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The Federal Budget has been sold as a responsible, cost-of-living focused plan that supports households now while strengthening economic resilience and laying the groundwork for future growth. Lofty promises, but does it actually deliver?
In this week’s Brief, we answer four key questions on this year’s Budget.
What are the inflationary impacts of the Budget? Will it help or hinder the Reserve Bank’s fight against inflation?
In her last press conference, Governor Bullock warned the Government that extra spending would only make the RBA’s job more difficult. It appears the Government took notice of Governor Bullock’s stern words. While delivering an income tax cut to workers was central to the tax reform narrative, delayed implementation of the Working Australians Tax Offset (WATO) until the second half of 2028 pushes any meaningful stimulus beyond the near term.
Similarly, developments in the Middle East effectively forced the government’s hand in delivering immediate cost-of-living relief in the form of a fuel excise tax cut, which cost the Budget $2.5b. The excise tax cut lowers inflation by 0.5 percentage points (ppts) in 2025-26 but lifts inflation in 2026-27 by 0.5ppts. Direct statistical effects aside, the fact that this policy was implemented as a very short-term measure for only 3 months is a nod to the RBA and highlights the government’s desire to keep the stimulus to a minimum.
Despite that, net policy decisions since the Government’s Mid-Year update added $5.3b in spending to the 2025-26 budget and a further $6.5b to the 2026-27 budget. The modest increase in near term spending contains the risk of further rate rises.
There has been a big focus on the changes to the capital gains tax (CGT) regime, removing the 50% discount, shifting to indexation and applying a minimum 30% tax rate. Is this the key tax reform?
The CGT reform is the headline but not the whole story. Negative gearing, for example, is a popular investment strategy with housing investors, with approximately half of investment properties currently negatively geared. The Budget eliminates negative gearing on purchases of existing property from 1 July 2027, which directly reduces the after‑tax return on established property investment, dampening investor demand where it has been strongest. Together, the CGT and negative gearing changes raise $2.3b in 2029-30 and this will increase over time as the impact of grandfathering the current tax settings diminishes.
The Budget’s imposition of a 30% minimum tax rate on discretionary trusts is more consequential than it appears and is expected to raise an additional $4.5b from its implementation in 2029-30. While associated with wealthy households, trusts are widely used by small business owners and professionals to split income and reduce tax. Accounting arrangements for trusts will no doubt change, but ultimately the total taxation revenue will be higher as the loopholes for tax minimisation are closed.
Does this Budget shift the dial on intergenerational inequity?
The worst form of intergenerational inequity is leaving debt to future generations without the assets to support it. In that context, the changes made in this Budget make progress in restoring intergenerational equity, as debt is lowered due to a combination of higher taxes on capital gains, a broadening of the tax base, and long-term spending restraint. In a decade’s time, net debt will be 15% of GDP compared to around 20% prior to this Budget.
However, for most young people, their ability to get into the housing market is the most tangible indicator of intergenerational inequity. In the longer term, the Budget projects the tax changes will help 75,000 first home buyers get into the property market due to reduced competition from investors. But in the short-term, any benefit to new builds that would enhance supply will be negated by higher construction costs from the Iran conflict.
What were the most significant productivity-enhancing measures in the Budget? Will they help?
The Budget contains a range of pro-productivity measures but lacks a clear productivity agenda. It includes targeted business tax changes, red tape reductions and reforms to support labour supply. The tax changes aim to encourage risk‑taking, with a permanent instant asset write‑off and loss refundability for businesses with turnover under $1 billion.
The Government also estimates that cutting regulatory burden will reduce compliance costs by around $10 billion annually. Labour market measures focus on mobility and skills, including progressing national licensing and worker screening with the states, alongside migration reforms to attract younger, more skilled workers and faster skills recognition for migrant tradies.
While helpful, the productivity measures in the Budget are unlikely to shift the dial on their own.
