A budget forever in the red: Beating bracket creep will cost billions
By Shane Wright
The federal budget will forever be mired in huge deficits if future governments deliver tax cuts to working Australians without “substantial” spending cuts or tax increases worth tens of billions of dollars, the independent Parliamentary Budget Office has revealed.
Ahead of new figures that are expected to show the current budget with a surprisingly large surplus before nose-diving into the red in 2024-25, the analysis by the budget office shows eradicating bracket creep would leave a hole in the budget that could climb to more than $85 billion a year.
Treasurer Jim Chalmers delivers this year’s budget in which the revamped stage 3 tax cuts were confirmed.Credit: Alex Ellinghausen
And if the government fails to keep a lid on grants and departmental spending, public debt could climb by an extra $300 billion over the next decade and inflict even more pain on taxpayers.
Workers will share in $23 billion worth of income tax cuts from July 1, returning bracket creep that has built up over the past decade. Bracket creep is the increase in a person’s average tax rate as their income grows over time.
Parts of the Coalition are agitating for tax thresholds to be indexed to inflation to ensure people’s average tax rates are not increased. On Thursday, Liberal leader Peter Dutton said the Coalition had shown an appetite to deal with bracket creep while in government and that the value of next week’s tax cuts would be eroded “over a number of years”.
While indexing tax brackets has won some support among economists, Treasury secretary Steven Kennedy has warned it could make it harder to control inflation, putting pressure on the Reserve Bank to vary interest rates.
The budget office found that next week’s tax cuts will reduce the average income tax rate from 26.1 per cent to 24.6 per cent. But they will start to increase again from 2025-26 if tax thresholds are not adjusted.
Without change to the personal tax system, the budget – forecast to record a $28.3 billion deficit in 2024-25 – would eventually move back into surplus in 2034-35.
But if thresholds moved in line with inflation, the budget would show a deficit of 1.5 per cent of GDP – or about $60 billion – by 2035. If thresholds moved with wages, the deficit would be around $85 billion.
“In both scenarios, the budget would never return to surplus, meaning that future governments cannot afford to fully compensate taxpayers for bracket creep without increasing other taxes or substantially cutting spending,” the budget office noted.
Personal income tax already accounts for half of all revenue raised by the federal government. This will grow as other sources of cash recede.
The budget office noted excise revenue, which in the early 1980s accounted for a quarter of all tax, is on track to fall to just 5 per cent of total Commonwealth collections by the middle of next decade.
The advent of electric vehicles and more efficient petrol-driven cars is expected to reduce fuel excise, which the budget office projected could be between $2.8 billion and $4.8 billion a year lower by the mid-2030s.
Tobacco excise could collapse to little more than a rounding error, while alcohol excise could also fall.
“Together, the most extreme downside scenarios would result in excise being lower by $12 billion by the end of the decade,” the budget office found.
“As the tax base narrows our reliance on personal income tax increases. Government revenues become more sensitive to both changes in the composition of the economy and future policies to compensate taxpayers for the impact of bracket creep.”
Government spending is expected to ease slightly over the coming years, mostly due to smaller grants to states and territories for major infrastructure projects.
The fastest growing expense is interest on federal government debt and the National Disability Insurance Scheme.
But the budget office warns that spending on government departments and grants programs has been consistently underestimated. If this were to continue, the budget would be $50 billion worse off in 2034-35 while the government would be carrying $300 billion in extra debt.
Growing use of EVs and more efficient vehicles will reduce the amount of fuel excise collected by the federal government.Credit: Dominic Lorrimer
In the short term, Treasurer Jim Chalmers will receive some good news on Friday, with monthly figures expected to show a sharp but temporary improvement in the budget.
In May, Chalmers forecast a surplus of $9.3 billion for the current financial year. To the end of April, the budget was showing a surplus of $300 million, but this is expected to have been inflated by large corporate tax collections over the past month.
It may not last long, with extra expenses in June likely to bring the overall surplus down to around its May forecast.
“Whatever the final result, it’s already clear that delivering back-to-back surpluses for the first time in nearly two decades is the right thing for our economy, for interest costs in the budget, and as a buffer against global uncertainty,” Chalmers said.
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