2026-27 Federal Budget: A step forward, but short of ambition

The Federal Treasurer handed down the 2026-27 Budget this week. Delivered against a backdrop of heightened global uncertainty and resurgent domestic inflation, the Budget was framed around savings initiatives, tax reform, productivity and investment. The Budget partially delivered on those goals but ultimately fell short of major reform ambitions.

The tax reforms that took centre stage in the Budget included a return to the indexation mechanism for discounting capital gains, an end to negative gearing of investment properties (excluding new builds, and grandfathered to exclude existing investments), and a higher tax rate on trusts.

On the productivity front, the Budget made permanent the $20,000 instant asset tax write-off for small businesses, re-introduced loss carry back provisions, and made changes to the R&D tax incentive.

The reforms signal a renewed appetite for change, especially the property tax changes that have long been viewed as political dynamite. In general, the proposals are sensible and will deliver modestly higher rates of home ownership over time. But the package does not go far enough to be counted as ambitious tax reform.

Extensive grandfathering provisions mean the property tax changes will be slow to generate revenue, limiting their ability to fund offsetting tax cuts for the working population. The Budget did give workers an income tax credit of up to $250 each, but they will have to wait until 2028-29 for it, and it is nowhere near the scale required to ease Australia’s fast-growing tax burden on workers.

As a whole, the Budget lacks the structural reforms required to fix an inefficient tax base. More substantial reform is needed to address Australia’s dual productivity and fiscal challenges, including by shifting the tax mix away from income and investment and towards more efficient consumption-based taxes, including through a higher and broader GST.

The Treasurer’s focus on savings initiatives will deliver $63.8 billion in gross savings over the forward estimates. But it is net savings, not gross savings, that is the true test of fiscal discipline. On this measure, the Budget underperformed. After accounting for new spending commitments, policy decisions only reduced spending by $1.2 billion over the next four years.

In the near term, the Budget will also be modestly inflationary. Savings are skewed heavily toward the latter years of the forward estimates, and the Budget has revised government spending higher by $18.3 billion in 2026-27 as a result of both economic developments (such as higher inflation) and new policy decisions.

This will challenge the coherence of fiscal and monetary policy. The Government is injecting more money into the economy at a time when inflation is already too high, while the Reserve Bank of Australia is hiking rates to stamp out excess demand.

Overall, tax policy changes and medium-term spending restraint – driven by long overdue reforms to the NDIS – will leave the Budget bottom line healthier than previously forecast. But the Budget improvements are still overwhelmingly being driven by good fortune rather than good policy.

The underlying cash balance is projected to be a cumulative $44.9 billion smaller between 2025-26 and 2029-30. Changes in the economic outlook (so-called ‘parameter variations’) – primarily a result of higher prices for Australia’s commodity exports, as well as higher inflation and nominal growth throughout the economy – are responsible for $36.6 billion of that improvement.

The Budget was an encouraging first step towards politically difficult tax reforms and savings measures, but there is plenty more to do.

Australia’s budget position remains precarious, with net debt projected to rise from 18.8% of GDP in 2025-26 to 21.9% of GDP by 2029-30. There is still an excess of spending that is either unnecessary or poorly designed. Tax reform has also barely scratched the surface.

The conversation about economic reform has intensified over the past year. It’s critical that this is only the start of the Government’s renewed appetite for change.

This newsletter was distributed on 15^th May 2026 . For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Daniel Weber (Associate Director, Deloitte Access Economics)

Click on the links below to read our previous Weekly Economic Briefings:

• Licence to stall – reforming occupational entry regulations could boost productivity growth (22 Apr 2026)
• Fuel uncertainty: oil price scenarios (13 Apr 2026)
• Deloitte Access Economics’ Business Outlook: Running on empty (31 Mar 2026)
• Dire Straits: Consumer confidence falls to all-time low (25 Mar 2026)