Treasurer Jim Chalmers says retirement savers and not Australian workers have been paying a bigger tax burden to deliver a narrower Budget deficit as he warned of more interest rate hikes during a worsening Middle East conflict.

Higher business and superannuation taxes have delivered extra revenue that has reduced the size of the deficit by $6 billion for 2025-26, Treasury’s final Budget outcome revealed on Monday.

Despite the improved Budget position, Labor’s spending will still be at a four-decade high outside of COVID with the Treasurer insisting public demand growth had slowed, ahead of another expected Reserve Bank interest rate rise on Tuesday after a two-day meeting.

“I think it’s the universal or near universal expectation of economists and the market that rates will go up around the world including in Australia,” Dr Chalmers told reporters in Canberra.

“We see much more pressure on inflation from developments in the Middle East in particular and that’s why if you look right across the major advanced economies, there is an expectation of higher interest rates around the world as a consequence of higher inflation coming from primarily oil prices.”

Dr Chalmers stressed the smaller deficit had little to do with higher commodity prices during the Iran war or higher personal income tax receipts as more Australians move into higher tax brackets, with personal individual income tax revenue still making up more than half of the Federal Government’s tax take.

“I want to be really clear that the improvement in receipts is not from commodities, in fact, mining profits came in lower than was anticipated,” he said.

“It’s also not from wage earners. It is overwhelmingly from higher super and investor income than what we anticipated in the Treasury’s forecast in May.”

The deficit for the 2025-26 financial year came in at $22.3b, which was $6b less than forecast in the May Budget and made up 0.8 per cent of the economy instead of 1 per cent as predicted four months ago.

“Despite this very welcome improvement in the Budget, we know that pressures are intensifying rather than easing,” Dr Chalmers said.

“We’ll see that in the months ahead as well.”

Opposition Leader Angus Taylor said Labor didn’t understand business or economics.

“If the Government had offset all of its extra expense since it’s been in government, we’d be in surplus right now,” he told reporters.

“You’ve got a Treasurer here who’s just a media adviser - it’s all just spin. That’s where he comes from. He doesn’t understand the economy.”

The deficit was still more than double the $10b deficit for 2024-25, a point shadow treasurer Tim Wilson highlighted, noting Labor’s spending growth of 4.3 per cent was double the 2.1 per cent economic growth pace.

“The Treasurer has forecast debt and deficits for decades because he can’t kick his spending addiction, and even when he gets a windfall he could use to restructure, he just keeps fuelling inflation and higher interest rates,” Mr Wilson said.

“With interest rates set to rise because the Treasurer can’t kick his inflation addiction, we know that he can’t afford to because it is underpinning his Budget held together by inflation and gaffer tape.”

The Commonwealth during the last financial year collected $4.6b more in tax revenue “largely driven by higher personal income tax from business and investment income and higher superannuation fund tax receipts”, Treasury said.

“Personal income tax from wage and salary income was broadly consistent with the 2026-27 Budget estimate,” it said.

Total tax receipts added up to $704.4b, making up 24.1 of gross domestic product instead of 23.6 per cent as forecast in the Budget.

Personal income tax revenue of $366.5b made up 52 per cent of the Government’s overall tax take and came in $2.3b better than predicted in May.

Superannuation fund tax revenue came to $35b, which was $1.9b more than expected.

Overall income tax receipts, covering business taxes, added up to $557.3b - a $4.9b improvement.

But tobacco excise revenue was $200 million weaker than expected, at $3.9b, despite excise per cigarette increasing to $1.53 in March.

Gross government debt printed at $971.4b, which was $10.6b less than forecast in the Budget, but it will still make up 33.2 per cent of GDP.

“We have much, much lower debt-to-GDP than the major, advanced economies and this is precisely why the agencies have rated us AAA for Budget management,” Dr Chalmers said.

Treasury said slowing the trajectory of debt would reduce interest payments by $70b over the 11 years to 2032-33, with the interest bill adding up to $17.6b in 2025-26.

“We expect there will be substantial additional pressure on borrowing costs going forward because of what we’re seeing in bond yields around the world,” Dr Chalmers said.

Government payments made up 26.9 per cent of gross domestic product which was the highest since the 1986-87 financial year outside of COVID.

“Responsible economic management is a defining feature of this Government - you can see that in the way we have made savings,” Dr Chalmers said.

Treasury noted that new public final demand grew by 2.2 per cent, the slowest in 11 years and half a percentage point below the May Budget forecast.

By comparison, new private final demand grew by 3.6 per cent during a time of high inflation.