2026-27 Federal Budget

This Budget tries to achieve a lot — it succeeds in some areas but struggles to shift the dial in others. There are some big savings measures in the Budget, but there is also a substantial amount of new spending. In 2026-27, when the fight against inflation will be hardest, the deficit widens $3.2bn (relative to 2025-26). At the same time, new policy decisions result in a net spend of $6.5bn. We judge the stance of fiscal policy as neutral-to-mildly expansionary. 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. Greater spending restraint in 2026-27 would have reduced aggregate demand across the economy and created more headroom for the RBA. Inflation pressures are expected to remain challenging. 

Cost of Living

• Instant Tax deduction, from the 2026–27 financial year, workers can claim an instant $1,000 receipt-free deduction for work related expenses, benefiting an estimated 6.2 million people.
• Working Australians Tax Offset (WATO), a new $250 annual tax offset for over 13 million workers will begin in the 2027–28 financial year.
• The budget confirms scheduled cuts to the lowest tax bracket: the 16% rate will drop to 15% on 1 July 2026, and then to 14% on 1 July 2027.
• The Budget included $2.6 bn to fund the temporary 26-cent cut to the fuel excise, but the Treasurer ruled out an extension beyond June 2026.

Health

• Spending cuts on the National Disability Insurance Scheme (NDIS). Federal Health Minister Mark Butler had already announced $15 bn would be cut from NDIS over the next four years. 
• The NDIS will have $37.8 bn cut over the forward estimates, in an attempt to address the unsustainable growth of the scheme. The new targeted cost of the NDIS under the planned reforms will be $55 bn in 2030, down from the current forecast of $70 bn.
• $2 bn for the new “Thriving Kids” disability program, and $3 bn to cover support outside the NDIS.
• A further $25 bn in funding for public hospitals.
• $5.9 bn investment towards listing more medicines on the Pharmaceutical Benefit Scheme.
• The government will permanently fund the 137 Medicare urgent care clinics that have opened around the country, with $1.7 bn over the next four years and half a billion dollars each year after that.
• Around 3.2 million Australians aged over 65 will have to pay, on average, between $226 and $255 more a year for their private health insurance. The government expects 44,000 older people will stop paying for private health insurance.
• Increase Medicare levy low-income thresholds by 2.9%, costing $450m over five years.

Defence and industry 

• Australia will raise defence spending to 3% of GDP by 2033, including increased outlays on drones as it responds to rising conflict globally and China’s military buildup.
• The new target means the Federal Government will spend an additional $53 bn over the next decade, with outlays increasing by $14 bn over the next four years. 
• Overall spending includes some projects that have already been announced, including $12 bn towards the upgrade of the Henderson shipyards in Western Australia. The facility will be used to dock and maintain nuclear-powered submarines under AUKUS and construct Mogami-class frigates in the future. 
• Additional $8.6bn over 11 years for major transport projects, including $3.8bn for Suburban Rail Loop East and $1.75bn for rail freight.
• Funding to improve the way Services Australia delivers services, costing $2.1bn over five years

Housing and property tax reform

• Negative gearing will be restricted to new builds from 1 July 2027. Existing assets held as of 7.30pm on 12 May 2026 will be grandfathered and remain exempt, with a one-year grace period for investors, so as not to discourage investment in new housing supply. 
• From 1 July 2027, the 50% Capital Gains Tax Discount will be replaced by indexation for assets held for more than 12 months, with a 30% minimum tax on net capital gains. The changes apply to all CGT assets. 
• $2.1bn Local Infrastructure Fund for roads, water, power and sewerage to support up to 65,000 new homes.

Small Business

• The continuation of the $20,000 instant asset write-off for small business, complimented by tax relief in the form of the re-introduction of a “loss carry back” policy, allowing businesses with up to $1 billion in turnover to claim refunds on tax paid in the prior two years.
• The government is also making all mandatory Australian standards free; previously firms use to pay up to $1,600 to access these.
• From 2028-29, small businesses that are less than two years old will be able to get a tax refund on their losses. Businesses younger than 10 years old will be able to take advantage of an increase in the threshold for research and development (R&D) tax refunds from $20 million to $50 million.

The underlying cash deficit for 2026-27 is now expected to be $31.5 bn, a small improvement of $2.8 bn since Mid Year Economic and Fiscal Outlook (MYEFO). The underlying cash balance (UCB) has been upgraded by $44.9 bn over the five years to 2029-30, with $27 bn of this improvement coming in the final year. Deficits remain stable at -1ppt/GDP for the next three years, before steadily improving. Over the decade, the Budget does some serious heavy lifting. It delivers major structural improvements through a mix of higher taxes and lower spending. The last Budget didn’t show a realistic path back to surplus; this Budget does. A balanced budget is now forecast in 2034-35 and by 2036-37 the UCB is projected to be 1.3ppt/GDP better than at MYEFO. However, this all relies heavily on the promised NDIS savings being fully delivered.