The ‘baseline’: bracket creep increasing personal income tax

The PBO’s annual medium-term fiscal projections, presented in Beyond the budget, have highlighted the role of bracket creep in repairing the budget over the next decade. Governments present their budgets on a ‘no policy change basis’, incorporating only announced policy decisions. As such, fiscal projections do not assume any further personal income tax cuts, which is a key driver of the budget being expected to return to surplus around 2034.

Personal income tax is therefore projected to increase to around 46% of total Australian tax revenue (Figure 5-1). While this represents a large increase from the post-GST low of 36%, it is still below the high point in the mid-1980s of over 47%. Future governments may choose to repeat past approaches to fund increasing spending through allowing continued bracket creep.

Returning bracket creep

Alternatively, governments may prefer to adjust rates and thresholds to avoid average tax rates increasing to record levels. 

In this scenario, if government fully returned bracket creep the average personal income tax rate would stay at its current level of 24.9% rather than increasing to 28.5%. Personal income tax would remain at around 42% of total tax revenue. 

In this scenario, unless other sources of revenue were found, the trajectory of the Australian Government’s fiscal balance would reverse and threaten the projected return to budget surplus in 10 years (Figure 5-1).[57]

Figure 5-1: Returning bracket creep

Source: ABS and PBO analysis.