For households and businesses alike, the outlook remains challenging. Interest rates, inflation and unemployment – the metrics that most acutely shape economic confidence – are all trending in the wrong direction.
Deficits narrow, but pressures remain
The Government delivered a deficit of $31.5b for 2026-27, and is forecasted to increase slightly to $34.4b before decreasing to a deficit of $25.3b by 2029-30. Notably, the budget position over the forward estimates improved by $44.9b compared to the MYEFO delivered in December. The Government noted a slight revenue increase over the next four years, with higher commodity prices and elevated inflation, and notes $63.8b in savings.
Inflation is widely expected to peak at 5 per cent by the middle of the year, largely due to global instability and oil shocks. While the RBA increased interest rates to 4.35 per cent in May, any Government spending needs to be cautious or risk fuelling further inflation increases.
The Government’s immediate focus is clear: cost-of-living relief. With households and businesses under sustained pressure from business costs, rising interest rates, and persistent inflation, targeted support measures are both politically and economically necessary.
Energy security as economic policy
The Government announced a package to secure Australia’s fuel and fertiliser security, of which $7.5b is allocated to provide financial support for the supply of fuel and fertiliser, $3.2b to fund an onshore fuel security reserve, and $1b for interest-free loans for manufacturing and logistics businesses impacted by the fuel crisis.
Alongside this is a gas preservation scheme where from 1 July 2027, exporters will be mandated to set aside 20 per cent of their export volumes for domestic use for east coast markets, in an effort to shore up supplies and lower energy costs for households and businesses. Crucially, this will only apply to contracts signed before 1 July 2027, and not to existing contracts. It also comes as the Federal Government resists pressures to introduce a 25 per cent tax on gas export revenue.
Tax concessions recalibrated in the name of fairness
Positioned as advancing intergenerational equity and fairness, the Government introduced changes to key concessions, including the Capital Gains Tax (CGT) discount and negative gearing. After much speculation, the Government lowered the CGT discount from 50 per cent to an indexed discount based on inflation, while negative gearing has also been limited to new residential builds only – both effective from 1 July 2027. Meanwhile, changes to discretionary trusts were also announced, receiving a 30 per cent tax from 1 July 2028. Combined, these changes mark the first significant tax reform since, and add $3.6b to Government revenue.
In isolation, these measures have merit. But in the absence of broader system redesign, they risk of being incremental adjustments rather than genuine reform. Tax reform, in its truest sense, requires a holistic rebalancing of the complicated system – not simply the removal or reshaping of individual concessions. Over the years, piecemeal changes have introduced a complex taxation system, which the CGT discount was introduced to simplify. Will removing it, or indexing it, be adding more complexity?
This narrower approach also raises a broader question around equity and burden-sharing. Without meaningful offsets – such as adjustments to income tax rates – any incremental change risks disproportionately impacting certain taxpayers. Major reviews of Australia’s tax system over the last few decades have identified pathways for comprehensive reform; yet implementation has been lacking. The result is a system that continues to evolve in fragments – responsive, but rarely transformative.
Spending growth outpaces revenue
Beneath the surface, structural challenges persist. Australia’s tax base remains heavily reliant on personal income tax, leaving it exposed in periods of economic softness. As growth slows, unemployment edges higher and those of working age retire, meaning income tax receipts will likely come under pressure, while at the same time demand for government support will likely increase.
Spending pressures only heighten this challenge. Government expenditure remains elevated as a share of GDP at nearly 27 per cent, reflecting both deliberate policy choices and structural demand drivers. The growth of Australia’s main spending areas – defence, the NDIS, aged care, health – and public debt and interest costs are soon to surpass $1t and have all long been outpacing revenue at an unsustainable rate.
The Government has increased efforts address this at least in part, by overhauling the NDIS with stricter eligibility criteria, hoping to save an estimated $37.8b over the next four years. While any reduction to the NDIS does save the Government money, this would result in putting more pressure on aged care providers as individuals will need more support. However, new spending commitments – even if modest individually – continue to accumulate, adding to longer-term fiscal pressure.
Backing productivity and economic resilience
On the growth front, the Budget includes targeted measures aimed at supporting business activity and investment. Initiatives such as the expansion of the Trusted Trader program, the $20,000 instant asset tax write off, and the loss carry back scheme – both now permanent for small businesses – are a welcome signal.
The R&D Tax Incentive has also been changed, with the current cap on eligible R&D expenses of $150m increased to $200m as part of the Government’s productivity focus. Similarly, investments in areas like fuel security and housing speaks to a broader awareness of economic resilience in an increasingly volatile global environment. The Government announced $2b for ‘enabling infrastructure’ for new housing developments, along with $500m to speed up approvals for housing, energy, and critical minerals projects.
A cautious budget that avoids the bigger reset
We acknowledge the Government is in a difficult position with current deficit, global instability, and rising fuel prices and war. Despite these challenges, we would still like to see more intentional tax reform from the Government.
Naturally this budget seeks to balance cost-of-living pressures, fiscal constraints and political realities – as it should, the Government had their work cut out for them – but it stops short of holistically addressing the deeper structural issues that will ultimately shape Australia’s economic trajectory into the future.
Wednesday, 13 May 2026
Federal Budget Virtual Seminar 2026
