The 2026 Federal Budget was always going to be an interesting one. The need to address the external forces of geopolitical tensions and fuel supply, had to come up against Australia’s unique position of low productivity, high inflation, frustrations surrounding housing affordability and changing demographics. These issues are all touched on in this year’s Budget. It is unusual for a Government to address so many issues at once, the long tail of the changes’ impacts suggest it may take years to determine if they are successful.
For the policy outlook, they have refrained from large spending packages, allowing this Budget to be relatively fiscally neutral in the near term. The big policy changes, particularly addressing housing, may weigh on house prices over the coming year but are in-line with our current forecasts. As such, this leaves our RBA outlook unchanged and is currently reflected in our portfolio positions.
The headline cash deficit for 2026/27 came in at $31.5bn, which is better than had previously forecast. This was to be expected, given the better revenue tracking across the year. Expense growth was higher in 2025 but curtailed in 2026, but isn’t the main story for this year. Gross Debt was revised marginally lower, and net debt remains low compared to Australia’s global peers at 20% of GDP in 2026/27.
Changes in the headline deficit were predominantly attributed to better economic conditions, while policy measures were a net negative $6.52bn for the 2026/27 year, but overall positive $8.2bn across the forecast horizon, with much of this back loaded.
Essentially, the Budget reflected the need to limit any additional stimulus, in order not to add to overall economic GDP. This is because, as the RBA constantly notes, monetary policy cares about overall growth, no matter its origin. If the Federal Government were to fan any inflationary flames at this juncture, by splashing some cash around, it would be incumbent on the RBA to douse them. They met this criteria, only just, with the fiscal pulse over the next few years flat – neither stimulatory nor contractionary.
The overall Budget is relatively neutral for the economic outlook, which will be dominated by global supply challenges and a tailwind from the AI investment cycle.
The key policy proposals
Expenditure
• NDIS restructuring. Net cost reduction around $36.2bn over four years.
• Defence spending increase of $14bn over 4 years and a total of $53bn over 10
years.
• Fuel Resilience – $14.8bn to ensure fuel supply. Also to reserve 20% of gas exporter gas.
• Infrastructure: Support Victoria with $3.8 for the Suburban Rail Loop
• Housing: $2bn in housing infrastructure. Reduction in red tape to facilitate faster approvals.
• Tax cuts: $250 per working Australian tax offsets (27/28, WATO) and $1000 instant tax deduction (2026/27) for income tax payers.
• Hospitals: additional $25bn for public hospitals, increased spending on Medicare, PBS, urgent care clinics.
• Business investments packages: loss refundability, R&D and VC incentives, productivity initiatives, reduced red tape, EV tax benefit: reduce fringe benefits tax benefit for EV purchases over $75k to 25% from July 2027. The overall scheme will end in 2029.
Revenue
• Negative Gearing: remove negative gearing from purchases of existing housing, applied to property purchased 12 May 2026 (7:30pm) but implemented July 2027.
Expected to lower house prices by 2% over “a couple of years.”
• Capital Gains Tax: remove the 50% discount and bring back tax on real gains, for assets held over a year. Applies July 2027. Minimum tax paid will be 30%.
• The two measures together are expected to raise $3.6bn over the first three years.
• Trusts: apply a minimum 30% tax rate. This is expected to add $4.5bn in 2029/30.
We would expect the changes in housing to boost demand for new housing, which is the intended policy, while creating some turnover in the existing housing market. This may see marginal price moderation in major cities, building and broadening on the moves seen in the last few months. As the Government is addressing affordability challenges through changing supply (focussing new investment demand on new housing, facilitating faster approvals and infrastructure), and demand dynamics, these policies are likely to begin that process. As the policy is grandfathered, the impacts are more likely to be slowly felt, rather than have a deep near term influence.
The slight moderation in debt levels points to a similar issuance profile for the AOFM for the next year, and thus not impacting supply.
