By Matthew Cranston
If Australia tips into recession, voters may blame the Treasurer’s great big gamble on tax reform and fairness.
If Australians believe Jim Chalmers, then this Tuesday’s budget is meant to be the most consequential in decades.
In front of more than one million viewers the Treasurer will frame his speech by saying the budget will not be one that just navigates another crisis – the Iran war oil shock – which is pushing Australia’s already high level of inflation even higher, but one that will bravely attempt tax reform that carries significant economic and political consequences.
Chalmers and his boss, Anthony Albanese, are making big promises that this budget will improve perceived “intergenerational inequity”, that it will “rebalance” the tax treatment of a worker’s pay-packet versus an investor’s risked capital, that it will help record low productivity to recover, repair the fiscal position and temper inflation.
But across the past few weeks, as The Australian revealed daily Chalmers’ budget blueprints for change, a growing number of people have questioned whether the policy plans and such promises will be kept.
Sitting in the worst fiscal position leading into any of the four major crisis this century, Chalmers is being encouraged by economists to “go big or go home”.
His plan involves cutting the 50 per cent capital gains tax discount in favour of inflation indexation and scrapping negative gearing altogether, while family trusts are to be hit with a minimum tax, workers are given tax offsets of $200 to $300, and business is given more wriggle room to write off rising costs.
The Prime Minister and Treasurer have repeatedly down played The Australian’s revelations as “speculation” but do not deny the tax changes, some of which break key election promises and catch investors and business advocate groups on the hop.
In the fog of the Iran war, Labor is betting it can pass legislation quickly with the support of the Greens, then implement the changes and go to the next election minimising any damage from resistance campaigns of the sort fund manager Geoff Wilson used to fell former Labor leader Bill Shorten’s similar tax plan in the latter’s failed 2019 election bid.
Chalmers knows the Shorten saga could play out again but this week has batted away questions about breaking promises not to change such taxes on housing investment.
“My job is to make the right decisions for the right reasons in 2026, not to re-run the election of 2019,” Chalmers said. “I take seriously the views that Bill expresses from time to time. He obviously had a front-row seat in that 2019 election, but my job is to look forward, not back.”
But if Australia goes into recession, as Reserve Bank governor Michele Bullock warned this week, voters might not be blaming the Iran war alone but also the government’s tax changes and economic management.
The RBA this week made its third 0.25 percentage point interest rate hike of the year, revising higher its forecast for inflation to 4.8 per cent and cutting economic growth to an anaemic 1.3 per cent by the end of this year. Business investment is expected to plunge to a meagre 0.8 per cent annual growth. The bank also assumes Australia will not experience fuel shortages, which the government is allocating $10bn in off-budget funds to ensure supply is secure.
Treasurer expects inflation to hit 5 per cent
In Tuesday’s budget, Treasury will reveal it expects inflation to hit more than 5 per cent this year, that GDP could be cut by as much as 0.6 percentage points by 2027, while better productivity growth will be delayed until financial year 2030-31, net migration will be higher than expected and that Australia will have even lower fertility rates.
Higher inflation will make government programs costlier, a challenge for Health Minister Mark Butler’s ambitious plan to cut spending growth in the National Disability Insurance Scheme from 10 per cent to 2 per cent, and a challenge for other ministers to keep a lid on other rapidly growing costs such as defence, hospital payments, medical benefits payments and the Child Care Subsidy.
But higher inflation and higher commodity prices also mean bigger tax revenues for government – forecast by some commercial bank economists to be about $23bn extra across the next four years and $7bn this financial year, helping to reduce the deficit from the current forecast of $36.8bn to about $29bn and, hopefully, bringing the budget back to balance sometime in the next 10 years.
Economists such as UBS’s George Tharenou and Westpac’s Pat Bustamante, among others, say overall government spending is still stimulatory for the economy, which the RBA’s Bullock said this week made her job of keeping inflation and interest rates low all the more difficult.
Jim’s tax logic
The logic behind the Treasurer’s overall budget plan is that tax changes – CGT discount removal, scrapping negative gearing and ensuring a new minimum tax on trusts – will raise billions of dollars for the budget across the next four years. This pays for an income tax offset of $200 to $300 and incentives for business investment, such as making the instant asset write-off permanent along with sweeteners such as two years of loss carry back – a mechanism by which companies can reduce their tax retrospectively.
Chalmers argues the new tax revenue measures won’t raise much.
“Even if we went down the path that has been speculated about … people shouldn’t expect there to be this huge amount of new revenue show up over the course of the next few years in the budget.”
Instead, he says his new measures are about improving three main areas.
The first is fairness, for both intergenerational equity and the treatment of labour income versus capital income.
“Intergenerational fairness is a really important way that we address some of the substantial and understandable issues in our budget, in our tax system and in our economy more broadly,” Chalmers said this week.
The second is productivity. “We put productivity at the very core of our second term in office, and it will be a core part of the budget as well,” Chalmers said this week.
And the third is fiscal responsibility. “When it comes to the broader inflationary pressures in our economy, this is why a responsible budget is so important next week,” Chalmers said. “It’s a budget that will have significant savings. It’s a responsible budget.”
But will his budget actually deliver on these three areas?
Before forecasting any success or failure in the first area of intergenerational inequity, it must be acknowledged that there is a ferocious debate about whether there really is such inequity in the first place. Chalmers needs a problem before he can solve it with big changes.
The Actuaries Institute’s Intergenerational Equity Index, compiled by actuaries Hugh Miller, Laura Dixie and Shams Mehry, measures wealth and wellbeing for different age groups, combining 25 indicators into an overall score.
The latest – for 2025 – shows the disparity between the age groups is not quite at the record level seen in 2019 but that it is worse than it was in 2000.
“Directional trends suggest, in the absence of any policy measures, that record level of disparity could be reached again within years,” the index report warns.
However, economists Jack Buckley, Matthew Maltman and Matt Nolan at independent, nonpartisan think tank e61 have a completely different take. Their detailed study, Rethinking Intergenerational Equity in Australia, concludes there is no inequity.
“Much of what looks like an intergenerational problem is really a life cycle one. Younger Australians are unlikely to be worse off than their parents over a lifetime – they are simply earning later, with HELP debts, super contributions, and housing costs front-loading pressure,” the e61 economists say.
“The fix lies in adjusting the tools that help smooth income across the life cycle, not in redistribution between generations.”
Barriers to wealth creation
The changes in tax to negative gearing (which allows landlords to deduct the rental losses on investment properties from their income) and the removal of the 50 per cent discount are arguably preventing younger people from using the wealth creation tools that older Australians have used to get where they are.
Walshs Financial Planning managing director Simon Farmer says if the government were to get rid of negative gearing, it would actually hurt younger people trying to build wealth.
“Chalmers says that current investors won’t be disadvantaged due to grandfathering, OK, then future investors are disadvantaged relative to current … Aren’t future investors the ones that he feels have been hard done by? So, again, how does taxing future investors more help anyone?”
It’s a key point echoed by AMP economist Shane Oliver, who remembers when Chalmers’ hero Paul Keating temporarily scrapped negative gearing in 1985 before reinstating it two years later because of political pressure.
“There may be good reasons to cut CGT discount and restrict negative gearing to say two properties … but it won’t fix housing supply and it’s hard to see how it improves intergenerational equity. Older generations got the benefit of concessions – I got into property as a rentvester – and now it’s being curtailed for the young,” Oliver says.
Australian Taxation Office data shows that about 1.2 million people negatively gear and that property investors under the age of 40 have the highest proportion of negative gearing.
Economist Saul Eslake has a different take on all the changes, calling them meaningful reform.
“I am not suggesting that changing the CGT regime and/or scaling back or abolishing negative gearing are magic bullets which will, on their own, solve the problems of housing affordability and declining home ownership rates. But I do believe that they will help,” Eslake says.
He says the change to the CGT regime in 1999 effectively converted negative gearing from a strategy that had been, up until then, principally about deferring tax, to one that thereafter became about both deferring and permanently reducing tax.
Getting more young Australians into homes
About 50 per cent of all property investors are negatively geared. This has incentivised more investors into the housing markets, with the share of all housing loans taken out by investors running at about 39 per cent.
While most people say that’s important for increasing the supply of rental accommodation, Eslake says more than 80 per cent of the money lent for the purchase of investment properties has been for the purchase of “established” housing.
“When investors buy housing that already exists, they increase the demand for rental housing – by outbidding a prospective homeowner – by exactly the same amount as they increase the supply of it.”
The prospective homebuyer includes the younger generation and they are now the ones bidding on houses whose price have hit 8.9 times Australia’s median household income, a ratio that has more than doubled for the 30 to 45-year-old cohort since the 1980s.
Centre for Independent Studies senior fellow Robert Carling is circumspect that a reduced number of negatively geared investors would necessarily lead to owner-occupiers buying more.
“Owner-occupier demand would not neatly fill the void left by departing investors, as the types of housing favoured by investors and owner-occupiers are not perfectly interchangeable,” Carling says.
Housing Industry Association chief economist Tim Reardon says attempts to redirect investor demand can create rental market disruption long before additional housing supply is delivered.
“In a market already characterised by extremely low vacancy rates, reducing investor participation in established housing can tighten rental supply very quickly,” he says.
Reardon points to recent economic modelling by Qaive and Tulipwood Economics that found restricting negative gearing to newly constructed dwellings would reduce dwelling commencements by about 22,700 homes across five years, reduce GDP, lower construction employment and increase rents relative to the business as usual scenario.
The left-leaning Grattan Institute also says similar changes, such as halving the capital gains tax discount and curbing negative gearing so rental losses could no longer be offset against wage and salary income, leads to the number of new homes being built contracting by about 16,500 across five years.
Regardless of what the academics say, there are already reports of the property market slowing and people putting up rents.
Tamara Henman, an independent buyer’s agent on the Gold Coast in Queensland, says activity has slowed as people wait to see the changes to negative gearing. “Over the last fortnight, buyer and seller sentiment has shifted, and behaviour has changed,” Henman says.
“On the buyer side, investors are telling me directly that if they don’t secure something before the May 12 budget, they’ll sit back and wait. While on the owner-occupiers side they too are pausing, thinking prices could fall and planning to jump back in if that happens. At the same time, sellers are pulling back. I’ve had multiple conversations this week alone with owners who were considering selling, and they’ve now decided not to.”
The Australian Institute for Progress has modelled the changes and expects rents to rise $83 a week.
Whatever the precise outcome, a drop in new supply, higher rents and a stalled housing market are hardly signs of tax reform making good on its promise to lift productivity.
Westpac chief economist Luci Ellis has questioned whether changes to negative gearing and capital gains tax would boost productivity. Both the changes are grandfathered.
“Is it really reform?” she said. “Reform really depends on what you’re solving for. If you’re trying to lift productivity, does tweaking CGT or negative gearing really help? Probably not much. If I’m going to try to lift productivity I wouldn’t look at tax reform; that would be the last place I’d look. I’d start with regulatory reform.”
The changes to CGT also are expected to apply to business investment. There is strong resistance here both on the basis of intergenerational fairness and a drag on productivity.
Wilson Asset management’s Wilson, who ran the campaign against the plan that Labor took to the 2019 election, has warned of “Labor’s CGT slaughter of the young coming in next week’s budget by Jim Chalmers and Anthony Albanese”.
“This isn’t reform. It’s theft from every aspirational Australian under 40 trying to get ahead,“ he wrote in viral LinkedIn and X posts.
While Wilson has given support for changes to the way investors are treated when it comes to buying existing properties, he is upset about how the capital gains in a business investment would be taxed.
Then there are the venture capital investors such as Blackbird VC partner Rick Baker, EnergyLab chief executive Megan Fisher and Square Peg Co-founder Paul Bassat, who are hoping the government’s changes don’t dent the flow of capital into much-needed start-ups.
Chalmers is also looking to take some of the revenue from changes to tax and rework that into incentives for business.
He wants to make the instant asset write-off of up to $20,000 permanent. That costs about $300m a year.
The Treasurer also wants to give businesses two years of loss carry back, under which businesses can reduce previous years’ profits and the amount of tax they pay, leading to refunds from the ATO. When the policy was used during the Covid era, the refunds were estimated to be as much as $5bn.
There also will be changes to research and development, but the overall cost to the budget is expected to stay the same. It is understood the government has been convinced to make the thresholds higher for R&D subsidies, advantaging the bigger companies. Think Atlassian or Tesla, companies whose investors Scott Farquhar and Robyn Denholm have both been Tech Council of Australia lobbyists.
The Productivity Commission had suggested last year that Australia’s company tax system be overhauled, recommending a new cashflow tax that treated capital expenditure in the same way as other operating expenses, but that was rejected by the business community and Chalmers has ruled that out of his budget.
Other measures considered by government were an expanded version of the instant asset write-off and an allowance for corporate equity that seeks to remove the current bias towards debt over equity financing.
The Australian National University Crawford School of Public Policy’s Tax and Transfer Policy Institute director, Robert Breunig, who has supported the allowance for corporate equity, says a mere extension of the instant asset write-off “is not the kind of deep and meaningful reform that is required”.
Commonwealth Bank chief executive Matt Comyn suggested earlier this year that big new business investment incentives could be paid for with a profit tax on exported gas, but Albanese ruled that out, opting for a gas reservation policy instead.
The hit to capital from changes in CGT also go straight to the Albanese government’s attempt to “rebalance” the treatment of labour income versus capital income.
Goldman Sachs’ Australian strategist, Matthew Ross expects that if the proposed changes were legislated then Australia would end up with one of the least favourable tax treatments of capital in the world.
This fits in with Chalmers view on money earned from wages versus money earned on assets – at least outside of the average superannuation account. (Labor’s darling of superannuation escapes unscathed in this budget.)
“There is a welcome debate out there about the role of tax reform in trying to rebalance this issue we’ve got between very generous treatment of assets and less generous treatment of labour income of workers,” the Treasurer said this week.
As part of this narrative, the government is expected to announce on Tuesday an income tax offset of $200 to $300 for every person in Australia who gets a wage or salary and pays tax.
But there is pressure to think about whether this fits in with the third promise of fiscal repair and efforts to reduce inflation.
This week the RBA’s Bullock warned that government handouts to households amid an economic crisis sparked by the Iran war will make it harder to temper inflation, just as the RBA lifted interest rates for the third consecutive meeting.
The government’s gross debt is also rising alongside the increase in tax revenues.
Analysis by the federal opposition shows income tax bracket creep since the Albanese government came to office four years ago is costing taxpayers $2000 a year and cemented Labor as the highest taxing government on average in history.
The removal of bracket creep – where wages rise nominally across time, leaving individuals subject to higher average tax rates – doesn’t look to be on Labor’s radar.
The independent Parliamentary Budget Office has stated that younger people will bear the burden of higher taxes given Labor’s high levels of spending, with bracket creep ramping up personal income tax revenue to 14.5 per cent of GDP by 2035-36, up from 12.4 per cent of GDP this financial year.
Centre for Independent Studies senior fellow Parnell Palme McGuinness points out in her recent study Budget Betrayal: How Young People are Getting Ripped Off that as the federal debt approaches $1 trillion, the burden of repayment will fall disproportionately on younger generations.
Current budget settings are worsening intergenerational inequality by forcing young Australians to pay for government spending through higher future taxes, reduced economic opportunity and declining access to home ownership, McGuinness says.
For all changes in this budget – no matter how consequential – the advice to Chalmers is be careful not to be seen raising revenue and spending more.
John Ralph, the man who advised John Howard and Peter Costello to implement the 50 per cent CGT discount, says aside from the complexity of such changes it is the perception around more tax and spending that are the undoing.
“Abraham Lincoln said that ‘you don’t give people what they want, you give people what they need’. That’s what politicians should be aiming for but they are too scared to do it,” Ralph says.
“Chalmers’ notion is how does the government get more revenue. There is a sense of entitlement in Australia now so I am not surprised governments are going to act in this way.
“But if Jim goes for broke and makes the changes we will probably end up a poorer country.”
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