Federal Budget 2026: Key takeaways

The Albanese Labor Government deserves recognition for attempting to address some long-standing economic challenges in this year’s Budget, such as the escalating costs of the National Disability Insurance Scheme (NDIS) and housing affordability.

However, at a time of high inflation and tight product and labour markets, the Budget offers little in the way of significant near-term macroeconomic restraint that could ease interest rate pressures. Additionally, some of the proposed tax changes risk producing unintended consequences, especially given the need to boost productivity, competition and entrepreneurial effort.

Over the upcoming 2025-26 and 2026-27 financial years, the estimated cumulative underlying budget deficits are now projected at $59.8 billion, which is $11.2 billion less than previously forecast in the Mid-Year Economic and Fiscal Outlook.

This improvement largely results from a $32.3 billion upward revision in expected revenue collections, mainly due to higher taxes stemming from increased commodity prices (following the conflict in Iran) and the lift in incomes and inflation. These are considered the Budget’s automatic stabilisers, functioning to moderate economic overheating during prosperous times.

Conversely, this revenue boost is offset by $11.8 billion in net new policy spending – primarily on defence and health – and an additional $9.3 billion in spending on existing policies due to NDIS overruns and higher inflation-indexed welfare payments. The budget already incorporates modest “Stage 3” income tax cuts scheduled to commence in FY’27 and FY’28.

In essence, the Budget’s automatic stabilisers exert a slight braking effect on economic growth, while increased policy spending and cost overruns partly offset this by pressing on the accelerator at the same time.

One measure of the fiscal impact on growth, known as the “fiscal impulse,” is the change in the underlying budget deficit as a percentage of GDP. On this metric, the budget appears fairly neutral, with the deficit in FY’27 projected at 1.0% of GDP – unchanged from FY’26 – and both figures lower than the 1.9% deficit in FY’25.

Less widely publicised is the headline budget balance, however, which includes various government spending measures through off-balance sheet funds that are expected to generate returns and are thus treated as financial assets. These include expenditures on the National Broadband Network (NBN), student loans and projects related to housing, infrastructure and clean energy.

The headline budget deficit for this and the next fiscal year amounts to $112 billion – a whopping $52 billion more than the underlying budget deficits. Unlike the underlying budget deficit, the headline deficit has widened as a percentage of GDP, from 0.9% in FY’25 to an estimated 1.7% in FY’26 and 2.0% in FY’27.

When considering off-balance sheet spending such as student loan forgiveness and various infrastructure, housing and clean energy projects, the Budget appears more stimulatory than the underlying numbers suggest.

More fiscal restraint is anticipated beyond FY’27, with an expected saving of $36 billion over four years in NDIS costs and approximately $16 billion annually from FY’30 onward.

There is also a projected increase in taxation of around $3.5 billion per year over time, driven by long-flagged changes to negative gearing, capital gains tax and family trusts, which are expected to raise about $8.5 billion annually by FY’30.

These savings will be partly offset by tax cuts for workers, including a $1,000 instant tax deduction starting FY’27 and a $250 income tax credit from FY’28, collectively costing around $5 billion annually over time.

Reflecting recent increases in energy costs and the Reserve Bank of Australia’s (RBA) monetary tightening, the Budget forecasts a somewhat weaker economic outlook over the coming year, coupled with higher near-term inflation.

Economic growth is projected to slow to below-trend rate of 1.75% over 2026-27, which is expected to modestly raise the unemployment rate to 4.5% by mid-2027. Headline CPI inflation is forecast to peak at 5% in the June quarter of this year, then slow to 2.5% by mid-2027, in line with weaker economic growth.

In terms of policy measures, the government’s primary focus was to improve housing affordability and access for first-time buyers by reducing incentives for investors to outbid them at auctions.

However, the proposed changes seem to have only a modest impact.

According to government estimates, around 75,000 more Australians will be able to purchase their first home over the next decade than otherwise. Assuming an even distribution, this equates to about 7,500 additional first-time buyers annually, representing roughly a 6% increase over the recent annual entry of 125,000 new market entrants. Since investors account for approximately 25% of the market, this shift also translates into about a 3% reduction in the share of homes owned by investors within the total stock of 11 million properties.

The Treasury estimates that reduced investor demand will lead to a 2% decline in house prices relative to a no-change scenario over the next few years, with only a $2 weekly increase in rents. The actual impact remains to be seen. While grandfathering existing investment properties’ negative gearing may mitigate some fallout, a weakening economy combined with rising interest rates could prompt a significant investor exodus, exerting further downward pressure on house prices and upward pressure on rents. As for the retention of tax benefits for new properties, there’s also a risk that this just significantly increases new house prices given ongoing development constraints.

Perhaps the most significant concern is that the government’s broad capital gains tax measures appear be more broad-based than necessary to address housing affordability. Such broad scope could produce unintended consequences related to productivity and entrepreneurial activity.

Higher capital gains taxes could also hinder younger investors’ ability to save for a home deposit and diminish their incentives to invest in existing properties for wealth accumulation. Reduced investor incentives might also lead to higher rents, making it more difficult for renters, especially younger Australians, to afford housing.