February 2026: A month of shocks

In February 2026, volatility in Australian politics rose to new levels. An interest rate hike nobody wanted, a defence estate shake-up, a leadership spill that reshapes the Opposition, the architecture of a new national disability support system, and an unstable geopolitical backdrop — all compressed into a few short weeks. The SAS Group was on the ground in Canberra for the February sitting fortnight, and we’ll be back in March, as three consecutive sitting weeks promise to be among the most contested of the parliamentary term so far.

The RBA shock: rates go up, not down

The Reserve Bank’s decision on 3 February to raise the cash rate by 25 basis points to 3.85 per cent was a defining moment of the month. After three rate cuts in 2025, markets had been anticipating further easing. Instead, the RBA unanimously raised rates, citing persistent inflation pressures that picked up materially in the second half of 2025. The politics were further exacerbated by figures showing real wages went backwards last year.

The numbers tell the story: monthly CPI running at 3.8 per cent for the year to December 2025, up from 3.4 per cent in November; quarterly trimmed mean inflation at 3.4 per cent through the year; and stronger-than-expected private demand driven by household spending and investment. The RBA’s Statement on Monetary Policy made clear this is not a temporary blip. The Board now sees capacity pressures as greater than previously assessed, and labour market conditions remain tight.

The political implications are significant. The Albanese Government has staked much of its second-term agenda on visible cost-of-living relief — the very terrain on which it won re-election in May 2025. An interest rate increase hands the Opposition a ready-made economic narrative. Treasurer Jim Chalmers has limited room to manoeuvre: the fiscal position is deteriorating, and the IMF forecasts Australian economic growth of just 2.1 per cent in 2026, well below the three-decade average of 3 per cent. The IMF expects inflation won’t return to the midpoint of its 2–3 per cent target until the latter half of 2027.

The IMF report card: fiscal pressure and the case for tax reform

The IMF’s Executive Board concluded its 2025 Article IV consultation with Australia on 9 February, with the findings released publicly on 12 February. While the Treasurer was quick to claim a “powerful endorsement” of economic management, the fine print tells a more challenging story.

What caught our attention was the IMF’s sharpest language in years on the state of the federation’s finances. The IMF warned that rising state and territory debt — driven by infrastructure, health and social protection spending, and exacerbated by uneven commodity revenues — has caused missed sub-national fiscal targets and widening disparities.

At the federal level, the IMF endorsed the government’s planned medium-term fiscal consolidation, but its prescriptions go well beyond what any treasurer would find comfortable. The Board called for “comprehensive tax and expenditure reforms”, including an increase in indirect taxation (the GST), the reintroduction of a resource revenue tax, removal of income tax exemptions and, critically, phasing out superannuation concessions and the capital gains tax discount to create a “more equitable and efficient tax system”. The IMF argued that Australia’s high reliance on direct taxes, and a relatively high effective cost of capital, hinders investment and productivity growth.

Capital gains tax: the debate the government started

The 50 per cent CGT discount has returned to the centre of Australian tax policy debate and, given the debate still continues, it is quite possible that the government embarks on one of its riskiest moves yet.

The Treasurer has refused to rule out changes, telling the ABC on 4 February that “we haven’t changed our policy on capital gains”, but that the government considers there to be “intergenerational issues in housing”. The Prime Minister has similarly declined to close the door. The framing is deliberate: the government is keeping its options open while letting the Senate committee and the public debate continue.

The Australian Council of Trade Unions is pushing for the discount to be halved to 25 per cent, at least beyond one investment property. Deloitte Access Economics has proposed reducing it to 33 per cent as part of a broader package. Housing and welfare organisations, including ACOSS, Q Shelter and the Council to Homeless Persons, support reducing the discount and recycling the revenue into social housing and rent assistance.

The counterarguments are equally forceful. The Property Council, Master Builders and the Real Estate Institute warn that reducing the discount would deter investor activity, constrain rental supply and ultimately worsen the housing shortage the reform purports to address. Grattan Institute research suggests that trimming the discount would reduce house prices by less than 1 per cent, suggesting that while the equity case for reform is strong, the affordability case is modest at best.

Coalition leadership: Taylor and Hume take the wheel

The most dramatic development of the month was the Liberal Party leadership spill on 13 February, which saw Angus Taylor defeat Sussan Ley 34 votes to 17, with Senator Jane Hume elected deputy, defeating Ted O’Brien 30 to 20. Ley announced her intention to resign from Parliament, which will trigger a by-election in the regional New South Wales seat of Farrer.

The leadership change was the culmination of months of escalating dysfunction. The Coalition had split twice under Ley’s leadership — first in May 2025 and again in January 2026. The Coalition reunified on 8 February under a new “solidarity agreement”, but the damage to Ley was terminal. A Newspoll released on 8 February showed the Coalition’s primary vote at a record low of 18 per cent (Liberals 15 per cent, Nationals 3 per cent), with Ley’s net satisfaction at minus 39 — the worst for any major party leader since Simon Crean in 2003.

One Nation polled at 27 per cent, an all-time high for any minor party in Newspoll, meaning that for the first time, the official Opposition was polling in third place behind a minor party. Newspoll declined to calculate a two-party-preferred result.

Taylor arrives with strong economic credentials: a Rhodes Scholar, a long career in management consulting, and most recently Shadow Minister for Defence under Ley, having previously served as Minister for Energy and Emissions Reduction in the Morrison Government. His opening rhetoric harks back to traditional conservative economic principles: “We need less government, less spending, less taxes, less regulation and fewer regulators.” The challenge will be whether that message — and the man delivering it — can cut through in a political environment where populism is front and centre.

Taylor unveiled his shadow cabinet on 17 February, and the appointments tell us a great deal about where he intends to fight. The headline moves are strategic: James Paterson to Defence and Jonathon Duniam to Home Affairs and Immigration. Tim Wilson takes Treasury, with Claire Chandler in Finance, giving the economic team a generational refresh. Ted O’Brien, who challenged Jane Hume for the deputy leadership and lost, has been given Foreign Affairs.

The returning MPs are telling. Andrew Hastie lands Industry rather than the Defence or Home Affairs brief many expected. Jacinta Nampijinpa Price takes Small Business, Skills and Training. Julian Leeser takes Education. Bridget McKenzie takes Infrastructure and Transport, while Dan Tehan retains Energy and Emissions Reduction, with the added responsibility of managing Opposition business in the House.

The by-election in Farrer will be the first electoral test. It is conservative heartland, where Ley won the seat from the Nationals in 2001. The result will be an early indicator of whether the leadership change has arrested the Coalition’s decline.

Thriving Kids: NDIS reform takes shape

The government released its operational model for the Thriving Kids initiative on 3 February, a $4 billion program that will fundamentally reshape early childhood support in Australia. The program will provide for children aged eight and under with developmental delays requiring low to moderate support needs in a program that sits outside the NDIS.

Services will begin rolling out from 1 October 2026, with full implementation by 1 January 2028. The federal government has committed $2 billion, matched by states and territories. At least $1.4 billion of the Commonwealth’s contribution will flow directly to state-delivered services. Bilateral agreements are being negotiated with each jurisdiction, with the government having finalised agreements with South Australia and the Northern Territory.

Looking forward: a crowded March

March promises to be one of the most consequential months of the parliamentary term. Sitting weeks commencing 2 March, 10 March, 23 March and 30 March will see the government push its legislative agenda at pace, while the new Taylor-led Opposition will seek to establish its credentials across the dispatch box.

Some issues likely to be front and centre:

Immigration and the ISIS brides. Prime Minister Albanese’s line — “If you make your bed, you lie in it” — plays to community sentiment but is being carefully managed against legal obligations and national security realities. Taylor has flagged immigration as a centrepiece of his agenda; his appointment of Jonathon Duniam as Shadow Minister for Home Affairs and Immigration underscores that intent. The issue sits squarely in One Nation’s wheelhouse, and both major parties will be conscious that their handling of it will directly affect One Nation’s polling.

The South Australian election. The 21 March state election provides a real-time barometer of how federal political dynamics are filtering into state contests. Premier Peter Malinauskas is well positioned, but One Nation’s performance in a state with traditionally strong minor party representation will be closely watched as a leading indicator for federal politics.

Geopolitics and the US relationship. The US administration’s tariff regime continues to shape Australia’s strategic calculus. The recent Supreme Court decision, along with the US administration’s subsequent actions, will affect both strategic relationships and the performance of the global economy in the coming months.

The Budget on 12 May. Everything in March builds towards the Budget. The Treasurer acknowledged this week that the deficit would be more than $14 billion worse over the next two years. The recent rate hike, the IMF’s recommendations on tax reform and the Senate CGT inquiry all set up what will be the government’s most challenging and consequential Budget since taking office. The structural spending pressures are real: the NDIS, defence, aged care, health and debt servicing costs are all growing faster than revenue. If the government decides the Budget is the moment to move on CGT or broader tax reform, the political dynamics of the second half of 2026 could look very different from the first.

The bottom line

The Albanese Government enters March with its majority intact, a two-party-preferred lead that still hovers around 54–46, and a deeply weakened Opposition. But the political fundamentals are shifting. Inflation is rising, not falling. Interest rates are going up, not down. Housing delivery is falling behind, not catching up. The IMF is politely telling Australia it needs to reform its tax system and get its states’ finances in order. And One Nation, polling at 25–27 per cent, is reshaping the right side of Australian politics in ways that complicate both major parties’ strategies.

For the government, the risk is clear: a second term won on the promise of delivery, judged on delivery that isn’t materialising fast enough, and a looming Budget decision on CGT reform that could either demonstrate fiscal seriousness and appetite for long-term reform or reignite the political battles that cost Labor dearly in 2016 and 2019. For the Opposition under Taylor, the challenge is equally stark: developing credible economic alternatives while navigating a populist insurgency that threatens to permanently fracture the conservative base, with a pressing real-world test in the seat of Farrer.

The SAS Group will be in Canberra for the March sitting weeks. If you would like to discuss how these developments affect your engagement strategy, please reach out to us.