With the 2026 federal budget just two weeks away, Grattan Institute CEO Dr Aruna Sathanapally joins Deputy Director our of Energy and Climate Change Program Hamish McKenzie to unpack what could be one of the most consequential budgets in a generation.
Against a backdrop of war, a global energy crisis, and rising inflation, the government faces a set of colliding imperatives: steady the ship or seize the moment for long-overdue reform. With a thumping majority and an opposition in disarray, the Albanese government has a window for change. But will it take it?
Read Aruna’s article in The Australian Financial Review here.
Transcript
Hamish: The 2026 federal budget is just two weeks away, and it could be one of the most significant budgets in a generation. The government has been talking up its appetite for reform for months. But nine weeks ago, everything changed with the war on Iran and the closure of the Strait of Hormuz. We are now in what feels like the early stages of a global energy crisis, one that could quickly become a global economic crisis.
So with a backdrop of war, spiralling costs and a nation on edge, will the government still seize its moment to change the nation? Or will it pull back from its dreams of reform and focus instead on steadying the ship?
Welcome to the Grattan Podcast. I’m Hamish McKenzie, Deputy Director of our Energy and Climate Change program.
Today I’m joined by Grattan Institute’s CEO, Dr. Aruna Sathanapally. Aruna – it’s slightly odd to welcome you to the podcast, because you’re the CEO and this is my first time on it. But all the same, welcome.
Aruna: Thanks, Hamish. Lovely to be here.
Hamish: Aruna, you’re a budget nerd. You’ve got a background in law and economics. You’ve worked at New South Wales Treasury, where you helped prepare budgets, and you’ve been front and centre of debates about what this year’s budget needs to deliver. I want to go back to August of last year. The Albanese government was re-elected in 2025 with a thumping majority, and right after they got elected, they called this summit on economic reform.
You were invited to give the keynote address on the last day of that summit. Tell us about that day. What was the summit about? Did it achieve what it was supposed to achieve?
Aruna: The summit was broadly about economic reform – or, for those who are really into the specific terms, productivity reform. The first two days covered a whole suite of measures, things the government can do without touching the tax system. But day three was about tax and spending. So day three of the summit was really the day to grapple with some of the budget issues.
It wasn’t clear necessarily that the government was going to go there. There’s a storied history of tax reform being considered impossible to do in Australia. But the momentum had built, the expectations had built, and lo and behold, we had a whole day at this three-day summit focused on tax and spending – and particularly on tax.
I was invited to give an opening presentation to the group assembled in the cabinet room about where the greatest need was for tax reform in Australia and what the opportunities were. In that speech, I canvassed a whole range of things. But the particular theme I emphasised was that our tax system represents a pretty wretched intergenerational bargain and is well out of balance in terms of the type of world we are moving into.
What I said to the group was that we really need a tax system that adapts to the times we live in. Some of the things we discussed in the course of that session weren’t actually a matter of heated contest. There were some very affluent people in the room who could also see the really strong case building for a tax system that better adapted to our future, but that was also fundamentally fairer to younger people and to working Australians.
Hamish: The government called this summit about six months ago. The idea was to lay a foundation and build consensus for reform. We’re six months on, on the precipice of that budget. Before we dive into the specifics, just talk us through: what is a budget? Why does it matter?
Aruna: The budget is basically the occasion each year where the government takes stock of how we’re going to raise public money and how we’re going to spend it. That involves being informed, in the first instance, by what’s happening in the economy – what’s happening globally, what we expect our taxes to raise, what we expect the spending pressures to be for the programs and payments we already have.
It also involves a suite of new decisions – what are called NPPs, or new policy proposals – that go through a budget process to decide: is there a tax we’re going to raise? Is there a new form of spending? Are there savings we’re going to find? Or is there a tax break we’re going to offer? Different parts of government do the work for their respective areas, and that goes through a process before a powerful subcommittee of cabinet called the Expenditure Review Committee. They make their decisions, and the end product is the federal budget – with all those decisions kept super secret until such time as the government wishes to let people know. So we’ve seen a few pre-budget drops of key decisions, with a few saved for budget night.
Hamish: Let’s pull back the curtain a bit. You’ve been in the room preparing budgets before, at the state level. Two weeks out – are all the decisions already made and they’re just printing the budget papers? Or would there still be hundreds of public servants pulling together the latest numbers on iron ore prices and tax receipts, trying to figure out what decisions should be made?
Aruna: It’s a really good question. Generally in a typical budget process, all the decisions would be made by two weeks out. You might be fine-tuning some numbers because there’s some last-minute data coming in, but you wouldn’t be making fundamentally different decisions at this stage. Of course, we are in a situation where a number of things are quite fast-moving. But in a typical world, you would expect your decisions to be made and you’d really be in the final stages of writing, proofing, dotting your i’s and crossing your t’s.
Hamish: And we’re not in a typical world right now.
Aruna: We’re not in a typical world.
Hamish: One of the things the budget has to do is respond to the macro-economic environment – what’s going on with unemployment, growth, inflation, and so on. Paint a picture of that environment. What is Treasurer Jim Chalmers looking at as the big indicators he has to be attuned to as he makes these final decisions?
Aruna: It is a really uncertain environment in which to be setting a budget. And it’s worth remembering that the budget isn’t set and forget – if the government needs to do more things in July or August, it will, because the budget isn’t its only opportunity.
But one of the key things you do in a budget is take a forward view of what the economy is likely to be doing, to understand the approach government should take to economic policy. For instance, if you’re in an overheating economy with high inflation, typically a government should be looking at how to reduce inflationary pressure and cool spending. If you’re heading into a downturn, the government will be looking at what it can sensibly do to support the economy and keep the downturn to a minimum.
Unfortunately, the economic environment we’re looking at has a bit of both. There’s a widespread expectation that inflation will tick significantly upwards in the second half of this year, because of fuel prices and the way they will roll through the rest of the economy. Expectations are for inflation in the order of 5%, potentially upwards of 6%.
Hamish: When you ideally want it at two to three per cent.
Aruna: Exactly – two to three per cent. Coming out of COVID, it was hitting 7%, and that was way too high. The RBA and the federal government had to act on that pretty quickly to bring it back under control.
What we have now is a Reserve Bank indicating it is very ready to raise interest rates to bring inflation under control. But interest rates are an imperfect tool for this type of price shock. They will cool the economy down, but in circumstances where the economy is already facing cost pressures, there are other factors that will also cool things down – and that increases the chances of what economists call stagflation, where you’ve got inflation but the economy isn’t growing.
Hamish: Interest rates are a blunt tool – the only tool the Reserve Bank has. That means we have to look at fiscal policy as the other big lever: how much the government chooses to put into the economy.
The Albanese government has come under pressure in recent months about its spending. You recently published a piece in the Financial Review that said the government has to show spending restraint – but you had this interesting line that it should be “restrained, not a razor.” Where do you think the government is landing on that?
Aruna: This is just information from the outside – we’ll find out on budget night. But word is that this is a budget process where the government hasn’t let a lot of new spending proposals through. We know from public reporting that they’ve asked all government departments to find savings, and that’s what spending restraint looks like. It’s not pretty. It means closing the door on what might be some great spending ideas or areas of real need, and requiring all departments to find things to spend less on.
But obviously the biggest announcement – which they’ve already made – is the proposal to bring NDIS growth down substantially. This matters for several reasons. There’s been a lot of talk about government spending growing, and if you break it down, it is really a story about the NDIS and aged care. Those are the two big areas of spending growth.
With aged care, that is entirely unsurprising. We have an ageing population, and we always knew that around about this time we’d see an escalation in the number of people moving into aged care. You need a workforce to care for those Australians to a standard that allows them dignity, and that costs money. A large part of that spending pressure has been the recognition that if you don’t pay decent wages, you can’t staff aged care centres. The Albanese government, to their credit, have put money behind wage rises for some of the lowest-paid workers in a highly feminised workforce – but again, it costs money, and there is an underlying demographic driver there.
The other piece is the NDIS, where there isn’t a strong demographic driver. What we’ve seen is a scheme that was not sufficiently well designed at the start and has become a catch-all for all sorts of services that go well beyond what it was originally designed to do. This has happened under successive governments, but it has gotten to a stage where the NDIS’s growth has far outstripped our ability as a country to pay for it.
Hamish: The announcements you’re referring to – the minister last week announced changes to NDIS eligibility and the way participants access care through their plans. The government is suggesting this might shave $15 billion off the cost of the NDIS over four years, reducing participant numbers from a forecast 760,000 to around 600,000. Grattan has called for major reform of the NDIS to bring it back to its original purpose. But it’s also really important to note that this is a massive deal for so many people. The NDIS has been a transformative social reform, and millions of Australians fundamentally rely on it for participation in day-to-day life. Looking at these reforms through your “restraint, not a razor” framework – which category do you think this fits?
Aruna: This is one where it should be restraint, not a razor. But the way that needs to happen is through the effective development of supports that sit outside the individualised system of the scheme.
Going back to basics: the NDIS is fundamentally built around individualised packages where a person receives a bucket of money and can spend it on supports that enable them to live a full life. But that’s not the only way to provide support services to people with a disability. What happened with the introduction of the NDIS is that a lot of the service systems people had previously relied upon were withdrawn by the states. So what’s critical is not that the NDIS is simply pulled out from underneath people, but that we put in place evidence-based, value-for-money supports – provided not through an individual buying services in a market, but through something that looks more like a traditional government service. That means either states providing a service directly, or commissioning one – identifying what a population needs and then paying for those services to be provided, for instance in preschools, in schools, and in other settings where kids live, play, and learn.
The number of children on the scheme has far outstripped what was originally expected. The NDIS has come to stand in for the sorts of universal supports we really should be providing to make sure kids are able to thrive, both before school and during school.
Hamish: Aruna, it’s interesting to look at the debate about the NDIS alongside developments in the energy and climate change space – particularly how we tax our gas resources. The NDIS is an example of structural imbalances in the budget, and we really need to be fixing the revenue side as well as the spending side. Gas is one of those examples where people have argued for a decade that we haven’t got the settings right.
The Commonwealth taxes offshore gas resources through the Petroleum Resource Rent Tax, while onshore gas is handled by the states through different schemes. The PRRT really isn’t up to the job – it raises less than $2 billion a year, which is less than 1% of Commonwealth receipts. We are one of the biggest gas exporters in the world, and comparable countries are getting a much larger share of the profits from their gas industry than Australia does. There was a major push to reform the PRRT in the coming budget, and it looks like the government might be walking away from that.
Aruna: It’s a really good point. Grattan recently published a report that took stock of the health of our democracy. Typically when we talk about democracy, we talk about process – electoral rules and parliament – but democracies are also about outcomes. What comes out in the survey data is that Australians really want their governments to solve the big challenges. They want them to have a spine, and they want them to stand up to vested interests. Australians are particularly sceptical of corporate interests wielding more power than they ought to in our democracy.
So how we tax gas is really a proof point for whether our government is willing to stand up for the public interest over vested interests. At the same time, the government is currently engaged in a very delicate set of diplomatic exercises. The way I think about this budget is that it’s a budget of colliding imperatives – one to set ourselves up to survive whatever’s coming, and another to tackle longstanding challenges, given the expectations the Albanese government has raised as a government with a thumping majority that is here for the long term.
Hamish: You had this interesting line in your Financial Review op-ed that “the future is going to be expensive.” We’ve got massive expenditures coming down the pike – aged care, the NDIS, defence, managing natural disasters. And in the last five years, we’ve had a pandemic, global conflict, and the current fuel crisis. All of this puts more pressure on the budget.
In that context, looking at the gas debate – and there have been misrepresentations on all sides – the whole thing got kicked off with a comparison between the tax take from beer versus gas. It’s true that we get more from the beer tax than from the PRRT. The gas industry came out hard and said, “That’s not the only tax we pay – there are also royalties, income tax, corporate tax.” And when you stack all that up, it’s a lot bigger than beer. That’s fair enough. But there is one project off the north coast near Darwin that cost nearly $50 billion to build, has been exporting 9 million tonnes of LNG for nearly a decade, and has never paid any petroleum resource rent tax.
The intensity of the response to the gas tax debate feels to me like a real indicator of what you referenced in that democracy report – a sense that the system is not working for people, that it’s really about defending corporate interests. If the government decides not to introduce a gas tax reform, set against the NDIS changes and all the other decisions they might make, what do you think the public reaction might be?
Aruna: This is why I think this should be a tax reform budget. I certainly hope the government will take at least a few of the opportunities on the table. It may not be a gas tax reform budget, for the reasons we’ve just discussed, but we come back to what we were discussing at the Reform Roundtable last year.
We have a tax system that provides extremely generous concessions for wealth. The inequalities in our system don’t just extend to corporate interests – they also extend to how we treat income from wages versus passive income: the income you make from having wealth, whether that’s housing or superannuation. That is incredibly lightly taxed in Australia.
Turning to the point about how well adapted our system is for the future: a future where we have a shrinking working-age population and a growing older population relying on passive income and largely opting out of the tax system is not a sustainable one. You’re relying on a shrinking population to pay for the NDIS, our hospital system – and overwhelmingly, the highest users of our hospital system are the very same people who are very lightly taxed. The maths just becomes very hard to make add up.
Going into the last election, the Labor Party stepped back from previous proposals to reform capital gains tax and negative gearing. Grattan has long called for these reforms, and we’re not the only ones. They have been well-known weaknesses in Australia’s tax system for a long time.
A couple of things have changed. First, house price growth in Australia has been truly staggering. It has gotten to the point where this isn’t a niche problem facing a small cohort of first home buyers – it has become the defining intergenerational challenge in Australian society. It’s not just young people who feel this; it’s their parents and grandparents, who are looking at the situation and not recognising the Australia they grew up in.
There is now a much broader coalition for tackling what’s happening in the housing market. It’s also an economic failure – at the point where housing is so expensive that working people can’t live near their jobs, you start to see real economic repercussions. Employers see it in what their employees are facing, and state governments see it in wage pressures.
A large part of the solution is boosting housing supply, but we also have to look at how our tax system has created incentives for people to pour their money into housing. It is a very preferential place to put your money.
What Grattan has called for is halving the capital gains tax discount, phased in over five years, and limiting negative gearing. Negative gearing allows you to claim a tax deduction for losses on a rental property against your wage and salary income – that’s not what other countries do, and it’s fairly unique to Australia. These reforms have been proposed for a long time.
It’s not clear whether that’s what the government will do – they may do something different. But the important thing is that we reduce the tax attractiveness of investment in housing, and that we do it in a way that is meaningful, not just incremental. It needs to be enough to plug a leak in our income tax system that is enabling a group of people to pay less tax than they otherwise should be.
Hamish: You’ve also argued in your op-eds and in that democracy report that one of the things government really needs to prioritise – this year and in future years – is getting ready for a world of rolling crises. Australia was well positioned going into the GFC, the COVID pandemic, and the current fuel crisis. We were able to respond by spending money because we had money in the bank. That is a really important point as we look ahead to a world of more frequent and intense crises. You can imagine how vulnerable we’d be in this fuel crisis if we didn’t have money to procure additional fuel supplies, invest in storage, or support the transition to electric vehicles to reduce our dependence on imported oil.
We’ve got a budget deficit of nearly $40 billion a year and debt approaching a trillion dollars. How do we manage those numbers when we’re trying to keep money in the bank for future crises, but also maintain spending on critical services today?
Aruna: The answer is actually pretty straightforward: we have to be really disciplined about what we spend on, and when we spend, we have to make sure we’re doing it as effectively as possible – putting our money where it gives us the biggest return.
But fundamentally, even if we do best-practice spending restraint, those underlying drivers we talked about aren’t going anywhere. That means we have to raise more revenue. It’s just an unavoidable reality. That doesn’t give anyone an excuse not to engage in good budget discipline – we absolutely have to – but it won’t be enough on its own. So we actually have to have a grown-up conversation about what kind of society we want to live in and whether we’re prepared to pay for it.
Hamish: And when you say “spending restraint,” you don’t mean across-the-board cuts. You mean: stop spending money on things that don’t solve a problem or aren’t a good investment; keep spending – and potentially spend more – on what we actually need more of, whether that’s social care, disability support, or something else. Even with the NDIS changes, overall spending in that space will still increase. It’s quite a subtle concept.
Aruna: Absolutely. What you don’t want is spending restraint that means you keep funding the ambulance at the bottom of the cliff. It is a subtle thing, and a difficult thing. But we in Australia are really fortunate – you have to play the hand you’re dealt, and we’ve been dealt a pretty good hand. We have substantial natural resources, and our fiscal position is actually much better than many of our peers. Right now is the time for a budget that meets these colliding imperatives – that deals with the short-term situation while continuing to progress those long-term reforms.
Hamish: Aruna, we’ve gone deep. Let’s broaden out to close. The government has been in power for four years. They’ve got an absolutely massive majority, an opposition in disarray, and a resurgent populist flank on the right. They’ve got a global crisis and a population feeling anxious about the future and looking to government for solutions. You could barely cook up better circumstances for reform in a lab. And yet we’re not sure – is the government going to seize the opportunity, or take a steady-as-she-goes approach? Reading the tea leaves two weeks out, which way do you think they’ll land?
Aruna: I suspect the reforms they adopt will be pretty sensible, measured steps. A lot of this terrain has been well covered, and there is broad consensus about where the sensible policy lies. I suspect they’ll fall within that.
The spin they put on it is going to be really interesting – because for some audiences, you want to say it’s all steady as she goes, nothing dramatic here. But the flip side is that it has to be meaningful. We have to have confidence that these changes will actually deliver results.
We’ve finally got a government that can look up above the next two years – above the next election campaign – and start thinking about the problems that, if it hasn’t made a dent in them, will be on them. Because they will have been in power for long enough to make a difference.
Hamish: We’ll of course be back with the Grattan Podcast after the budget to analyse where we’ve landed and what it means for Australia.
Aruna: Can’t wait.
Hamish: Aruna, thanks for joining the podcast.
Aruna: My pleasure.
Thanks for listening to the Grattan Podcast. Our expert analysis is freely available thanks to the donations of listeners like you. Please consider making a regular or one-off donation at grattan.edu.au/donate. Thanks again for listening, and we’ll see you after the budget.