Younger people more likely to miss out on tax cuts, PBO warns

Jim Chalmers is under pressure to address intergenerational inequality, as the PBO warns younger people are more likely to carry the burden of taxation in Australia.

Younger people will end up with fewer tax cuts and higher tax rates than in the past to pay for government spending and lower traditional revenue sources, the independent Parliamentary Budget Office warns, placing further pressure on Jim Chalmers to address concerns about intergenerational inequity.

The Treasurer has acknowledged one of the main outcomes of the government’s economic roundtable in August was building consensus over issues of “intergenerational fairness” and is seeking to introduce changes to the taxation of high value superannuation accounts.

But personal income tax is now the only government revenue source projected to increase as a share of GDP over the medium term, the PBO said, and the younger generational will bear the burden.

“The increasing reliance on personal income tax to balance the budget limits the government’s ability to provide relief from bracket creep, resulting in higher average tax rates for wage earners spreading the tax burden unevenly between generations,” the PBO said.

Bracket creep, where wages rise nominally over time, leaving individuals subject to higher marginal tax rates, boosts government revenues through higher personal income tax collection.

Without income tax policy changes, bracket creep is projected to ramp up personal income tax revenue to 14.5 per cent of GDP by 2035-36, up from 12.4 per cent of GDP in 2025-26 and 54 per cent higher than the low point of 2009-10.

The PBO said the government was dependent on this income tax, making it harder to remove bracket creep and deliver tax cuts.

“Future governments may find it harder to continue to offer regular income tax cuts while maintaining budget sustainability as a result of pressures on both the revenue and expense sides of the budget,” the PBO said in its 2025-26 Medium-Term Budget Outlook: Beyond the Budget.

The PBO specifies that the tax burden will be on the younger generation because its share of income comes more from wages than does that of the older generation.

“This shift to increasing the burden on the tax mix to income derived primarily from labour poses equity challenges in the context of Australia’s ageing population. Older Australians, who are more likely to derive income from savings, investments, and superannuation, benefit disproportionately from lower taxes, while younger and working-age individuals bear a heavier tax burden on their labour.

“As people age, their contribution to income tax generally peaks around 40-49, then declines to less than 5 per cent by the time they are over the age of 70.”

The Treasurer said last month that he would seek to address intergenerational inequity.

“One of the defining outcomes of this Economic Reform Roundtable was building consensus and momentum around ensuring that intergenerational fairness is one of the defining principles of our country but also of our government. And that’s certainly something that we will pick up and run with,” Dr Chalmers said.

The PBO’s report noted that “Notwithstanding the tax cuts announced in the 2025-26 budget, there is a continued risk of increased dependence on personal income tax driving the intergenerational challenge as well as raising issues around equity and efficiency of the tax-base more broadly.”

In this year’s budget, the Albanese government promised tax cuts for Australians earning $45,000 or more – an extra $5 a week from July next year and $10 a week from 2027-28.

“These new tax cuts return bracket creep by lowering average tax rates for all taxpayers, especially for low- and middle-­income earners,” the budget papers say.

Former Productivity Commission chair Michael Brennan has previously criticised the government strategy of reforming tax by default through bracket creep.

“Even if there is no substantial tax reform, our tax rates will change because the default strategy is to balance the budget gradually via bracket creep. But that is neither the fairest nor most efficient way to achieve budget repair,” Mr Brennan said.

Dr Chalmers referred to the federal budget this year as “not yet sustainable enough” and said economic reform was needed to address such “blunt truths” about the nation’s fiscal outlook.

The PBO’s forward estimates were all largely in line with the federal budget released in March.

It assumes conservative government spending projections but says they are unlikely. “Following historical patterns, expenses may be understated by up to 1.5 per cent of GDP by 2028-29 and up to 3 per cent of GDP in a decade.”

The PBO assumes spending on public service would not grow as it has done. “The cost of the public service is assumed to decline by over half a per cent of GDP over the forward estimates ($17bn in 2028-29), on the basis that there will be no new spending beyond that … publicly announced.”

It also assumed the cost of subsidies would decrease, but again qualifies that saying government rarely cut back such spending.

“Spending on many grant programs are assumed to decline significantly through the forward estimates period as a share of GDP. Assumed declines of this size are common in budget projections but they have never eventuated due to governments later announcing new programs or extensions to terminating programs.

“These longstanding assumptions mean that the budget continues to understate expenses.”