Across the projection period, the UCB is projected to improve modestly over the forward estimates (to 2029-30), then more substantially over the medium term (to 2036-37). The improvement primarily reflects higher personal income tax receipts (mainly from bracket creep), together with lower public service spending and non-hospital funding to the states. These effects are partly offset by lower excise revenue and higher major payments such as on interest, defence and hospitals. Consistent with the 2026-27 Budget, these projections assume no further personal income tax cuts for the next decade beyond what has already been announced.

Despite the current conflict in the Middle East, Australia’s fiscal outlook remains stable, with debt as a share of GDP projected to peak at 35.8% of GDP in 2028-29 and then decline over the medium term, as a result of the steady improvement in the UCB over the decade.

Compared to the 2025-26 MTBO, the projection for gross debt as a share of GDP (Figure 1-2) is slightly more favourable over both the forward estimates and the medium term. This reflects the upward revisions to the UCB projections.

Gross interest payments (Figure 1-3) are projected to rise over the forward estimates and into the early medium term, peaking at 1.5% of GDP in 2032‑33 before declining, reflecting the level of the debt stock. Previously accumulated deficits mean interest expenses are one of the fastest‑growing areas of spending, highlighting the increasing budgetary cost of servicing debt. While borrowing can play an important role in supporting economic stability and productivity‑enhancing investment, it still entails ongoing servicing costs that weigh on the budget.

Compared to the 2025‑26 MTBO, projections for interest expenses are largely unchanged over the forward estimates, before becoming modestly lower over the medium term due to a reduced debt trajectory.

10‑year government bond yields have increased and are projected to remain between 4.8% and 4.9% over the medium term reflecting stronger economic conditions.² Bond yields have also been trending higher globally.³ Continued increases in bond yields since COVID-19 initially reflected the post‑pandemic recovery and have since been driven higher by global inflationary pressures due to the ongoing conflict in the Middle East. These higher rates significantly raise the cost of servicing both new and refinanced debt.

The primary underlying cash balance is the UCB excluding public debt interest (PDI) payments and interest receipts. By excluding the interest payments arising from past deficits and debt accrual, it provides an informative measure of the government’s current fiscal stance.

The primary UCB is projected to return to surplus within the forward estimates period in 2029-30 (Figure 1-4), which means the government’s ongoing operations would not contribute to debt beyond this point.

The headline cash balance (HCB) is similar to the UCB, but it also accounts for the government’s investment in financial assets for policy purposes (such as student loans and equity investments).⁴ These ‘alternative financing’ mechanisms are sometimes called ‘off-budget’, but they are part of the HCB.⁵

In 2026-27, the HCB deficit is around double the UCB deficit (Figure 1-5). Both balances then improve over the medium term, but a ‘wedge’ remains between the HCB and UCB, largely reflecting ongoing alternative financing arrangements. This gap is projected to narrow before stabilising from 2032-33.

Economic shocks, especially global shocks, can have major implications for both economic and fiscal projections. Over the past 20 years, the Global Financial Crisis and the COVID-19 pandemic each had substantial effects on the fiscal position. Most of current Australian Government debt stock was generated by responding to these globally significant negative events. More recently, conflicts in Ukraine and the Middle East have also affected Australia, particularly through reductions in the global supply of goods which increases their prices.

The conflict in the Middle East represents a key source of uncertainty for the economy, primarily through its impact on global energy markets. 

Australia imports most of the refined fuels it consumes, but exports most of its petroleum products, such as crude oil and natural gas. This means that while households and businesses are exposed to higher fuel prices, the budget will improve with higher export prices and increased nominal GDP. A prolonged conflict would be likely to detract more from economic growth and tax receipts, further offsetting the improvement from oil prices. 

Box 2 considers the fiscal impacts of the conflict, including potential fiscal implications should it persist.

Consistent with the government’s budget, the PBO’s fiscal projections are based on a ‘no policy change’ assumption which includes no personal income tax cuts for the next decade beyond those already legislated, as well as temporary programs due to terminate not being extended, including grants and departmental expenditure.

Historically, these assumptions have not been realised, with governments typically announcing further tax cuts as well as additional expenditure associated with new or extended programs. Figure 2-1 shows the impact on the budget under 3 scenarios:

• Return bracket creep - indexing the tax thresholds by CPI each year.
• Maintain grants - reflecting historic revisions, government grants to states and territories for road and rail funding are 0.25% of GDP higher than baseline projections from 2030-31 and beyond, with smaller increases for earlier years.
• Maintain the size of the public service – reflecting historic revisions, government operating costs are 0.5% of GDP higher than the PBO’s baseline projections from 2029-30 and beyond, with smaller increases for earlier years.
  • Public service staffing projections are discussed further in Section 5.4.

Net overseas migration (NOM) is a key driver of fiscal outcomes, affecting revenue and expenditure.¹⁰

On average, migrants typically have a more positive fiscal impact than members of the total population. Although migrants include a similar proportion of school-aged people as the broader population, they are less represented in older age groups and generally arrive after many publicly funded education and early health care costs have already been incurred overseas (Figure 2-2).

Governments have also sought to use migration in a range of ways that affect the fiscal position over the medium to long term. These include addressing structural demographic pressures associated with an ageing population, supporting labour force growth and skills needs, and contributing to productivity and economic activity. 

This report reflects the fiscal impacts of migration (NOM) to the Commonwealth budget. There are also a range of direct and indirect effects which could result in positive and negative fiscal impacts for states and territories. Some of these state budget effects include changes in demand for health, education, housing and infrastructure services, along with impacts on GST distributions, Commonwealth grants and state tax revenues.

Climate change, and the response to it, has and will continue to have broad impacts on the Australian economy. Natural disasters and their associated damages are becoming more severe and more frequent. Changing climatic conditions pose growing risks to infrastructure, health and economic activity.¹⁵ However, investments to mitigate the impacts and adapt to the changing conditions, although increasing expenditure, may reduce damages and prevent costs.

This section looks at the sensitivity of the fiscal outlook to climate-related effects and policies over the medium term. The PBO does not model the economic and fiscal impacts of climate change, but we have constructed scenarios based on public information on the range of possible impacts. 

While their nature and severity are uncertain, the fiscal impacts of climate change can be helpfully grouped into three categories: direct costs, indirect economic impacts, and mitigation and adaptation expenditure. 

Direct costs refer to expenditure arising from climate-related events and physical damages from longer-term environmental changes. 

Disaster response expenditure is a key cost in this category, with the majority of Commonwealth costs incurred through the Disaster Recovery Funding Arrangements (DRFA) and Australian Government Disaster Recovery Payment (AGDRP).¹⁶ This expenditure fluctuates significantly year-to-year and due to this uncertainty, future funding requirements are not provisioned for in budget forecasts.

Indirect economic impacts capture the broader impacts of climate change on economic activity, such as those on labour productivity, with flow-on effects to government revenue, as well as those on individuals and communities with flow-on effects for government expenditure through healthcare, social security and other channels.

The relevant literature assessing the impact of global warming levels on GDP, presents a wide range of estimates due to differences in data sourcing, assumptions and empirical approaches. As an example, from across a selection of studies assessing the future economic impact of global warming between 2.5°C and 3.0°C above pre-industrial levels, the average estimated decrease in GDP was around 1.5%, with the largest estimated decreases in GDP being 20%.¹⁷

Mitigation and adaptation expenditure relates to proactive policy-driven expenditure in the face of climate change-related pressures or economic opportunities. This stands in contrast to the ‘direct costs’ which are reactive as they occur in response to a disaster or adverse event. 

The first component, mitigation, covers efforts to limit greenhouse gas emissions and, more broadly, shift Australia’s economy towards being more sustainable. Australia has made binding commitments such as the 2015 Paris Agreement and domestically legislated targets to achieve ‘net zero’ by 2050.¹⁸ Achieving these targets will require substantial changes across the Australian economy supported by government. 

An example of mitigation expenditure is the Future Made in Australia policy package from the 2024-25 Budget, which committed funding to support the development of industries associated with the net zero transition, including green metals, low carbon liquid fuels and clean energy manufacturing.¹⁹

The second component, adaptation, covers efforts to anticipate adverse effects of climate change and take actions to prevent or minimise the damage caused. As a result of rising global temperatures, among other impacts, Australia is expected to experience more frequent and intense extreme heat events with longer fire seasons, as well as declining cool season rainfall in southern regions contrasted by more intense heavy rainfall events.²⁰ These changes will increase the exposure of communities and infrastructure to heat-related impacts and bushfire events, while both worsening water availability and drought risk in some regions and elevating flood risk in others. 

Adaptation will be needed to counteract the adverse impacts of these climatic and environmental changes, and a key example of adaptation expenditure is the Disaster Ready Fund (DRF). Announced in the 2022-23 October Budget, the DRF is funded to provide up to $1 billion over five years from 2023-24 to support increased resilience and preparedness of governments, community groups and affected communities, as well as improved understanding of disaster impacts that can be utilised to reduce future risk.²¹

Since the 2022-23 October Budget, each Budget has reported on ‘new net zero spending measures’ since the prior Budget under the classification system as laid out in the 2024-25 Budget (Figure 2-5).²²

Increasing state and territory debt has potential implications for the Commonwealth in terms of the overall Australian debt burden.²⁷

The International Monetary Fund noted in its latest assessment of Australia’s finances that ‘higher sub-national debt could eventually impact Commonwealth borrowing costs’.²⁸ Increasing state debt could also risk increasing pressure for transfers from the Commonwealth to maintain services.

In this report, fiscal sustainability refers to the government’s ability to maintain its long-term fiscal policy settings indefinitely without the need for major remedial policy interventions. The PBO’s fiscal sustainability framework tests the trajectory of future government debt through scenarios based on historical experience. Our ‘central’ scenario assumes that future governments can maintain budget balances making policy adjustments, similar to those of the past on average, in response to downturns and upswings.³⁰

Other scenarios examine future paths for government debt based on economic and budget assumptions that reflect historical periods of lower and higher economic and fiscal outcomes.

The fiscal position is sustainable where the debt to GDP ratio is expected to be stable or trend downwards over the long term under most scenarios considered. This provides governments the fiscal space to pursue policies that support long-term economic growth and flexibility for governments to respond to changes in economic conditions, including downturns, either through automatic or discretionary mechanisms. 

The long-run trajectory for the debt-to-GDP ratio is driven by 3 parameters: the primary headline cash balance (HCB) (HCB before interest payments); the interest rates that apply to government debt; and economic growth (nominal GDP).³¹

The budget does not necessarily need to be balanced or in surplus to reduce the debt-to-GDP ratio. If the rate of economic growth exceeds the rate of interest on debt, debt-to-GDP can be reduced with sufficiently small budget deficits. Accordingly, budget deficits can be consistent with a fiscally sustainable position.

A sustainable position also does not mean the debt-to-GDP ratio will not increase at times, especially in response to large unforeseen economic shocks, such as the COVID-19 pandemic. In this sense, it is not necessarily the level of debt that determines if the fiscal position is sustainable, but whether, on average, the debt-to-GDP ratio is expected to remain stable over the medium and long term.

Sustainable fiscal settings should also preserve fiscal flexibility to respond to future economic and fiscal shocks. While the long-term trajectory of debt relative to GDP is a key indicator of sustainability, the level of debt also matters. Repeated shocks that leave debt at progressively higher levels would reduce the range or effectiveness of future policy responses.

By comparison, in the scenario where the debt-to-GDP ratio is projected to trend upwards over the long term, the fiscal position may not be sustainable. In such circumstances, more significant interventions – beyond those historically employed by governments – would be needed to reduce deficits and keep debt broadly stable as a percentage of GDP.

In the PBO’s fiscal sustainability analysis, 27 possible scenarios for the debt-to-GDP ratio are examined over a 40-year period. Each scenario reflects variations in 3 parameters (the primary HCB, interest rates and economic growth) and is consistent with low, middle and high ranges throughout history. These variations are referred to as ‘cases’. For example, one scenario might combine the middle case for the budget balance, the best case for interest rates and the worst case for GDP growth. 

Each of these scenarios represent a possible future trajectory for the debt-to-GDP ratio, but the PBO does not make any judgement as to which scenario is most likely. For instance, the middle scenario should not be considered as a baseline or most-likely trajectory. Instead, the PBO is illustrating what the path could be under a range of economic and policy conditions.

Importantly, the overall best- and worst-case scenarios represent combinations of interest rates and economic growth that would be unlikely to persist for an extended period of time. For example, should economic growth slow to the rate assumed in the worst scenario, the Reserve Bank of Australia (RBA) may respond by lowering interest rates, offsetting the impacts on the budget balance. The extreme scenarios are intended to illustrate that the budget is generally sustainable even assuming highly unlikely combinations of long-term economic growth, interest rates and budget balances.

By building the scenarios around historical averages, the PBO has implicitly captured the impact of future economic shocks and policy changes, to the extent that these are of a similar magnitude and regularity to those of the past. However, if future economic or climate change shocks were comparatively larger or more frequent than historical shocks, or if long-term structural shifts meant that GDP growth rates were comparatively much lower, this would make maintaining a fiscally sustainable position more difficult. 

The PBO also uses historical average budget balances to guide the scenarios, on the basis that future governments can respond to their challenges to a similar extent as those of the past. It is important to note, however, that some past government actions may not be available in the future. For example, certain assets cannot be resold (e.g. the Commonwealth Bank or Telstra) and some taxes cannot be reintroduced (e.g. the GST).

For further information on the framework the PBO uses to assess fiscal sustainability, see the PBO’s report on Fiscal sustainability.

Table 3-1 shows our middle, best and worst cases. The results of all 27 scenarios are shown in Figure 3-1.³²

Some of the 27 scenarios may be more plausible than others. In particular, there are structural factors that suggest the downside scenarios may be relatively more likely to persist than the upside cases.

Over the long term, it is possible that economic growth may not return to historical averages, largely as a result of productivity growing less in the future than it has in the past. This is a plausible risk, given the slowing of productivity growth internationally and in Australia. 

Budget balances may also weaken relative to historical norms due to ongoing structural pressures on the budget balance. Reliance on personal income taxes is projected to increase over the coming decades (Chapter 4) including following the taxation changes announced in the 2026-27 Budget. While structural expenditure pressures such as ageing-related spending, defence and fiscal impacts associated with the response to climate change will also continue to grow.

Figure 3-2 demonstrates the impact of lower economic growth on the debt-to-GDP ratio. This scenario shows the impact of lower economic growth (3.6% nominal annual growth instead of 4.4%), while keeping the budget balance and interest rates similar to the central scenario. 

Total revenue is forecast to dip from 26.4% of GDP in 2026-27 to a low of 25.9% in 2028-29 before a projected increase to 27.4% of GDP in 2036-37 (Figure 4-1). 

Over the medium term, revenue is projected to increase as a share of GDP driven by increasing personal income taxes. This reflects the impact of bracket creep plus the growing impact of new taxation measures announced at the 2026-27 Budget.

Compared to the 2025-26 Budget forecasts, total revenue projections have increased by around $50.4 billion over the forward estimates, almost entirely across the first 2 years (2026-27 and 2027-28) due to higher projected commodity prices, which are expected to return to normal levels during the forward estimates.

For further discussion of these projections, see section 4.2: Drivers of changes in revenue. 

For a more detailed breakdown of revenue projections, see Table B-1 in Appendix B.

Trends in revenue growth

Projected revenue growth over the medium term is predominantly driven by personal income taxes, the only source of revenue projected to increase materially as a share of GDP (see Figure 4-2), from 12.6% of GDP in 2026-27 to 14.8% by 2036-37. Much of this projected growth can be attributed to bracket creep, which is explored further in Section 4.3. 

Company tax revenue is higher in 2026-27, primarily due to higher commodity prices, but is projected to decline over the forward estimates from 5.1% of GDP in 2026-27 to 4.4% by 2029-30, then remain broadly stable at this level to 2036-37.

Indirect taxes are also projected to decline from 5.5% of GDP in 2026-27 to 5.3% by 2036-37, driven primarily by excise revenue declining from 1.3% to 1.1% of GDP over this period. For further detail, see section 4.4: Trends in excise revenue.

In the absence of further announced personal income tax policy, the PBO projects that average tax rates will continue increasing from 24.9% in 2026-27 to a historical high of 28.6% by 2036-37, mostly driven by bracket creep (Figure 4-7).

For a progressive tax system featuring tax brackets, bracket creep occurs when nominal wage growth increases individuals’ incomes so their average tax rate rises over time, including as a result of moving into higher tax brackets. This increases average tax rates and budget revenue each year without any explicit policy change.⁴²

Bracket creep is particularly prevalent in times of economic growth and inflation and has played an important role in fiscal consolidation after previous major downturns, including the 1990s recession, the Global Financial Crisis and the COVID-19 pandemic.

Figure 4-7 shows the average personal income tax rate from 1966-67 to 2036-37, including historical policy changes that have notably impacted the average tax rate.⁴³

Following Federation in 1901, excise taxes comprised most of the Commonwealth’s revenue. However, their contribution has been in long-term decline, shrinking from around 2.6% of GDP in 2006-07 to a projected 1.3% of GDP by 2026-27. This trend is expected to continue over the medium term (Figure 4-8) as contemporary economic and social developments continue to undermine the tax base for all forms of excise, with total excise revenue expected to decline further from 1.3% of GDP in 2026-27 to 1.1% of GDP in 2036-37.

The 2026-27 Budget included 23 revenue measures, a number of which apply to capital as a part of the smaller but key part of the personal income tax base, beyond wage and salary income alone.⁴⁷ Many of these measures commence in 2027-28 or later and have grandfathering arrangements, so their impact on revenue is expected to be largely beyond the forward estimates. 

Figure 4-9 shows the estimated financial impact over the next 10 years for the largest revenue measures in the 2026-27 Budget, based on preliminary PBO estimates.

The measure with the largest negative revenue impact over the medium term is the measure Tax Reform – cutting taxes with a Working Australians Tax Offset, projected by the PBO to reduce revenue by $3.0 billion in 2028-29, growing to $3.9 billion by 2036-37. 

Three measures, all affecting personal income taxes, account for the majority of the positive revenue impact of the 2026-27 Budget measures over the medium term. The measures Tax Reform – Boosting Home Ownership – reforming negative gearing and capital gains tax and Tax Reform – introducing a minimum tax on discretionary trusts are each expected to increase revenue by just over $40 billion between 2026-27 and 2036-37.⁴⁸ Additionally, the measure Electric Car Discount – more sustainable fringe benefits tax treatment of electric cars is estimated by the PBO to increase revenue by around $29.2 billion between 2026-27 and 2036-37.

Taken together, these three positive revenue measures are estimated to increase revenue by around $101.1 billion between 2030-31 and 2036-37, compared with $10.1 billion over the forward estimates.

Total expenses (Figure 5-1) are projected to decrease from a projected peak of 27.1% of GDP in 2027-28 to 26.2% of GDP in 2036-37, averaging 26.7% of GDP across the medium term. 

Compared to previous projections, the NDIS is no longer expected to be a major driver of spending growth. This change reflects the 2026-27 Budget measure Securing the National Disability Insurance Scheme for Future Generations. Projecting the NDIS forward estimates expenses over the medium term results in projected NDIS expenses reducing by around $170 billion between 2026-27 and 2035-36 (see 5.3).

The savings in the NDIS expenditure growth are largely offset by increased expenditure in other areas. The largest upward revisions have been in grants to the states (particularly for hospital funding), interest expenses and other operating expenses. 

Table 5-2 compares projected spending by program in 2028-29 and 2035-36 between the 2025-26 MTBO and the 2026-27 MTBO, highlighting the largest revisions. For example, in the 2025-26 MTBO, the NDIS was forecast to cost $62 billion by the end of the 2025-26 forward estimates period in 2028-29 and projected to cost $107 billion by the end of the 2025-26 medium term period in 2035-36, while in this year’s report, the NDIS is now projected to cost $54 billion and $72 billion in those years.

In April 2026, the Government committed to a range of reforms to the NDIS which aim to achieve an annual growth in NDIS spending of below 2% over the forward estimates and approximately 5% over the remainder of the medium term.⁴⁹

The 2026-27 Budget NDIS savings measure reduced projected payments by $37.8 billion over the forward estimates (relative to the latest NDIS Actuary projections), partially offset by NDIS parameter variations of $13.9 billion over the forward estimates. By comparison, the next largest expenditure savings measure in the past decade was the 2024-25 Budget measure National Disability Insurance Scheme – getting the NDIS back on track which was estimated to save $14.1 billion over 4 years.  

Figure 5-3 shows historical forecasts for NDIS expenditure along with actual costs – the NDIS has consistently exceeded forecast growth and over the previous 5 years has grown at an average rate of 18.7% each year, highlighting the challenges in achieving this. 

The forecast decline in public service spending is the largest projected fall in spending over the forward estimates and medium term (Figure 5-2 above). This reflects the budget’s ‘no policy change’ assumption, such that temporary decisions of government are assumed to end as scheduled, and no new decisions will be made. When temporary decisions end, the associated departmental funding also terminates, reducing projected wages and supplier costs. In practice, future budgets often include new resourcing decisions resulting in expense forecasts being ‘topped up’. Grant funding typically follows the same pattern. 

This appendix outlines the economic context and methodology used in the 2026-27 Medium-Term Budget Outlook (MTBO). 

The PBO’s projections methodology

The PBO’s projections are based on the same economic assumptions that underpin the budget and are broadly consistent with the budget’s medium-term outlook. The PBO’s projection for the underlying cash balance (UCB) in 2036-37 is not significantly different to that presented in the budget.

Revenue projections use a ‘base-plus-growth’ methodology. Economic parameters are used to estimate growth rates, which are then applied to the relevant base. 

Expenses projections are based on:

• the number of expected recipients receiving payments
• the average cost per person
• adjustments year on year for a range of factors including population growth, demographics, demand for services, and indexation. 

The report presents the major fiscal aggregates on both an accrual and cash basis using a balance sheet framework that uses accounting identities, consistent with the PBO’s previous reports. Revenue and expense projections are on an accrual basis. 

Estimates presented as a share of GDP use the latest GDP forecasts. If GDP is revised in subsequent budgets, these estimates as a share of GDP may change, including for prior years. 

For further information on the PBO’s balance sheet framework, see the PBO’s Beyond the Budget: 2021-22 report.

Bridging the balances

The PBO uses several measures to examine the budget position, including the:

• net operating balance (NOB)
• fiscal balance (FB) 
• underlying cash balance (UCB)
• headline cash balance (HCB) 

These measures provide different views of the budget depending on timing (cash vs accrual) and the treatment of investment and interest.

For further information about each measure, see the glossary at the end of this report, or the PBO’s online budget glossary. 

The 2026-27 Medium-Term Budget Outlook in context

Forecasts and projections of economic parameters underpin the PBO’s analysis. The key economic parameter forecasts are summarised in Budget Paper No. 1 of the 2026-27 Budget (Table 1.1).

Source: 2026-27 Budget, Budget Paper No. 1, 7.

Compared with the 2025-26 Budget, the 2026-27 Budget (the starting point for the 2026-27 MTBO) shows:

• Economic growth (nominal GDP) is forecast to be higher in 2025-26 and 2026-27 but then lower in almost all years from 2027-28 onward (shown in Figure A-1 below).
• Employment growth is forecast to be slightly higher from 2026-27 onward. 
• The unemployment rate is forecast to be slightly higher from 2026-27 onward.

Table B-1: Comparison of revenue programs

Source: 2026-27 Budget and PBO analysis.
Note: ‘Change’ refers to the total change between 2026-27 and 2036-37. Numbers may not sum due to rounding.

Table B-2: Comparison of expense programs

Source: 2026-27 Budget and PBO analysis.
Note: ‘Change’ refers to the total change between 2026-27 to 2036-37. Numbers may not sum due to rounding. Defence expenses/spending from 2026-27 to 2029-30 is based on the 2026-27 Budget estimates. For 2030-31 to 2035-36, the PBO has assumed expenses grow in line with the medium-term projections of consolidated defence funding that were published in the 2026 National Defence Strategy. For 2036-37 the PBO has assumed defence spending would be maintained at the same level of GDP as 2035-36.