Good morning, everybody. I acknowledge the Gadigal land that we’re gathered on today. And I wanted to thank you, and thank Bloomberg in particular, for the opportunity to participate in this Bloomberg Forum. I’m conscious that these happen all around the world, and so to be a part of this gathering today is something that I am very, very grateful for. I’m grateful to Ben and Peter and Orson and Zoe and the team here at Bloomberg. And I also wanted to acknowledge James in the Canberra Bureau as well, and Ben before him, for the very professional and very objective way that they go about covering some of the big issues that I wanted to touch on today. I also wanted to acknowledge we have Sarah Hunter with us today, the Assistant Governor of the Reserve Bank, and Sarah will be speaking after me, as you know, but I wanted to acknowledge Sarah’s presence in the room as well.
This is a really welcome opportunity to talk about the government’s fifth Budget. And the best way to understand the Budget that we handed down on Tuesday night of last week is it’s effectively 2 budgets in one. A budget to get through the difficult period brought to us by a major global oil shock, but also a budget which tries to tackle some of the longer‑term reform issues in our economy as well. It would have been the easiest thing in the world for a government, any government, to see what’s happening around the world and the impact on the Australian economy and the global economy, and to see that as a reason to kick some of these difficult decisions down the road, but we haven’t done that. And so, effectively, the Budget is in 2 major parts with a number of packages which flow from that, and I wanted to touch on a couple of those packages today.
There is more than the usual amount of budget repair in our Budget last Tuesday, more than the usual amount of economic reform and in the face of more than the usual amount of global economic uncertainty, as you all know. And you’re all confronting this in different ways in your own work and in your own portfolios, and obviously, as a government in a G20 economy, we are navigating some of these choppy waters as well, brought to us substantially by a major war in the Middle East but also turbocharging some of those longer‑term challenges that we’ve had in our economy over a period of time as well. And so the Budget is really about inflation and productivity, it’s about housing and tax, and it’s also about intergenerational aspiration and opportunity as well, and I’ll come back to some of those themes in a moment.
Now, you’ve all seen the way that we are forecasting developments in the economy. You’ve seen that the impact of the war in the Middle East has pushed our inflation forecast up around 5 per cent in our central case. You’ve seen that that’s weighing a bit on growth as well, with implications for unemployment. But the Australian economic story is still overwhelmingly a positive one. We’ve got very low unemployment. We’ll learn more about unemployment in the labour force data on Thursday. But we’ve got very low unemployment. We’ve had decent wages growth. We finished 2025 with faster economic growth than any major advanced economy. The jobs growth story in Australia has been a very positive one as well. And even in our Budget, we’ve got lower debt to GDP than any major advanced economy. And in those numbers that the IMF released only a few weeks ago, the budget in the coming year in Australia is expected to be one of the 3 strongest in the G20.
And so even though we’ve got a lot coming at us from around the world, we’ve also got a lot going for us as well. And the Budget, which is primarily directed at the major challenges in our economy, some recent, some long‑standing, is all about building on that Australian economic strength, which a lot of you recognise, I see, in your market notes and certainly in some of the coverage that comes out of Bloomberg and from other places as well.
And so we’ve got that central case – inflation up, growth down a bit, implications for the unemployment rate – but overwhelmingly a pretty positive story about Australia. But what we’ve also tried to do, to give you a sense of the kind of contingencies and scenarios that we are grappling with, is to present in the Budget papers in an unusual way – not frequently done – what we consider to be a realistic downside scenario as well.
And for all of you who spend most of your day like I do, tracking the global oil price and some of these other major indicators in the global economy, what we’ve tried to do with that downside scenario is anticipate a global oil price which is higher for longer, and what that would mean for our economy. And that’s to give you a sense of a realistic downside scenario that we may have to grapple with, but our central case is inflation around 5, a bit of a hint of growth in the coming years, and that flows through obviously to some of the other major macro indicators but also through to the budget as well.
And so if you think about those 5 challenges that I mentioned, you think about the Budget that is doing 2 things at once, near‑term pressures and longer‑term opportunities, including when it comes to economic reform, there are really 5 packages in the Budget. And I don’t intend to go through each of those in detail. I want to focus on a couple of those today.
But the 5 packages are effectively, first of all, a fuel security package, trying to make sure that we can secure more fuel for motorists and for industry. And colleagues have been doing a wonderful job, making sure that we can keep the economy ticking over by securing more fuel on international markets. The fuel security package is an important part of the Budget, but I don’t intend to spend a lot of time on it today.
The second component of the Budget is the cost‑of‑living package. Effectively, a cut to fuel taxes, but also some tax cuts, topping up the 4 tax cuts already in the system with a fifth to provide some cost‑of‑living relief in a responsible way.
The third package is the savings package, the budget repair package, and here we found much more than the usual amount of savings, about $64 billion in savings. The net impact of our policy decisions on the Budget is a net improvement of about $26 billion. If you compare that to history, that is an exceptionally responsible budget by those 2 markers, saving more than we spend, making sure that we are playing a helpful role rather than a harmful role in the fight against inflation. A very, very important part of the Budget.
And if you look over the 4‑year budget horizon, the bottom line gets better in every year, debt comes down every year from the trajectory at the Mid‑Year Update, and that’s deliberate. We recognise that we can play a helpful role here, and that’s what we are doing.
If you look over the medium‑term, the 10‑year horizon in the budget, what you can see there is that the quite substantial improvement in the fiscal position over the 10‑year horizon, around almost 3 times as much of that heavy lifting is done by savings rather than tax changes. So, big changes when it comes to the NDIS, for example, but other savings as well, making a meaningful difference to the medium‑term position in the Budget. Three times bigger contribution from savings than from tax changes in the Budget.
And that brings me to the last 2 pieces, which are very closely related to each other. The productivity package, much broader, much more comprehensive, much more ambitious on productivity than budgets for a very long time, arguably since the ‘80s and ‘90s. About 15 different ways that we are getting compliance costs down in our economy. We think the compliance savings from the Budget are more than $10 billion a year. And that’s because the productivity package is all about getting those compliance costs down, they’re about making it easier and faster to build things in our economy – houses, clean energy, other types of important projects, data centres and the like. And also, to make our economy a more attractive place to invest, and I’ll come back to investment in a moment. But that’s what the productivity package is all about.
And there are a couple of elements of that where I’m going to provide some new details in a moment about that. But the productivity package and the tax‑reform package intersect because there’s about $3.5 billion worth of tax incentives in the tax reform package for business. Tax incentives to encourage start‑ups – to encourage small business – to treat losses in a more accommodating way so you can carry losses back, not just forward. Making the instant asset write‑off for small business a permanent feature of our tax system. Reforming the R&D tax incentives to focus more effectively on core research and development. This is a really important part of the tax package, which has not received a lot of attention, but $3.5 billion in the Budget to incentivise a more productive, more dynamic economy via the business tax system. A really important part of the Budget that we handed down on Tuesday night.
But what I wanted to do today is really to touch on 3 things in a bit more detail. First of all, I wanted to dispel some of the myths that you may have read about what our tax changes in the tax reform package mean for investors. But then I want to give you a bit more detail on the foreign investment changes that are in the productivity package in the Budget, taking advantage of this global, well‑informed audience.
And then, thirdly, I wanted to talk to you about our financial sector reforms, effectively the deregulation that we’re undertaking in the financial sector, again to get those compliance costs down and make the place run more effectively and more efficiently.
So, if you think about that first piece that I mentioned and the impact of the tax reform package on investment, it’s really about rebalancing the tax treatment between different kinds of income. So, the tax reforms are about reducing the distortions that are in our housing market, getting more Australians into home ownership, more accurately compensating investors for inflation, and encouraging productive investment in areas like medium‑density housing. So, our changes to capital gains, for example, will achieve a more neutral and a fairer treatment of capital gains compared to the current arrangements. And that’s because we recognise that a distorted tax system means distorted investment decisions. That’s why we’re changing that. We want to encourage investment for good economic reasons and not necessarily just for good tax reasons.
And so there’s been some commentary about that. These changes are contentious, and you would have noticed that in some of the commentary and some of the analysis. But – and some of that has focused on why we’re applying our capital gains changes to all assets, and I wanted to unpack the reasons for that as well.
Firstly, the distortions in the housing market are about the combination of negative gearing and the treatment of capital gains, which is why we’re addressing both. Our changes to negative gearing only apply to residential property, not other asset classes like shares. But our CGT changes are about more accurately compensating investors for inflation. That will help ensure investment decisions are driven by those economic outcomes, not tax outcomes. And the current system over‑compensates some investments and under‑compensates others as well, like, as I’ve said, medium‑density housing.
So, the impact of our changes will depend on the rate of return, the inflation rate, marginal tax rates, but there will be some people that will do better under the new arrangements than under the current arrangements. If you look at a 20‑year period, where we’ve taken the average of the impact of the current arrangements, versus what the impact would have been under the new arrangements, over the past 20 years, investors in shares would have been equal to, or a bit better off, with a discount based on indexation compared to the existing policy.
So, making changes to the CGT settings for one type of asset and not another type of asset, we think, would just introduce new distortions, and ultimately that’s bad for investors and for the economy. A company that generates high returns from capital gains will still generate a better post‑tax return than a company with lower returns.
Now, there’s also been a bit of discussion about the effective rates on capital gains before and after these changes, and compared to some other jurisdictions around the world. But, again, I think that overlooks the difference between tax rates on real gains versus nominal gains. Capital gains are already taxed at marginal rates, as you know, of up to 47 per cent after applying the relevant discount. So, what we’re talking about here is the size of the discount, the calculation of the discount, which will depend on the rate of asset growth and inflation. And that’s why it’s not especially easy to perfectly compare headline tax rates on nominal gains in other countries to our new approach, which will only apply to real gains.
But even for an asset with gains of 10 per cent, the effective tax rate on the nominal gain after adjusting for inflation in the past decade would be less than 37 per cent. That’s less than the rate in other jurisdictions, including California, which is a bit higher than 37 per cent. But on average, Treasury tells us that the average tax rate on gross capital gains will be around 21.4 per cent by the end of the medium term, that 10‑year horizon, which is up from 19.3 per cent today. So, a bit of perspective on some of the commentary that you would have seen.
So, beyond these details of how capital gains are treated, the reform package as a whole is fundamentally about reducing distortions in our tax system. Stand‑alone housing tends to have strong capital gains relative to other assets, as well as more scope for leverage, which has been a recipe for the kinds of distortion we’ve seen in recent decades. The combination of our changes to CGT and negative gearing will reduce the incentives for excessive leverage to buy established housing and this will help balance the system. Not just towards new housing – which is obviously very important – but also to investments like shares and new businesses, where leverage doesn’t play as big a role.
And as I said before, these reforms to CGT and capital gains need to be seen in light of the bigger tax reform package and the incentives that we’ve got in the system as well. So, we’re reintroducing loss carry back. As I said, that will help businesses. We’ve got loss refundability for start‑ups, which has the same logic, because we know that early stage firms don’t have prior‑year profits to carry back losses against.
So, if you think back to 1999, the big change was made to CGT. We’re returning to the pre‑1999 arrangements. But those changes that were made in 1999 created a big distortion in Australian markets, especially for housing, but also for shares, which became relatively less attractive compared to fixed housing. And so what we’re trying to do here is to introduce fairer and more neutral settings in place of that nominal discount, which was in place before. So, that’s the tax... some of the important considerations when it came to reforming the tax system.
Two other pieces I wanted to tell you about is the Foreign Investment Review Board changes in the Budget as well. And some of you will have followed the first tranche of reforms that we did to FIRB, which is meaningfully improving the system. But speaking with a lot of investors, we know that there’s more work to do, and in the Budget, there’s a second tranche of foreign investment reforms, which we think will make a difference when it comes to making our economy more productive. And we put some more detail on these foreign investment reforms out this morning.
But, in essence, what we’re doing is setting a new performance target to decide all the low‑risk applications within 30 days, from the beginning of next year. We’re updating or removing ineffective conditions on existing foreign investment approvals. We’re amending the foreign investment laws to further streamline and strengthen the framework. And we’re also streamlining the Register of Foreign Ownership of Australian Assets, and that’s about making sure that the regime is stronger where risks are high, and faster where risks are low. And in doing that, we hope to make the FIRB system work better for investors, for our economy, and for our national interest as well.
The last thing I wanted to touch on in detail was the financial sector deregulation that is in the productivity package as well. And this is a real passion of ours, to get compliance costs down to see where we can make a meaningful difference, recognising that in some areas we need better regulation, in some areas the regulation has been too onerous. And so if you look at our financial reform package, it was the result of the financial sector deep‑dive that we got the Council of Financial Regulators to do after we convened a big Economic Reform Roundtable in Q3 last year. I acknowledge the work of Sarah’s colleagues at the Reserve Bank, and a really important part of the Council of Financial Regulators, helping us to do some of this really important work.
So, we’re cutting the regulatory burden in the financial sector by almost a billion dollars a year, and we’re doing that in 3 ways. We are reducing costs, we’re reducing uncertainty and we’re making it easier to invest. So, there’s a legislative package here – about 14 different law reforms – which will cut the regulatory burden in the financial sector. That’s about almost $800 million a year in compliance cost improvements.
So, some of the things we’re doing there, we’re increasing the large proprietary company threshold, improving our climate‑related financial disclosures, increasing banks’ covered bond cap as well. But in addition to that, we’ve also got the Council of Financial Regulators reducing unnecessary data requests. We’ve got them reducing costs and uncertainty for financial institutions. And also something like 50 different commitments in the Better Regulation Roadmap. So, together with this work from the Council of Financial Regulators, we’ll reduce costs by almost another $200 million a year.
We’re also helping the financial sector innovate with payments reform and tokenisation. We’ve got a new Regulatory Sandbox to give businesses a safe place to test digital assets and new technologies. We’re strengthening regulator‑industry cooperation. We’re exploring the market potential for digital bonds, plus we’ve got a new payments system Strategic Plan as well. And if you listen to the Digital Finance Cooperative Research Centre, this is something like a $24 billion opportunity for our economy to get these financial sector reforms up and running.
Now, I’m conscious of time, and I know that you want to hear from Sarah in a moment, so let me just finish by saying I hope you understand that I’ve deliberately left the political contest out of the remarks that I’ve made for you today. And that’s because we understand that some of these changes are politically contentious, but the politics of what we’re trying to do here – to get Australians through a difficult period in the global economy at the same time as we reform our economy for the future, to deal with inflation and productivity, housing and tax and intergenerational equity and aspiration.
What we’ve deliberately done here is, recognising that when you make important economic reform in this country, you’re always gonna get a hard time politically. But what matters more to us than the political turbulence from day to day, or one opinion poll to the next, is to make sure that we get some of these longer‑term settings right in our economy. As I said before, it would have been easy for us to leave some of these difficult challenges for somebody else to fix, but we’ve deliberately decided to take on some of these difficult economic reforms, to seek the economic benefit and the intergenerational benefit, even though it has come at a near‑term political cost for the government.
And that, as I said, is deliberate. We’re focused on the economic outcomes here and not the political outcomes here. We consider the investors gathered here, and outside this room as well, to be a really important part of making our economy stronger into the future. And that’s why I’m really grateful for the opportunity to come here to Bloomberg today and to talk to you about the fine elements of the Budget, and particularly those specific elements which we think will make a substantial difference, a meaningful difference, to the more productive economy that we’re all seeking to build. Thanks very much.