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Australia is set to announce one of its biggest housing tax reforms in decades while reporting a lower-than-expected budget deficit, supported by strong commodity revenues and inflation-led tax collections. The government is expected to introduce changes to capital gains tax discounts and negative gearing rules to improve housing affordability and intergenerational equity. The budget is also likely to include higher defence spending, fuel security measures and welfare reforms aimed at reducing long-term costs. Economists, however, remain concerned that additional government spending could add pressure on inflation and force further interest rate hikes.
Australia is expected to present a better fiscal position in its federal budget, with Treasury figures indicating deficits across coming financial years will be lower than projected previously. The government’s budget position is estimated to improve by around AUD 44.9 billion compared to forecasts released late last year. Advertisement
Treasurer Jim Chalmers said the budget would include a higher level of savings and reforms than usual as the country faces growing global economic uncertainty linked to the ongoing Iran conflict and slowing economic conditions. The government is expected to focus on five major areas including fuel security, housing and cost-of-living relief, productivity measures, tax reforms and expenditure savings.
The biggest attention, however, remains on proposed housing and investment tax reforms that could reshape Australia’s property market. Local media reports indicated the government may reduce or remove the 50% capital gains tax discount currently available on assets held for more than a year. Authorities are also expected to review negative gearing benefits, which presently allow investors to offset property investment losses against taxable income.
According to Chalmers, the government believes the housing market and the tax system are not working effectively for many Australians and the budget is expected to address some of those concerns. He also acknowledged increasing pressure on younger Australians trying to enter the housing market and wider economy.
The proposed reforms are aimed at improving intergenerational equity, a debate that has intensified in Australia over rising home prices and investor-driven demand. Critics of the current system have argued for years that tax concessions such as negative gearing and capital gains discounts disproportionately benefit older and wealthier property investors while making home ownership harder for younger buyers.
The issue carries political significance because similar proposals contributed to the ruling Labor Party’s election defeat several years ago. This time, however, the government appears prepared to revisit the reforms amid worsening housing affordability and increasing public pressure.
Alongside housing measures, the government is expected to allocate around AUD 10 billion to create permanent government-owned fuel reserves after recent supply disruptions linked to the Iran war led to local fuel shortages across parts of the country.
Defence spending is also expected to rise sharply, with the government committing an additional AUD 53 billion over the next decade, including a AUD 14 billion increase during the current budget forecast period.
Another key part of the budget will involve major reforms to Australia’s disability welfare programme, where rapidly rising costs have placed pressure on public finances. The overhaul is projected to generate savings of more than AUD 35 billion over the next four years.
Higher commodity prices, particularly due to geopolitical tensions and supply concerns arising from the Iran conflict, have helped strengthen government revenues. Elevated inflation has also boosted tax collections. However, economists have cautioned that continued spending increases may worsen inflationary pressures at a time when borrowing costs are already high.
The Reserve Bank of Australia has already raised interest rates three times this year to 4.35% in response to inflation and energy-related pressures linked to the conflict. The central bank has warned that economic growth is likely to remain weak while unemployment could increase further.
Paul Bloxham, chief economist for Australia and New Zealand at HSBC, said there were concerns that new spending initiatives could outweigh future savings plans. He warned that if fiscal policy becomes too expansionary, the central bank may need to increase rates further, raising the possibility of an economic recession before inflation returns to target levels.
Source Reuters
5th Jun, 2025
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