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A pivotal period requires bold budget reform
In the 2026-27 Budget, Treasurer Jim Chalmers faces the daunting task of steering the economy through choppy waters while global trade routes are less predictable, supply chains more fragile, and households are stretched. The essential task of lifting productivity growth, which the Treasurer identified as a key ambition at last year’s election, has become more pressing given the economy is being buffeted by yet another supply shock. The Middle East conflict is building on the challenges of the pandemic, trade disputes and the war in Ukraine.
Three ambitious reform packages have been promised by the Treasurer in his fifth budget. These are centered around savings; productivity and investment; and tax. As well, intergenerational fairness and supporting new housing have been identified by the Government as priorities. It all adds up to a big task, and certainly one that is possible. We welcome all positive policy changes but fear the reforms will not reach as far as they need to.
Thankfully, despite the current challenges, the Australian economy has continued to show resilience with relatively low unemployment and high commodity prices, which will likely lead to better-than-expected income and corporate tax collections. Data from the Department of Finance indicates that the deficit in FY26 will be much smaller than initially forecast. The year-to-March underlying cash deficit was $30.4 billion, approximately $17 billion smaller than forecast in the 2025-26 Mid-Year Economic and Fiscal Outlook (MYEFO) (which was published in December 2025). This gives the Government some flexibility with policy in the short term as new policies can be introduced without making the budget deficit worse.
But this flexibility is limited by the existing debt projections. At MYEFO, Australia’s gross debt was projected to exceed $1 trillion in FY27, rising to more than $1.2 trillion by FY29. Higher interest rates and bond yields will lift the cost of issuance and refinancing even higher, increasing debt servicing pressures. Alongside persistent deficits, this risks undermining Australia’s AAA rating and shifting a larger share of revenue toward interest payments rather than funding essential government services and investing in future priorities.
The impact of the Middle East conflict and subsequent rise in oil prices means Australia’s inflation problem has only gotten worse from an already elevated level. Government spending, which is at a record high as a share of the economy, must avoid adding to inflation. We know some cost-of-living measures are planned but hope anything further is targeted only to those in need to avoid exacerbating the problem.
Our 2026 Budget wish list is largely consistent with our 2025 list, although with another shock having hit the economy this year, the urgency around reform has grown:
- Do not add to spending, unless offsetting it elsewhere
- Change existing policy to lower spending and find new revenue that will persist over time
- Put in place reforms to assist the private sector to invest and maximise productivity growth.
Download the Federal Budget 2026-27: Budget Preview
Summary
With another global shock hitting the economy, the urgency for reform has only intensified. The Government must resist adding to spending unless it is offset elsewhere, focus on new sustainable revenue measures, and prioritise reforms that unlock private sector investment and productivity. That includes meaningful tax reform, shifting away from an over-reliance on income taxes, improving investment incentives, and providing the certainty businesses need to commit capital and drive growth.