Australia has a fiscal problem, and it is not a small one. The 2026-27 budget carries an underlying cash deficit of \$31.5 billion, roughly one per cent of GDP, with aggregate deficits of some \$150 billion across the forward estimates and no return to balance projected until the middle of the next decade. On the headline measure, which also counts the equity injections and concessional loans the government channels through off-budget vehicles, the gap is far larger: cumulative headline deficits of around \$217 billion over the forward estimates, against roughly \$150 billion on the underlying measure. Gross debt has passed \$1 trillion and is heading toward \$1.1 trillion.
The headline balance, on the Treasury series, has with the exception of two recent surpluses sat in deficit for most of a decade, and those surpluses were the product of a once-in-a-generation surge in commodity prices rather than any structural repair. Strip out the mining windfall and the underlying position stayed in deficit throughout, with successive budgets projecting a return to balance that has repeatedly failed to arrive. Anyone arguing about tax policy who pretends the money is not needed is not being serious.
A problem of that size has to be closed from both sides of the ledger. Some combination of spending restraint and revenue measures is unavoidable. This piece does not try to settle that balance or to nominate where the axe should fall. It takes up a narrower question, are the changes to the Capital Gains Tax (CGT) well designed? Because a gap this structural will not be closed by a tax that raises little while doing real harm, and on that test the CGT changes fail. They reveal a budget well aimed at fairness in the present and poorly aimed at the wealth of the nation in the future.
Start from the principle
The honest place to begin is with a principle: income from labour and income from capital should, as a default, be taxed the same, unless there are compelling reasons not to. Treating a dollar earned through work differently from a dollar earned through investment requires justification. As the table below shows, there are real differences between the two, and each one carries its own implication for how they should be taxed.
Before turning to those differences, it is worth being clear about what a tax is for, because the case for the reform rests on a goal that sounds unanswerable until it is placed alongside the others. The goal is neutrality: why should someone who earns \$300,000 from work pay more than someone who earns \$300,000 from a capital gain? Put that way the question answers itself. But it is the wrong question, because no tax system serves a single goal. A tax system is asked to do many things at once, raise adequate revenue, treat like cases alike, fall more heavily on those who can bear it, avoid distorting the choices people make, and stay simple enough to administer, and these goals routinely conflict. No single instrument satisfies all of them, which is why every real system is a mix: income tax for one job, consumption tax for another, land and resource taxes for another, each chosen because it is the least-bad tool for the goal it serves. The right question is therefore never whether one tax is neutral in isolation. It is whether each instrument does its part in the mix without sacrificing the goals it is not built to serve.
There is also a goal the fairness framing tends to crowd out, and it is the one that matters most over time. A tax debate conducted almost entirely in the language of distribution, of slicing the pie more evenly, quietly demotes the question of whether the pie grows at all. Equity is a legitimate goal. So is the size of the future economy, and it has a stronger claim than it is usually given, because it is the goal that funds all the others: a system optimised to equalise today's income can shrink tomorrow's, and a smaller economy eventually means smaller slices for everyone, including those the equity was meant to help. Paul Keating, who built the capital gains regime this budget partly unwinds, also gave us the line that the best form of welfare is a job. The same logic applies to tax. A good tax system is not the one that most perfectly redivides what exists; it raises the revenue a society needs while preserving the conditions under which the economy can grow, because that growth is what funds everything else over time. That is not an argument against fairness, any more than Keating's was an argument against welfare. It is an argument about which goal delivers the others.
| Dimension | Labour | Capital | Implication |
|---|---|---|---|
| Mobility | Largely immobile; earned locally | Globally mobile at the margin | Heavy taxes on labour stay onshore; heavy taxes on mobile capital can drive it away |
| Timing | Earned and taxed in the same year | Accrues over years, taxed in one | Single-year crystallisation overstates real annual income; argues for averaging or indexation |
| Concentration | Smeared across a working life | A life's gain can arrive in one sale | A single-year spike is pushed into top brackets without averaging to spread it |
| Inflation | Wages track prices | Nominal gains include pure inflation | Taxing nominal gains taxes phantom income; argues for indexation |
| Compliance | Withheld at source, record-free | Cost base must be tracked for years | Indexing each cost element by its own date revives heavy record-keeping |
| Risk | Relatively certain | Volatile; capital can be lost | Asymmetric treatment of gains and losses penalises risk-taking |
| Source | Mostly effort | Partly effort, partly economic rent | Rent from fixed assets can be taxed heavily with little distortion |
| Productive | Always adds output | Splits: funds new capacity, or captures existing value | A flat tax cannot tell an IPO or a new build from secondary trading or land-banking; good design favours the productive side over the rentier. |
| Distribution | Spread across incomes | Concentrated at the top | Concessional treatment of capital favours the well-off |
| Behaviour | Labour supply responds modestly | Realisation responds sharply | High rates cause lock-in, freezing capital and shrinking the tax take |
Read the table down its final column and almost every row counsels the same thing: tax capital with care, attend to real gains rather than nominal ones, spread a single-year spike rather than punish it, favour the investment that builds something over the holding that merely captures scarcity, keep the compliance cost honest, and beware the effects of high rates on a base that can either move or simply decline to be realised.
Two rows pull the other way. Distribution points the government's way, and points there strongly: the benefits of concessional capital treatment do flow disproportionately to high earners, and that is the strongest argument for reform. An honest analysis concedes it. The 50 per cent capital gains discount introduced in 1999 was always a blunt instrument, and the case that it fuelled speculative investment and worsened the very housing problem it is now invoked to solve is a serious one. The productive row cuts both ways at once, conceding that rentier capital is fair game while insisting that the capital which builds things is not.
But concede those rows and the rest still stands, and the rows do more than catalogue differences. They predict who gets hurt. The bunching of a life's gain into a single year, the loss of averaging, the punishment of volatility, the heavy base with little to index, these are not abstractions. They fall on identifiable people, and it is worth naming them.
The productive row deserves more than a line, because it cuts within capital, not just between capital and labour, and it is the distinction the budget most conspicuously ignores. Not all capital does the same work. Some funds new capacity: the equity that capitalises a start-up, the money raised at a float to build a business, the investment that puts up a dwelling that did not exist before. Some merely captures value that already exists: the holding bid up by scarcity, the established dwelling that appreciates because too few new ones are built, the share traded from one owner to another with not a cent reaching the firm. The first kind grows the productive base; the second is closer to economic rent. An efficient system would lean lightly on the productive and harder on the rent, because taxing rent changes little while taxing productive investment raises the cost of capital and shrinks what gets built.
The evidence bears this out: cutting the tax on qualifying start-up gains has been found to lift the capital raised per funding round by around a tenth, precisely because it lowers the cost of financing new ventures. The distinction is sharpest where it matters most. In housing it is the line between building and bidding up, which is to say it is the supply problem again. In equities it is the line between the primary market, where an IPO or capital raising channels money into a firm, and the secondary market, where ownership of existing shares merely changes hands. A flat 30 per cent floor across all assets is blind to every one of these distinctions. It taxes the float and the speculator alike, the new build and the land bank alike, and in doing so it gets the one cut that matters exactly backwards.
The conclusion that follows is not that capital gains should go untaxed. It is that the design of the tax matters enormously, because capital is mobile, forward-looking, and lumpy in ways that labour is not. And it is on design that this budget falls short.
What the budget actually does
From 1 July 2027, the 50 per cent discount is to be replaced with an inflation-based discount, and a minimum tax of 30 per cent is to apply to net capital gains, that is, gains for the year after capital losses have been offset against them. The changes apply only to gains arising after that date, with transitional valuation rules and a carve-out allowing investors in new dwellings to choose, at the point of sale, between the old discount and the new arrangements, whichever then proves the lower-taxed. Assets already owned as at budget night, 7:30pm on 12 May 2026, are grandfathered, keeping the existing discount. These measures are now before Parliament, introduced in late May and referred to a Senate committee, but not yet law, and the detail may shift before they pass.
The first half of this is defensible, and an analyst should say so plainly. Returning to inflation indexation revives the logic of the original 1985 regime, which adjusted the cost base so that only real gains were taxed. Taxing real rather than nominal gains is sound. It is hard to attack on first principles, and opposing it would cost any critic credibility.
One genuinely contestable element is the 30 per cent minimum. A minimum tax is a floor, and a floor is structurally one-directional. An ordinary marginal-rate system is symmetric: a good year is taxed at a high rate, a thin year at a low one, and over time a taxpayer with volatile income is treated roughly fairly. A floor removes the relief of the thin years while keeping the bite of the good ones. It is designed precisely to stop people realising gains in low-income years, which is to say it is designed to strip away the natural averaging that a progressive system provides.
Averaging is the deeper omission, and it is worth dwelling on because it is the half of the timing problem indexation leaves untouched. A capital gain accrues silently over many years, but the whole of it is taxed in the single year the asset is sold. Even after indexation has stripped out inflation, the real gain of a decade lands in one year's income and is taxed at the marginal rates that one year's spike attracts, rates far higher than the taxpayer's true annual income over the holding period would justify. The original 1985 regime understood this and built in averaging to spread the gain; Keating's design contemplated smoothing the spike over several years. The new regime restores indexation but not averaging, so it corrects for inflation while leaving the bracket-bunching in place. It fixes one half of the timing problem and ignores the other, and the half it ignores is the one that bites hardest on the person whose gain is large, real, and earned slowly.
This matters because volatility is not an accident of capital income. It is its defining feature. The founder who has one large year and several lean ones, the investor whose portfolio swings, the enterprise whose return arrives in a single lumpy event after years of risk, all of these are taxed by a floor as though every year were a good year. The lumpiness problem that indexation and averaging were built to solve is reintroduced, deliberately, by the very same package that restores indexation. The budget gives with one hand and takes with the other.
Two further features deepen the concern. The minimum applies across all assets, not by asset class, and it effectively ends pre-CGT asset status, requiring valuations at the changeover date. That is a real compliance and valuation burden, and it falls hardest on unlisted holdings, family businesses, and farms, the productive enterprise that least resembles passive wealth. And the international posture is close to unique. Most comparable countries set a maximum rate on capital gains. Australia is introducing a minimum. The combined effect, on one analysis, lifts the effective rate on Australian capital gains toward the highest in the developed world.
Indexation carries a further cost that is easy to overlook, because few assets are bought in a single parcel at a single moment. Shares are accumulated over years through regular purchases and dividend reinvestment, a business is built with capital injected in tranches, a property is improved with expenditure spread across the holding period. Under indexation, each component of the cost base has its own acquisition date and must be lifted by the inflation factor running from that date to disposal. An asset assembled over twenty years can carry twenty separate indexation calculations. This is precisely the record-keeping the flat discount was introduced in 1999 to abolish, and the new regime revives it. The burden falls hardest not on the one-off speculator but on the patient accumulator, the saver running a reinvestment plan and the owner who tops up an investment year after year, the very behaviour a sensible system should encourage.
It is worth being precise about what is and is not wrong here. The objection is not that the government changed the rules; governments change tax rules, and no investor is owed permanence. Nor is it the vague invocation of "sovereign risk," a phrase that too often means nothing more than that an affected party is unhappy. The objection is specific and assessable: a minimum tax abandons the real-gains principle the rest of the package restores, and it does so in a way that penalises the volatile, patient, risk-bearing capital on which new industry depends. The deterrent is real because of what the measure is, not because change as such unsettles anyone.
There is also the matter of lock-in. A high effective rate on realisation gives every holder a reason never to sell. Assets are held to defer the tax, capital stops flowing to its most productive use, and the revenue the measure is supposed to raise partly fails to appear because the taxable event never happens. This is not ideology; it is standard public finance. It undermines both the fiscal case and the productivity case at once.
Who carries the cost
A tax change is best judged by who it falls on, and here the burden is not spread evenly. It concentrates on a handful of cohorts, and they are not, for the most part, the idle wealthy the reform is pitched against.
The founder is the clearest case, and the most telling, because the founder embodies almost every row of the table at once. A founder's return is gain from a near-zero base: the company was worth little at the start and a great deal at the exit, so there is almost nothing for indexation to lift, and the inflation shield the rest of us get is worthless to them. The gain is concentrated, a life's work realised in a single sale, with no averaging to spread it. It is volatile and risk-bearing by definition, most ventures fail, so the survivor's gain is the pooled reward for risk taken across the whole class. The new regime taxes that gain at close to a flat rate with none of the relief the old discount provided. On a two million dollar gain, the discount was worth around four hundred and seventy thousand dollars to a top-rate founder; indexation returns only a sliver of that on a fast-grown asset. Early employees holding equity are hit on the same logic, so the harm reaches the people a young company most needs to attract. Founders are not the largest class of capital gains taxpayers, but they are the class whose decisions matter most for new firm formation, innovation, and future productivity. The government has flagged consultation on start-ups, which is close to an admission that the design misfires precisely where the country can least afford it.
Next are those who hold for the short to medium term. Indexation rewards long holding, because inflation needs years to lift a cost base. Over a few years it lifts it barely at all, so these investors lose most of the flat discount and get little in return.
Then, and this is the cohort that should trouble anyone who defends the package on fairness, the low-income earner realising a one-off gain. The 30 per cent floor binds only when a taxpayer's marginal rate on the gain would otherwise fall below 30 per cent, which is to say in a low-income year: the person between jobs, the modest earner selling an inherited parcel of shares, the small holder cashing a single asset. For the high earner the floor often does not bind at all, because their marginal rate already exceeds it. The minimum tax is therefore most punishing at the bottom and lightest at the top, the opposite of the distributional story told to sell it. Pensioners and income-support recipients are carved out, which narrows the group, but the modest earner with one lumpy gain is squarely caught.
Two concessions keep this honest. Superannuation, including self-managed funds, sits largely outside the new regime and keeps its own concessional treatment, so the retiree saving through super is mostly shielded; the harm falls on assets held in personal name. And because losses already erode the value of the old discount, and gains accrued before the changeover keep it, the gap between the old system and the new is real but narrower than the rawest comparisons suggest. Concede both, and the core point survives: the people who carry the cost are founders, risk-takers, patient builders, and the occasional low-income seller, not necessarily the passive wealthy the reform claims to target.
The housing argument does not hold
Part of the package is sold as a contribution to housing affordability, and here the reasoning is weakest. Tightening the tax treatment of established-dwelling investment may, in the short run, shift some prices. But a price fall is a transfer, not new supply. Renters who become buyers gain, incumbent owners and landlords lose, and the number of dwellings is essentially unchanged. The thing that actually sets housing costs over any meaningful horizon is how many homes are built relative to how many people need them.
On that measure the government's own numbers are unflattering. Treasury's costings point to modestly lower price growth, a negligible effect on rents, more owner-occupiers, and around 35,000 fewer dwellings over a decade. The policy tries to thread the needle by exempting new builds, on the theory that investor capital redirects toward construction, and bank analysis judges the net supply effect roughly neutral on that basis. But even granting the policy its own logic, the government's dwelling estimate concedes that the redirection does not fully compensate. An earlier independent modelling exercise on a similar policy reached the same directional conclusion. The measure nets out negative on the one variable that drives long-run affordability for both renters and purchasers.
This is compounded by demand. Whatever view one takes on migration, housing demand is being sustained while supply is being constrained. Net overseas migration is running near record levels outside the pandemic period, around 311,000 in the year to September 2025, against rental vacancy rates close to one per cent. New arrivals overwhelmingly rent before they buy, so the demand lands first and hardest in exactly the market where pressure is most acute.
Strip the affordability framing back and what remains is a rearrangement of the deck chairs, not relief for everyone. Lower established-dwelling prices help the renter who is positioned to buy. They do nothing for the renter who is not, and may well leave that renter worse off, because the same supply constraint that the package quietly worsens keeps upward pressure on rents. This is picking demand-side winners, not bringing relief across the board. And the losers are not only renters. Commonwealth Rent Assistance, which already supports more than 1.4 million households and is indexed to rents twice a year, rises as rents rise. So the cost of sustained rental pressure flows through to the Commonwealth budget as well, the very budget the package is meant to repair. A policy sold as easing affordability shifts the burden onto renters and onto the taxpayer who subsidises them.
The real driver of housing costs sits untouched. It is supply, and supply is throttled less by tax settings than by sclerotic planning systems, slow approvals, complex rules that limit densification, and the long lead times that keep new dwellings from reaching the market. A tax change cannot build a house. The deepest point is the one this exposes. If the government actually fixed supply, much of the case for these measures would dissolve on its own, because a meaningful part of the capital gain the package targets is the gain that comes from policy-induced housing scarcity. Banks lend against expected price growth, and expected price growth is, in no small part, a bet that supply will keep failing to meet demand. Remove the scarcity and you remove the speculative premium, and with it the windfall the tax is reaching for. The budget treats a symptom the planning system creates, and leaves the cause in place.
And there is reason to doubt the benign projections that underpin the housing case. The same forecasting apparatus has missed the migration turning points badly. Successive budgets have pencilled in a return to a presumed normal of around 225,000 and been overtaken by reality: the original forecast undershot the outcome for three consecutive years. The pandemic collapse of 2020-21 should be set aside, since no model could have priced in a closed border. But the reopening surge that followed was a known, scheduled event whose magnitude was nonetheless badly underestimated, precisely when it mattered most for rents. A housing outlook resting on demand assumptions from a forecaster with that record deserves scepticism.
Where the real repair is, and is not
Step back, and the structure of the budget comes into focus. The improvement in the bottom line rests overwhelmingly not on the tax measures but on ambitious savings to the National Disability Insurance Scheme, around \$36 billion over the forward estimates, achieved by holding annual cost growth to roughly two per cent before it is assumed to revert. Independent analysts regard those savings as highly ambitious and unlikely to be delivered in full. The Parliamentary Budget Office frames the entire improved outlook as resting on them. If they underdeliver, the repair evaporates.
The CGT changes, by contrast, are a secondary contributor to the bottom line, and much of what they raise is recycled into offsets and spending rather than directed at the deficit. So the painful tax change does relatively little fiscal work, while the genuine heavy lifting is parked on spending assumptions that the government's own forecasting track record gives reason to question. The package imposes real economic cost on capital for modest fiscal return, and pins its credibility on restraint that even sympathetic observers doubt.
If revenue is the goal, there is a better base sitting in plain sight, and the contrast with it exposes what kind of reform this is. The Petroleum Resource Rent Tax is, in theory, the efficient instrument: a profit-based levy on the economic rent from a resource that cannot be moved offshore. Rent from a fixed asset can be taxed heavily with minimal distortion, which is precisely the property the mobility principle says to look for. In practice the tax has been hollowed out, so that its take has collapsed even as export revenues soared; receipts are forecast at under \$2 billion in 2025-26 from an industry of that scale. The government attempted a fix in 2023, projected to raise only some \$2.4 billion across the forward estimates, a modest return from an industry of that scale. Fixing it properly is the hard, necessary reform, and twice now governments have flinched: the Minerals Resource Rent Tax, the resource-rent measure's sister, was repealed in 2014 after raising almost nothing.
That is the real indictment. Faced with a structural problem, the government did the easy thing and called it reform. The hard thing was to repair an efficient but broken rent base, an immobile target that could bear more with little economic cost. The easy thing was to lift the effective rate on capital gains, a mobile, risk-bearing base, because it was politically simpler and the design could be waved through. Resource revenue is volatile and the resource will deplete, so the rent base is no panacea; the point is sequencing and proportion. An analyst is entitled to ask why the more distorting lever was pulled while the less distorting one was left half-repaired. Necessary reform, done well, was available. This was an easy change, done badly, dressed as reform.
Two goals, not one
The deeper problem is the frame within which the budget asks to be judged. It is sold, and largely assessed, on fairness: fairer treatment of gains, fairer distribution, fairer funding of services. Fairness is a legitimate goal, and on its own terms parts of this package can be defended.
But fairness is one goal, not the only one. Another is whether the economic regime expands the opportunity for enterprise, investment, and industry that generates the future wealth of the nation. A budget can be exquisitely fair in the distribution of today's income and still neglect the growth of the productive base that funds everything, including fairness, tomorrow.
On that second axis, this budget does poorly, and the reasons are concrete rather than rhetorical. It raises the effective tax on the mobile capital that funds new ventures, where lock-in reduces the reallocation of capital to its best use. It introduces a minimum tax that raises the hurdle for exactly the volatile, lumpy returns that characterise entrepreneurship and risk. It constrains housing supply while demand runs high. And it leaves the efficient resource-rent base under-taxed while reaching for the gains of enterprise. Each of these is a recognised mechanism, not a slogan, and together they describe a tax mix that gets the efficiency ranking backwards: heavier on the base that should be taxed lightly, lighter on the base that could bear more.
You cannot tax your way to greatness, and you cannot build a stronger economy by raising the cost of the very risk-taking that builds one. None of this is an argument against closing the deficit. The gap is real and it will take both restraint on spending and revenue to close it. It is an argument about which revenue, and at what cost. The budget is not a failure of intent. It is a failure of design, and design is where capital taxation either compounds national wealth or quietly erodes it.
So, good reform or bad? The honest answer is that it is good in parts. The return to real-gains taxation is sound; the recognition that the old discount was a blunt instrument is fair; the goals of neutrality and a fairer distribution are legitimate. But a tax, like the curate's egg, does not get to be judged good for its good parts. The rot spreads. A minimum-tax floor that punishes lumpy, risk-bearing, productive capital, a housing fix that constrains supply while demand runs high, an efficient rent base left half-repaired while the harder, better reform was passed over for the easy one, these are not blemishes on an otherwise sound design. They are the design. A government serious about the future would tax the immobile rent before the mobile gain, would fix the real-gains principle without bolting a punitive floor onto it, and would build supply rather than redistribute scarcity. This budget does the reverse, and it is the future wealth of the nation that will pay for the choice.
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