Australians set to be slammed with $336 billion tax bill

The country’s balance sheet is improving substantially and the government has you to thank – to the tune of hundreds of billions of dollars.

New analysis from the independent Parliamentary Budget Office shows even after Labor’s attempt to shift some of the tax burden away from workers in the latest budget, they will be doing even more of the heavy lifting 10 years from now.

If tax policies remain unchanged between now and then, Australians will be tipping in an extra $336 billion in personal income tax by 2026-37, a huge increase from this year’s $390.9 billion, bringing the take to more than $720 billion.

In fact, personal income tax will make up half of the government’s revenue by 2029-30 and 53.8 per cent by 2036-37.

That might seem strange considering the government’s 1 percentage point cut to the lowest tax bracket just kicked in on July 1 but it’s basically down to one thing: bracket creep.

The dreaded term is what happens when wages go up but the tax brackets aren’t adjusted to account for people earning more, meaning individuals are gradually pushed into ever higher tax brackets.

“Bracket creep is particularly prevalent in times of economic growth and inflation and has played an important role in fiscal consolidation after previous major downturns, including the 1990s recession, the Global Financial Crisis and the COVID-19 pandemic,” the PBO notes.

It projects average tax rates will continue increasing from 24.9 per cent in 2026-27 to a “historical high” of 28.6 per cent by 2036-37, mostly driven by bracket creep.

The analysis also comes with a big caveat, noting that the “no change” to tax policy assumption is “unrealistic as it effectively assumes that the government will not provide any future personal income tax cuts for a decade”.

But while that might be good news for taxpayers, it’s not great news for the government’s bottom line.

While increased commodity prices help in the short-term, the PBO stresses repeatedly that its projected return to surplus by 2034-35 – two years earlier than previously predicted – is heavily reliant on the increase in income tax receipts.

“Should the government provide future personal income tax cuts similar to those of the past absent other policy changes, a return to surplus would become unlikely over the medium term,” it said. 

“This holds, even if other economic factors, such as commodity prices, turn out considerably better than assumed.”

NDIS cuts do heavy lifting

The government’s future financial position is also massively helped by Labor’s “historically large” cuts to the NDIS through restricting eligibility although they’re “largely offset by faster growth in structural spending including interest costs, defence and health”.

Those interest costs are set to rise as high as 1.5 per cent of GDP by 2032-33 before declining. That’s a reflection of the prediction that debt itself will peak at 35.8 per cent of GDP in 2028-29 and then start to fall.

The migration factor

Another fascinating element of the predictions is how reliant they are on migration, because migrants typically have a “more positive fiscal impact” than people born in Australia.

That’s because they generally arrive ready to work, having already benefited from education and healthcare spending of another country but not yet requiring the extra spending needed for older people.

The baseline projections assume net overseas migration sits at roughly 235,000 for most of the next 10 years, based on population projections from the Centre for Population.

An extra 40,000 people arriving per year would add $80.6 billion to the government’s underlying cash balance over the medium term while 40,000 fewer people would take $79.1 billion, all driven primarily by tax.

It would also increase some expenses, particularly for states and territories, but the “aggregate impact is less than the revenue gain”.

Those findings could have big implications for the Coalition and One Nation’s pledges to dramatically cut immigration numbers.

Middle East war uncertainty

Of course, all this modelling is easily thrown out by global conflicts. For now, the war in the Middle East has bizarrely been good for the government’s bottom line because higher petrol prices mean more tax is collected.

But the PBO warns that even that odd “improvement” would likely suffer in the long term if prices remained high because economic growth and tax receipts would start to be hit.

Treasurer Jim Chalmers pointed to the PBO’s prediction that a surplus would arrive two years earlier, along with lower government debt.

“Lower debt and smaller deficits are the fruits of our responsible economic management,” he told The Sydney Morning Herald.

“By getting the budget in better nick, we’ve been able to find room to cut taxes, help with the cost of living, strengthen Medicare and invest in the future.”