A positive fiscal impulse will provide a growth tailwind for Australia in 2025-26, with the structural deficit declining by 0.9 percentage points of the GDP and public demand growth re-accelerating modestly through 2026, BofA Securities said in a Thursday note.

Despite high commodity prices and low unemployment supporting a surplus, increasing structural spending pressures are keeping public demand around a record 29% of GDP and leading to a budget deficit of around 1.3% of GDP.

The expansionary fiscal stance is running counter to the Reserve Bank of Australia's (RBA) tightening cycle, with elevated government spending supporting demand, amplifying capacity pressures, and adding to persistent inflation risks. A positive fiscal impulse through 2025-26 increases the likelihood that the central bank will need to keep policy restrictive for longer to offset this demand impulse.

Fiscal sustainability is set to become more important in light of the structural trends underway, such as geopolitics, demographics, and climate change, skewing medium-term risks towards larger deficits and increased debt.