Budget tax changes weigh on market outlook

Binaya Dahal

Journalist

12 June 2026

T. Rowe Price has warned Australian equities are under renewed pressure as a series of tax measures in this year’s federal budget add to concerns about economic growth, corporate earnings and investor sentiment.

In a new market outlook, the $1.83 trillion asset manager said Australia’s equity market is entering a more challenging phase, with both fiscal and monetary policy increasingly acting as headwinds at a time when inflation remains elevated and economic growth lingers.

The firm noted the country’s cyclical recovery, previously supported by lower interest rates and improving private-sector credit growth, was becoming more fragile as inflationary pressures re-emerge across the economy.

Rising prices, driven by capacity constraints and higher energy costs, have prompted the Reserve Bank of Australia to reverse earlier easing measures, lifting interest rates back towards levels seen before the previous rate-cutting cycle began.

Against this backdrop, T. Rowe Price said the federal budget has made fiscal policy less supportive by combining elevated government spending with increased taxation on the private sector.

T. Rowe Price equity investment analyst Nicholas Vidale said the combination of tighter monetary policy and greater fiscal pressure was creating a difficult backdrop for both consumers and businesses.

“Australia’s high starting point on inflation has made it more vulnerable to inflation shocks such as rising energy prices resulting from geopolitical instability,” he said.

“This, combined with increasing wage inflation among national minimum and award wage workers, increases the risk that the RBA is forced to move higher on interest rates and into a tightening cycle, which will be a headwind to the continued elevated fiscal impulse from state and federal governments.

“The federal government’s latest budget shows elevated government spending is now being met with increased taxation on the private economy, and this will weigh on both consumer and business sentiment, as well as the housing market.”

The asset manager also noted signs of weakness emerging in corporate earnings, particularly among banks.

While resource and energy companies continue to benefit from stronger commodity prices and structural demand linked to global infrastructure investment and the rapid expansion of artificial intelligence-related spending, the firm said strength in those sectors has not been enough to offset broader concerns across the market.

As a result, T. Rowe Price remains cautious on Australian equities despite maintaining a modest pro-risk stance across global markets.

“Australian equities are less favoured, given their dependency on energy imports and the cumulative headwinds from tightening monetary and fiscal policies,” said Thomas Poullaouec, head of global investment solutions, international, at T. Rowe Price.

“In fixed income, we favour inflation-linked bonds over sovereign bonds because we believe the market is underestimating the persistence of this inflation shock.”