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The 2026-27 budget and what to make of inflation

  • 4 days ago
  • 3 min read

The Australian government entered this year’s federal budget with the confidence of a nation that had largely avoided recession, but not the anxiety of one that had escaped inflation. Treasurer Jim Chalmers delivered a spending plan framed around “resilience” and “restraint,” even as households faced rising mortgage repayments, stubborn grocery prices and the prospect of further interest-rate pain from the Reserve Bank of Australia.


The budget attempted a difficult balancing act: easing public frustration without reigniting the inflation the government says it is determined to defeat. Ministers promised billions for housing infrastructure, Medicare clinics and fuel security, while also touting more than $60 billion in savings and spending cuts, much of it tied to reforms of the National Disability Insurance Scheme (NDIS). The government argued that discipline now would protect the economy later, a message aimed as much at bond markets as suburban voters.


Key to the budget’s proposed tax reforms is limiting negative gearing benefits for future property investors by reducing the range of deductible losses and tightening eligibility rules for multiple investment properties. It also moved to increase Capital Gains Tax (CGT) liabilities on investment properties by lowering the CGT discount for assets held longer than 12 months, a change aimed at cooling speculative housing demand and improving housing affordability.


Ethinvest’s Blair Palese, who founded the Climate Capital Forum, and Climate Energy Finance’s Tim Buckley told media the treasurer missed the opportunity to ramp up investment in our clean energy sector, end $19 billion in annual fossil fuel subsidies and tax the gas export sector as the nation experiences the rising cost of living and petrol and growing impact of climate change.


“The solution to our cost of living, energy and national security and future economy challenges is the rapid move to clean energy,” Palese said. “There is no economic argument not to ramp up, get allocated funds out the door and prioritise electrification, green industry and transport.”


Meanwhile, the central bank raised interest rates for a third time this year in May, lifting the cash rate to 4.35%. In blunt analysis, Shane Oliver of AMP warned that Australia was drifting toward a “whiff of stagflation,” where weak growth and persistent inflation collide. He argued that the Reserve Bank had little choice but to keep tightening, fearing that inflation expectations could become entrenched in the way they did during the oil shocks of the 1970s.


Behind both the budget papers and the rate rise loomed a broader geopolitical anxiety: the war involving Iran and the disruption of shipping through the Strait of Hormuz. Australian policymakers fear a prolonged energy shock could push petrol prices sharply higher, worsening already fragile consumer sentiment. The Reserve Bank’s forecasts now assume slower economic growth, slightly higher unemployment and inflation remaining above target for longer than previously expected.


AMP estimates that the latest rate increase alone will add roughly A$1,300 a year to repayments on an average mortgage, deepening pressure on heavily indebted households. On social media and online forums, Australians responded with a mix of exhaustion and anger, with many arguing that wage earners were carrying the burden of inflation while asset owners remained protected.


Economists are divided on whether the government’s budget will help or hinder the Reserve Bank’s campaign against inflation. Some analysts praised the emphasis on spending restraint and productivity reforms, while critics said the package lacked long-term economic reform.


Anthony Albanese has sought to cast the budget as one focused on “intergenerational fairness,” arguing that difficult decisions now are necessary to preserve economic stability later. But some economists accuse Labor of relying too heavily on optimistic savings projections.


For now, Australia’s economy sits in an uneasy middle ground: unemployment remains comparatively low, but consumer confidence is weakening; inflation is no longer surging, but neither is it retreating. The government insists the country is navigating global instability better than most advanced economies. The Reserve Bank, meanwhile, is signalling that more interest rate rises may still be required.


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