Westpac chief economist Luci Ellis says indexation of income tax brackets would curb government spending

Federal governments should be stopped from reaping extra revenue from income tax bracket creep and instead be forced to provide relief to workers, a former Reserve Bank official says.

Labor is rejecting Opposition Leader Angus Taylor’s Budget-reply plan to index marginal tax brackets for inflation on the grounds it would cost too much.

The Government is instead adjusting tax brackets at the lower end, providing $268 in relief from July, ahead of a $250 tax rebate coming into effect in July 2027 as another $268 worth of tax cut relief rolled out at the same time — less than a year out from the next election due in May 2028.

Westpac chief economist Luci Ellis, a former Reserve Bank assistant governor, argued whoever was in power was cynically using higher-than-expected income tax revenue to tell voters they had narrowed projected Budget deficits.

“A government can project to close a fiscal deficit using the increasing revenue from bracket creep,” she said.

This, however, often didn’t lead to automatic income tax relief with governments often spending the extra revenue.

“When the day comes, the temptation to moderate an ever-increasing tax burden is too great,” she said.

Dr Ellis argued indexation would curb Federal Government spending, likening it to the Reserve Bank of Australia’s 2-3 per cent inflation target.

“Just as central banks cannot credibly pre-commit to hit inflation targets without independence, accountability or some contractual arrangement, governments cannot credibly commit to improving their finances via future bracket creep,” she said.

“Proposals to index tax brackets in some way can been seen in this context as a kind of pre-commitment device, much like independence and inflation targets are for monetary policy.

“Instead of giving periodic tax cuts but pretending you will not, bracket indexation legislates the unwind of bracket creep in a more mechanical way.”

With inflation already at 4.6 per cent, Dr Ellis argued indexing target brackets and thereby limiting government spending would also ensure relief didn’t add to price pressures in the economy.

“It also avoids the risk that the usual decision and implementation lags end up seeing ad-hoc bracket adjustments arrive when the economy is hot and tax cuts are least needed,” she said.

Prime Minister Anthony Albanese said the Government would send an omnibus bill to the Senate next month grouping together tax cuts, a $1000 tax deduction without receipts, the abolition of the 50 per cent capital gains tax discount and fringe benefits tax changes for employers providing electric cars.

“It will be a bill that will contain four elements — tax cuts, the standard deduction, capital gains tax and the fringe benefits tax,” he told reporters on Monday.

As Opposition Leader, Mr Taylor wants to index tax brackets for inflation at a cost of $22.5 billion over four years from 2028-29, arguing it would give 85 per cent of workers $1000 in tax savings.

His Tax Back Guarantee would see the bottom two tax thresholds indexed for inflation, covering the tax-free threshold under $18,200 and the existing 16 per cent threshold for those earning up to $45,000.

Treasurer Jim Chalmers noted former Liberal prime minister Malcolm Fraser had dumped the idea of indexing tax brackets, despite winning a landslide election victory with that policy in 1975, during an era of high inflation and government deficits.

“The reason why the Fraser Government abandoned the indexation of the thresholds all those years ago is because it couldn’t properly take into consideration the conditions at the time,” he told the Democracy Sausage podcast on Saturday.

The Coalition is supporting Labor’s Working Australians Tax Offset of $250, announced in the Budget, that is coming into effect in July 2027 should it get through the Senate.

It last year campaigned against reducing the marginal tax bracket from 16 per cent to 15 per cent for those earning $18,200 to $45,000 from July 1, 2026, providing $268 in relief.

That tax bracket is falling to 14 per cent in July 2027, providing another $268 in relief.

Personal income taxes are forecast to make up 52 per cent of the Commonwealth’s $737.1b in tax revenue.