‘Missed opportunity’: Budget to bring long-term surplus, short-term inflation, says CBA

Following the announcement of the 2026 federal budget on 12 May, the underlying cash deficit has improved by $2.8 billion and is now expected to be $31.5 billion in 2026–27.

As one of the most “keenly anticipated budgets” in a few years, the budget is good for some, but it struggles on numerous metrics, Belinda Allen, head of Australian economics at CommBank, said.

“There are some big savings measures in the Budget, but there is also a lot of new spending,” CommBank said, with a budget deficit worse than the current financial year, and risks of future interest hikes.

“In our view, the RBA is unlikely to adjust its existing forecasts or its expected cash rate path as a direct result of the Budget. We retain our view that the RBA will remain on hold for the rest of this year, with clear risks sitting to the upside,” the bank said.

“Against these tests, the budget succeeds in some areas, most notably long-term budget repair, but struggles to move the dial in others,” the bank said. CommBank accepted that the budget contains some good measures aimed at cutting red tape and lifting productivity, but said it will not materially lift the economy’s “speed limit” or supply-side constraints.

“The budget does not include any 'big bang' personal or corporate tax reform, instead prioritising long-term budget repair. This creates room for larger tax cuts or reform ahead of the next federal election,” it said.

Further, CommBank emphasised that fiscal policy should be working in the same direction as monetary policy. “In our view, the cash rate is mildly restrictive, but there is a clear risk the RBA will have to further tighten monetary policy,” it said.

In her May press conference, RBA Governor Bullock said: “The extent to which the government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand.”

“Overall, we judge fiscal policy is neutral to mildly expansionary in 2026–27, with relatively minor changes since MYEFO,” the bank said.

However, CommBank noted that greater funding to states and territories for public hospital services, defence spending, and new Pharmaceutical Benefit Scheme listings is estimated to cause a small fiscal loosening of $6.5 billion in 2026–27.

The bank said that the budget delivers major improvements in the longer-term fiscal position, with a balanced budget expected in 2034–35 after more than half of the underlying cash balance improvement in the final year (2029–30) as payments fall sharply for the NDIS and receipts lift due to an increased tax take.

“Still, the budget could be considered a missed opportunity. With inflation risks elevated, more could have been done to reduce new spending in 2026–27. The economy is currently running above its speed limit, and all new spending adds to aggregate demand. Less spending would have given the RBA more breathing room, reducing the likelihood of further interest rate hikes if inflation remains high,” the bank said.

CommBank business and industry economics director Ryan Felsman said that R&D tax incentives and venture capital incentives capture the entrepreneurial spirit of Australian businesses.

Despite the downsides of the budget, Felsman said: “[These incentives] really capture that entrepreneurial spirit for Australian businesses at the moment.”