Federal Budget

13 May 2026

This year’s Budget has been compiled amidst a challenging set of circumstances – rising inflation, an energy price shock and 75bp of rate hikes from the RBA.

This year’s Budget has been compiled amidst a challenging set of circumstances – rising inflation, an energy price shock and 75bp of rate hikes from the RBA. But we should also acknowledge the positives; the backdrop for Budget 2026/27 from a purely domestic economic perspective is above trend growth and a tight labour market.

This improved cyclical starting point has flowed through in revenue upgrades, thanks primarily to higher-than-forecast commodity prices and stronger taxation revenue. Over the forecast horizon, the cumulative net revenue upgrade from better economic parameters since the publication of MYEFO is worth $37bn. The forecast budget deficit for 2026-27 is now $31.5bn (1% of GDP) and a small improvement basis MYEFO estimates.

In a nod to the requirement for restraint on expenditure, not all of the additional revenue upgrades have been spent. This has allowed the government to present a $45bn improvement in cumulative deficits through the forecast horizon.

In less encouraging news, forecasts for the headline cash balance, a measure more relevant for the Government’s borrowing needs, is $64bn for 2026-27, 2.1% of GDP. The fact remains that Australia continues to run a structural budget deficit, around 1.5% of GDP for the next couple of years. Fixing this will require some combination of further spending restraint, productivity growth and wider reform of the taxation system. The need for meaningful fiscal and economic reform will sustain beyond Budget 2026/27.

Pre-Budget positioning promised reform, and the government has largely delivered on the pre-announcements. Indeed, it is possible that the changes to taxation arrangements for housing are some of the most significant in a quarter of a century.

Reforms have been primarily targeted towards negative gearing and CGT arrangements. This is important, because it is the combination of these tax arrangements – not each on its own – that have delivered leverage and price outcomes perceived as detrimental to housing affordability and at times, to financial stability.