The May 2026 federal budget will mark one year since the Albanese government's unexpected landslide win at the last election.
Author
- Aruna Sathanapally
Chief Executive, Grattan Institute
That budget is arguably the most important one for this term: setting the agenda for the government's final two years and offering a chance to take some measured steps towards lasting reform. That includes rebalancing our income tax system.
Many of those decisions are being taken now. And Australia needs to make some big changes to the status quo to ensure a fair and prosperous future.
This includes reforms to make housing affordable, get to net zero in the least costly way, lift moribund productivity growth and ensure our health and care systems are high quality and sustainable. Doing nothing means stagnating living standards and a growing wealth divide.
Laying the groundwork for change
Politicians who want to achieve lasting, meaningful change need to prepare the ground. Then they need to follow through with concrete steps that take us some of the way forward.
There also needs to be broad support for reform to withstand the blowback that will undoubtedly come from vested interests.
The federal government's Economic Reform Roundtable back in August was an exercise in preparing the ground.
The roundtable process grappled with this uncomfortable truth: the long-term economic picture is not rosy and we have lost many years to inaction and policy gridlock.
It was unexpected - and welcome - that the government moved so quickly after its May 2025 election victory to ask openly for ideas and build momentum for an economic reform agenda.
The government cannot let this momentum lapse.
Breaking the deadlock on tax
At the reform roundtable, I set out what it would take to get a tax system that helps - rather than hinders - Australia to adapt as our population ages and the world changes.
As Treasurer Jim Chalmers recounted at the end of the summit, there was broad agreement the tax system is overly generous to older and wealthier Australians, at the expense of younger people and our future prosperity.
Decoded: this means we need to wind back income tax concessions for housing and superannuation that are distorting our tax system and our economy. We can use that money to pay for reforms that will lift living standards for everyone.
Getting reform done
The passage of the Environment Protection and Biodiversity Conservation Act last week was an economic reform that has finally broken the gridlock.
It provides clearer national environmental standards so we can get speedier and more consistent decision-making. Passing the law demonstrates our parliament can get things done.
Setting a 2035 emissions reduction target in September was also a critical milestone. It set a clear direction of travel for the most important economic transition of our era.
The May budget is a golden opportunity
Prime Minister Anthony Albanese moved quickly after the roundtable to manage expectations of sweeping tax reform. But next year's budget is a golden opportunity for this government to take some measured steps towards rebalancing our income tax system, with two years before the next election.
Incremental, but meaningful, reforms would include gradually reducing the capital gains tax discount on housing and scaling back superannuation concessions.
The Grattan Institute's proposed reforms to super contributions tax breaks would raise about A$4 billion a year. Our proposal to reduce the capital gains tax discount from 50% to 25% over five years would raise another $6 billion a year once fully implemented.
This money could be used to shore up the budget to pay for the growing health and aged care expenses that are coming at us like a slow-moving train. It could support better, realistic hospital budgets , enabling our public hospitals to be run more efficiently and reduce avoidable costs. Or it could be used to fund income tax relief, offsetting future bracket creep .
Alternatively, just one year's worth of reduced tax breaks could be used to boost the National Productivity Fund tenfold. This fund is what the government has to drive its national competition reform agenda - an attempt to renew the productivity reforms of the 1990s.
Action by the states
It is telling that so many of the reform ideas that gathered the broadest support at the August roundtable require action by the states and territories.
The leading economic reform priority - a single, national economy - is hard to argue with. But getting there is an absolute grind in our federal system.
And when it comes to the economic issue Australians most want to see action on - the cost of living - the states have the powers to change the game on housing affordability by unlocking greater housing density in the inner suburbs of our cities.
The states need the Commonwealth to help pay for the services they deliver because they have limited means of raising the money themselves. And the Commonwealth needs the states to act: on housing reforms, and other reforms to streamline and modernise Australia's patchwork economy.
It is not easy to withdraw a tax break, or wrangle the federation. But 2026 is the window of opportunity, and Australia needs the federal government to seize it.
The Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute's board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.
