Fix bracket creep under wider economic reforms

The sobering news that Australian businesses have suffered their sharpest annual fall in gross operating margins in 25 years points to the need for sweeping, not piecemeal, economic reforms. The fall, the Australian Industry Group told Simon Benson on Saturday’s front page, is due to inflation-driven costs, including a 51 per cent spike in gas prices. The situation puts Jim Chalmers’s call for an economic recovery led by the private sector at risk. So does the budget’s structural deficit. Nor do current circumstances leave room for spending sweeteners in next week’s budget, or from either major party in the election campaign. The economic cost of Cyclone Alfred, the Treasurer will tell the Queensland Media Club on Monday, will be up to $1.2bn, causing new pressure on the budget and inflation, and possibly wiping as much as 0.25 per cent off growth this quarter.

And the reduction in revenue due to low growth and company profits, Deloitte Access Economics warns, will cause a longer-term deterioration of the structural budget, exacerbated by increased government spending. Partner Stephen Smith forecasts that the deficits will be $13.1bn worse than forecast in MYEFO, providing a “reality check for politicians wanting to announce election sweeteners in the weeks ahead”. And the election of a minority government would make a difficult situation worse. Deloitte forecasts that net debt will grow by more than $200bn over the next four years to $747.4bn, increasing the proportion of net debt from 19.6 per cent this financial year to 23.9 per cent by 2027-28.

Neither major party is yet to tackle how to cut government spending as a proportion of GDP. But Angus Taylor is on the right track, raising expectations that a Dutton government would deliver meaningful income tax cuts in its first term. On Sunday, Greg Brown reports, the opposition Treasury spokesman released a new analysis of Parliamentary Budget Office and ATO figures showing workers paid $3500 more in tax last financial year due to bracket creep than before the Albanese government was elected in 2022, with dual-income households paying an additional $7000.

Labor’s stage three tax cut changes have failed to lower taxes for households, with taxes on the rise due to inflation and bracket creep, the analysis showed. Mr Taylor will take his campaign against bracket creep to marginal seats in NSW, Victoria and Tasmania this week. For workers in the productive economy, that incentive-sapping situation is untenable. And it is set to worsen.

Under Labor’s current policy settings, the average taxpayer will be paying more than $8900 more in tax in the 2028-29 tax year (about $18,000 in dual-income households) compared to 2021-22 levels, the analysis shows. In the marginal NSW Labor seat of Bennelong, the average taxpayer would be paying an additional $11,750 by 2028-29, an extra $9692 in the teal-held seat of Goldstein on Melbourne’s bayside, $10,955 more in Parramatta, and $22,357 more in the northern beaches teal seat of Mackellar.

Mr Taylor’s call for the restoration of the tax-to-GDP gap “and fiscal guardrails to reduce wasteful spending”, abolished by Labor in 2022, is essential. But he needs to outline how and where a Coalition government would cap spending. And Dr Chalmers needs to do the same. Ahead of the campaign, the Coalition has matched and added to Labor’s $8.5bn pledge to increase the proportion of GP bulk-billing visits to 90 per cent. Current spending in the so-called care economy and cost-of-living handouts would be better scaled back to allow taxpayers to keep and control more of their own hard-earned incomes.

Reversing bracket creep would be an important step towards the sweeping reform the economy needs to be more productive and attractive to investors, and generate higher profits and revenue. Uncompetitive business taxes, red tape, approval times, over-regulation of workplaces and government spending must also be cut.