Some of Australia's most prominent economists are warning that bracket creep will strip away more than half of future pay rises for the country's lowest-paid workers, as new analysis released Wednesday calls for urgent tax reform to address growing fiscal pressures.
The research, produced by the e61 independent think tank and economists from UNSW, examines the impact of bracket creep across income levels over the next decade. Among those releasing the findings are former Productivity Commission head Michael Brennan, e61 chair Greg Kaplan and UNSW economist Richard Holden.
How Bracket Creep Hits Low-Income Earners Hardest
Bracket creep occurs when ordinary pay increases push workers into higher tax brackets, lifting their average tax rate even without any deliberate change in tax policy. The new analysis shows the effect is far from uniform across the workforce.
For someone earning $45,000 a year, which sits below the current minimum wage, bracket creep is projected to lift their average tax rate by 5.1 percentage points over the next decade, rising from 10.8 per cent to 15.9 per cent. That increase would wipe out 56 per cent of their expected after-inflation pay rises by the mid-2030s, as those workers are pushed into the 30 per cent marginal tax rate.
Higher earners are also affected, though in a different way. Those on $190,000 a year face a 4.7 percentage point increase in their average tax rate, costing them 65 per cent of their after-inflation income gains as they are pushed into the top marginal rate of 45 per cent, which applies above $190,001.
Michael Brennan said bracket creep strikes the working population unevenly, with the lowest paid bearing a particularly heavy burden. He noted that while previous governments had used personal income tax cuts to offset bracket creep, sustained spending pressures now made a broader approach to tax reform necessary.
"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," he added.
Political Backdrop: Tax Cuts, Poll Slumps and Rate Rises
The findings land amid considerable political and economic turbulence. The federal government has already delivered a package of modest income tax cuts, arguing these more than offset the impact of bracket creep, and has not ruled out further cuts ahead of the next federal election. Opposition leader Angus Taylor has pledged to gradually index personal income tax thresholds as a direct measure against bracket creep.
This year's budget also included changes to capital gains tax and negative gearing, which Treasurer Jim Chalmers framed as part of a broader overhaul of the tax mix. Those moves have drawn sharp criticism and contributed to a slide in Labor's standing, with its primary vote recorded at 28 per cent in the most recent Resolve Political Monitor. Prime Minister Anthony Albanese on Tuesday defended Chalmers, saying he was "doing a great job" and would remain as treasurer through to the next election.
Economic Outlook Darkens as Confidence Falls
The tax debate is unfolding against a deteriorating economic backdrop. Consumer confidence measures from two separate surveys both recorded steep falls following the Reserve Bank's decision to lift the official cash rate to an 18-year high of 4.85 per cent.
Analysis from Commonwealth Bank's economics team indicates the labour market is also beginning to feel the strain. Jobs growth has fallen below the level needed to keep the unemployment rate steady, and the number of workers leaving jobs for better-paying roles is declining. Senior economist Harry Ottley said the bank expects the unemployment rate to "drift higher" and the labour market to move closer to balance in the coming years, which should help bring inflation back to target over time.
With bracket creep set to tighten its grip and the broader economy under pressure, the push for a more comprehensive rethink of Australia's tax system is likely to intensify in the months ahead.
