Budget improves long‑term outlook, but inflation fight left to the RBA

The Federal Budget delivered a credible path back to surplus, supported by spending restraint and significant tax changes, CommBank Chief Economist Luke Yeaman says.

“The long‑term budget position does lift as a result of this budget,” Yeaman said, pointing to an improvement in the underlying cash balance and a sharp decline in projected gross debt over the decade ahead.

Speaking on the latest episode of the CommBank View: Economics & Markets podcast,  Yeaman said the Budget also represented “something of a missed opportunity” in helping the Reserve Bank of Australia curb inflation. While it hadn’t materially altered the inflation outlook, he described the overall stance as “broadly neutral to mildly expansionary”.

“When the RBA is sitting down looking at their next set of forecasts, we don’t think the budget will be playing a big role,” he said, noting that the government had “actively put money into the economy” during a period when inflation pressures were expected to be most acute.

Despite this, Yeaman said CommBank hasn’t changed its view on interest rates, with the RBA expected to keep the official cash rate on hold for some time.

NDIS savings central to budget outlook

A significant share of the Budget’s long-term improvement relies on a sharp slowdown in National Disability Insurance Scheme (NDIS) spending, an area Yeaman said was critical but difficult to deliver.

“The NDIS has been the biggest cost pressure in the Federal Budget for at least the last four, five, six years,” he said, noting strong growth in the scheme had driven repeated upward revisions to budget estimates.

The Budget assumes NDIS cost growth will slow to an average of 2 per cent over the next four years, down from around 10 per cent previously, before returning to 5 per cent longer‑term. Yeaman said those assumptions were now “baked into the budget bottom line”.

However, he warned the targets were ambitious and carried material risk.

“If they can’t deliver that, then that’s going to punch a hole in the budget estimates and the budget improvement that we described,” he said.

“It’s going to require cooperation from the state governments… and it’s going to require a lot of community support, particularly from the disability community,” Yeaman said.

While welcoming efforts to improve the scheme’s sustainability, he said execution would be critical.

“The numbers are very ambitious… and it’s not going to be easy to drive this change,” he said, adding there was “a high risk that some of those savings won’t be delivered particularly in the next two to three years”.

Housing tax changes reshape incentives

One of the most significant policy shifts in the Budget was the overhaul of tax concessions for property investors, with negative gearing to be scrapped for established housing from July 2027 and the capital gains tax discount replaced with indexation.

“This is the big news of the night,” Yeaman said.

He said removing negative gearing would lift the upfront cost of property investment and weigh on investor demand.

“When you remove the option of negatively gearing for an investor… this represents an upfront increase in the cost of servicing that investment,” he said.

CommBank modelling suggested national house prices could fall by around 3 per cent over the next few years, with potentially stronger effects in investor-heavy segments of the market.

CommBank Head of Market Strategy and Rates Research Adam Donaldson said changes to capital gains tax were also likely to reshape behaviour across broader financial markets.

“The structure of the Australian tax system has typically favoured assets that grow quickly or have those capital gains,” he said.

“What this change is doing is effectively starting to level that playing field,” he said, noting it could influence how investors assess risk and allocate capital across asset classes.

Stronger fiscal outlook supports investment appeal

While expectations for the Budget had been high, Donaldson said the improvement in Australia’s long-term fiscal position was meaningful for bond markets and the nation’s AAA credit rating.

“We think it certainly helps to shore up the outlook for the credit rating,” he said.

He pointed to lower projected government bond issuance and a reduced peak in the debt-to-GDP ratio compared with earlier forecasts.

“That long-term system sustainability… is a really good one,” he said.

Donaldson said Australia stood out against a backdrop of fiscal strain and political uncertainty in other advanced economies.

“That simply doesn’t apply in Australia,” he said.

This fiscal position, he said, was underpinning demand for Australian‑dollar assets and reinforcing the country’s appeal to long‑term investors.

“The budget has helped cement Australia as a very popular investment destination because of that,” he said.

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