Budget 2026–27: smaller deficits and a housing tax shake-up

Federal BudgetSmaller deficits, housing tax reform

The Treasurer handed down the 2026–27 Budget on Tuesday, projecting an underlying cash deficit of $28.3bn in FY2026 (1.0% of GDP) — an $8.5bn improvement on MYEFO. Commodity windfalls and stronger nominal demand have lifted near-term revenues by $41.1bn over five years.

The deficit is forecast to widen to $34.4bn in FY2029 before narrowing to $25.3bn in FY2030. Gross debt now peaks at 35.8% of GDP in FY2029, below the MYEFO trajectory, while net debt rises to 21.9% of GDP in FY2029.

The headline reform is the long-flagged shake-up of property tax: changes to negative gearing, the CGT discount and trust taxation, alongside a minimum tax on discretionary trusts. Treasury estimates the package will deliver 75,000 additional first-home buyers and 30,000 extra dwellings over a decade.

• NDIS savings build slowly but reach 0.7% of GDP by FY2037 — one of the largest savings packages since the mid-1990s. Combined tax and NDIS measures lift the bottom line by around 1.0% of GDP by FY2037.
• Key spending: $18.1bn in hospital funding (NHRA), $11.9bn on fuel and fertiliser security, a $53bn defence package over a decade, and a permanent $250 Working Australians Tax Offset ($6.4bn) from 2027.
• Treasury’s growth outlook is more optimistic than Westpac’s: real GDP at 1.75% in FY2027 versus 1.1%, with unemployment peaking at 4.5% versus 4.9%. Inflation control is squarely left to the RBA.

Consumer ConfidenceConfidence falls 3.1pts after the May hike

WagesSteady growth keeps labour costs sticky

• The ABS Wage Price Index rose 0.9% in the March quarter, in line with market expectations and matching the December outcome. Annual wage growth eased modestly to 3.2% from 3.4%, but remains well above pre-pandemic norms and consistent with persistent labour cost pressures.
• Private sector wages lifted 0.9%qtr while public sector pay rose at a similar pace, with enterprise agreement renewals continuing to anchor growth around the 3¼% mark. The data offers little relief on the inflation front and reinforces the RBA’s caution around second-round effects from higher energy costs.
• With real wages still negative on a year-ended basis, household purchasing power remains under pressure even as nominal pay growth holds firm — a key dynamic underpinning the soft consumer demand outlook flagged in this week’s confidence data.

Foreign ExchangeAUD eases but holds near four-year peak

• AUD/USD pulled back to around the 0.72 mark this week but continues to trade close to multi-year highs, caught between the federal budget release and ongoing inflation risk from the Middle East stand-off — both of which support an extended RBA tightening path.
• Tuesday’s budget delivered tighter projected deficits and a meaningful overhaul of housing tax settings, but stopped well short of taking on the inflation challenge directly. That heavy lifting remains the RBA’s responsibility — a positioning markets quickly read as supportive of higher rates for longer.
• The market is pricing a roughly 1-in-5 probability of a back-to-back hike in June, but conviction on an August move to 4.60% has firmed materially — odds now above 80% — locking in a structural rate advantage over the USD.
• Q1 wage data printed largely in line: soft enough not to surprise hawkishly, firm enough to keep the inflation thread alive. Neutral for the AUD on the day.
• The energy backdrop remains a tail risk in both directions: US–Iran diplomacy has stalled, the Strait of Hormuz is operating well below capacity amid naval friction, and elevated crude keeps a structural inflation premium embedded in front-end Aussie rates.

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Sources: Westpac Economics 2026–27 Federal Budget Report (12 May 2026), ABS, ANZ-Roy Morgan. This summary is for informational purposes only and should not be considered financial advice. Always consult a professional before making investment decisions.