By James Glynn

SYDNEY--Australia's treasurer touted the latest budget as reform-focused and the most ambitious in a generation. Economists hope that he is proven right.

Calls for Australia to pursue concerted economic reform to lift flatlining productivity growth and falling living standards stretch back decades.

On Tuesday, the country's Labor government began what those advocating for economic change hope is the start of something big and far-reaching.

Treasurer Jim Chalmers announced changes to the tax system around property ownership, ending so-called "negative gearing" that directs generous financial incentives toward those buying investment homes.

Critics have long argued that the policy has helped make cities like Sydney the most expensive housing markets in the world. Proponents, however, say it encourages the construction of new homes by swelling demand.

Labor also changed how the capital-gains tax is applied to the sale of investment properties, making the asset class far less appealing.

Chalmers told parliament the tax changes address growing "intergenerational unfairness" that has priced many young people out of the property market.

For economists looking on, the budgetary measures present a ray of hope that a more extensive reform agenda is taking shape--one that will boost the economy's ability to grow faster without fueling inflation.

The Reserve Bank of Australia has highlighted the problem of weak productivity growth and low potential economic growth, delivering three interest-rate hikes so far this year to combat a spike in inflation that emerged even prior to the war in Iran.

"I'd like to think it [the budget] does open the door to a bigger, more ambitious reform agenda," said Saul Eslake, a former chief economist at Merrill Lynch in Australia.

If the process of reform is to be extended from here, policy makers should consider increasing and/or broadening the country's goods-and-services tax to repair the revenue side of the federal budget and help ease the significant tax burden faced by wage earners and companies, he said.

But an extensive reform program of that nature would require a mandate from voters at the next federal election, likely in 2028.

"A tax mix switch involving an increase in the rate and or broadening of the base of GST would need an explicit electoral mandate to be doable," Eslake added.

Shane Oliver, chief economist at AMP, is also hopeful that bigger changes are coming because the property tax changes as announced don't go far enough and, by themselves, amount to a tax increase.

"If you do one reform without looking at income tax, then you miss the bigger picture," he said.

The case for shifting the tax system toward consumption rather than an excessive reliance on income is urgent, Oliver said.

Economists contend that an inefficient tax system is one reason why Australia's potential economic growth rate has slumped to around 2.0% a year from around 3.5% two decades ago, when the economy was reaping the benefits of ambitious reforms carried out in the 1980s and 1990s.

Huw McKay, economist and visiting fellow at the Australian National University, said the changes to capital gains tax and negative gearing "could be the start of something bigger."

To score higher on the reform meter, the government could articulate a strategy for how the tax changes fit with an overall desire to increase the economy's competitiveness and aid productivity, McKay said.

Still, others were less sanguine, saying the tax changes will ultimately not help make the economy more productive.

"It's tinkering around the edges that will do next to nothing to solve the housing problems, which stem from a lack of supply," said Stephen Walters, chief economist at Optimal Economics. "These tax changes risk making housing shortages worse."

In his view, what the policy changes do represent is an effort to raise more revenue to support higher spending.

"Tax reform must be whole-of-system, lift productivity, boost efficiency and ease compliance. The changes do none of that," Walters said.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

May 12, 2026 07:00 ET (11:00 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.