The economic backdrop for Federal Budget 2026

The Government has delivered this budget during a difficult period of inflation and geopolitical uncertainty. Productivity, intergenerational equity, and budget sustainability were already central objectives, but the 2026 energy crisis has added an immediate need to improve economic resilience and ease cost-of-living pressures.

Economic outlook

The Government forecasts economic growth of 2.25% in 2025–26 and 1.75% in 2026–27, which is more optimistic than the RBA’s recent assessment. The expected improvement in the budget bottom line should therefore be viewed in the context of Treasury’s relatively positive central forecast and the downside risk from a larger or more persistent oil shock.

Productivity

Productivity is front and centre in this year’s Federal Budget, with changes to the CGT discount, reduced red tape, and improved skills policy.

Most of the benefit from the current CGT discount goes to owners of existing residential property, which does not promote innovation in our economy like investing in a growing business does. While reducing the CGT discount will cost investors across all asset types, it will likely hit residential property investors hardest (especially when paired with limits on negative gearing for established housing), shifting the incentives towards investing in more economically productive assets.

The Government has also announced a policy to remove trade barriers, improve labour mobility nationally, and attract younger, more appropriately skilled migrants through reforms to the permanent migration points test.

Resilience

Geopolitical uncertainty has put resilience firmly on the agenda, particularly in the energy sector. The Budget includes a $14.8 billion fuel resilience package, a 20% domestic gas reservation requirement for LNG exporters, and a broader energy security package. This includes lifting diesel and jet fuel reserves to 50 days, establishing a $3.2 billion government fuel security reserve, supporting EV charging and Australia Post fleet electrification, and providing $1.1 billion for domestic low-carbon fuel production.

Intergenerational equity

The Federal Budget 2026 has delivered a suite of policies designed to improve economic prospects for younger Australians, with changes to tax, housing policy, and budget sustainability.

For housing, the 50% CGT discount will be replaced, for gains made from 1 July 2027, with an inflation-adjusted real-gains discount plus a 30% minimum tax on capital gains. New-build investors may still use the previous arrangement. Further, the Government will limit negative gearing to new builds and existing property holdings from 1 July 2027 and will extend the ban on foreign purchases of established dwellings to mid-2029. This aims to remove competition from the housing market, benefiting younger generations.

The Budget shifts some tax burden away from workers and towards asset owners through the WATO and changes to the CGT discount and negative gearing. This shift away from taxing incomes will be welcome for younger generations. However, this only claws back the last couple of years of increases to the effective tax rate for the average working Australian.

Funding government consumption with debt is a burden on future Australians who must repay it, so a sustainable budget is good for intergenerational equity. The intended savings from changes to the NDIS represent a substantial improvement in that sense.

Inflation and cost of living

Governments have been responding to the energy crisis with various support policies in the past few months. The Federal Budget 2026 was restrained in terms of substantial new support, avoiding additional inflation pressure.

The WATO provides a $250 annual offset from 2027–28, which Treasury says increases the effective tax-free threshold for workers by nearly $1,800. This sits alongside already legislated rate cuts and the $1,000 instant tax deduction. This is an untargeted support measure, but it is not a significant risk to short-term inflation, since the WATO will begin more than a year from now.