Chalmers vows reform budget on May 12 as inflation hits 4.8 per cent

Treasurer Jim Chalmers announced on Thursday the May 12 federal budget will contain three reform packages targeting tax, spending and productivity as Treasury warned the Middle East war could drive inflation above 5 per cent.

In a speech to the Australian Business Economists in Melbourne, Chalmers said the packages would form a supply-side strategy to expand economic capacity and rebuild fiscal buffers despite global uncertainty.

Treasury modelling presented in the speech showed two scenarios for oil prices. The first assumes oil stays at $100 per barrel until mid-2026 before returning to pre-conflict levels by December. The second assumes a peak of $120 per barrel taking three years to recover.

Under the first scenario, inflation would peak 0.75 percentage points higher than baseline forecasts. Under the prolonged scenario, inflation would peak 1.25 percentage points higher.

Chalmers said this meant inflation peaking in the high fours or even above 5 per cent was very real. The Reserve Bank raised the cash rate to 4.1 per cent on Tuesday, the second consecutive monthly increase.

Tax reform to target younger Australians

Chalmers said tax reform would be guided by clear principles including addressing how the current system was outdated and weighing on opportunities for younger Australians and future generations.

He flagged reforms to encourage businesses to lift investment and make the tax system simpler and more sustainable. Government sources confirmed capital gains tax, negative gearing and electric vehicle subsidies were under consideration.

Treasury estimates the capital gains tax discount will cost $21 billion in revenue forgone in 2025-26, rising to $80 billion over the forward estimates to 2028-29.

The 50 per cent CGT discount applies when selling assets held for at least 12 months. Roughly 2.2 million Australians own at least one investment property. One-fifth of the 830,000 Australians who used the discount in 2022-23 were aged 60 to 64. Less than 10 per cent were aged 25 to 40.

A Senate committee formed in November to review CGT arrangements is expected to deliver findings this month. Chalmers said any tax changes would depend on how far the government could improve the budget, international developments and cabinet discussions.

Spending cuts to target NDIS and structural pressures

Chalmers promised a substantial savings package with the government prepared to make difficult decisions in areas where structural spending pressures were growing fastest.

This points to further action on the National Disability Insurance Scheme. The Expenditure Review Committee has been holding regular meetings to consider possible reforms. The committee has been enforcing stricter requirements that any new spending must be offset by savings.

Chalmers said the savings would make room for the private sector to grow while building fiscal buffers. The government has already delivered $114 billion in savings and re-prioritisations since taking office.

Productivity measures to focus on housing and red tape

The productivity package will contain measures to make it easier to build faster, attract investment and cut compliance costs.

Chalmers said the government was implementing a sustained effort to unlock investment in housing, the net zero energy transition and AI infrastructure.

He argued the three packages were designed to work together with savings making room for private sector growth, productivity reforms boosting supply without adding to price pressures, and tax reform driving more productive investment.

Coalition attacks reforms as tax grabs

Shadow treasurer Tim Wilson said the Coalition was prepared for a conversation around economic reform but the government had not taken action against corruption connected to the CFMEU.

We know that $15 billion has gone out from public money to organised crime through the CFMEU-Labor cartel. We know the National Disability Insurance Agency says about 10 per cent of their $50 billion program, or $5 billion, is going towards fraud and corruption. And the answer from the government is to turn around and say, let's increase taxes on Australians, let's not stop fraud and corruption.

— Tim Wilson, Shadow Treasurer

Wilson said public spending was crowding out the private sector and the government should control spending rather than increase taxes. He argued any changes to CGT would reduce housing construction rather than increase it.

Opposition finance spokesperson James Paterson called the CGT changes a grab for revenue from a government that could not control spending.

ACTU backs CGT discount cut to 25 per cent

The Australian Council of Trade Unions joined advocates pushing for the capital gains tax discount to be cut, arguing it would give Australians a better shot at home ownership.

ACTU secretary Sally McManus said at a February roundtable that productivity was in the doldrums because businesses had stopped investing in skills. She argued worker protections were not an impediment to productivity growth but a means through which workers could reap its benefits.

The ACTU wants the CGT discount reduced from 50 per cent to 25 per cent. The discount was introduced by the Howard government in 1999 with then-treasurer Peter Costello arguing it would increase investment in venture capital and assets.

Independent MP Allegra Spender said the 2026 budget was the government's best opportunity for tax reform in decades because of Labor's massive parliamentary majority and the long period until the next federal election.

Economists urge action on intergenerational equity

Grattan Institute chief executive Aruna Sathanapally said the social compact was at risk and the budget must build on the momentum of Chalmers' August productivity roundtable.

Housing Minister Clare O'Neil said young people had a right to be angry about housing, labelling it the biggest intergenerational issue across the country. She said the housing system was designed to support people who got into the market much earlier than most young people of today were even alive.

ANU Crawford School research fellow Shiro Armstrong said Chalmers did an amazing job of marshalling disparate views at the roundtable and finding consensus.

Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the roundtable was a very good initiative and helped establish the narrative needed to undertake priority reforms. But he said the government missed opportunities for more pro-business outcomes on environmental laws.

War uncertainty drives reform urgency

Chalmers said economic uncertainty and volatility was a reason for more reform, not less.

All this economic uncertainty and volatility is a reason for more reform, not less. It's a reason to go further, not slower. A supply-side strategy to lift the speed limit of the economy and make it more resilient. To create room in the budget. To expand capacity. And to make our tax system stronger, fairer and more sustainable.

— Jim Chalmers, Treasurer

Treasury estimated GDP would be 0.2 per cent lower around mid-year under the short-term oil scenario but would recover quickly. Under the prolonged scenario, GDP would be 0.6 per cent lower in 2027.

Chalmers said the government would have more to say about fuel security in the coming days. Fuel security and broader impacts of the Middle East conflict were the focus of a national cabinet meeting on Thursday morning with state premiers, territory chief ministers and Prime Minister Anthony Albanese.

The May 12 budget will be finalised during continued uncertainty from the Iran war and elevated inflation. Chalmers said the government's task was not just to respond to shocks but to position Australia to succeed through them.