Deloitte says bracket creep is getting so bad that personal tax cuts are likely soon

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The Coalition Government is likely to have to promise personal tax cuts before the next election, according to analysis by Deloitte Access Economics.

The reason is bracket creep, or fiscal drag, where taxpayers move into a higher tax bracket as their wages increase over time and pay a bigger proportion of their incomes to the government.

The flow of cash from bracket creep is significant even at today’s average low level pay rises of under 2% a year. For example, pay as you go tax collections this financial year would be $4.2 billion lower if the 2014-15 tax thresholds had been indexed, says Deloitte.

“Inflation keeps pushing people into higher tax brackets and that’s an ungainly and unfair way to raise taxes,” says Chris Richardson, partner Deloitte Access Economics.

“But with wages stuck near record lows, creep is crawling.”

The bracket creep tax bonus for Canberra moves to $6.6 billion in 2018-19, $9.2 billion in 2019-20 and to $12.2 billion in 2020-21.

This chart shows Deloitte’s projections for a rising share in national income going to federal revenues:

Source: Deloitte Access Economics

About 44% of the increase in national income will go to Canberra over the next four years. The official budget numbers assume 39 cents in the dollar of rising national income over the next four years will go into federal coffers.

“There’s a rising likelihood the government — behind in the polls — will have to promise personal tax cuts before the next election,” says Richardson.

“After all, middle income earners are also swinging voters, and developing trends in their tax burden make for uncomfortable reading in Canberra corridors.

“Yet that applies much more widely than realised. It isn’t just swinging voters who will see big bucks going to the taxman in the next few years. We all will.”

Deloitte forecasts an underlying cash deficit of $25.8 billion in 2017-18, about $3.6 billion better than the projected deficit in the budget.

“The bottom line is that we see total revenue in 2017-18 beating the budget forecast by $2.7 billion,” says Richardson.

And assuming no change in policy, Deloitte sees a cash underlying deficit of $7.2 billion in 2019-20, moving to a small surplus of $2.3 billion in 2020-21.

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