Analysis: A Federal Budget shaped by short-term global shocks and long-term economic reform
Tuesday, 12 May 2026
By PwC Australia’s Chief Economist Amy Lomas
According to an old proverb, the best time to plant a tree was 20 years ago.
The second-best time is now.
In the 2026/27 Federal Budget, the Treasurer has put on his gardening gloves and attempted to sow the seeds for structural economic reform that bears fruit for generations of Australians, while tackling the thorns emerging from the Middle East conflict in the near term.
As he shields our economy from a global oil shock which rewrote the outlook overnight, Jim Chalmers is also trying to balance the books by reining in Commonwealth spending - a challenge that pre-dated the war and is likely to outlast it.
Australia’s economic growth is constrained, price pressures are stubbornly persistent, and an operating surplus seems like a distant goal in the face of back-to-back crises including COVID, tariffs, and now the fresh inflationary hit from the Iran-U.S. war.
For the Treasurer, the choice was never between responding to the conflict or reforming our economic settings. It was doing both tasks at once, and accepting that not all Australians will be happy.
Adjustments to capital gains tax and negative gearing have long sat in the ‘too hard basket’ but with affordability issues entrenched in the property market, this Budget suggests that for the Government, the cost of inaction has become greater than the cost of reform.
In taking these risks, Jim Chalmers appears to acknowledge that Australia cannot spend its way to future prosperity in perpetuity. It signals that he’s ready to spend some political capital to pursue meaningful change, while continuing to defend our economy in a volatile world.
The big pictures in numbers
The headline figures reflect economic momentum faltering over the coming financial year, with growth dropping by 0.5 percentage points from 2.25% in FY26 to 1.75 percent in FY7. The Government has levelled the blame squarely at the global oil shock, with inflation projected to peak at 5% in FY26 before falling to 2.5% in FY27.
It’s the combined dampening effects of the fuel supply crisis, rising CPI, and higher interest rates that will cause household consumption and business investment to fall. This in turn leads to growth in public spending overtaking private demand growth in FY27.
| FY27 | |
| Deficit | $31.5 billion |
| GDP Growth | 1.75% |
| Inflation | 2.5% |
| Unemployment rate | 4.5% |
AI and the productivity payoff
Artificial intelligence remains one of the most promising levers for lifting Australia’s productivity, even if the benefits are yet to be fully reflected in the headline numbers. The gains from AI will build gradually into the economy, rather than arrive immediately.
More than $105 million has been committed over four years in the Budget to develop an AI tool that aims to fast-track assessments for housing and energy projects pending environmental approvals. It’s one telling sign that the Government sees AI as a practical mechanism to unlock tangible productivity growth in priority policy areas where delay can carry an economic, and political, cost.
This follows the release of the Government's National AI Plan, which focuses on building the foundations for stronger data capability and expanded infrastructure, skills and governance across industries. With the right policy and fiscal settings, Australia can unlock the full potential and long-term value of investment in AI.
High inflation and uncertainty slow down the AI dividend, with businesses retreating to survival mode, at the expense of innovation and reinvention. As the Reserve Bank Governor noted recently, controlling CPI and providing greater economic certainty will create the conditions for companies to confidently invest, experiment and improve with AI, allowing them to embed new technologies into workflows, systems and skills.
‘Intergenerational equity’ and the changing tax mix
Housing is at the heart of the Government’s big-ticket tax reforms.
Winding back the capital gains tax concession and negative gearing aims to rebalance the system and give younger Australians a fairer shot at home ownership. The intention to even the playing field is widely accepted as necessary, but it risks undermining confidence and certainty for the business community.
There is real concern about the $3.63 billion hit to investors – locally and globally – as well as start-ups and entrepreneurs who rely on equity and risk capital to drive the same productivity and private sector led stimulus the Budget is trying to unlock.
The devil is in the detail and design.
‘Grandfathering’ arrangements will soften the impact on many existing investors, and on the budget bottom line, with real capital gains made after 1 July 2027 to now be taxed at the full rate. Any gains made before then will still attract the 50% discount - except for new builds – which attract it indefinitely.
For negative gearing, this will only be available for new builds, with investments held up to budget day being exempt.
Consultation has been flagged on the implementation of the capital gains tax changes for new businesses, in consideration of workers who are allocated shares by cash-strapped start-ups and innovators.
Building resilience amid the Middle East war shocks
The spillover of higher commodity prices from the conflict in the Middle East, coupled with its flow‑on impacts to transport and other essential costs, have materially dampened Australia’s short‑term economic outlook.
While these disruptions are largely outside the Government’s control, they have upended the assumptions underpinning the Budget only a few months ago and become unavoidable in domestic fiscal policy.
In response to the war and to build a more resilient economy, a range of reactive and defensive measures have been aimed at cushioning households and businesses from higher prices, and insuring Australia’s fortunes against future external risks.
Among them is the $10 billion fuel security and resilience package to increase strategic reserves and stockholding obligations, $2.55 billion worth of temporary fuel excise cuts, and an east coast gas reservation policy that forces exporters to sell 20% of new supply to the domestic market from July 2027.
Combined these measures will help to buffer Australia from the threat of future supply shocks and the elevated uncertainty that has caused consumer and household confidence to plummet.
The battle between savings vs spending
The 2026/27 Budget is an exercise in restraint, as much as relief. If Australia’s economic growth is to recover, the Commonwealth cannot remain the primary driver of demand through continuous stimulus. Whatever flows out of the coffers today, shouldn’t undermine what’s needed for the economy of tomorrow.
The Treasurer has banked savings of $64 billion, led by $35 billion worth of cuts to the National Disability Insurance Scheme and job reductions in the public sector workforce. But there is targeted help for Australians, despite warnings from the RBA Governor against cost-of-living support to avoid fanning the flames of inflation.
For businesses that invest in research and development, there are new ‘carry back’ provisions that enable losses today to be offset through refunds of tax paid in prior years. The $20,000 instant asset write-off is now a permanent feature for businesses with less than $10 million in turnover.
A new suite of ‘nuisance tariffs’ are being abolished on 1 July and the government is doubling down on efforts to streamline approvals.
For companies struggling to attract qualified workers, up to six months is being shaved off skills recognition timelines for migrants, and university students will be recognised for existing vocational skills qualifications.
For workers, one-off relief of up to $250 is on the way via an earned income offset, which will come into effect next year, along with up to $1000 as an instant tax deduction. This is in addition to a further percentage point tax cut for the lowest tax threshold.
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