Federal budget 2026-27 Robbing Peter to spend money

Treasurer Chalmers delivered the Government’s fifth federal budget on 12 May 2026. As flagged prior, this year’s budget contains a raft of significant revenue raising measures, headlined by substantial cuts to the National Disability Insurance Scheme (NDIS) and reforms to capital gains tax (CGT), negative gearing, and taxes on discretionary trusts. These measures are expected to improve the bottom line by $45.9 billion over the next five years. However, rather than attempting to engage in true tax reform, these additional revenues are being spent on healthcare, defence, housing, and minimal additional income tax relief to working Australians. As a result, forecasts for 2025-26 and for the next four years reveal ongoing persistent deficits of around $30 billion per year (or around 1.0% of gross domestic product [GDP]). The continued strength in the jobs market (and elevated commodity prices) have continued to boost the budget bottom-line to the tune of $37 billion over the five years to 2029-30.

From a fiscal perspective, deficits of a little over 1% compare favourably to offshore, especially to the US (closer to 6% of GDP) and even Europe (at 3%). That said, most of the savings in this budget come in the out-years, with the near-term fiscal impulse still stimulatory (albeit mildly so at 0.2% of GDP). Needless to say, this will only further complicate the Reserve Bank of Australia (RBA)’s challenges in bringing domestic inflation under control. Furthermore, it is with great disappointment that Australians should view this latest ‘attempt’ at tax reform, which essentially amounts to raising taxes further across the economy (and particularly raising taxes on aspirational Australians), in order to spend more on the Government’s chosen policy priorities. The lack of a genuine redistribution of the tax structure, the lack of true reforms targeted at improving productivity, and the lack of focus on repairing Australia’s structural deficits unfortunately threatens to condemn our lucky country to a B+ lifestyle of mediocrity and government dependence.

A tax and spend budget masquerading as ‘reform’

Coming into this year’s budget, the Government stressed its focus on reform and hard decisions to address generational inequity. The pre-budget announcements of changes to the NDIS, CGT, and negative gearing (none of which were flagged prior to last year’s election) presaged a substantial revenue-raising exercise. The key question for many Australians and investors was, what did the Government intend to do with this additional revenue? Embark on genuine tax reform to structurally shift our unbalanced tax base, perhaps redistributing the increased tax take via personal income and/or corporate tax reform? Genuine productivity measures to help Australia compete in an increasingly uncertain and volatile multi-polar environment? Or more cost-of-living and vote-buying spending?

Unfortunately for investors and Australians, the Government chose the latter, with the savings spent on healthcare, defence, fuel security, and housing, alongside minimal additional tax relief for Australian workers (which will be trivial for individuals but will still cost $6.8 billion over the forward estimates). The 2026-27 budget forecasts a deficit of $31.5 billion (1.0% of GDP) for 2026-27, a modest improvement from the Dec-25 Mid-Year Economic and Fiscal Outlook (MYEFO) forecast of $34.3 billion. This is driven by a more resilient economy that delivers $9.3 billion to the bottom line, offset by cost-of-living spending of $6.5 billion. Off balance sheet spending masks an even greater fiscal deterioration – over the next four years, the cumulative headline cash deficit is expected to be $94 billion worse than the Government’s preferred underlying cash deficit measure.

Thereafter, out to 2028-29, the bottom line is little different, with the deficit stable at 1.0% of GDP before a modest improvement to 0.7% in 2029-30. Effectively, increased revenues and savings are being re-allocated to new spending until the NDIS savings start ramping up from 2029-30 and beyond. The reforms to this program may end up being a silver lining over the long-term, with CBA estimating they could save up to $170 billion over the next decade – potentially providing a future, braver Treasurer (or one seeking re-election) with a war chest to embark on genuine tax and productivity reform (or simply spend more).

Key revenue-raising policies (revenue over the next five years)

As flagged prior to budget night, there are four key pillars behind the Government’s revenue-raising initiatives for this budget, highlighted by significant reforms to the NDIS, CGT, negative gearing, and trusts. Combined, these four measures are expected to add $45.9 billion of revenue over the next five years, with revenues increasing further over time.

• NDIS reforms – The flagship policy change in this year’s budget involves a substantial reform of the NDIS in an attempt to rein in runaway spending growth and secure its social licence. These reforms include setting clearer eligibility requirements, tightening criteria around spending, and fighting fraud. Together, these reforms are expected to save $37.8 billion, and if executed well, substantially more over the longer term.
• CGT reforms – The Government will replace the 50 per cent CGT discount and replace it with cost base indexation at the rate of inflation, subject to a 30 per cent minimum tax rate. These arrangements will apply to gains arising after 1 July 2027, giving investors a 1-year grace period. These changes will not apply to new homes, where investors can choose to apply either CGT treatment. The family home will continue to be exempt, as will investors in government and affordable housing.
• Negative gearing – The Government will restrict the use of negative gearing to new builds only, effective from 12 May 2026, with a grace period for investors who purchase existing properties to negatively gear until July 2027. These changes will be grandfathered and existing investors can continue to negatively gear their property until it is sold. The combination of CGT and negative gearing reforms are expected to add $3.6 billion in additional revenue.
• Minimum tax on trusts – The Government will apply a minimum 30 per cent tax on discretionary trusts from 1 July 2028. Fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts will be exempt from this minimum tax. This change is expected to add $4.5 billion in additional revenue.
• Other savings measures – These include $3 billion by removing the age-based uplift for the private health insurance rebate from April 2027, $2.7 billion in cuts to public service budgets for external labour hire (such as consultants and lawyers) and spending on travel, hospitality and property.

Key spending policies (spending over the next five years)

Disappointingly, despite the Government’s massive parliamentary majority, a fragmented opposition, and no imminent election, this year’s budget contained little in the way of genuine reform in spending or productivity measures. It does, however, include further spending on the care economy, cost of living, defence, and fuel security. This year’s key spending policies include:

• Minimal additional income tax relief for Australian workers – The Government will introduce a $250 Working Australians Tax Offset from July 2027, to offset income derived from work. This measure will cost $6.4 billion, adding to previously legislated minor tax cuts (1 per cent) from July 2026 and July 2027, and the previously legislated $1,000 instant tax deduction from July 2026.
• Healthcare – $25 billion of additional funding for public hospitals, $1.8 billion to secure the future of Medicare Urgent Care Clinics, $5.9 billion for new and amended listings on the Pharmaceutical Benefits Scheme
• Defence – An additional $6.8 billion of funding to support the 2026 National Defence Strategy and Integrated Investment Program, part of a total $53 billion of investment over the next decade on defence.
• Fuel security and cost-of-living relief – $11.9 billion in spending to support the National Fuel Security Plan, including increasing Australia’s fuel and fertiliser reserves. A further $2.5 billion as the net cost of the Government’s previously implemented temporary fuel excise and heavy vehicle road user charge reductions.
• Business productivity – $2.3 billion to re-introduce a 2-year loss carry back for companies with up to $1bn in turnover, allowing them to claim losses against prior years’ profit, $890 million to make permanent the $20,000 instant asset write-off for businesses with a turnover up to $10 million, an expansion of tax incentives for venture capital and a commitment to “consult with stakeholders” to offset the impact of the CGT changes on venture investing.
• Housing – $2 billion of additional spending on critical infrastructure to support the construction of up to 65,000 homes. Mandatory Australian standards will also be made free for construction firms.

2026-27 budget and out-years underlying cash balance

Source: Australian Government, LGT Wealth Management.

What does it mean for markets?

Equities – markets fall in the lead-up

On average, the Australian equities market is typically up almost 3% in the month prior to the federal budget. This partly reflects the fiscal largesse that has historically been flagged or leaked ahead of budget night, particularly where it supports consumer spending, infrastructure, construction or other domestically-exposed sectors. However, this year, the market has bucked that trend, falling over 3%. This is in stark contrast to global equity markets, which have gained ~7% over the same period, condemning Australian equities to COVID-era levels of annual underperformance.

Although impossible to apportion with precision, part of the underperformance likely reflects concern that the reforms to CGT and negative gearing, housing uncertainty and lack of productivity reform could weigh on already fragile business and consumer confidence.

Although last night’s budget was structurally significant – particularly across tax, housing incentives and NDIS reform – its equity-market impact is likely to be more selective than the pre-budget headlines suggest. The stock market is not the economy – Australian Securities Exchange (ASX) listed companies derive only 55–60% of revenue from Australia, and superannuation funds, which are ring-fenced from the CGT changes announced last night, own a large proportion of the listed equity value. 

The budget's savings are built around four pillars, however, not all of them are equity-market significant (at a stock or sector level):

1. NDIS reform (AUD $38bn over five years) – minor listed market exposures
2. Removal of the 50% CGT discount in favour of inflation-indexation from July 2027 – potential ‘flow-related’ impacts on equity markets.
3. A 30% minimum tax on family trust distributions – more relevant for private wealth structures than listed equities
4. A restriction of negative gearing to new builds only – relevant for banks, housing turnover, property platforms and developers, and consumer confidence. 

Analysis by Barrenjoey models a 3-4% fall in house prices from the combined CGT and negative gearing changes, equivalent on their estimates to 25–30bps of rate hikes – enough, they argue, to keep the RBA on hold through its August meeting (the market is fully priced for a September hike). Whether that order of magnitude holds is difficult to assess, as the pro-rata grandfathering mechanism will likely create a front-loaded selling incentive for some property investors if they sell before July 2027, rather than after it. 

Replacing the 50% CGT discount with inflation indexation removes the simple, highly visible reward for holding an asset beyond 12 months. Investors will instead be taxed more explicitly on real capital gains. UBS argue this shifts relative attractiveness from capital-gains-oriented strategies toward income. We’re reluctant to overplay this impact, although we support the logic, at the margin – we’re not convinced Australian-domiciled investors explicitly targeted a different holding period for longer-duration growth stocks. However, we concur that an increase in capital gains tax may result in shareholders rewarding companies with higher dividend payout ratios and dividend yields, given Australia’s dividend imputation policy remains intact. Ultimately, with the superannuation industry owning a substantial swathe of the equity market and exempt from these changes, any impact is likely to be marginal and orderly. 

Restricting negative gearing to new builds should slow investor credit growth – the Parliamentary Budget Office estimated this saves AUD $2bn per year – which weighs directly on loan growth and, at the margin, net interest income for the major banks. A 3-4% fall in residential collateral values would compound the effect, although the transmission mechanism is not credit losses in the first instance, but weaker investor credit growth, softer housing turnover, slower collateral appreciation and more cautious household sentiment. The impact is likely to be modest unless the housing-price effect is larger than expected. 

Both CGT reform and negative gearing restrictions could accelerate housing turnover in the near term as investors reassess after-tax returns. That could support listing volumes, and digital property company REA Group has notably outperformed the broader market over the past month. Longer-term, there is a risk that the near-term boost to housing turnover fades as the investor cohort shrinks (higher after-tax costs mean fewer leveraged investors, and fewer investors means fewer listings).

While there is some near-term uncertainty likely for residential property developers, especially combined with higher rates, Citi analysts see some medium-term demand upside as investors shift to new housing to capture tax benefits. We are also likely to see further concentration of wealth in Australians’ principal place of residence (PPR), which remains exempt from all CGT.

The Working Australians Tax Offset (~AUD $6.4bn, equivalent to roughly 20bps of RBA easing and applicable to all wage earnings) and the simplified $1,000 work-related deduction (AUD $1.3bn, applying to 6.2m workers) provide some cash-flow support to lower- and middle-income households, where the propensity to spend is highest (noting that the deduction is not equivalent to a $1,000 cash payment but is dependent on a taxpayer’s marginal tax rate). There are consumer discretionary benefits at the margin, although cost-of-living pressures, and potentially flat-to-negative household wealth effects will likely mitigate any share price relief for the sector.

Across a variety of sectors, there are also several smaller, but at the margin, impactful measures in the budget:

• The fuel security package ($12bn) is the most material of the smaller measures (in dollar terms), with relevance across storage, terminals, engineering services and fertiliser infrastructure – minimum fuel stockholdings, the establishment of a government-owned reserve, and support for new fuel and fertiliser infrastructure, creates a potential tailwind for fuel storage, terminals, engineering services, industrial maintenance and selected energy-security beneficiaries (e.g. refiners). This may also be a small positive for companies exposed to significant fuel costs (transport and haulage companies).
• Defence spending ($7bn over the forward estimates) is a positive for local defence exposures.
• New housing supply measures ($2bn enabling infrastructure, $500m approvals streamlining) partially offset the negative gearing headwind for developers, contractors and building materials, though the timeline on supply response is long enough that near-term earnings impact is minimal. 
• The rollback of electric vehicle (EV) fringe-benefits-tax concessions is a modest negative for EV affordability and has some implications, at the margin, for novated leasing, salary packaging and fleet management companies.
• The permanent $20,000 instant asset write-off supports small to medium enterprise SME-exposed equipment retailers and commercial-vehicle names, at the margin.
• Government-exposed consulting, IT services and labour-hire names face a direct headwind from cuts to external contractors, although listed exposure is small.
• Removing rebates on private health insurance for over 65s is marginally negative for private health insurers and hospital operators. 

In aggregate, the budget is broadly neutral for Australian equities, with potential ‘flow-related’ tailwinds somewhat marginal and long-dated, and ignoring the second order impacts that the most negatively impacted from today’s budget (banks via housing impacts) are also the largest single cohort in the ASX200. The direct market impact should be diluted by the offshore earnings mix of the ASX, the importance of superannuation and institutional ownership, and the fact that some of the downside appears to have already been priced through the pre-budget underperformance of several sectors. 

Australian equities have, on average, gained almost 3% in the month leading into federal budgets over the past decade. This time, Australian equities have fallen ~3%, an almost 6ppt differential to what we had expected. This has been most pronounced in the performance of the economically sensitive parts of the market:

• Financials down 6% over the past month vs a decade average of +2.4% gains in the month before the budget; and
• Consumer discretionary stocks down 7% vs +2% on average.

The data following the budget is also instructive at a sector level:

• Materials have underperformed the market six of the past seven years in the month following the budget.
• In contrast, the healthcare and financial sectors have outperformed the market six of the past seven years in the month following the budget.
• Consumer Discretionary stocks have underperformed four of the past five years in the month following the budget, giving credence to the view that much of the benefit to the sector had historically been leaked in the lead up to the budget. 

Average post-budget ASX 200 moves the past decade

Average post-budget sector moves the past decade

Source: Bloomberg

Fixed income – higher issuance than expected

The federal budget points to a modestly larger funding task than markets had expected, with the AOFM likely to announce around $137 billion of nominal Australian Commonwealth Government Bond (ACGB) issuance for FY27, above expectations of $125 billion. Issuance will likely include around $40 billion of syndications in new 2038 and 2057 lines, helping to improve liquidity, and extend the ACGB curve in the 10-year and 30-year sectors, respectively. The balance is expected to be issued through weekly tenders. The budget also implies average gross issuance of around $153 billion across the following three financial years (FY28-30).

The modestly larger issuance profile is likely to place some upward pressure on long-end yields in the near term. Over the medium to longer term, however, we believe the increase in issuance is largely expected by markets, and is therefore unlikely to result in sustained underperformance, particularly given Australia remains one of the few sovereign issuers globally to retain a AAA credit rating. In our view, Australia’s solid fiscal fundamentals should support investors’ capacity to absorb the additional $12 billion funding task.

ACGB issuance

Source: Australian Government, Barrenjoey