Lowest paid to suffer the most from bracket creep

Australians earning less than the minimum wage will lose more than half of their future pay rises to bracket creep, some of Australia’s most prominent economists have warned while calling for an overhaul of the tax system to cover the nation’s growing spending pressures.

Former head of the Productivity Commission, Michael Brennan, chair of the e61 independent think tank, Greg Kaplan and UNSW economist Richard Holden will on Wednesday release analysis of the tax system highlighting the impact of bracket creep over the next decade.

Bracket creep is the process by which a person’s average tax rate goes up due to ordinary pay increases. Liberal leader Angus Taylor is promising to gradually index personal income tax thresholds in a bid to mitigate the impact of bracket creep.

The government has put in place small income tax cuts which it says more than offset bracket creep. It has also not ruled out more tax cuts in the run-up to the next federal election.

The research by e61 and UNSW shows that bracket creep will lift the average tax rate on someone earning $45,000 a year by 5.1 percentage points over the next decade, from 10.8 per cent to 15.9 per cent.

The increase would wipe out 56 per cent of their expected after-inflation pay increases by the mid-2030s. The large hit happens as workers are pushed into the 30 per cent tax rate.

People on $190,000 will suffer a 4.7 percentage point increase in their average tax rate that will cost them 65 per cent of their after-inflation income gains. These workers get pushed into the top marginal tax rate of 45 per cent which starts at $190,001.

Brennan said bracket creep hit the working population unevenly, hurting the lowest paid particularly hard.

He said while previous governments had offset bracket creep with personal income tax cuts, the pressure on the budget meant a broader tax base was needed.

“There are persistent spending pressures due to population ageing and rising demand for disability, health and care services. These pressures risk undermining fiscal sustainability,” Brennan said.

“The two credible paths to fiscal sustainability are deliberate moderation in the growth of public spending, and tax reform to raise revenue in a more sustainable and less distortive way than bracket creep.”

This year’s budget contained a suite of tax measures, including changes to capital gains tax and negative gearing, that Treasurer Jim Chalmers argued were aimed at overhauling the mix of taxation.

It has prompted heated attacks from critics and contributed to Labor’s fall in the polls, including this week’s Resolve Political Monitor, which showed its primary vote at 28 per cent.

Prime Minister Anthony Albanese on Tuesday defended Chalmers, saying he would remain as treasurer through to the next election.

“The treasurer is doing a great job. This is a treasurer [who] has produced a couple of budget surpluses, lower deficits, is producing economic reform,” he said.

But the economic outlook continues to deteriorate.

Both the weekly ANZ-Roy Morgan and monthly Westpac measures of consumer confidence, released on Tuesday, showed steep falls in sentiment following last week’s decision by the Reserve Bank to push official interest rates to an 18-year high of 4.85 per cent.

Figures released by the Commonwealth Bank’s economics team suggest the labour market is also starting to feel the impact of the RBA’s rate rises.

They showed jobs growth is now below the level needed to keep the unemployment rate steady. Internal Commonwealth Bank data also showed the number of people quitting their job for a better-paying one is also easing.

“From here, we expect the unemployment rate to drift higher and the labour market to move closer to balance over the coming years, assisting in bringing inflation back to target over time,” Commonwealth Bank senior economist Harry Ottley said.

One of the factors in the RBA’s rate hikes has been the soaring price of oil, with fears it is increasing inflationary pressures across the entire economy.

In late October, oil reached $US116 a barrel. But since last week’s US midterm elections, it has fallen by more than 20 per cent to about $US92 a barrel on growing hopes the conflict may end.