The Budget reinforces Australia’s place as a destination for investors

In the political commentary and daily news cycle around the latest 2026-27 Federal Budget, it’s easy to lose sight of the fact that Australia’s economy is in a relatively strong position. Economic growth is solid, unemployment is low and the Budget charts a credible path back to surplus.

“There are some challenges around the Budget, but for Australia as a whole, the economy is in a good place,” says Belinda Allen, Head of Australian Economics at CommBank.

“We’re still one of only nine countries that are triple-A-rated. From a debt perspective, there’s now lower spending on interest costs than there was before, because debt is settling at a lower level.

“Compared to peer economies, Australia is still a very attractive place for investors to want to come and invest.” – Belinda Allen, Head of Australian Economics, CommBank

A challenge for the RBA

A near-term challenge from the Budget is the extent to which it adds to demand and puts pressure on interest rates. The Australian economy grew at 2.6% in 2025, above the economy’s speed limit; unemployment is low; and consumer spending remains resilient, despite low consumer confidence.

All of this adds to pressure on the Reserve Bank of Australia (RBA) to raise interest rates and the Budget won’t help to reduce demand, says Allen.

If anything, the Budget is mildly stimulatory. Over the next four years, the government is making large additional spending commitments on health, defence and the strategic fuel reserve, and introducing reductions in personal income tax.

“There’s a lot of spending coming through the economy and that’s going to make the RBA’s job harder in the near term,” says Allen, although noting the Budget spending on its own is unlikely to alter the RBA’s rates decisions. However there are emerging risks with the housing market weakening.

The economy will need to slow to reduce inflation and the stable contribution from the public sector means the private sector will have to do the work of taking demand out of the economy.

CommBank Chief Economist Luke Yeaman describes the Budget as a missed opportunity to do more to keep spending constrained.

“Inflation is a real pressure point. There’s a risk that it will continue to stay sticky and elevated going forward. So in that environment, the RBA would have been looking for a bit more help than they got,” says Yeaman.

“It’s not going to fundamentally shift the path of rates for the RBA, but it probably just gives them less flexibility and less headroom.

“We certainly do think the risks to interest rates sit to the upside, in terms of the longer-term picture.” – Luke Yeaman, Chief Economist, CommBank

Realising savings

Cuts to the rate of spending growth in the National Disability Insurance Scheme (NDIS) and tax changes – including that abolition of negative gearing on existing investment property, the end of the capital gains tax discount and the taxation of discretionary trust income – all put the Budget balance in a much stronger position.

Australia’s solid economy is also helping the Budget bottom line. Parameter changes (changes to the economy) will do more to deliver budget savings in the next four years than government policy decisions.

The spending savings will make a small impact on the deficit in the next couple of years. The deficit for 2026-27 will be $2.8 billion lower than Treasury forecast in its December Mid-Year Economic and Fiscal Outlook.

The improvement in the Budget position in the next few years is relatively modest, as the government is spending much of the NDIS savings and the additional revenue from the tax changes.

“There is now a clear path back to surplus over the longer term, which there wasn’t in the previous Budget.” – Luke Yeaman, Chief Economist, CommBank

Only in 2029-30, when the housing tax policies and the new tax on trusts have been in place for a couple of years, will there be a meaningful improvement in the Budget bottom line.

The Budget is forecast to return to balance in 2034–35 and a surplus of 0.8% of GDP in 2036–37.

The return to surplus is not without risks, chiefly whether the NDIS savings will be delivered in full. The NDIS savings will be delivered by limiting its annual spending growth to 2% in the next four years and 5% after that, compared with the 10–12% growth it has been averaging over the past few years.

This should deliver savings of almost $40 billion over the first four years of the Budget projections and $150 billion over the next decade. Taken together, the tax changes will improve the Budget position by $77 billion over 10 years.

“If those savings to the National Disability Insurance Scheme are not delivered, then it’s going to punch a big hole in the budget outlook,” says Yeaman. “Fundamentally, the budget is stronger in a structural sense, but we’ve got to closely watch those savings.”

Demand for Australian bonds

The spending and tax reforms, and the projected return to surplus, have put Australia on a strong economic and fiscal footing compared with the rest of the world. This will be reflected in demand for Australian bonds from global fixed-income investors, says Adam Donaldson, Head of Market Strategy and Rates Research, CommBank.

“We think it’s a big tick and investors will feel confident that economic and fiscal management in Australia is still being run very capably.” – Adam Donaldson, Head of Market Strategy and Rates Research, CommBank

This will ultimately lead to a flattening of the yield curve – where longer-term bonds attract a lower interest rate – and the difference between Australian and US rates narrowing, with the potential that Australian rates will be lower than those of the US once inflation is back under control.

Donaldson says there is an “Aussie dollarisation” of capital markets unfolding as investor appetite brings forth more Australian dollar bond issuance by banks, corporates and foreign issuers who might previously have looked elsewhere.

“It’s leading to a deepening and more liquid capital market in Australia that is ultimately really good for the economy in terms of cost of funding, access to capital and market vibrancy,” he says.