Overview

This report provides an aggregated outlook for the national fiscal position. The PBO's National Fiscal Outlook (NFO) consolidates the forecasts from state and territory (state) budgets with the Australian Government’s budget.

The combined 2025‑26 budgets show that the national fiscal outlook has worsened since the last edition of NFO in October 2024, reflecting a deterioration in aggregates across most jurisdictions. This deterioration is despite improved forecast revenue in each jurisdiction, which has been more than offset by increases in forecast expenses. As such, the timeline for achieving a national net operating surplus is no longer in the forward estimates.

The total state net operating balance is forecast to return to surplus in 2027‑28, 2 years later than forecast in the combined 2024‑25 budgets.

National net debt is forecast to steadily increase over the forward estimates from 34.8% of GDP ($1,002 billion) in 2025‑26 to 37.9% of GDP ($1,257 billion) in 2028‑29. Public debt interest payments are forecast to increase, reflecting higher debt levels, tight monetary policy settings and global market conditions.

The PBO's scenario analysis shows a weaker long‑term fiscal sustainability outlook at the national level compared to last year’s report. Nonetheless, in all but 3 scenarios (up from 2), the debt‑to‑GDP ratio is still expected to trend downwards over the 40‑year period. The national fiscal position is likely to remain sustainable provided expense growth falls more into line with that of revenue to return the budget balance to average levels.^[1]

Box 1: National fiscal sustainability over the long term

The PBO has applied its fiscal sustainability framework to analyse governments' ability to maintain long‑term fiscal policy settings indefinitely, without the need for major remedial policy interventions. If debt‑to‑GDP is declining, it is more likely to be sustainable. 

In our fiscal sustainability analysis, we examine 27 scenarios for the consolidated national debt‑to‑GDP ratio over a 40‑year period (see Table A1 for case matrix). Each scenario reflects the range of historical outcomes to project upper, middle, and lower variations from 2028‑29. Variations are made to the consolidated national budget balance (headline cash balance before interest payments), the prior stock of debt and the interest rates that apply to this debt, and economic growth (nominal GDP). The results are shown in the shaded area of Chart 5.

Because each scenario is based on the range of historical outcomes, they implicitly allow for changes in economic conditions, including downturns, and the flexibility for governments to respond, either through automatic or discretionary mechanisms. No specific scenario should be considered as a baseline or most likely trajectory. Instead, we are illustrating what the path could be under a range of economic and policy conditions which are broadly consistent with historical fluctuations. For further methodological details and analysis, please see our Technical Appendix.

This year’s analysis shows a slightly weaker long‑term sustainability outlook, with the consolidated national debt‑to‑GDP ratio expected to trend downwards, suggesting likely sustainable fiscal positions in all but 3 scenarios (Chart 5). The debt‑to‑GDP ratio at the end of the 40‑year period in the worst scenario is projected to be 5 percentage points higher than projected in the 2024‑25 NFO. 

In our middle scenario, the debt‑to‑GDP ratio is projected to trend downwards to reach nil in 2068‑69, 3 years later than previously projected. In our best scenario, the debt‑to‑GDP ratio trends sharply downwards and reaches nil by 2048‑49, one year later than previously projected.

Box 2: State and Territory fiscal trends: Impacts on net operating balance

Over the last 2 decades, the state net operating balance (NOB) has fluctuated, predominantly influenced by the business cycle. Since the early 2000s the NOB has deteriorated on average, with variations within the period, largely driven by steady growth in state expenses from 13.1% of GDP in 2003‑04 to 14.4% of GDP in 2023‑24.

e composition of state expenses has changed over this period (see Chart 6). Health spending has steadily increased as a share of GDP, rising from around 3.3% in 2003‑04 to 4.3% in 2023‑24. Social protection (including disability support and aged care), public order and safety, and housing expenditure have each increased by around 0.2% of GDP, while state education spending declined by around 0.4% of GDP over the same period. Economic affairs remained stable except for a spike during the COVID‑19 pandemic.

^{Note: Transfers from the Commonwealth are not included.
Source: PBO modelling based on ABS Government Finance Statistics and state budget papers.}

State revenue has shown an overall limited change (13.8% of GDP in 2003‑04 and 13.9% of GDP in 2023‑24) but, like expenses, has experienced a degree of volatility throughout the period. State revenue is closely tied to economic activity – including payroll tax, GST, dividend income and sales of goods and services – as well as Commonwealth payments. Revenues declined in 2008‑09 during the Global Financial Crisis, in 2012‑13 amid a weaker Australian economy and in 2019‑20 and 2020‑21 due to the COVID‑19 pandemic.

Commonwealth expenditure has risen but at a slower rate (24.8% of GDP in 2003‑04 to 25.7% of GDP in 2023‑24) compared to state expenditure. During this period, the largest expense growth has been in health which has increased by 0.4% of GDP. Commonwealth revenue (25.7% of GDP in 2003‑04 and 26.4% of GDP in 2023‑24) continues to have a growing dependence on personal income tax. The composition of indirect taxation has changed, as tariffs and wholesale sales tax have declined or been replaced by a broader based consumption tax (the GST). For more details, see our 2025-26 Medium-term Budget Outlook: Beyond the Budget and Budget Explainer, Australia's Tax Mix.