2026 federal Budget preview: go big or go home

The Budget strategy: trying to hit a moving target

This Federal Budget is shaping as one of the most interesting in a long time, but what sort of Budget will it be? Will it be a reform Budget, aimed at lifting productivity? Will it be an austerity Budget, to keep inflation low? Will it be a crisis Budget, to buffer the economy from the global energy crisis? In our view, the Treasurer will try to achieve all these objectives.

The Treasurer would have started framing this Budget straight after the election win in May 2025. Since then, the landscape has been constantly shifting, making it hard to land a Budget narrative and fiscal strategy.

First, the Labor’s Party’s huge election win in May 2025 raised expectations that major economic reforms were on the way (including long overdue tax reform). The stated priorities have been to boost productivity, business investment and improve intergenerational fairness.

Second, the economy strengthened faster than expected, inflation picked up, and the RBA responded with back-to-back interest rate hikes. With a clear lack of spare capacity in the economy, calls to cut public spending got louder. Fighting inflation moved up the list of Budget priorities.

And finally, the Iran War threw a huge spanner into the Budget machine. It is still unclear what will happen next: peace, impasse or escalation, making it hard to frame a Budget response. Higher inflation is locked in, but the damage to economic growth is harder to gauge. National resilience will now be a clear Budget priority. But the Government will also feel pressure to dole out some more cost-of-living relief.

Achieving all of this in one Budget (major reform, big spending cuts, national resilience and supporting households) is quite the ask. We expect the government to try to thread the needle. To pull this off, they will need to meet several tests. This is what we think success looks like:

• Inflation & spending: They need to deliver major spending cuts (in the tens of billions); the savings can’t be cosmetic. And they need to show a large net improvement in the bottom line over the forward estimates and the medium term, relative to MYEFO.
• Tax & productivity: They need to announce substantive tax reforms. Major changes to CGT and negative gearing appear locked in. This will boost revenue but won’t shift the dial on productivity or housing affordability. Broader business or personal tax reform would deliver a true ‘reform Budget’.
• National resilience & cost of living: the Budget needs to include a clear plan (and allocate enough funding) to shore up our fuel security, including boosting oil stocks to at least 90 days. If further cost-of-living relief is delivered, it should be temporary and tightly targeted. A big splash risks driving inflation higher.

Reining in the NDIS: the fiscal saviour

The government has already announced major cuts to the NDIS. The stated goal is to slash annual NDIS spending to average just 2% over the next four years, before returning to 5% growth (we are currently closer to 10%). Our working assumption is that spending growth will be forecast at 4%, 2% and then two years of just 1%. This would see real spending on the scheme declining from 2027 28 to 2029 30.

The government expects the changes to cut the number of participants to 600,000 by the end of the decade, compared to current projections for over 900,000. Today there are 760,000 people on the scheme.

This will deliver huge budget savings that should easily allow the Treasurer to deliver a net improvement in the underlying cash balance (UCB) over four years and the next decade (one of our tests above).

We estimate that cumulative savings will be ~$20 25bn over the next four years and close to $170bn over the decade relative to the most recent outlook in the 2025 MYEFO. In light of the flagged blowout in costs since MYEFO, the total savings may be even larger at ~$35bn to 2029/30. Total annual scheme costs would be cut to $55bn in 2030 (down from ~$70bn) and $74bn in 2036 (from $108bn). The Treasurer has stated that this is “easily the most important part of the savings package” in the May Budget - and it’s easy to see why.

This is a welcome and badly needed reform. As we outlined last year the NDIS has been growing beyond all expectations and punching a major hole in the Budget. Structural spending at the federal level is at near record high levels and was projected to stay at ~27%/GDP. Most of this spending lift can be attributed to the extreme growth in the NDIS.

The big question is whether such sharp cuts in spending can be delivered, especially so quickly. As noted by Minister Butler, total scheme costs were growing by over 20% in 2022. In 2023, National Cabinet agreed to cut that figure to 8%. They then agreed to cut it to 5 6% or lower (albeit these were not yet included in any Budget costings).

However, those projected savings have not been delivered. Minister Butler noted “the measures we’ve introduced to control spending are simply not working as we intended” and “our efforts to get growth to 8% are still hitting hurdles”. He added “the scheme actuary has advised Government that spending has blown out by $13 billion over the next four years”. Our assessment is that without the announced changes, the average growth rate of the scheme out to 2029/30 would have been ~9%.

Will things be different this time around? The statements by the Minister will provide enough cover for the Treasury and Finance Departments to reflect the cuts in the official Budget projections in May, banking the savings. What ultimately happens to actual spending will depend on the passage of the legislation and the sector and community response.

The states are already deeply concerned about costs being shifted from the NDIS to their public health systems. Around $6bn has been set aside over 5 years for replacement services (or ‘foundational supports’) but the new NDIS savings dwarf this figure. The states will demand more federal funding before supporting new legislation, which will eat into the savings.

As details around the legislation and eligibility firm up, there will also be deep community concern from the roughly 160,000 people that are on the scheme and will lose access, along with those that would have been eligible in coming years but now won’t be, along with disability advocates.

In our view, the changes are a strong positive step and necessary to put the scheme (and the Budget) on a sounder footing. However, achieving average NDIS cost growth of 2% over four years looks highly ambitious and unlikely, creating upside risk to the Budget estimates. Getting average cost growth down to 4 5% over that period is more realistic and would still be a major achievement, but that would now punch a $14bn hole in the Budget out to 2029 30.

CGT and negative gearing: the sacred cows

The stars have finally aligned for long touted reforms to the CGT discount and negative gearing, with the Government seeking to frame this as a housing and intergenerational equity issue, not a “tax grab”.

We have been confident for some time that the Budget will include changes, but based on media commentary, it seems they will go further than we expected, with a return to CGT indexation applied to all asset classes (not residential housing only), and negative gearing fully abolished (not just capped at the second property). This materially boosts the expected revenue uplift.

Currently, there is a flat 50% discount that applies to capital gains across all asset classes when held for greater than 1 year. For example, if you buy an asset for $500k and sell it two years later for $700k, the capital gain is $200k. Under the current rules, the taxable capital gain is reduced by 50%, so only $100k of the gain is included in your taxable income and taxed at your marginal tax rate. Under the new plan, inflation indexation will be applied, rather than a flat 50% discount.

This takes us back to the model that was in place before 1999. It means that investors will be taxed on only the real capital gain. This is a more defensible reform than an arbitrary cut to the discount (e.g. to 25%), but it does mean that outcomes will vary depending on economic conditions.

In an environment of high asset price growth and low inflation, investors will generally be worse off under indexation, and the longer you hold the asset, the worse off you will be.  However, in a low growth, high inflation world, investors will generally be better off. The Budget will (as always) assume stable inflation and solid nominal growth. This will drive a revenue gain over time, but this gain is likely to be modest, especially early on.

Media reports suggest ‘partial grandfathering’ will be applied, reducing near term revenue. Investors will restructure to optimise their tax arrangements, so the assumptions around investor behaviour will matter a lot. That said, assuming the changes are effective from Budget night, there isn’t much lead time to allow for mass restructuring of investments. In addition, the Budget forecasts for inflation will be higher over the next two years, hurting revenue. The PBO has previously indicated that moving to indexation could in fact “lead to a relatively small decrease in revenue over the forward estimates”.

For negative gearing, we had expected caps to only apply beyond the first or second property, but media reports now suggest full abolition. This will drive up the revenue gain significantly. Around 1.1 million taxpayers negative gear just one property, with only ~275,000 holding 2 or more. Based on earlier PBO costings1, abolishing negative gearing raises roughly $5bn in revenue per year. If the first property is excluded, this falls to just under $1bn. If the full abolition option was grandfathered, revenue builds more slowly, raising around $2bn over four years and ~$20bn over 10 years.

Putting this all together, we expect a package that includes replacement of the CGT discount with indexation for all assets (with grandfathering) and the abolition of negative gearing for all new investments to generate revenue of ~$2bn over the first four years and $25 30bn over 10 years. There may be some exemptions or deductions for new builds, reducing the gain a little.

The Government will argue that the combined changes reduce the existing tax bias towards housing (allowing capital to be allocated to more productive investments), and take some modest pressure off housing demand, thereby improving affordability, without damaging new supply.

These are fair arguments overall, but we judge that the impacts on house prices and productivity are likely to be quite modest - the largest benefit will be higher long term government revenue and a stronger budget. Additional short term volatility in the housing market is likely though, especially at a time when the interest rate cycle and slower population growth is also shifting prices and market sentiment.

Trent Saunders has estimated the house price impact of potential changes to the CGT discount and found that the level of housing prices could be ~1 4% lower than they otherwise would have been. Including the full abolition of negative gearing will likely increase the magnitude of the impact, with research suggesting it could further lower prices by around 2%. Investor behaviour will be crucial – if there is a larger response than assumed based on the modelling, prices could come under greater downward pressure.

However, the fundamental drivers of supply and demand and interest rates are still expected to dominate market moves. The impact on productivity is also expected to be very modest. In short, housing tax reform may help with affordability at the margin, but it will not solve the housing crisis. Boosting supply is still the key.

Will business tax reform make the cut?

The NDIS spending cuts and additional revenue from housing tax reforms opens up options for the Treasurer, by delivering a fiscal ‘war chest’. This could be used to fund more substantive tax reform, improve the budget bottom line, or used to fund new spending measures.

A key wildcard in this Budget is what (if anything) happens with business tax reform. It is widely acknowledged that Australia’s corporate tax rate is high by global standards. It is also accepted that business investment has been too low in the non mining sector, holding back productivity (although the data centre rollout has given it a boost). The Treasurer has said he is open to changes, but only if it can be funded within the system.

The Productivity Commission (PC) suggested an overhaul of Australia’s corporate tax system, with a new cash flow tax . The move to a cash flow tax, which treats capital expenditure in the same way as other operating expenses (removing the need to track depreciation), was meant to remove the current tax system bias towards debt financing and stimulate greater levels of investment. This proposal has not received much support, inside or outside of Government, mainly due to the complexity of running dual systems and broader implementation risks.

If the Government does pursue business tax reform, we consider a more live option to be an Allowance for Corporate Equity (ACE). An ACE also seeks to remove the current bias towards debt over equity financing, but it does this by granting a new deduction for a notional return on equity. Tax experts (including in Treasury) tend to like the ACE in theory, as it removes current distortions and removes taxation on normal returns. This drives more efficient capital allocation and lifts productivity.

This model has major upside potential and major downside risks. On the one hand, an ACE would see very large, modelled, increases in private business investment across the economy. Marginal investments in low debt sectors that previously didn’t stack up, now would. If the Treasurer wants a major economic reform targeting new investment, this fits the bill.

On the other hand, an ACE will be expensive, chewing up the other Budget savings. The productivity Commission estimated that an ACE applied to all existing equity would cost around $38bn a year. This could be reduced by limiting the allowance to new equity only, but the cost would still be large at ~$7bn with a 2.5% allowance rate (see here).

There are also major design risks with an ACE.  An ACE lives or dies on what counts as eligible equity and how you measure “new” equity. It is also critical to design the system in such a way that it stops companies from ‘gaming’ the system through complex corporate structures. Our dividend imputation system adds further complications. A poorly designed ACE risks huge revenue leakage, damaging the Budget.

Additional revenue measures (outside of CGT and negative gearing) could be used to help fund an ACE. One option is a windfall profit tax on exported gas; possibly paired with commitments to fast‑track new domestic gas supplies. The Prime Minister has recently made comments on a windfall gas tax. Changes to existing fuel tax credits is often floated, but any change would be fiercely opposed by the mining and agriculture sector, especially during a global energy crisis.

Any business tax reform that benefits corporate Australia is a tough sell, no matter when it’s put forward. In our view, the war in Iran raises the hurdle even higher, making an ACE announcement on Budget night less likely. Still, the Treasurer could announce a formal process to look at design options for an ACE and offsetting tax savings. This would bolster the Budget’s reform credentials, without locking anything in at this stage.

Spending: Any surprises under the Budget tree?

In our view, the Budget will largely be judged on how much new spending it contains. With the NDIS and housing tax reform delivering tough savings, there is an opportunity to deliver more tax reform and/or leave the structural budget position stronger overall. Too much new spending will undermine this, and risks driving up inflation and interest rates.

Some new spending is unavoidable. The main new spending package in the Budget will likely be aimed at lifting Australia’s low fuel reserves and storage, once the crisis eases. There may also be investments to expand our oil refining capacity. It would not be surprising to see a supporting package to accelerate EV uptake, to take advantage of elevated demand.

Minister Bowen has said that lifting Australia’s domestic fuel reserves to 90 days to meet IEA requirements would cost $20bn over four years. This has been considered too expensive in the past (and largely unnecessary), but that view must surely change now. We assume that Government will commit $20bn in the Budget over five years to boost energy resilience. This could include a combination of increasing the domestic reserves and boosting refining capacity. The risk to our expectation is that less will be spent rather than more.

Some additional support for households, to assist with higher fuel costs and higher inflation is likely, but we expect the Government to resist the urge to make a big splash. This would risk adding fuel to the inflation fire and heap pressure on the RBA, at a time when the outlook is still very uncertain. We may yet see the conflict in Iran settle in coming weeks, reducing the hit to demand and the need for any significant stimulus.

That said, all Budgets include some surprise sweeteners. It’s possible that we could see an extension of the fuel excise cut, additional modest personal income tax cuts, a further expansion towards universal free childcare or other social spending.

Other measures in the Budget are likely to focus on AI adoption, taxation of family trusts, road user charging, and streamlining regulation, but these are likely to be on a smaller scale and won’t materially shift the fiscal outlook or move the dial on national productivity.

Adding it all up: where does this leave the bottom line?

The forecasts below represent what we expect to be in the Budget on the night, not our own expectation as to where the final budget outcomes will land in the coming years. Overall, we expect an improvement in the fiscal outlook, relative to the MYEFO, with the largest improvements from 2030 onwards. In the near term, the improvement in the Budget bottom line from higher commodity prices and NDIS savings is expected to be broadly offset by weaker economic forecasts and additional spending on energy resilience and other measures.

At MYEFO, the deficit was expected to be 1.3%/GDP ($36.8b) in 2025 26. It was then forecast to sit around 1.1%/GDP out to 2028 29, before steadily improving back to balance by 2035 36, thanks to bracket creep.

As outlined above, we expect the NDIS and housing tax reform to deliver big improvements in the bottom line. Together, they could improve the underlying cash balance by around $30bn over four years and $200bn over 10 years.

As recently outlined by Adam Donaldson, we do not expect the Iran conflict to deliver a huge commodity windfall, as we saw during the Ukraine War. Bulk commodity prices (eg iron ore and coal) have not spiked nearly as much as they did then (helping to deliver two surpluses). Still, they are well above the typically conservative budget assumptions. And the nominal economy and labour market has been running stronger than expected.

Offsetting this, Treasury recently lowered its productivity assumption in the near term (slowing the glide path back to 1.2%). This puts downward pressure on the underlying cash balance. The economic forecasts are also likely to be revised down somewhat, although higher inflation will offset the nominal loss. As noted, increased spending on fuel security and other (hopefully targeted) new spending will also take a slice.

For forecasting purposes, we have assumed around $2 3bn of additional spending each year over the next four years. This is over and above the estimated cost of our fuel security package.

In 2025 26, we expect a underlying cash deficit of ~$29bn, a small improvement on the MYEFO forecast of $36.8b.  Monthly Financial Statements to March show YTD receipts $6.9bn ahead of MYEFO and payments $10.1bn lower, due to the stronger economy and commodity prices. However, the new structural savings will take time to build up, the halving of fuel excise costs the Budget $2.55bn in 2025 26 and near term blowouts in the NDIS will all limit the immediate benefits to the UCB.

The following year, our high level assumptions on commodity prices and the economy point to another upgrade. We should see a larger impact from NDIS and tax changes. But accounting for increased spending (as well as higher direct payments from the stagflation impulse), we predict a deficit of $22bn, around $12bn better than forecast in MYEFO.

In years three and four, we also expect improvements relative to MYEFO, but these remain relatively modest, as commodity prices return to their assumed long run (and conservative) anchors and the lower productivity assumption bites. We expect the deficit to sit at around 0.9% GDP in 27/28 and 28/29, relative to 1.1% in MYEFO.

The more material improvements in the budget position begin to emerge beyond the forward estimates (from 2030/31 onwards). NDIS savings compound and accumulate rapidly. Increased revenue from changes to the CGT and negative gearing also begin to build more materially as the housing stock turns over, reducing the grandfathering effect.

In total, over the next four years, we expect the cumulative improvement in the underlying cash balance to be in the order of $40bn. Over the decade to 2035/36, this rises to a significant~$280bn absent other policy decisions. The vast majority of this comes from the reforms to the NDIS. This would see the Budget return to structural balance in 2031 32.

A good outcome, but let’s just wait and see…

If delivered, this would represent a material improvement in the fiscal position and reduction in projected debt. However, there are risks.

As noted above, the NDIS savings appear highly ambitious. If this is another false dawn, and the scheme costs continues to grow, the budget position will deteriorate over time. Similarly, in our view, we are moving into a higher inflation environment, which means the CGT changes could generate less revenue over the long term than the Budget costings imply. There remain substantial budget pressures in health, aged care and Defence — we retain our view that Defence spending will need to rise further over the decade.

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Read the full analysis by Luke Yeaman and Harry Ottley: 2026 Federal Budget Preview: Go Big or Go Home