Alison Pennington is Chief Economist at the McKell Institute.
Delivering a Budget against the backdrop of an oil crisis and a global growth shock is an unenviable task. After inheriting public institutions and productivity drivers in tatters at the start of their first term, it’s the second major energy price and inflation crisis federal Labor have been tasked with navigating.
But instead of going on the defensive, domestic political pressures have become the catalyst for a more ambitious reform push this Budget. These domestic pressures were created by the rising cost-of-living and a growing view that Australia’s social contract with wage earners and future generations has been eroding, marked by the ascent of a tax-subsidised wealthy, older asset class.
Ensuring workers can earn the living standards that wages once delivered to older generations was the leading frame in Budget 2026-27.
But has this budget, billed as Labor’s most ambitious, managed to set Australia on the path to achieve this?
Retaining low unemployment despite inflationary pressures
The government’s employment and spending forecasts show it expects wages to grow after an initial hit, while unemployment remains mostly steady, rising from 4.25% in 2025-26 to 4.5% in 2026-27 and holding for two years before reducing again. This shows government intends to keep workers in jobs rather than cutting spending drastically to lift unemployment in response to this oil crisis.
It should be noted that the Budget’s central forecasts rest on the highly optimistic view that the US-Israel War with Iran resolves this year, with global oil prices dropping mid-2026 and stabilising mid-2027.
Inflation is expected to halve dramatically from 5 per cent in 2025-26 to the RBA’s target of 2.5 per cent in 2026-27, which would defy the persistence of high prices after the last energy price shock subsided.
Interestingly, Treasury’s 4.5% unemployment rate projection from next year is now aligned with the RBA’s Non-Accelerating Inflation Rate of Unemployment (NAIRU). The government’s Employment White Paper argued for a more ambitious, proactive approach by government to lowering structural unemployment, rather than relying on a narrow, technical NAIRU, and this projection will diminish the policy space for RBA to justify more rate hikes on the basis that unemployment is not high enough.
Wealth vs work takes center stage
Central to the Budget are significant CGT, negative gearing and trust tax reforms. The new inflation-adjusted regime for capital gains after 1 July 2027 (i.e. only taxing real gains), with a 30% minimum rate and the 50% discount retained for new builds, negative gearing changes limiting the concession to only new housing, and a new 30% minimum tax on trust distributions will genuinely help rebalance the scales with worker incomes. With the average tax rate for labour incomes set to rise to almost 28 per cent in the next decade, up from 24.5 per cent now, allowing capital gains to be taxed at half the rate of workers, or for trusts to be exploited widely for tax avoidance was neither fair or sustainable.
Essentially the changes will create two lanes in the individual income tax system, where every dollar of investment income is taxed at 30%, while labour incomes are taxed for every dollar earned after a new low-tax threshold of $19,985.
The changes will have a strong effect on investor behaviour and raise $3.6 billion in additional revenue over the next four years. The inclusion of assets purchased before 1985 for CGT will widen the tax net, with any capital growth from mid-July captured upon sale on these formerly exempt investments. Though it should be noted that most of Australia’s over 2 million investment properties were purchased after introduction of CGT.
Importantly, the 30% floor will disincentivise the practice of delaying property sales till retirement when investors hit a lower income tax bracket, reducing their tax bill. For instance, under the former settings John would wait till retirement to sell his $1m investment with capital gain of $400,000, paying tax on only $181,800 of that gain ($200,000 minus current $18,200 minimum tax threshold). Now an investor will pay a 30% effective rate on every dollar made in capital gains, regardless of whether their marginal rate is below 30%.
The reality is grandfathering and slowing house price growth means the majority of wealth accumulated through housing tax loopholes will remain under those settings, and a capital gain of the scale like John’s is unlikely to materialise under the new regime. Since the CGT changes cannot compensate for rising wealth inequality, more should be done to address this.
The only way to tax what has already been accumulated, is wealth taxes and inheritance taxes. For starters, McKell Economist Tom Probst and I have proposed a moderate wealth tax on Australia’s largest land fortunes valued over $20 million, with an estimated $3 billion in revenue raised to cut stamp duty for FHB.
It is clear that the 50% CGT discount overcompensated investors for inflation. Pegging tax to gains above inflation is better, but claims to rebalancing the treatment of passive incomes vis-à-vis earned incomes should factor in that workers pay tax on their income regardless of how much prices rise. Their taxable incomes don’t change with the rising cost of mortgages, rents, groceries, utilities and other essentials.
A new $250 Working Australians Tax offset for labour incomes at a cost of $6.4 billion over two years introduced from mid-2027 will help address some of the bracket creep faced by workers. Furnishing the ‘wealth vs work’ political frame, higher revenues from housing and trust tax reforms will mean that investors ‘fund’ workers’ tax cuts. This increase in the tax-free threshold to $19,985 is minimal, and far from compensates workers for surging inflation. It is a powerful political device for the government to draw upon though. With further tax cuts on work incomes already flagged by the Treasurer today, it suggests this new worker-specific tax infrastructure will be built upon soon.
Efforts still needed to ‘recouple’ wages and home price growth
Rising real wages are a key measure of workers’ living standards. If they decline, workers go backwards. In the period leading into the Budget, real wages had been in recovery after the last global supply shock in early-2022, which saw inflation reach over 6 percent. Real wages then began clawing back lost ground over the two years 2023-24 to 2025-26, until the Middle East war kicked off, sending oil prices soaring, and the RBA unwinding its last three cuts with three more hikes.
If wages decoupled with home prices under Howard’s CGT changes, then the goal must be to ‘recouple’ wages with home price growth. Therefore, wages must grow at least at the same pace as projected house price growth. House prices are expected to rise at around 3% this year, and 3% in 2027, but Treasury are forecasting a decline in real wages this financial year 2025-26, and only 1% growth in 2026-27, and 1% in 2027-28.
For context, the savings challenge to buy a home is already immense for a young worker today. A 20% housing deposit on a median capital city unit price of $767,901 is around $153,000. The average 25-35-year-old who saves 15-20% of their income will take 10-15 years to save this deposit. With average earners already thousands of dollars behind their real wage position before the 2022 price shock, and real wages projected to decline in the government’s own forecasts for this year, new measures will be required to lift the power of paypackets. A stronger collective bargaining regime that covers more workers with guaranteed union representation would help deliver guaranteed above-WPI wage increases, and more action to reduce the costs of essentials, especially housing would help wages go further.
Little action on prices
The lack of measures addressing rising costs is my big Budget omission. The Budget confirms an end to the fuel excise cut on 30 June 2026, all-but guaranteeing the RBA raises rates in August. With 1.5 million mortgage holders – 28% of all – at risk of mortgage stress, the government’s 5% deposit regime starts to look dangerous, bringing new meaning to the adage ‘what the government gives, the RBA taketh away’.
High-cost subsidies like the electricity rebates after the 2022 energy price shock would have been politically difficult with the threat of RBA hikes hovering over this Budget. Nor would they have been effective since these urgent time-limited measures overcompensate producer profits, in turn doing nothing to reduce prices long-term. But they should be placeholders while more fulsome, long-term cost reduction plans are developed.
All tools should be on the table – regulation, super-profits taxation, and public sector financing, direct investment and delivery.
Gas reservation and tightened regulation on fuel retailers are steps to getting a grip on prices in this Budget, but more decisive foundations should be established this term of government, to prepare for a new macroeconomic stabilisation regime as the 1990s monetary policy regime continues to fray.
Housing supply ambitions could be hampered by conflict
A number of housing supply measures are in the Budget, including $2 billion paid to states and local councils to build infrastructure for 65,000 homes over 10 years, faster planning approvals, and support for youth at risk of homelessness, combined with continued demand measures like higher income caps on the 5% deposit and shared equity schemes. Treasury forecasts the combined effect of housing policies and tax changes will extend homeownership to an additional 75,000 first-home-buyers over the decade.
I see challenges with the government’s plan here. The retained 50% CGT discount and negative gearing for new housing will be powerful incentives for investors to buy new houses. Rising housing costs due to supply chain pressures from war in the Middle East will work against these signals, reducing the pace of new dwelling stock construction. With a lower volume of housing built, investors will also be in an even more competitive position compared to FHB, pushing up prices at the bottom end of the market. If reversing collapsing homeownership rates among working-age Australians is the objective, a larger quote of minimum stock must be allocated for first home buyers, as well as measures to leverage lower public sector financing costs and purchasing power to build homes directly in the public sector.
The other challenge is State and territory FHB incentives are currently working in the opposite direction to these Budget changes, with bigger stamp duty cuts for FHB buying new dwellings.
Stamp duty exemptions on new dwelling for FHB became the implicit recognition that competition with investors for established dwellings was too great for FHB. New greenfields supply projects led by states are also implicitly developed for FHB too.
New buyers were already competing with downsizers and now investors will be crowding into the new dwelling market.
Limiting tax avoidance, channelling more productive investment
The minimum 30% floor for CGT with a new 30% tax on trust distributions equalises the tax treatment of different forms of investment (property, shares, interest etc), and ends business incentives to operate through family tax structures to avoid company taxes on business income. Before this change, trusts could facilitate income flows from both active trading businesses and passive investments. Income-splitting allowed them to pay a lower rate of tax than businesses under the company tax rate, and a lower rate than workers’ labour incomes. Tax-avoidance through trusts has exploded with over 1 million registered trusts in Australia. This is an important reform for fairness, productivity and reducing inequality.
By aligning the 30% rate across CGT and trusts with the company tax rates, government is equalising the tax treatment of business income – tax neutrality.
By ending Australia’s long-held preferential taxation of housing (with the exception of negative gearing available for new housing), capital can choose returns in more productive assets and innovative activities than houses which is good for Australia’s lagging productivity growth rate.
Housing market investors who’ve fattened their pockets under prior settings claiming this equalisation will harm productivity should be ignored. The public mostly understands that the billions in largely-speculative investment stored in bricks and mortar is not the same as investment in productive, employing, value-adding businesses. Which raises the question of where new investment should go?
New reforms to the Superannuation Performance Test have been flagged, which will help unlock investment in renewables and housing previously limited by the test’s restriction to short-term returns. This would separate returns to renewable energy, affordable housing and venture capital from traditional assets, allowing their assessment over longer timeframes. With the government falling short on two key targets – housing builds and renewable electricity generation – in part due to over reliance on markets unmoved by public underwriting or concessional loans, it has an opportunity to lead with its own direct investment in building houses and renewable energy infrastructure, ‘crowding’ in new investment and closing the investment gap.
Cuts warrant caution
Many questions have been raised about the revenue ‘bankability’ of the NDIS cuts, with ambitious savings targets of $38 billion over the forwards. But merits-aside of the government’s move to refocus this burgeoning quasi-market, there is a real risk that the cuts just show up in other government-funded services – most notably schools.
The NDIS cuts will channel greater resourcing constraints to schools and teachers, who are already ill-prepared for the volume of children with complex needs and disability. But salt on the wound is a hidden Budget savings measure cutting $472 million cut to disability support in schools. A tidy saving in the short-term to help balance books, but a world of pain for workers in schools that’ll show up in future industrial campaigns.
An inflection point for Labor, but more to do
SOCIAL SHARE