Top economist lays out three tests for Labor in budget
The chief economist at Australia’s largest bank says reining in the National Disability Insurance Scheme and tax breaks for property investors could save the budget $30 billion over four years.
Luke Yeaman, who was a senior official to Chancellor Jim Chalmers before moving to the Commonwealth Bank, said the upcoming budget was shaping up to be one of the most interesting in a long time.
Since Labor’s massive election victory in May 2025, it has been framed as a reform budget to fix Australia’s chronic productivity malaise and structural fiscal deficit.
The Iran war made Mr. Yeaman’s former boss’ job even more difficult; Dr. Chalmers is trying to achieve major reforms, major spending cuts, national resilience and supporting households in one budget.
The conflict deepened the government’s inflation problem.
The consumer price index rose to 4.6 percent in March as the oil shock caused a 33 percent increase in fuel prices, the Australian Bureau of Statistics reported on Wednesday.
“We expect the government to try to thread the needle. They will need to go through various tests to achieve this,” Mr Yeaman said.
First, tens of billions of dollars in spending cuts are needed to reduce the budget deficit and help cool inflation.
The government has already announced major changes to the NDIS, claiming it would save $35 billion over four years.
“This is a welcome and much-needed reform,” Mr Yeaman said.
“The question is whether such sharp cuts in spending can be achieved, especially so quickly.”
He said the demand for more funding from the provinces to shoulder renovation services would test the government’s resolve, predicting that cumulative savings would be close to $20-25 billion over the next four years.
Telegraphed changes to negative gearing and capital gains tax relief will also boost revenue, although Mr Yeaman expects the impact on house prices to be relatively modest.
Mr Yeaman estimated that together with NDIS savings they could increase the budget’s profitability by around $30 billion over four years and $200 billion over 10 years.
Mr Yeaman said the second test of the budget would be changes that turn the dial on housing affordability and productivity.
This might sound like broader business or personal tax reform, but an allowance for corporate capital or a tax on gas windfall profits has not been made more likely by the Iran war.
The third test relates to national resilience and cost of living, including increasing Australia’s fuel reserves to 90 days in line with international standards.
“We assume the government will budget $20 billion over five years to improve energy resilience,” Mr Yeaman said.
“This could involve a combination of increasing domestic reserves and increasing refinery capacity.”
More support for households was also likely, but Mr Yeaman expected the government to refrain from making a big splash that would risk further fueling the inflation fires and increasing pressure on the Reserve Bank.
Following Wednesday’s inflation announcement, bond traders slightly lowered their rate expectations but still forecast two more increases, one of which will be at the RBA’s next meeting on Tuesday.
Citi chief economist Josh Williamson expects the central bank to follow up with another increase in June.
He said Australia’s inflation headache was “about to turn into a migraine” and price pressures were expected to continue in the coming quarters.
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