Bracing for May: the Budget, the by-election and the decisions that could define the term

Everything over the next ten weeks will build towards the Budget on 12 May. Structural spending pressures like the NDIS, defence, aged care and health are all growing faster than revenue. And the external environment is compounding the challenge: rising energy costs tied to conflict in the Middle East, US tariffs (still in flux), and the IMF urging Australia to pursue tax reform.

The central question is whether the government decides the Budget is its moment to tackle tax reform, starting with the capital gains tax discount. Treasury’s preferred option is understood to be a reduction from 50 per cent to 33 per cent, though the government is, reportedly, also considering a more targeted reduction applied only to housing investments. Negative gearing changes are also being floated in the media.

The politics remain finely balanced. Housing and welfare organisations, the ACTU and the Planning Institute, all support a reduction, with revenue recycled into social housing. However, industry groups like the Property Council, Master Builders, HIA and the Real Estate Institute warn it would deter investment and worsen the rental shortage. Grattan Institute research continues to suggest a modest house price impact of less than one per cent. Others, such as Labor icon, Bill Kelty – who told the Senate inquiry that simply scaling back investor tax breaks to fund more government spending was not good enough – argue that any changes must be part of broader reform that shifts the tax burden off younger Australians in a way that makes a meaningful difference to their lives.

Whether Labor decides to proceed and accept the political risks, given the lessons of 2016 and 2019 will be one of the defining decisions of this parliamentary term.

Inflation and Interest Rates

The Reserve Bank is expected to hold the cash rate at 3.85 per cent at its meeting on 16–17 March. But a hold should not be mistaken for a pause. Three of the four major banks are now forecasting a further 25 basis point increase in May, which would take the cash rate to 4.10 per cent.

Governor Bullock reinforced this hawkish posture at the Australian Financial Review Business Summit on 3 March, warning that another hike remains possible before the March quarter CPI data is released in late April. She cautioned markets not to assume the Board would wait, stating that “every meeting is live.” The RBA’s revised forecasts now have trimmed mean inflation at 3.7 per cent in the year to June 2026, with inflation not expected to return to the midpoint of the target band until around mid-2028.

If a May hike materialises, it will land in the same week as both the Farrer by-election and the Budget – a convergence that amplifies the political stakes considerably.

The Opposition

Angus Taylor’s first fortnight as leader has produced a modest but meaningful polling recovery. Roy Morgan’s most recent survey (23 February – 1 March) has the Coalition at 23.5 per cent, One Nation at 22 per cent and Labor at 30.5 per cent. Newspoll showed a smaller bounce, with the Coalition lifting two points to 20 per cent while One Nation held at 27 per cent.

Taylor has been disciplined in his early messaging, tightening the LNP’s focus on cost-of-living and immigration. The early rhetoric has returned to traditional conservative economic themes: limiting the role of government, reduced spending and less regulation.

The Farrer by-election, now formally set for 9 May, will be the first real electoral test. The contest could shape as a four-way race between the Liberals, Nationals, One Nation and prominent independent Michelle Milthorpe. The result will be a real test of whether One Nation’s polling result can be backed up by a strong campaign that translates to votes at the ballot box.

South Australia: an election with national implications

Early voting begins on 14 March ahead of the South Australian state election on 21 March. Polling consistently points to a strong Labor win. The national significance lies in what the result reveals about the state of conservative politics and whether One Nation can establish a robust base of elected representatives in one state that builds momentum into upcoming contests in Victoria, New South Wales and the next federal election.

Finally, the SAS Group will be in Canberra several times over the March sitting weeks. Please reach out to us if you would like to discuss your engagement strategy in Canberra.