A very courageous budget, Prime Minister

Matthew Drennan

26 May 2026

“Ahhh… courageous Sir Humphrey?”

“Well illogical if you prefer.” 

(Apologies to any younger readers who don’t get the Yes Prime Minister reference).

The fact that our Treasurer has a PHD in political science and international relations and not economics has been on stark display since budget night. From the outset, let me state that I am not a fan of Governments attempting to pick winners. There is not much historical evidence that this ends well. But if your stated goal is to free up the supply of housing for first home buyers, one approach is make housing less attractive as a pure investment option relative to the alternatives. You do not make ALL investments less attractive by subjecting them to exactly the same tax regime.

The negative gearing concessions preserved for new housing is at least consistent with the overall goal of increasing the supply for first home buyers. The issue in the current environment, however, is that spiralling labour, finance and materials costs mean that many builders are saying they can’t make money from developing affordable projects. The risk is we get a slew of new luxury apartments close to our major city centres with a tiny percentage of “affordable” dwellings as part of the package.

As David Pearl noted in a recent article in The Australian, Treasury appears to have told Chalmers that subjecting all investments to the same tax regime reduces distortions across asset classes. But isn’t the goal to achieve the exact opposite? By making housing a less attractive investment relative to the alternatives you hope to redirect capital and free up some of the housing stock for first home buyers.

Making these changes applicable to all assets leaves capital little choice but to go offshore. Already there has been a savage backlash from young entrepreneurs with start-ups.

Startups are particularly hard hit by the inflation adjusted method of taxing capital gains since there is relatively little financial capital invested in the early years and hence is no base to inflate gains against. Already we have seen successful startup entrepreneurs banding together and demanding a different treatment for the sector. This is an area very susceptible to being attracted offshore if the current policy is legislated for the very reason that there are few hard assets to be relocated. Our cousins across the ditch are not missing the opportunity to court such companies in a bid to bolster and diversify their economic base. New Zealand of course has no capital gains tax.

The other extremely serious long term implication of the proposed capital gains tax regime is in our biggest export industry, mining. Like it or not, we operate in a globally competitive environment for capital. We seem intent on treating this 100 metre dash as a three legged race with government inextricably lashed to business. There are plenty of new mining projects opening in up in Africa, South America and the US which will become increasingly attractive to our big miners. Might they also consider an offshore domicile?

Other unintended consequences from this ill thought through policy are:

• It will reduce existing house prices. Treasury estimates a slowing of house price growth by 2% over the next few years, a figure that has been scoffed at by some industry experts. SQM’s Louis Christopher argues the outlook in our two largest property markets remains grim with house prices likely to fall up to 9% in the remainder of 2026. I am not sure existing owner occupiers will thank the Government for that. Worse still, for relatively new buyers who have taken advantage of the Government’s 5% deposit scheme, finding they have negative equity in their property is a real possibility.
• These proposed changes have the potential to inadvertently cause a serious short term supply issue for that cohort of the population who need (or choose) to rent their home. While capital gains tax discounts and negative gearing may still be attractive for new builds, this will take time to fill the gap left by current investors exiting the property market. Again, Treasury’s prediction of a meagre $2 per week increase in rents as a result of changes is difficult to take seriously. It hardly compensates existing investors for their loss in net capital gains.
• The tax environment will kill aspiration and make the nation poorer overall as investment either declines outright or flees offshore.

Add to this an ill-defined 20% domestic gas reservation scheme as icing on the cake. This is borderline a command economy approach. How companies in the industry are supposed to comply with this directive while still fulfilling offshore supply contracts has yet to be explained. Rather important I would think given reliable supply of gas has been used as a bargaining chip by the PM and Energy Minister to increase refined petrol and diesel supplies from Singapore and South Korea in recent talks.

What is it that is so hard to understand about dealing with a lack of supply? Directives don’t increase supply. More exploration and development is what is required. The Victorian Government is particularly culpable here due to its longstanding ban on new onshore gas exploration and development which has only been lifted recently. It still has bans on unconventional gas development such as fracking and coal seam gas.

The final word 

You know you are in deep trouble when sports stars and young entrepreneurs are criticising your budget. Worse still, it is arguable that the baby boomers are least impacted from the budget changes, the opposite of the intent. By and large they have already accumulated wealth, have existing negatively geared properties which are partially grandfathered and still benefit from tax free superannuation in retirement. Xer’s, Millennials and the ilk now have less incentive to invest or try a startup. Aren’t we penalising the very cohort the Government claims to want to help?

The PM’s emotional defence of the negative gearing and capital gains tax changes as “pro-aspiration and pro-supply” at last weekend’s Victorian Labor Conference do not stand up to scrutiny. He wilfully ignores the impact on the young attempting to generate wealth from shares, other assets and startup businesses. It focuses solely on housing affordability. Estimates of 75,000 new homes in10 years is a drop in the ocean, but the inclusion of all assets in the new tax regime smacks of a pure tax grab to prop up massive government spending programs.

Changes to some policies announced on budget night are inevitable as widespread pressure (and an appeal to common sense) grows. Key here are testamentary trusts and startups. Less likely are changes to reduce the impacts on share investing unless we are extremely fortunate. Whether these changes will be narrow and ham-fisted is the emerging question.