Budget must deliver ‘real reform over short-term measures’: Deloitte

Ahead of the federal budget, advisory firm Deloitte has highlighted the enduring structural deficiencies facing the federal budget, despite the $3.6 billion improvement in mid-year cash deficit.

The improved cash deficit projection has been termed “a conflict-driven boost”, with Deloitte Access Economics warning that the government must instil reform, or risk regressing. In its May 2026 edition of the bi-annual Budget Monitor report, Deloitte called for sustainable policy and reform that provides only short-term relief or continues dependency on volatile revenue.

Deloitte Access Economic Partner and report lead author, Stephen Smith, has warned that the downside risks have not been erased by the short-term uptick and, in fact, highlight existing weaknesses.

“The Federal Budget is structurally flawed. The revenue windfalls of recent years - a result of soaring commodity prices and surging inflation - temporarily papered over Australia’s precarious fiscal position,” he said.

“But even another commodity and inflation boost cannot cover up the fiscal cracks.”

He warned that “sugar hits on the revenue side” will only cause a negative elsewhere in the budget, projecting the reduction in current oil supply will flow on to affect demand, and at the same time, the Reserve Bank of Australia (RBA) will need to hike interest rates higher than anticipated.

In turn, if the government decides to provide short-term cost-of-living support, it will only compound the problem.

“Even with a relatively disciplined approach to new spending, the increased cost of existing spending is likely to offset a large part of the budget’s revenue windfalls.”

Growth outpacing revenue is especially prevalent in key areas of fiscal pressure on the budget – defence, the NDIS, aged care, health, and interest.

“The Government has announced substantial reforms to finally tackle the pace of NDIS spending growth head on, but it remains to be seen how much of those savings will be used to fund budget sweeteners elsewhere,” Smith added.

The government, he said, is walking a fine line between reigning in new spending and providing crucial cost-of-living relief, seen most clearly in the fuel excise reduction.

“This budget must be more than a crisis management exercise.”

“Australia’s tax system is not equipped to efficiently or equitably raise the revenue needed to fund the country’s growing spending needs.”

Looking towards proposed tax reforms, Smith said adjusting the CGT discount and limiting negative gearing will provide the clearest answer to “whether the Government is prepared to pursue meaningful reform”.

He said these changes “won’t solve Australia’s productivity woes, they could, if designed well, help shift the housing market away from investors and serve as a building block for more ambitious, productivity-enhancing reform”.

He continued: “The proposed transition must be more ambitious than grandfathering existing assets into the old rules. While grandfathering is politically palatable, it creates a two-tiered asset market, and it severely delays the fiscal and economic benefits of the reform”.

Modelling its own proposed version of the personal income tax system, Deloitte Access Economics proposed a $35,000 tax-free threshold, a 33 per cent marginal rate on all income up to $300,000, and a 40 per cent marginal rate on all income above this.

This, Smith said, would reduce the top marginal tax rate for the highest earners, who are most likely to be affected by CGT discount changes, create a more consistent rate for the majority of the labour force, and improve incentives for lower earners and part-time workers.

He clarified that such reform could be funded by a more ambitious transition of property tax settings, identifying the upcoming package as a test of whether the government was prepared to pursue meaningful change.

“Grandfather everything, and the budget gets a token revenue stream that arrives too slowly to fund much beyond the next round of short-termism. Phase-in the changes across the entire stock of assets, and the reform looks like something more serious: a genuine contributor to structural budget repair, a cleaner tax base, and a plausible source of funding for more ambitious tax reform.”

“It’ll take more political courage, but that’s exactly what Australia’s economic outlook demands.”