The 2026 federal budget was delivered after a year of building expectations for bold reform.Part of that buildup was last year’s economic reform roundtable. That highlighted a laundry list of “regulatory hairballs” from the Productivity Commission, as well as opportunities to boost tepid productivity growth by supporting new industries and technologies.And part of the buildup was fuelled by the expectation that the government – with its strong majority – would be in the position to make some of the tough tax and spending choices previous governments have put off. This opened the door to reforming a tax system that is less efficient, less fair and less sustainable than it should be. Last night, the government delivered a broad and ambitious budget. It is meaningfully working its way through the to-do list for making Australia’s economy more dynamic and thereby more resilient. It tackles our largest spending pressures, and adapts our tax system to be less leaky and more sustainable.Many of the measures were announced before budget night – lifting defence spending, reining in the National Disability Insurance Scheme (NDIS) and addressing fuel security, given the shock to global supplies caused by the Middle East war. What remained was changes to the tax system, and how the measures together would shift Australia’s long-term budget trajectory.Finally, tax reform worth writing aboutThe budget set its focus on Australia’s imbalanced personal income tax system, which leaves taxes on wages and salaries to do the heavy lifting, while granting generous concessions to income from wealth. This has had implications both for the “horizontal equity” of the system – taxpayers with similar incomes often face very different tax bills – and for our housing system.For years, it has been clear that the combination of a capital gains tax discount, along with the ability for property owners to deduct rental losses from wage and salary income (“negative gearing”), had given highly leveraged property investors a leg-up in the housing market. Last night, Treasury gave us yet more evidence of this. Analysis of tax data showed that the top 1% of income earners (with incomes of around $800,000 per year) over their working lives have received an average benefit of more than A$700,000 since 2000. This compared to a benefit of just $12,400 for the typical income earner, who earns around $62,000 per year.The government’s reforms seek to wind back these expensive concessions. Importantly, a minimum tax rate of 30% will be applied both to future capital gains, and to distributions from trusts, with some exceptions (such as for farmers). This removes avenues used by many wealthier taxpayers to reduce their tax bill.For younger Australians, this means there may be fewer investors competing at auctions after budget night.Notably, while the capital gain changes do not begin until 2027, they will apply to all gains from that date, meaning existing investments are not fully “grandfathered” – or allowed to follow old rules. This increases the revenue raised by the proposal, and avoids unfairly locking in tax benefits for the current cohort of investors. While existing negatively geared investments are fully grandfathered, the reforms to the capital gains discount are likely to reduce the incentive to hold onto these loss-making properties regardless.The revenue raised by these policies is small to begin with, but within a decade we estimate they will reduce the deficit by more than $20 billion per year. By contrast, the impact on property prices is likely to be muted, with Treasury estimating prices will be 2% lower than otherwise. This is largely because the decrease in investor demand will be offset by an increase in purchases by homeowners – shifting the composition of property ownership.Supply is still criticalHowever, this budget’s real legacy on housing will be defined by its attempts to boost housing supply. Treasury estimates these tax changes will lead to 35,000 fewer homes being built over the next decade. But this is balanced out by other policies, such as a new $2 billion Local Infrastructure Fund. This will pay the states to loosen restrictive planning laws and boost construction productivity.This is critical. As Grattan’s previous research has shown, planning reforms to unlock more well-located homes have the potential to boost housing construction by more than 60,000 homes each year, while also enabling more vibrant cities that support a more dynamic economy.A quiet night for government spendingBy contrast, the expenditure side of the budget was more subdued. In light of rising demand for social services, and with inflation forecast to rise to 5% this year due to higher fuel prices, spending restraint was the order of the day.The government has made savings across a wide range of areas, from a reformed electric vehicle tax discount to lower private health insurance rebates, and pulling back tax credits and uncommitted funding set aside for clean industries. Read more: At a glance: budget 2026 By far the biggest saving in this budget was the decision to slash the growth of the NDIS to an average 2% over the next four years. This measure is worth more than $36 billion over that period, comfortably eclipsing the overall improvement in the budget deficit of just over $26 billion. And these savings are projected to continue to grow, reaching about 0.5% of GDP by 2035. According to Treasury’s projections, this alone is enough to push the budget into surplus by the mid-2030s, an improvement from the decade of deficits projected in last December’s mid-year update.Limited cost-of-living supportBut this budget was also defined by what the government chose not to do. Despite growing concerns about the impacts from the fuel crisis, the government did not roll out additional cost-of-living relief, and it wisely did not extend the fuel excise cut. While that helped keep spending in check, it also left families on working-age welfare payments – who have long needed additional support – out in the cold.Fundamentally, intergenerational fairness requires governments to take responsibility for the long-term outcomes of today’s choices, even if those choices create short-term losers. This budget starts to tilt the balance in favour of younger, working Australians trying to buy their first home. It was worth the wait. Read more: A budget with a bundle of reforms in a time of ‘extreme uncertainty’ The Grattan Institute began with contributions to its endowment of $15 million from each of the federal and Victorian governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.