Dutton needs to ignore the Morrison-era consultants

Peter Dutton delivers a speech at the Building a Bigger, Better SA Forum. Picture: NewsWire / Brenton Edwards

Peter Dutton’s change of heart on bracket creep will be a case of too little, too late unless he commits to immediately abolishing it if he wins the election.

Dutton’s aspirational desire to tackle this evil “when the budget can afford it” looks like an each-way bet to me.

If bracket creep is an economy “killer” which “stifles productivity and entrepreneurialism and hard work,” as he rightly says, then why allow it to remain in place for the indefinite future?

Let’s be clear on the harm that bracket creep does. Unlike the US, Canada. Germany and 14 other OECD countries, we do not index our personal income tax thresholds for inflation. When the post-pandemic inflation crisis erupted across the developed world, households in all those countries were insulated from bracket creep.

While their real incomes were squeezed by inflation, they were not at the same time pushed into – or further into – higher tax brackets, delivering a second blow to their living standards.

In Australia, by contrast, taxpayers received no such protection.

If you want to know why disposable incomes have fallen by over 8 per cent in Australia since 2022 – by far more than any other rich country – bracket creep is a big part of the answer.

For all the economic harm that bracket creep does – not only does it kill incentives, it is also regressive – let’s not forget how dishonest and unprincipled it is.

We routinely index pensions, unemployment benefits and a variety of other government welfare payments for inflation, but this basic decency is not extended to taxpayers.

Can you imagine the outrage if Dutton said he would stop adjusting pensions for inflation until the budget was in better shape?

Dutton says he will only act on bracket creep “when the budget can afford to do so” given how “costly” it would be.

But getting rid of bracket creep is not a cost, as Dutton claims.

It would not put a single extra cent in taxpayers’ pockets, but simply prevent their income tax burdens rising automatically with inflation. Bear in mind that bracket creep is likely to see average wage earners hitting the 37 per cent tax bracket by 2031.

I can understand the Labor Party characterising bracket creep as a cost, but why the leader of Robert Menzies’ Liberal Party?

In any case, indexing our income tax thresholds would lower revenue by only about $4 billion a year initially – much less than one per cent of what Canberra collects annually – but its impact rises over time.

So why is Dutton so reluctant to act? It’s because bracket creep is the centrepiece of his entire fiscal repair strategy. Since Dutton and Angus Taylor have said they will not cut spending (just cap its real growth) the only way they can possibly balance the budget is to rely on it.

This is the approach Scott Morrison applied to reduce the deficit before the pandemic hit. And it is central to Labor’s hopes of keeping future deficits under control.

Dutton and Taylor have things back to front. They say that we need a period of sound budget management before bracket creep can be removed.

But for any conservative government worth its salt, taking this step should be seen as essential to budget responsibility.

By putting an automatic cap on annual revenue growth, it establishes a clear resource envelope within which governments must operate. While it does not starve the beast, it at least puts it on a strict diet.

My fellow economists have been complaining about our deficits and debt, but these are not high by developed economy standards.

Our problem is the inexorable growth of government – with an out-of-control NDIS funded by an ever-higher tax burden on working Australians, courtesy of bracket creep – a recipe for slower growth, flatlining productivity and vulnerability in the face of global shocks.

According to the Parliamentary Budget Office, with no indexation of thresholds, the average personal income tax rate is set to rise from today’s 24.6 per cent to 28.2 per cent in 2034-35.

Dutton defends his reluctance to tackle bracket creep by saying that “John Howard never promised taxation reform going into the 1996 election”, but taking this step is not a “revolution”, as Dutton suggests, but a simple act of fairness for taxpayers bringing us into line with most other OECD countries.

And Howard was facing a 13-year-old government in 1996, not a first term one.

Dutton has been hurt by two things in this campaign. First, the RBA board’s politically convenient cut in the cash rate in February, at a meeting where someone – we still don’t know who – invited the media to attend, suggesting the decision was known in advance.

And second, Dutton’s fateful decision to cut the fuel excise rate – followed by a tit-for-tat contest with Labor ever since on voter giveaways.

This has been a strategic blunder. By effectively endorsing the Albanese government’s lie that we can spend our way out of a cost-of-living crisis, Dutton has let Labor off the hook for its three years of inflationary spending.

Voters have noted this. According to the Freshwater Poll, in October last year the Coalition had a 14-percentage point lead over Labor on dealing with the cost-of-living. The Coalition’s lead is now only 2 points, within the poll’s margin of error.

The advantage it enjoyed late last year over Labor on economic management has similarly evaporated. As Graeme Richardson says, the punters are no fools.

It is not too late for Dutton to make a contest of this election, but he needs to be bold. He should end the equivocation and announce he will abolish bracket creep if elected on May 3.

As I’ve argued before, let the campaign be a referendum on this rather than Labor’s Medicare lies.

If Dutton wants to indulge in aspirational policy pledges, he should say he wants to get rid of the 37 per cent income tax bracket. Dutton won the respect of many Australians for the principled stand he took on the voice and nuclear power.

If support for lower taxes is indeed “instinctive” for him, as he maintains, he needs to stop listening to Morrison-era political consultants and back himself.

David Pearl is a former Treasury assistant secretary.