Big and bold, but is it beautiful?
Budget at a glance:
This is a big, bold Budget. It is arguably the most significant tax package in more than 25 years. At the centre of the changes is a scaling back of the tax treatment of assets and trusts and a clear attempt to shift investor behaviour in the property market. There are changes to both capital gains tax (CGT) and negative gearing and most new investments other than newly built housing will now face higher taxation. With these changes, the overall tax take is set to rise to a 21-year high.
Whether this Budget is both big and bold, and ultimately ‘beautiful’, depends on perspective. Many older and wealthier Australians are likely to be worse off, paying more tax to the government. By contrast, the changes may (modestly) improve access to the property ladder for owner-occupiers and younger Australians by removing the preferential tax treatment for existing investment housing. Some modest declines in dwelling prices are likely, however affordability is more complex. We are not ruling out upward pressure on rents, particularly if new housing supply faces delays and elevated cost pressures.
The Budget has been framed around improving intergenerational fairness. The government contends it’s better aligning the tax system, supporting first-home buyers and helping younger Australians over time.
Business-wise, the government has announced the $20,000 instant asset-write off has finally become permanent for small businesses. It has also reintroduced the loss carry‑back scheme for most businesses and introduced refundability of losses for small start-up companies.
Missing in action are reforms to personal income tax and corporate tax, which are desperately needed to address the productivity malaise afflicting our economy. Indeed, Australia’s love affair with income tax remains and it’s now arguably more entrenched through heavier taxation of investment income and gains.
The 50% CGT discount is being removed. We’re returning to indexation and a minimum tax rate of 30% on certain capital gains. These changes lift the effective rate on capital gains to one of highest rates in the world. Negative gearing will also be restricted to new builds with losses on established homes quarantined against future rental profits and no longer able to be offset against wage income.
The Budget has been shaped against a backdrop of elevated economic uncertainty. The deficit has improved from earlier forecasts but is still set to widen to $31.5 billion in 2026 to 27, before narrowing slightly the following year. There is a risk of slippage, given the government’s ambitious NDIS spending targets.
Economic forecasts also appear optimistic, despite growth being cut sharply and inflation set to rise to 5%. Encouragingly, the Treasurer has shown restraint on not doing a cash splash at a time when the Reserve Bank (RBA) is trying to rein in inflation. However, fiscal-policy settings are still mildly expansionary with government spending continuing to rise.
1. What does all this mean for house prices?
From tonight, negative gearing will be limited to investors in newly built homes (subject to a limited transition window). This is designed to push investment toward lifting new housing supply, rather than existing properties.
The changes to CGT are complex. The system moves away from the simple 50% discount and back toward indexation, which taxes only the gain after the cost is adjusted for inflation. In practice, many investors will pay significantly more tax under indexation, especially when house prices rise more strongly than inflation. Investors in new housing stock can choose between the two systems, but a 30% minimum tax on capital gains (a tax floor) could apply.
Taken together, these changes make investment in existing housing less attractive, potentially improving access to these existing dwellings for younger Australians. The Government expects around 75,000 additional first-home buyers over the next decade. This uplift is unlikely to be driven by these tax changes alone and likely reflects the combined impact of complementary policies, including the first-home buyer deposit scheme.
The Government estimates that new dwelling prices will decline by around 2% relative to the median. We see risks skewed to a larger moderation, in the order of 4–6% over the next few years, depending on how quickly new supply comes online, how sentiment shifts and whether investors move away from ‘safe as houses’ investments to stocks and other higher yielding options.
The Government expects only a small and gradual impact on rents. Treasury estimates that rents could increase by around $2 per week. However, we see a risk that greater pressures could materialise, pushing rents higher in the near term. Building approvals have been trending higher, but elevated construction and transport costs have delayed or stalled some projects. Skilled labour shortages in construction also continue to be a constraint, especially in WA and Queensland. These factors mean that housing supply may respond more slowly than in the Treasury estimates. At the same time, net overseas migration (NOM) has been revised higher, and those migrants will require housing. For 2025–26, NOM is 295,000, up from 255,000. It has also been revised higher for 2026–27 by 20,000.
2. What does it mean for households?
On personal tax, a new one‑off Working Australians Tax Offset (WATO) will deliver up to $250 for each Australian worker in 2027‑28. This is equivalent to 68 cents per day.
This will be complemented by a $1,000 instant tax deduction for workers from the 2026‑27 income year. Under this policy, taxpayers will not need to maintain itemised records to claim the deduction. In practice, many may choose not to use this measure particularly where their work-related claims are more than the $1,000 deduction on offer.
3. What does it mean for business?
There is some relief for small to medium-sized businesses, although the major measures are modest. The existing instant asset write-off of $20,000 will become permanent for small businesses with turnover below $10 million.
The loss carry-back scheme has also been reintroduced with effect from 1 July 2026. Companies with less than $1 billion in turnover will now be able to carry back a tax loss and offset it against tax paid up to two years earlier. This measure is aimed at improving the resilience of firms through temporary shocks.
For start-ups and early-stage businesses with turnover below $10 million, a refundability scheme will be introduced from 1 July 2028. Eligible businesses will be able to use tax losses in their first two years of operation to generate a refundable tax offset.
Uncertainty remains around the CGT treatment of start-ups and early-stage firms. The Government has committed to consulting with stakeholders on the detailed design of the CGT changes, leaving key elements unresolved.
The changes to trust taxation will have broader implications. Many small businesses rely on discretionary trusts, and the move to a 30% tax rate for discretionary trusts will directly affect these structures.
4. The Budget and energy resilience
The Government has made new investments in national resilience. The focus has been on energy security. A commitment of $10 billion has been made to lift storage capacity and raise fuel reserves to 50 days. This is still well short of the 90 days recommended by the International Energy Agency and below many other major economies.
For start-ups and early-stage businesses with turnover below $10 million, a refundability scheme will be introduced from 1 July 2028. Eligible businesses will be able to use tax losses in their first two years of operation to generate a refundable tax offset.
Uncertainty remains around the CGT treatment of start-ups and early-stage firms. The Government has committed to consulting with stakeholders on the detailed design of the CGT changes, leaving key elements unresolved.
The changes to trust taxation will have broader implications. Many small businesses rely on discretionary trusts, and the move to a 30% tax rate for discretionary trusts will directly affect these structures.
5. The Budget and the share market
The tax changes alter incentives. They reduce the relative appeal of property investments and investments motivated by capital gains become less appealing.
There may also be a shift in investor preferences within equities. All else equal, there could be greater interest in income-generating stocks, particularly those that pay dividends, relative to growth stocks where returns rely more heavily on capital gains.
In practice, any impact on the broader share market is likely to be more nuanced. However, if property prices soften from these tax changes, weaker household wealth and confidence could spill over into consumption. That would create headwinds for consumer-facing sectors, especially consumer-discretionary and interest-sensitive stocks.
Uncertainty remains around the CGT treatment of start-ups and early-stage firms. The Government has committed to consulting with stakeholders on the detailed design of the CGT changes, leaving key elements unresolved.
The changes to trust taxation will have broader implications. Many small businesses rely on discretionary trusts, and the move to a 30% tax rate for discretionary trusts will directly affect these structures.
6. What does it mean for inflation and interest rates?
The Budget will also be judged on the amount of new spending, at a time when inflation remains high and the RBA continues to tighten policy. Too much fiscal support would work against these efforts and risk further rate rises.
Encouragingly, the Government has avoided a large cash splash, although fiscal policy remains mildly expansionary and overall spending continues to rise.
Total expenditure is projected to reach $829.6 billion in 2026–27 or 26.8% of GDP. Excluding the COVID period, this is the highest share since the mid 1980s. Encouragingly, the pace of real spending growth is slowing from 5.5% in 2025-26 to 1.3% in 2026-27. However, the Government is still adding to aggregate demand and one could argue an even more disciplined approach is warranted to assist in the RBA’s task of reducing inflation.
We continue to see a risk of one additional rate rise, taking the cash rate to a peak of 4.60%. Beyond this, the outlook remains highly sensitive to global developments.
7. Budget surplus slips further out of reach
The Budget bottom line is expected to deteriorate in 2026–27 to a deficit of $32.5 billion, from $28.3 billion in 2025–26. This represents a smaller deficit than previously forecast. The improvement reflects stronger nominal GDP growth, supported by higher commodity prices and elevated inflation.
Policy measures announced tonight point to an improvement in the underlying cash balance in 2027-28. However, these gains are partly offset by a softer economic outlook and additional spending aimed at strengthening energy resilience.
Over the five years to 2029-30, the underlying cash balance has been upgraded by $44.9 billion, but around 60% of this improvement comes in the final year.
A key source of savings is the flagged reduction in National Disability Insurance Scheme (NDIS) spending, expected to deliver nearly $38 billion over the next four years. The Government’s target of reducing average NDIS cost growth to 2% over the next four years may prove ambitious, creating some risk to the fiscal outlook.
NDIS spending has expanded well beyond earlier expectations and has been a major driver of the increase in government expenditure. Growth exceeded 20% in 2022. In 2023, National Cabinet agreed to reduce growth to 8%, although this target has not yet been achieved. Limiting growth to 2% would represent substantive progress.
The Government forecasts appear somewhat optimistic, particularly given the expectation that unemployment remains low even as economic growth slows sharply and ongoing geopolitical factors continue to weigh on the economy.
The Budget is not expected to return to balance until 2035–36, with a surplus projected in 2036–37. These timelines are a long way out and highlight the considerable uncertainty around achieving them.
8. Headline vs underlying cash balance – the widening divide!
The underlying cash balance, which strips out financing and investment flows, provides the clearest view of the Budget position. By this measure, the deterioration is relatively modest in 2026-27. The deficit worsens by $4.2 billion in underlying terms.
The headline position tells a different story. The deficit widens by $16.2 billion, taking it to $64.1 billion in 2026–27, the largest deficit outside of the COVID period. The larger deterioration in the headline balance points to a greater use of off-balance sheet spending.
Taken together, this suggests fiscal repair is slower than it appears. Underlying pressures on the Budget remain significant, despite a more modest improvement in core measures.
Over the five years to 2029-30, the underlying cash balance has been upgraded by $44.9 billion, but around 60% of this improvement comes in the final year.
A key source of savings is the flagged reduction in National Disability Insurance Scheme (NDIS) spending, expected to deliver nearly $38 billion over the next four years. The Government’s target of reducing average NDIS cost growth to 2% over the next four years may prove ambitious, creating some risk to the fiscal outlook.
NDIS spending has expanded well beyond earlier expectations and has been a major driver of the increase in government expenditure. Growth exceeded 20% in 2022. In 2023, National Cabinet agreed to reduce growth to 8%, although this target has not yet been achieved. Limiting growth to 2% would represent substantive progress.
The Government forecasts appear somewhat optimistic, particularly given the expectation that unemployment remains low even as economic growth slows sharply and ongoing geopolitical factors continue to weigh on the economy.
The Budget is not expected to return to balance until 2035–36, with a surplus projected in 2036–37. These timelines are a long way out and highlight the considerable uncertainty around achieving them.
9. Debt and fiscal resilience
Gross debt continues to rise, exceeding $1 trillion for the first time in 2026–27. This underscores the cumulative impact of persistent deficits and highlights the limited progress made on rebuilding fiscal buffers.
Net debt is also trending higher, reaching $616.6 billion or 19.9% of GDP in 2026–27. Outside of the COVID period, this is the highest share on record and points to ongoing structural pressure on the Budget, particularly as spending in key areas continues to outpace revenue growth.
Together, these trends signal a more constrained fiscal position. Higher debt levels leave the Budget more exposed to future shocks and reduce flexibility to respond to economic downturns, placing greater emphasis on the credibility of the medium-term consolidation path.
10. What about the economic forecasts?
Economic growth has been marked down across the next few years. Real GDP growth is forecast to slow to 1.75% in 2026–27, from 2.25% in 2025–26. Yet the unemployment rate barely moves, rising just 25 basis points to 4.50%. That combination points to a relatively optimistic view of how the labour market holds up under weaker growth.
The forecasts rest on several assumptions, including oil prices easing from current highs. Tapis crude is assumed to average around US$100 per barrel, before falling from mid-2026 and settling near US$80 from mid 2027. That path does a lot of work in keeping the inflation outlook contained.
Inflation is expected to lift to 5.0% in 2025–26 before falling back to 2.50% in 2026–27. The risk is clearly on the upside. A more severe oil shock, at around US$200 per barrel, would push inflation above 7% and near the peak seen during COVID. That would quickly reset the policy outlook.
Treasury has downgraded its outlook for productivity growth over the next five years, which had been flagged earlier this year. Previously, productivity was expected to return to its long-term trend of 1.2% within two years. That adjustment is now projected to take five years, pointing to a more prolonged period of weak productivity growth.
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