2026-27 Federal Budget: Big ambitions, mixed results

Budget strategy: did this Budget pass the test?

In our preview, we outlined the government's key objectives for this Budget and listed several key tests to help judge it on Budget night. 

On inflation and spending, we said it needed to deliver significant spending cuts (in the tens of billions) and a large net improvement in the Budget bottom line over the forward estimates and the medium-term, relative to MYEFO.

On cost of living, we expected some new support to be rolled out, but argued this should be temporary and tightly targeted, noting that a big splash risked driving inflation higher.

On tax and productivity, we said it needed to include substantive tax reforms with the ability to ' shift the dial on productivity, private business investment and/or housing affordability.

On national resilience, we said the Budget needed to include a plan and sufficient funding to shore up our fuel security, including boosting oil stocks to the IEA recommended 90 days.

Against these tests, the Budget succeeds in some areas, most notably long-term budget repair, but struggles to move the dial in others.

Fiscal impulse: is this an inflation-fighting Budget?

Overall, the Budget is unlikely to shift the RBA's near-term view on interest rates, but it does little to help in the fight against inflation. We judge more could have been done in 2026-27 to reduce aggregate demand and create some headroom for the RBA with inflation remaining elevated. As it stands the risk sits with further tightening by the RBA.

RBA Governor Bullock has been frank, noting in her May press conference "the extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand".

The RBA will need the most help in 2026-27, when inflation is forecast to be at its highest. Fiscal policy should be working in the same direction as monetary policy. In our view, the cash rate is mildly restrictive but there is a clear risk the RBA will have to further tighten monetary policy.

In terms of fiscal policy, the UCB deteriorates slightly from 2025-26 to 2026-27. While the deficit remains at ~ 1.0% of GDP, the deficit widens slightly in dollar terms from -$28.3bn to $31.5bn. The structural budget balance improves modestly in 2026-27 by ~0.1ppt/GDP.

If we go deeper and look at the impact of active policy decisions (excluding variations driven by the economic cycle, so-called parameter changes) we see a small fiscal loosening in 2026-27 of $6.5bn in 2026-27, driven by a lift in payments of $8.7bn. This has largely been driven by greater funding to states and territories for public hospital services, defence spending, new Pharmaceutical Benefit Scheme listings, infrastructure, the Thriving Kids program and other payments.

Overall, we judge fiscal policy is neutral to mildly expansionary in 2026-27, with relatively minor changes since MYEFO. In our view, the RBA is unlikely to adjust their existing forecasts or their expected cash rate path as a direct result of the Budget. We retain our view that the RBA will remain on hold for the rest of this year, with clear risks sitting to the upside.

Still, the Budget could be considered a missed opportunity. With inflation risks elevated, more could have been done to reduce new spending in 2026-27. The economy is currently running above its speed limit, and all new spending adds to aggregate demand. Less spending would have given the RBA more breathing room, reducing the likelihood of further interest rate hikes if inflation remains high.

In terms of the monetary policy outlook, we continue to watch household spending, the outcome of the Fair Work Commission decision on minimum and award wages due in June and the Q2 CPI from here. April CPI data due on 27 April will be important to firm up our trimmed mean CPI. We have flagged there is upside risk to our 0.9% quarterly estimate. 

Structural budget balance: some heavy lifting being done

Over the next four years, the UCB improves by a cumulative $44.9bn. This is driven largely by higher receipts rather than spending cuts. More than half of the improvement comes in the final year (2029-30) as payments fall sharply for the NDIS and receipts lift due to an increased tax take.

Beyond this point, the Budget delivers major improvements in the longer-term fiscal position, with a balanced budget now expected in 2034-35. This is followed by a 0.4% of GDP surplus in 2035-36, growing to 0.8% of GDP in 2036-37. This material improvement in the back end of the budget will likely be the lasting legacy from this Budget, provided it is delivered.

Looking over the next decade, the change in the underlying cash balance primarily reflects structural savings. Spending as a share of GDP lifts from 26.2% in 2024-25 to 26.6% in 2025-26 to 26.8% in 2026-27, but then falls to 26.2% by 2036-37 (compared with 26.8% at MYEFO).

Total receipts as a share of GDP are expected to increase from 25.5% of GDP in 2029-30 to 27.0% of GDP in 2036-37. The Budget papers note this reflects an assumption of no policy change with regards to personal income tax brackets (ie bracket creep). As is usually the case, further tax cuts are likely on the agenda in the lead up to the next election.

This structural improvement has a significant impact on gross debt. This is now projected to be 7.3%ppt of GDP lower in 2036-37. This also reduces net interest costs by $55.6bn. This will reduce bond issuance in Australia and shore up our AAA credit rating, continuing to paint Australia in a favourable light compared to many peer economies.

This structural improvement in the UCB is mostly driven by large cumulative NDIS savings and less so the growing increase in revenue that stems from the changes to negative gearing and the CGT regime.

The government expects to reduce NDIS scheme costs by a cumulative ~$150bn over the next decade. This is slightly less than we had expected due to the cost blow out in 2025-26 being larger than expected.

Average cost growth over the next four years will be reduced to 2%, before reverting to 5%. This will be achieved via a range of measures, including tightening eligibility, and cracking down on fraud. In 2035-36, the NDIS is now expected to cost $75bn, compared with $108bn at MYEFO.

The complete tax package; scrapping negative gearing, replacing the 50% CGT discount with an indexation model and cracking down on trusts also delivers long-term budget improvements of $77.2bn over the decade.

There are significant risks to this improved trajectory. The projected NDIS savings remain highly ambitious and, in our view, are very unlikely to be delivered in full. Slowing the growth in scheme costs from recent levels of over 10% a year, to just 2% a year, will be very difficult. Any delay in the necessary legislation or slippage in delivering the promised savings will punch a hole in the Budget.

To give an example, if growth continued at ~ 10%, that would add ~$50bn to the UCB over four years and ~$300bn over 10 years. Even if growth was reduced to 5% (still a major achievement), that would add ~$17bn to the UCB over four years and ~$74bn over 10 years. 

Housing tax reform: improving intergenerational equity

As widely expected, tax policy is the key focus of this Budget and will draw the most public attention. In net terms, new housing tax revenue measures will raise an additional $3.6bn over 4 years and the minimum tax on discretionary trusts will raise $4.5bn over 4 years.

The focus is housing tax reform. Negative gearing for property has been scrapped. Existing investments will be grandfathered, and new builds will be excluded, to minimise the impact on housing supply and rents.

The existing 50% CGT discount has also been scrapped and replaced by indexation. Investors in all asset classes (property, shares, bonds etc), will now be assessed on their real capital gain (after adjusting for inflation). 

Existing assets will be partially grandfathered.

The government argues these measures will shift the composition of the housing market back in favour of owners, not investors, helping young people to get onto the property ladder.

We expect some near-term volatility and house price falls in coming months as investors reassess their positions. We have revised our national house price forecast for 2026 to 3%, down from 5%.

Over time, we expect investor demand for residential property to be slightly lower, reducing overall house price levels by around 3% over three years.

Rents are likely to see only a very small and gradual impact. Treasury estimates that rents could increase by around $2 per week, which is broadly in line with our estimates. 

These reforms will likely have a small, but positive impact on affordability and access for first home buyers. Still, they are no silver bullet. It is still supply, relative to population growth, that will determine house prices and housing affordability over time. In this area, more work is still needed. 

Broader reform: does this Budget 'shift the dial' on productivity?

The government has also targeted productivity in this Budget through a mix of tax reform and other measures. The cuts to the NDIS, housing reforms and the crackdown on family trusts provided an opportunity to 'buy some broader 'big bang' personal and corporate tax reform. Instead, they have chosen to prioritise long-term budget repair.

There are several modest, targeted tax measures to support households and businesses. On personal tax, a new one-off Working Australians Tax Offset (WATO) will deliver up to $250 to Australian worker in 2027-28. This is targeted to 'earned-income' to incentivise work, not welfare. 

This will be complemented by a $1,000 instant tax deduction for workers from the 2026-27 income year. Under the scheme, workers can choose to claim $1,000 of tax deductions, instead of itemising work-related expense.

The WATO costs $6.4bn over 5 years, while the deduction costs $2.6bn.

On corporate tax, companies with less than $1bn in turnover will now be able to carry back a tax loss and offset it against tax paid up to two years earlier. This measure is aimed at improving the resilience of firms through temporary shocks. It will cost $2.3bn over 5 years from 2025-26.

Start-ups with turnover less than $10m will also be able to use a tax loss in their first two years of operation to generate a refundable tax offset, which is estimated to cost $3.8bn over 5 years.

The existing $20,000 small business instant asset write off has been made permanent - it was scheduled to revert to the old default level of $1,000 on 1 July 2026. This costs $890m over 5 years.

Outside of tax reform, there are some good measures in the Budget aimed at cutting red tape and boosting productivity, including faster approvals for projects. The government is also making all mandatory Australian standards free; previously firms used to pay up to $1,600 to access them.

These are welcome measures, but together, they won't materially lift the economy's speed limit or single-handedly solve the capacity constraints present in the economy that are contributing to inflation. 

Resilience: Does this Budget protect us from the next shock?

The Government has made new investments in national resilience, with a clear focus on fuel security. They have committed $10bn to lift our storage capacity and fuel reserves to 50 days. However, this adds only around 10 days to our current reserves. This is still well short of the IEA recommended 90 days and below many of our peer countries. At the start of this crisis Japan had ~160 days, the US had ~90 days and the UK had ~70 days.

Increasing fuel storage is expensive, but more will likely need to be done (and spent) in coming Budgets to further boost our fuel buffers.

A glance at the Budget economic forecasts

As expected, Treasury has downgraded its forecast for economic growth and upgraded its forecast for inflation and the unemployment rate.

Economic activity is now expected to grow by 1.75% in 2026-27 and 2.25% in 2027-28. The 2026-27 number has been downgraded by 0.5%pts compared to the MYEFO forecasts, while the 2027-28 forecast is unchanged. Higher oil prices from the Iran war and higher interest rates drove the 2026-27 downgrade. Inflation has been upgraded to 5.0% in Q2 2026 but is expected to fall back to 2.5% in Q2 2027.

As flagged by the Treasurer earlier this year, Treasury has downgraded its outlook for productivity growth in the next five years. Previously, Treasury expected productivity to return to its long-term assumption of 1.2% within 2 years. Now it expects it will take closer to 5 years to reach 1.2%, which is more in line with international best practice.

The forecasts are based on the assumption that the exchange rate stays around current levels and that the cash rate follows the market path, which includes another hike in August. As usual the export commodity price assumptions (excluding the price of oil) are conservative and are likely to track higher than the assumptions. The oil price is assumed to be at US$100/bbl until June before declining to US$80/bbl in Q2 2027. Net overseas migration has been upgraded across both 2025-26 and 2026-27 by 35k and 20k, respectively.

In broad terms, the Budget's economic forecasts are similar to CBA's.

GDP growth, headline inflation and the unemployment rate are expected to be broadly similar in 2026-27. With recent developments in oil prices, we now expect Q2 headline CPI inflation to be 4.7%/yr in Q2 2026, which is around the Budget forecast of 5.0%/yr.

Key Budget measures

Tax relief

• Working Australians Tax Offset: Annual tax offset of up to $250 for earned income from 2027-28, costing $6.4bn over five years.
• Instant tax deduction: $1,000 instant tax deduction for workers from 2026-27, costing $2.6bn over five years.
• Fuel excise: $2.9bn package to cut petrol and diesel excise by 32 cents per litre and reduce the heavy vehicle road user charge to zero for three months.
• Business loss reforms: Permanent two-year loss carry back for companies with turnover up to $1bn from 1 July 2026, plus start up loss refundability from July 2028, costing $2.7bn over next five years.
• Instant asset tax write-off: Permanent $20,000 per asset write-off for small businesses turning over less than $10m to from 1 July 2026, costing $890m over five years.
• Medicare levy: Increase Medicare levy low-income thresholds by 2.9%, costing $450m over five years.
• Productivity package: Regulatory reforms to cut compliance costs by $10.2bn a year, including tariff, approvals, financial regulation, Al, skills and housing reforms.

New spending

• Defence: Additional $14bnspending over four years and $53bn over the next decade for the 2026 National defence Strategy and Integrated Investment Program.
• Fuel resilience: $14.8bn fuel resilience package, including a $7.5bn Fuel and Fertiliser Security Facility and $3.2bn fuel reserve to lift diesel and jet fuel stocks to at least 50 days.
• Public hospitals: Additional $25bn over five years from 2026-27 for public hospitals and the new National Health Reform Agreement.
• PBS medicines: $5.9bn over the next five years for new and amended PBS listings.
• Aged care: $3.7bn to expand residential aged care beds, make Support at Home personal care free and improve aged care quality and viability.
• Housing infrastructure: $2.1bn Local Infrastructure Fund for roads, water, power and sewerage to support up to 65,000 new homes.
• Medicare urgent care: $1.9bn over five years to make Medicare Urgent Care Clinics permanent and free.
• Disability support: $1.6bn over four years for the Thriving Kids program.
• Transport infrastructure: Additional $8.6bn over 11 years for major transport projects, including $3.8bn for Suburban Rail Loop East and $1.75bn for rail freight.
• Services Australia: Funding to improve the way Services Australia delivers services, costing $2.1bn over five years.

New revenue

• Capital gains tax: 50% discount to be replaced with inflation indexation and a 30% minimum tax from July 2027.
• Negative gearing: Restricted to new residential builds from July 2027, existing assets excluded.
• Taxing trusts: Introduce a 30% minimum tax on discretionary trusts from July 2028, raising $4.5bn over five years.
• Electric vehicles: Wind back the EV fringe benefit tax concession, moving to a permanent 25% FBT discount.
• R&D Tax Incentive: Simplify and better target the R&DIT from 1 July 2028 to provide savings of $650m over the five years.

Spending cuts

• NDIS: Tighten access, planning, reassessment and fraud controls to reduce growth in NDIS payments by $37.8bn over four years.
• Private health insurance rebate: Remove the age-based lift in the private health insurance rebate from April 2027, saving $3bn over four years.
• Public service: $2.7bn in reduced external labour and non-wage spending.
• Health, disability and ageing: Identify savings from health, disability and ageing programs, saving $2.7bn over five years.
• Climate and energy programs: Identify savings from across the Climate Change, Energy, the Environment and Water portfolio, saving $727.0m over the five years.
• Veterans' services: Better target veterans' allied health and related services, saving $606.6m over five years.

South Australia leads the pack in wages growth 

By state, at 3.7 per cent South Australia recoded the fastest pace of wage growth, joining Western Australia in the top position for the first time since 2019. Wages growth in South Australia is responding to outperformance in the broader economy, with the unemployment rate the lowest in the country and economic growth the strongest. 

Western Australia maintained its highest or equal highest wages growth ranking in April, a position the state has held since late 2024. The state recorded wages growth of 3.7 per cent, a slight drop from March.

Wages in the Northern Territory have risen strongly in recent months, with growth the third highest in the country at 3.5 per cent. In New South Wales, Victoria and Queensland, wages growth has been broadly stable in 2026, sitting at 3.2 per cent, 3.0 per cent and 3.3 per cent respectively. Tasmania recorded the slowest wages growth at just 2.8 per cent.  

Broader measures of wage growth remain stable

CBA Wage Insights has also now examined a broader measure of wage growth to assess whether other indicators point to trends not captured in headline Wage Insights series, which is designed to emulate the ABS Wage Price Index. 

One such measure, Compensation of Employees (COE), reflects total wages paid across the economy. It does not adjust for changes in hours worked, bonuses or shifts in the composition of jobs. 

The COE measure has also remained relatively steady, but has edged higher since mid-2025. 

Ottley said the data supports the view that Australia’s labour market remains stable and has not yet shown a clear wage response to inflation. 

“This reinforces our assessment that the labour market is broadly stable, and still slightly tighter than what is considered full employment,” Ottley said. 

“We will continue to monitor the data closely over the coming months and quarters for any signs that wages begin to respond to inflation, particularly from an economy running above its speed limit and from the Middle East conflict.”