Today, Treasurer Jim Chalmers has spoken amidst leaked Treasury advice which urges the government to raise taxes and cut spending to bring the budget back to sustainability. Treasurer Jim Chalmers stated today, “We are interested in ways to simplify the tax system”. The government also faces challenges meeting it's housing targets, with the leaked Treasury advice suggesting the government will fall short by 300,000 houses.

Given these developments, the question arises whether Australia is on track to implement Austerity measures or adopt a more restrained approach.

What is Austerity?

But before we dive into this, there are probably some things we should unpack to help you understand the situation, and this starts with the simple question, what is Austerity?

Austerity is an economic policy focused on raising taxes and cutting government spending (often called cutbacks), which is generally implemented when a government faces debt and issues with it's current accounts. Although it is often confused for mass spending cuts, in economics it refers to both.

Governments typically adopt austerity measures when there are economic problems, especially when they cannot be addressed by small, targeted reforms or changing a single fiscal policy (taxes or spending etc). Austerity requires a multifaceted approach to tackle these issues, and specifically to tackle it's debt issues.

When a government imposes austerity, it generally has three goals. First, and most obviously, to reduce or eliminate budget deficits and prevent the unsustainable accumulation of public debt.

Second, to support the reduction of high inflation, although this is usually a secondary aim, with central banks taking the lead via interest rates.

Third, austerity can have the side effect of limiting overinvestment and speculative bubbles by cooling excessive demand, though this is not typically a primary policy objective.

Debt and deficits usually create the structural pressure for austerity, justifying it's use. Unemployment influences when and how austerity is implemented and GDP growth indicates the risk of implementing Austerity. Governments aim for a balance: they want to reduce debt but not crush growth or jobs.

Why Australia could potentially be on track for Austerity?

Australia could be moving towards Austerity measures. The nation faces those same budget deficit pressures mentioned earlier, creating an environment for the policy to occur. As it stands now, Dr Jim Chalmers has stated the Albanese Government will engage in "fiscally responsible, and a targeted approach in dealing with it's economic issues among global uncertainty."

The Treasurer also went on to state labor's priority in its first week in parliament is providing 20% HECS debt relief for students," As well as voicing Albanese's previous statements on the GST, leaving regressive taxation alone and reforming Australia's progressive taxation system. With the Albanese government committing itself to providing cost-of-living relief However the government places itself in a difficult position with mounting challenges:

• Productivity is stagnating

• GDP per capita is declining

• Government revenue is retreating from fiscal strength 

• Structural spending obligations (NDIS, aged care, defence) continue to rise

To fully understand the government’s constrained choices, we must examine these forces not in isolation, but as a tightening vice on future policy ambition.

The Indicators:

National Debt

As of July 2025, Australia's gross national debt is approximately $1 trillion which represents around 25% of GDP. This is the total amount of money the government owes — the full face value of all its liabilities (bonds, loans, etc.). It doesn’t account for any financial assets the government holds. Australia's net debt however is estimated at $556 billion, or 19.9% (Australian Department of Treasury, 2025).

This is the total amount of money the government owes — the full face.

This subtracts financial assets (like cash reserves, investments, loans to other entities) from gross debt. So it’s the government’s debt after accounting for what it owns.

According to the federal budgetary office, Gross debt as a share of GDP is projected to be higher in each year of the forward estimates compared to the 2024–25 Budget.  Net debt as a share of GDP is expected to be lower last financial year and in 2025–26, but higher in 2026–27 and 2027–28 compared to last year's Budget.

What this all means is that Australia’s Net debt to GDP is relatively quite low and that the government has a manageable debt burden and retains fiscal flexibility in addressing the country’s economic challenges. Compare this to other countries: US (~95–100% net debt to GDP) UK (~85%), Japan (well over 200%). Australia retains high credit ratings, strong institutional credibility, and manageable interest repayments.

While the current net debt level is not alarming, the projected increase highlights potential fiscal pressures. Factors contributing to this include persistent budget deficits, rising public spending, and economic uncertainties. Maintaining fiscal discipline and exploring avenues for sustainable revenue generation will be crucial to managing this upward trend in debt.

Current Account Deficits

Economists such as Saul Eslake have raised concerns about how Australia funds its growing debt and collects national revenue. Compounding the issue is a widening Current Account Deficit (CAD)—a sign that the country is spending more on foreign goods, services, and income transfers than it earns.

The current account forms part of Australia’s broader balance of payments and reflects the net flow of trade, income, and transfers between Australia and the rest of the world. Persistent CADs highlight deeper structural imbalances, particularly when paired with fiscal deficits—where government spending outpaces tax revenue, requiring additional borrowing to plug the gap.

To make up the budget shortfall, a government often issues treasuries to domestic and international investors. However, as a consequence, the government must now service the debt + interest on that debt to investors, in which it only has 3 practical ways to do this. 

1. Cut government spending

2. Raise taxes

3. Sell government assets

However, the government (specifically the Reserve Bank) also has 2 obscure and lesser-known ways it can also deal with this issue:

1. Inflate the Debt Away (a.k.a. Financial Repression)

2. Monetise the Debt (Money Printing / Central Bank Purchases)

Although, as it stands, the government is implementing conventional fiscal tools to manage the deficit.

Revenue and spending pressure is mounting

Despite high employment, the Albanese Government faces growing revenue challenges. GDP per capita is falling, which weakens income tax growth, and company tax has become increasingly volatile, largely due to fluctuations in commodity prices. With Australia’s economy heavily reliant on primary industries such as mining and agriculture, any softness in global demand directly impacts government income.

In an ABC article, Economist Saul Eslake warns that mounting pressure on federal expenditure—across health, social care, defence—means spending cuts are unlikely to close the gap that had been expanded in the 2025-26 election budget. Instead, Eslake flagged tax rises as the more probable remedy. But he cautioned that if Australia's debt becomes too burdensome, fiscal flexibility and future crisis-response capability will be compromised.

In terms of our key exports, recent developments suggest that iron ore is losing its status as Australia’s dominant economic engine. China — historically Australia’s biggest iron ore customer — is seeing a slowdown in steel demand, driven by global economic uncertainty, domestic overcapacity, and the ongoing US-China trade tensions.

Meanwhile, new mining projects such as Rio Tinto’s Pilbara expansion may oversaturate the market, raising concerns about long-term price stability. There’s also a growing international shift towards green steel and higher-grade, lower-emission ore, which may disadvantage traditional Australian exports unless adaptation is swift.

In the broader tax system, the Goods and Services Tax (GST) remains unchanged at 10% and excludes many modern services, such as digital platforms and streaming. Treasurer Jim Chalmers has expressed interest in tax reform, but has ruled out any increase to the GST rate, instead promoting progressive income tax changes and closing loopholes at the top end of the tax system.

Prime Minister Anthony Albanese has echoed this view, repeatedly stating his commitment to progressive reform over regressive taxation, and reaffirming his party’s position against broad-based tax hikes like a GST increase.

Sluggish GDP Growth

Australia has experienced sluggish economic growth ever since post-COVID in 2023. In the 23/24 financial year, Australia’s economy grew by 1.5%, and in the 24-25FY only performed slightly better at 1.6% GDP growth. All up Australia’s economy has only grown 3.1% over the two years, meanwhile countries like the US and China have grown significantly faster.

If we look at the average annual growth between 2023 to 2025 (two financial years) we can find that australia only grew by an average of 1.55%/year, while the US averaged 2.89% and China at 5.13%, However Australia performed slightly better than Canada, with the Canucks averaging 1.425% and the UK at a slow 0.75% average.

Economic growth directly shapes the political and fiscal risk of austerity. When GDP is weak, Austerity becomes more risky to implement because it can slow the economy further or cause a recession. If growth is strong, Austerity is easier to implement,  since the economy can absorb cuts and higher taxes without tipping into recession.

 It also signals a government's capacity to sustain debt and fund public services without resorting to austerity.

Why has the Labor Government restrained Austerity measures so far?

The Albanese government has kept tax reforms and government spending away from the public agenda, although these leaked documents suggest actions the government likely has to take. Despite this we might not see full-blown Austerity, and here are a few reasons:

Political constraints and popularity

Despite mounting fiscal pressure, the Albanese government has resisted full-scale austerity due to political risks and public sentiment. With a cost-of-living crisis still gripping households, cutting services or raising broad-based taxes remains deeply unpopular.

RBA Governor Michelle Bullock in a march press conference has highlighted the results of inflation:

Economic context

Australia's return to deficit, sluggish GDP per capita growth, and falling productivity have created a difficult fiscal landscape. However, unemployment remains low, and inflation is easing, making deep cuts harder to justify economically.

Liberal Shadow Treasurer Angus Taylor criticised Labor's approach during the treasurer's election debate earlier this year,

Signals from the Government 

Treasurer Jim Chalmers has carefully framed his strategy as "fiscally responsible and targeted," rejecting calls for deep cuts while still warning of structural pressures. “The Budget can't do everything,” he said in June. “We’re not pursuing austerity — we’re making difficult but deliberate decisions.”

The government has instead opted for tactical adjustments like super tax tweaks and temporary cost-of-living relief, steering clear of sweeping measures like GST increases or mass public service reductions.

Reform Over Reductions

Rather than resorting to blunt spending cuts, the Albanese Government has emphasized reshaping existing systems to improve sustainability without sacrificing essential services. This approach is evident in its careful adjustments to the controversial Stage 3 tax cuts, scaling back benefits for higher-income earners while preserving relief for the middle class.

Additionally, ongoing reforms to the National Disability Insurance Scheme (NDIS) aim to enhance efficiency and ensure targeted support reaches those who need it most, rather than cutting funding outright.

This strategy reflects a broader commitment to reform over retrenchment—seeking to balance fiscal responsibility with social fairness.

As Danielle Wood, head of the Productivity Commission, noted in 2025:

Her words underscore the delicate act of reforming government finances without undermining economic growth. It’s a call for smart, measured policy changes that boost productivity and target inefficiencies, rather than quick austerity measures that risk deepening inequality or stalling recovery.

What does austerity historically look like in Australia?

Austerity in Australia has historically been rare and relatively moderate compared to countries like the UK or Greece — but there have been key moments where governments engaged in fiscal tightening through spending cuts, wage restraint, or reduced services.

• Spending caps on programs like the NDIS, JobSeeker, or public service expansion.

• Bracket creep allowed to continue without tax cuts (a hidden tax rise).

• Delays or reductions in infrastructure and climate funding.

• Broader GST reform or closing loopholes for higher earners.

Why Australia’s Economic Model Complicates Austerity

Austerity is possible here, but constrained, risky, and often counterproductive if overused — especially in a trade-exposed, resource-dependent, small population economy like Australia's.

While Australia has implemented forms of cutback measures in the past, Australia's nature as a global economic player complicates its fiscal policy decision-making. Jim Chalmers in his press conference today stated,

With Australia being a globalised economy, our country faces challenges such as the US-China trade war, supply disruptions and volatile international relations. With this, heavy handed fiscal measures such as "Thatcher Austerity" and "UK Austerity" face blowback potential here.

• Heavily Dependent on Global Demand

  • Much of Australia's growth relies on exports (iron ore, LNG, agriculture), foreign investment, and immigration-driven demand.

  • When the global economy slows, Australia can’t export its way out of fiscal tightening — making austerity amplify downturns.

• Small Domestic Market, Big Global Exposure

  • Australia is price-taker, not price-maker — it has limited influence over commodity prices or global interest rates.

  • Austerity can reduce domestic demand at the very time external demand is already soft, leading to economic stagnation.

• Private Debt and Cost-of-Living Sensitivity

  • Households are already carrying high levels of private debt (mortgages, credit).

  • Cutting government support (or raising taxes) during inflationary stress hits consumers hard, making austerity politically toxic and economically risky.

• Federated System Limits Impact

  • The Commonwealth may tighten, but states continue to spend (or vice versa).

  • This diffuses austerity’s impact, often making partial tightening ineffective, or politically harder to sustain.

    
    

The Albanese Government Approach: "Jimsterity"

Rather than adopting harsh and volatile forms of Austerity, Australian Labor has vocalised it's plans to implement softer, subtler, and targeted reforms (aso considering the global economy and cost of living pressures at home).

The Labor Strategy — nicknamed “Jimsterity” (a nod to Treasurer Jim Chalmers) — is defined by:

• Selective tax hikes on the wealthy

• Efficiency-based trimming of government programs

• Structural reforms over blunt spending cuts

• Targeted cost-of-living support to soften the blow

The Difficult Pathway Forward

Australia faces a delicate balancing act as it navigates rising debt pressures, sluggish growth, and evolving global challenges. While traditional austerity measures remain politically and economically unpalatable, the Albanese government’s approach—dubbed “Jimsterity”—seeks a middle path of targeted tax reforms, measured spending restraint, and strategic structural changes.

This cautious strategy aims to safeguard fiscal sustainability without undermining the social safety net or economic recovery. Ultimately, Australia’s success will depend on maintaining this equilibrium amid a volatile global landscape and growing domestic expectations.

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