Introduction Mental disorders, in particular depressive and anxiety disorders are a leading cause of disability in Australia and globally. Physical activity (PA) may reduce the incidence of anxiety and depression, and this supports the inclusion of physical activity in strategies for the prevention of mental ill health. Policy makers need to know the potential impact and cost savings of such strategies. We aimed to quantify the impact of changes in PA on the burden of anxiety and depression and health care costs in Australia. Methods We used a proportional multistate lifetable model to estimate the impact of changes in PA levels on anxiety and depression burdens for the 2019 Australian population (numbering 24.6 million) over their remaining lifetime. The changes in PA were modelled through three counterfactual scenarios informed by policy targets: attainment of the Australian PA guidelines, and achievement of the WHO Global Action Plan on PA targets of a 10% relative reduction in the prevalence of insufficient PA by 2025 and a 15% relative reduction by 2030. Results If all Australians adhered to the recommended minimum PA levels, in 25 years’ time, the burden of anxiety could be reduced by up to 6.4% (95% uncertainty intervals [UIs] 2.5 to 10.6) and depression by 4.4% (95% UIs 2.3 to 6.5). Over the lifetime of the 2019 Australian population, the gains could add up to 640,592 health-adjusted life years for anxiety (26 HALYs per 1,000 persons), 523,717 HALYs for depression (21 HALYs per 1,000 persons) and health care cost savings of AUD 5.4 billion for anxiety (AUD 220 per capita) and 5.8 billion for depression (AUD 237 per capita). Discussion Adherence to the Australian PA guidelines and achievement of the 2025 and 2030 global PA targets could lead to a substantial reduction of the burden of anxiety and depression. This study provides empirical support for the inclusion of physical activity in strategies for the prevention of mental ill health. Future studies should also assess the size and distribution of the benefits for different socio-economic and ethnic groups.