Federal Budget 2026-27: Economic outlook and considerations for investors 

• Budget position steady despite global uncertainty: While deficits are forecast to continue, the FY2026-27 deficit is now projected to be $2.8 billion lower at $31.5 billion, with the Budget position improving in every year across the forward estimates and by $44.9 billion overall.
• Tax reforms reshape the investment landscape: Changes to Capital Gains Tax (CGT) concessions and negative gearing are designed to improve intergenerational equity, support home ownership and help fund new tax cuts for workers.  
• Productivity reform becomes a major economic focus: Measures including tariff abolition, compliance reduction, faster approvals and AI investment aim to improve business efficiency and support long-term economic growth.  

Against a backdrop of slowing growth, persistent inflation and global uncertainty, the 2026-27 Federal Budget is framed around resilience and reform. The Budget is expected to remain in deficit over the next four years. The anticipated reduction in the deficit was more modest than what many economists had been expecting, but greater than what the government forecast at the Mid-Year Economic and Fiscal Outlook (MYEFO) released in December 2025. The government now forecasts a $28.3 billion deficit for this financial year (FY) and a $31.5 billion deficit for FY2026-27, with deficits expected to persist for the foreseeable future.

Gross government debt is projected to rise to 35.6% of GDP by 2029-30. While this trajectory will be worth monitoring, the projected debt levels remain low compared to other developed economies.

The government expects inflation to fall back towards 2.5% in 2026-27, while forecasting the unemployment rate to remain stable over the forecast period at 4.25%, slightly below the Reserve Bank of Australia’s (RBA) current unemployment rate forecast. The government also expects economic growth to be weak in 2026-27 at 1.75%, from 2.25% at MYEFO, mainly due to the Middle East conflict. This forecast is slightly higher than the RBA’s expectation.

The Budget includes significant tax reform aimed at achieving what the government has described as a fairer and stronger tax system. These are significant changes to a system that has largely been unchanged for decades.

Some of the major changes include:

• Capital gains tax (CGT) discount: The Budget removes the 50% CGT discount and replaces it with an inflation-linked discount, subject to a minimum tax rate of 30% on gains. These changes will apply prospectively to all CGT assets, including pre-1985 CGT assets held by individuals, trusts and partnerships. This appears to be targeted at property investors, with the government aiming to “level the playing field for first-home buyers”, but will have implications for other investment classes. It will not apply to owner-occupied housing.
• Negative gearing: The budget removes negative gearing for established properties, while retaining it for new builds. Properties purchased before budget night would be able to maintain the current negative gearing arrangements.

These changes are likely to affect the attractiveness of property as an investment asset for high wage earners. The government has stated that the reforms are intended to help level the playing field for first-home buyers and support more Australians to achieve home ownership.

“We're delivering a fairer tax system for workers, first‑time buyers and young people. This will help rebalance a system which is more generous to assets than it is to labour,” said Chalmers.

The budget wasn’t expected to include many cost-of-living incentives, but several modest measures were delivered.

An annual tax offset of $250 for all Australian workers will apply from the 2027-28 tax year onwards, called the Working Australians Tax Offset (WATO), and this will be automatically applied to all workers’ tax returns.

A tax cut delivered by a reduction of the current 16% tax rate bracket to 15% in the 2026-27 tax year and again lowering to 14% from the 2027-28 tax year onward.

Also to assist with the high price of fuel, caused by the Middle East conflict, the government will reduce both the fuel excise tax, and excise-equivalent customs duties by more than half, and reduce the heavy-vehicle road user charge to zero, for a temporary period of three months.

To simplify taxes for workers from the 2026-27 tax year onwards an instant tax deduction of $1,000 will be applied. This will allow workers to claim up to $1,000 of tax deductions without keeping receipts.

Australia productivity has fallen over the past decade; in this budget the government has delivered measures to assist in boosting productivity growth in Australia. Some of these include:    

• Reducing financial sector compliance costs by progressing 14 legislative reforms, including increasing company reporting thresholds.
• Removing barriers to trade by abolishing 497 nuisance tariffs to save businesses compliance costs.
• Aiming to improve labour mobility for health practitioners through national occupational licensing and working with states on payroll tax administration reforms
• Accelerating approvals for environmental, low-risk foreign investment and telecommunications.
• Providing up to $70 million for ‘AI Accelerator’ grants to boost AI development.

Productivity growth in Australia has fallen well behind other developed market economies and impeded economic growth in Australia. This reform should help spur productivity and make it easier and cheaper to conduct business in Australia. 

The NDIS was established to support for Australians with permanent and significant disability and remains a critical pillar of the social safety net. Significant cost growth in recent years has prompted the government to pursue reforms aimed at improving the system’s sustainability while maintaining the scheme’s core purpose.

According to the Treasurer, “A big part of our savings package will restore the NDIS to its original intent and secure its future so it grows in a sustainable way, in line with programs like Medicare. This difficult but necessary reform will save $37.8 billion over the forward estimates.”

The 2026-27 Budget reinforces a clear shift in the investment landscape.

Key considerations include:

• Economic impacts: The Middle East conflict has hampered the economic growth outlook for Australia via higher energy prices and ensuing inflationary pressures across all sectors.
• Tax reforms: The removal of the CGT discount is likely to affect investors’ selection of some investment assets, with housing and growth assets becoming less attractive on an after-tax basis.
• Productivity reforms: The changes to encourage higher productivity growth are likely to improve business efficiency and make Australia a more attractive country to conduct business in the medium term.
• Cost-of-living: Supporting consumers during a time of increased uncertainty, will provide some support for consumers to respond to increases in the cost-of-living.

^{Prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 (Mercer Australia). References to ‘Mercer’ shall be construed to include Mercer Australia and/or its associated companies.}

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