyond the lost tax revenue.

A growing illicit market can also create additional costs for enforcement and reduce the effectiveness of the taxation system.

The Broader Question About Sin Taxes

Tobacco excise is designed partly to discourage smoking while raising government revenue.

But taxation can produce behavioural responses.

When the legal price of a heavily taxed product increases significantly, some consumers may look for cheaper alternatives. Where an illegal market already exists, this can contribute to increased demand for illicit products.

The $4 billion reduction in tobacco excise receipts therefore provides an important case study in how tax policy can interact with consumer behaviour and government revenue.

Are Australian Households Carrying More of the Tax Burden?

The episode also explores whether the government should prioritise reducing the deficit or leaving more money in the hands of working Australians.

John Saade argues in the discussion for greater tax relief, particularly for lower-income earners.

The broader issue is the pressure facing households when higher taxes and higher borrowing costs occur at the same time.

For mortgage holders, rising interest rates can substantially increase annual repayments. The episode also refers to estimates that an average mortgage household could be paying tens of thousands of dollars more each year in repayments compared with previous conditions.

For households already dealing with higher living costs, the combination of:

• Higher mortgage repayments
• Higher interest rates
• Income tax
• Rising household expenses
• Inflation

can significantly reduce disposable income.

Could Household Income Tax Change the Equation?

John Saade also discusses the concept of household-based taxation, where the income of spouses could potentially be considered together rather than treating each individual taxpayer completely separately.

The argument is that many Australian families manage their finances collectively, particularly where one spouse earns significantly more than the other or where one parent spends more time caring for children.

Whether Australia’s tax system should move further towards household-based taxation is ultimately a policy question. However, the discussion highlights the importance of considering the financial circumstances of households rather than looking only at individual incomes.

Interest Rates, Inflation and Government Spending

The timing of the budget outcome is particularly important because the discussion also considers the relationship between government spending, inflation and the Reserve Bank of Australia’s interest-rate decisions.

With the RBA cash rate at 4.60%, households and businesses remain exposed to relatively high borrowing costs.

Government spending can support economic activity, but stronger demand can also contribute to inflationary pressure when the economy’s capacity to produce goods and services is constrained.

This creates a difficult policy balance:

Reducing spending too quickly could weaken economic activity, while maintaining high spending could contribute to inflationary pressure.

The Reserve Bank’s role is to manage monetary policy and inflation, while the federal government controls fiscal policy and taxation. Their policies therefore interact, even though they operate independently.

What Does This Mean for Australian Property?

Higher interest rates have significant implications for Australia’s property market.

When mortgage costs rise, borrowing capacity generally falls. This can affect:

• First home buyers
• Existing mortgage holders
• Property investors
• Developers
• Property prices
• Housing demand

The episode also discusses the possibility of future government intervention if property prices come under significant pressure.

Potential measures could include incentives for construction, changes to development requirements or lending support.

However, government intervention can involve trade-offs.

Measures that support property prices may help existing homeowners protect their equity, while potentially making it harder for prospective first home buyers to access cheaper housing.

The Intergenerational Debt Problem

Perhaps the biggest question raised by the episode concerns future generations.

A government debt position approaching $1 trillion does not simply disappear. Governments must continue servicing debt and managing the cost of borrowing.

That creates an intergenerational question: how much of today’s spending should be financed through debt that future Australians will ultimately help service?

At the same time, government spending can fund infrastructure, services and programs that provide benefits to future generations.

The issue is therefore more complicated than simply asking whether government debt is good or bad.

The more important questions are:

• What is the debt being used to fund?
• What economic benefit does that spending create?
• Can the government sustainably service the debt?
• How much tax will future Australians need to pay?
• What happens if interest costs continue increasing?

These questions will remain important as Australia approaches the end of the decade.

What Should Australians Watch Next?

The final budget result provides useful information, but Australia’s economic outlook will depend on several moving parts.

Australians should continue watching:

• Government revenue and expenditure
• Gross government debt
• Interest costs
• RBA interest-rate decisions
• Inflation
• Household disposable income
• Mortgage stress
• Property prices
• Housing construction
• Employment and wages
• Tobacco excise collections
• The size of illicit markets

For business owners and investors, these factors can influence borrowing costs, consumer spending, investment decisions and cash flow.

Frequently Asked Questions About Australia’s $971 Billion Government Debt

How much is Australia’s government debt?

Australia’s gross government debt is approximately $971 billion based on the final budget figures discussed in the episode.

Was Australia’s 2025–26 budget deficit better than expected?

Yes. The final deficit was reported at $22.3 billion, approximately $6 billion better than forecast.

Why did tobacco excise revenue fall?

The episode discusses a roughly $4 billion fall in tobacco excise revenue and links weaker collections partly to the growth of Australia’s illicit tobacco market.

How do interest rates affect Australian households?

Higher interest rates increase borrowing costs, particularly for households with variable-rate mortgages or loans that need to be refinanced.

Could government debt affect future Australians?

Government debt creates ongoing interest and repayment obligations. Future governments may need to manage these costs through taxation, spending decisions, economic growth or further borrowing.

What does government debt mean for property investors?

Higher government spending, inflation and interest rates can influence borrowing costs, property demand and investment conditions. Property investors should consider their own cash flow and borrowing capacity when making decisions.

Need Help Understanding Your Numbers?

Whether you’re a business owner, investor or individual taxpayer, understanding how tax, cash flow, debt and economic conditions affect your finances can help you make better-informed decisions.

Latitude Accountants provides tax, accounting and advisory services designed around practical, proactive advice.

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📧 info@latitudeaccountants.com.au

Disclaimer

This article is general information only and does not constitute financial, tax, accounting, legal or investment advice. Economic figures and commentary discussed in the article are based on the information available at the time of publication and the discussion featured in The Account Rant. Individual circumstances vary. Speak with a qualified professional before making financial or investment decisions.