Economic and tax predictions for Federal Budget from economics and tax experts at BDO

Budget must lift productivity to secure growth as economic pressures shift

As Australia moves into a highly uncertain economic phase, BDO Australia says the May Federal Budget must look through temporary relief measures, to the harder task of lifting productivity in its pre-budget predictions.

With growth expected to be low but resilient, BDO chief economist, Anders Magnusson, says tax settings will matter as much as government spending, “because the clearest path to stronger investment, stronger innovation and stronger living standards is policy certainty that rewards productive risk-taking.”

Mr Magnusson continued, “the Federal Budget is a chance to set a clear, people-centric path for higher productivity, so Australia can grow steadily, lift living standards and fund essential services for the people who need support, without shifting avoidable costs to future generations.

“The Budget will be judged on whether it moves beyond temporary fixes and delivers a practical plan for higher productivity and sustainable service delivery. This will ultimately determine wages, services and quality of life.

“The big question is practical: what will this Budget do to improve quality of life for Australians into the future?” continued Mr Magnusson.

“Australia should be able to sustain positive growth through this uncertainty, but the next phase depends more on investment, skills and innovation than on population. That’s why productivity reform matters; it has to be disciplined, people-centric and built for real-world outcomes.”

What is BDO’s chief economist watching out for in this year’s Federal Budget?

BDO chief economist, Anders Magnusson, says:

• Productivity reform: “The Budget must look through temporary relief measures and implement practical, people-centric reforms that direct capital to productivity boosting projects, which is key to higher wages, growth, and sustainable public services.”
• Tax settings that encourage investment and improve intergenerational equity: “Effective tax reforms, including adjustments to capital gains tax and negative gearing, should create incentives for investment and innovation, fostering capital flow into innovative activities, while at the same time improving intergenerational fairness by shifting the tax base further towards wealth, rather than income from labour.”
• Sustainable social support: “The Budget should address long-term fiscal pressures from an ageing population and rising health costs. Primarily, by identifying groups under the NDIS where an alternative type of support would be more efficient at helping vulnerable people access the support they need – in line with the Thriving Kids program already announced.”

Productivity first: growth, wages and living standards

BDO is calling for a Budget that puts productivity first.

Put simply, productivity is how Australia turns effort into higher incomes. If the Budget wants durable growth and real wage gains, it should prioritise measures that lift output per hour worked: policy certainty that supports business confidence, incentives that unlock investment, and practical steps to speed up innovation and skills adoption across the economy. That is the pathway to stronger living standards - and it is what will make the broader fiscal and service commitments achievable over time.

“The Budget has to look through short-term relief to a long-term plan to lift productivity and strengthen living standards,” Mr Magnusson said. “That means reforms that are practical, prudent and paced for implementation, not announcements that create uncertainty without delivering results.”

Tax and incentives: settings that reward investment and innovation

Mr Magnusson said many Budget measures have “two stories” at once: a tax story and an economic story. The strongest measures improve incentives and lift productivity by directing capital toward investment and innovation, while also maintaining confidence and a clear sense of fairness across generations in terms of how tax revenue is raised.

“Capital gains settings are a good example,” Mr Magnusson said. “From an economics perspective, it’s about changing incentives, so capital isn’t simply locked up in existing assets. When more capital can flow to businesses that can innovate and scale, it supports stronger productivity and stronger living standards in the long run.”

In the lead-up to Federal Budget night, BDO will be watching for credible reforms to tax settings - including possible adjustments to capital gains tax and negative gearing - that have a clear economic purpose: create stronger incentives for investment and innovation, and help capital flow into activities that can scale, compete and lift productivity. Done well, reforms like these can also improve intergenerational equity over time by shifting more of the tax base toward wealth (and economic rents), rather than relying so heavily on taxing income from work.

While these reforms would improve intergenerational equity on face value, the devil will be in the detail in terms who the reforms benefit and when. There are designs for capital gains tax reform that would further disadvantage younger generations and BDO will be looking at that detail in the Budget.

Tax technical perspective

BDO tax partner, Mark Molesworth, shared his views on what the Federal Budget holds from an expert tax perspective.

“On the fiscal policy front, the Treasurer and Prime Minister have both flagged in recent days that a review of tax settings is underway. Most often at the top of their comments have been the ability for losses from investment assets to be offset against income from other sources (generally known as negative gearing) and the 50% capital gains tax discount available to individuals,” said Mr Molesworth.

“While we expect these to figure in the government’s thinking, BDO continues its call for the government to consider more holistic tax reform.”

Mr Molesworth says the accounting and advisory firm, BDO, is calling on the Government to consider whether the current tax mix – not just between taxes on labour and taxes on capital, but also between taxes on consumption and taxes on income - is still appropriate in the current economy.

“The last time a review of the Australian tax system resulted in significant changes was in the early 2000s,” continued Mr Molesworth.

“All updates since then have either been tinkering or have bolted on new tax obligations without considering whether some rationalisation would lead to better outcomes.

“We encourage the Government not to waste the current crisis, and not to play ‘rule-in, rule-out’ games. Instead, properly considered, strategy-led, system-wide reforms should be considered.

When asked, what would this look like? Mr Molesworth responded:

“These may include a consideration of broadening the base of the GST (with commensurate reduction in income taxes on lower earning individuals) and the rate of tax applied to investment income (not just capital gains) as compared to that applied to income from labour.”

Sustainable social support: reform that protects people and strengthens services

In BDO’s pre-budget predictions, chief economist, Anders Magnusson expects the Budget to engage directly with the long-run pressures shaping Australia’s fiscal outlook - particularly an ageing population and rising health and care costs - and to set out a clear approach to sustainable social support as demand for services grows over time.

“We can’t just do business as usual, because over time it becomes too expensive and something has to give,” Mr Magnusson said.

“The Budget needs prudent, thought-out reform that protects people first, but also improves value for money and makes the system more resilient as demand for care and support grows.”

Mr Magnusson said areas such as disability care, aged care and broader health spending will require careful redesign and stronger oversight, better incentives for quality providers, and practical settings that ensure funding reaches outcomes.

“In the NDIS in particular, that means identifying cohorts where a different form of support would be more effective and more efficient, helping vulnerable people access what they need without defaulting to expensive pathways, consistent with the Thriving Kids program already announced,” said Mr Magnusson.

“Done well, this is reform that improves support for people today while protecting the capacity to deliver it tomorrow.”

Growth and innovation: a Budget built for collaboration

BDO is calling for a pro-growth Budget that backs innovation that can be adopted at scale thus helping small and mid-sized businesses build capability, improve processes and invest with confidence. That means targeted, disciplined measures that unlock private investment, strengthen skills and reduce unnecessary friction.

BDO also expects housing and migration to remain central to the Budget narrative. Policy settings need balance: supporting workforce needs and attracting skills, while lifting housing supply and easing pressure on costs.

“Productivity is the thread that ties this together - growth, wages, services and fiscal sustainability,” Mr Magnusson said. “A Budget that brings government and business together to lift productivity can be optimistic and responsible at the same time.”

BDO Australia will provide further economic and tax analysis as Budget night approaches, with a focus on reforms that lift productivity, support innovation and deliver sustainable outcomes for people, business and government.

 

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For more information or to organise an interview:
Jane Ward
Senior manager, media
BDO Australia
jane.ward@bdo.com.au