Budget 2026: Tax reform dominates, but productivity is key

The sweeping overhaul to capital gains tax (CGT) and negative gearing announced in the Budget has dominated the headlines with reforms that could open the door to home ownership for more Australians. But over time, stronger productivity will matter just as much; shaping wages, growth and living standards across the economy.

The Governance Institute, therefore, welcomes Treasurer Jim Chalmer’s focus on productivity, particularly moves to simplify and streamline regulation, with several measures aimed at cutting compliance costs and making it easier for businesses to operate.

Treasury is assuming long‑run productivity growth of 1.2 per cent, with current labour productivity tracking closer to around 1.0 per cent and only gradually returning to trend over the next five years. Against that backdrop, Chalmers is betting heavily on reform to revive momentum – targeting a $10 billion annual reduction in business compliance costs across approvals, tax and regulation. There is a promise to simplify climate-related financial disclosures and financial regulations reporting. Much is at stake. The Reserve Bank is warning that without a sustained lift in productivity, inflation will remain stubborn, and workers’ wages will remain suppressed.

Productivity is central to economic vitality because it determines how efficiently goods and services can be produced. This is the primary driver of long‑term growth, wages and living standards. Without a sustained boost to productivity, economic expansion slows, living standards stagnate, and governments face increasing difficulty maintaining fiscal stability.

Growth in the Australian economy is forecast to slow from 2.25 per cent in 2025–26 to 1.75 per cent in 2026–27. While the outlook remains highly uncertain, the Australian economy is expected to grow by 2.25 per cent in 2027–28.

Treasurer Jim Chalmers said this was the “most important and ambitious Budget in decades”. He insisted that conflict in the Middle East was “pushing up prices, pushing down growth and punishing Australians”.

As ever, there are winners and losers in the Budget, and the political reaction has been immediate and fierce, underscoring the high stakes of the government’s reform agenda.

Shadow Treasurer Tim Wilson said the electoral consequences for Labor over “broken promises” regarding new taxes would be “horrific”. There is criticism, too, over the government’s breach of its election promise not to touch negative gearing and CGT. Critics have argued this could deter investment and add complexity.

Unquestionably, it has been a tough year for the Australian economy. Even before the war in Iran, inflation was driving up interest rates and growth was stalling. That is now forcing a sharper focus on the supply side of the economy by lifting productivity and easing constraints on business.

Governance Institute highlights that the Budget includes a targeted push to cut red tape, with 14 financial sector reforms expected to reduce regulatory costs by $780 million a year. A further $136 million has been set aside to modernise Australia’s business registers – linking director IDs, improving ABN systems and streamlining how businesses engage with government – alongside broader moves to simplify reporting, digitise compliance and adopt a “tell us once” model to cut duplication across agencies. The government will also run deep‑dive reviews across key sectors, from finance and tax to housing and construction, to lift productivity while easing the regulatory burden on business.

The Budget is light on detail on AI, but points to continued momentum. It commits $70 million to an ‘AI Accelerator’ to help bring research to market through Cooperative Research Centres (CRC) funding rounds, as part of the broader National AI Plan to lift capability and speed up commercial adoption.

Ultimately, the success of Jim Chalmers’ Budget will not depend solely on tax reforms, but on whether it delivers the sustained lift in productivity needed to drive growth, lift wages and secure Australia’s long-term economic future.