Mid-year budget update to show $8.4b improvement to bottom line

The federal budget's bottom line is expected to improve by more than $8 billion over the next four years compared to earlier forecasts, as Labor vows to make "every dollar count" and economists call for more spending restraint.

Treasurer Jim Chalmers will declare the federal government has made a "lot of progress" repairing the budget when he hands down the Mid-Year Economic and Fiscal Outlook (MYEFO) in Canberra on Wednesday.

The new figures will show the 2025-26 budget deficit is now due to reach $36.8 billion, which is $5.3 billion lower than was forecast at the election.

It will be $8.4 billion better off between now and 2028-29 due to a combination of savings and higher tax takes from stronger employment and wages, as well as net higher commodity prices.

With inflation rising in recent months, economists are calling on Labor to rein in spending or find more sources of revenue to cover unavoidable costs such as veteran and pension payments.

Mr Chalmers said MYEFO was "all about responsible economic management".

"By finding more savings, restraining spending and banking revenue, the budget is in much better nick than it was when we came to government, and it's even improved since the last election," he said.

Mr Chalmers said the government recognised there was "more work to do" to repair the budget, but believed the mid-year update showed there had been a "lot of progress".

Over the past three budgets Labor has opted to save on average 70 per cent of the unexpected revenue upgrades rather than spend it.

Finance Minister Katy Gallagher said Labor's approach was to make "every dollar count" by reviewing spending and "prioritising what matters".

"Every budget update is an opportunity to deliver smarter savings and invest in the future," she said.

"Through responsible financial management, we're not only improving the bottom line but also ensuring that essential services, like support for veterans, disaster recovery, and the aged pension, remain robust and responsive to community needs."

Call for more savings or revenue measures

The government earlier revealed MYEFO would contain $20 billion in savings over the next four years.

But independent economist Saul Eslake said that represented only a 0.6 per cent cut of the total $3.2 trillion the government planned to spend in that time.

The budget update is also going to include an extra $6.3 billion in spending on natural disasters, $3 billion in aged pension costs, $2.1 billion for military superannuation schemes and $1.3 billion for veterans' entitlements.

Mr Eslake said he was not critical of extra spending in demand-driven programs such as veteran payments and the National Disability Insurance Scheme (NDIS), but he urged the government to do more to offset those additional costs.

"I would expect the government to find savings or raise new revenue," he said.

"The government needs to be making net policy decisions that reduce the deficit."

Mr Eslake also cautioned against focusing exclusively on the underlying cash rate, which does not capture so-called off-budget spending such as student debt relief or "handouts" to various heavy industries struggling with energy costs.

Instead, he said it was important to look at the headline rate because the amount being spent off-budget had "grown substantially" under the Albanese government through vehicles such as the Future Made in Australia Fund and the National Reconstruction Fund.

The government last week confirmed it would not be extend the $75 a quarter electricity rebate for households and small business, which Mr Eslake said was the right decision given the uptick in inflation recently.

"When those rebates were introduced, households were under serious pressure from a whole raft of things, not just electricity prices," he said.

"Now that situation has changed, real wages are rising … income tax is a bit less.

"Households are still struggling with cost of living, but far fewer than when these rebates were introduced."