Intergenerational report: workers face increasing income taxes

AUSTRALIAN workers are facing relentless and damaging increases in personal income tax over the next 40 years.

AUSTRALIAN workers are facing relentless and damaging increases in personal income tax over the next 40 years, largely to pay age pensions to increasingly wealthy retirees, unless the government can pass its remaining budget savings.

The federal budget deficit will rise inexorably to almost 6 per cent of GDP by 2054 — more than double this year’s deficit — forcing the government to lift tax the burden to unprecedented levels in order to balance the budget.

According to the government’s latest intergenerational report, the net level of debt is set to rise from 15 per cent to almost 60 per cent of GDP — more than $2.6 trillion in today’s dollars and a significantly level higher than either Canada or New Zealand today.

“If no changes are made to payment levels ... taxes would need to rise and remain at a sustained level of around 26 per cent of GDP,” the IGR said. The previous high is 24.2 per cent.

By contrast, if the government can pass its controversial array of savings — including hikes in university fees and cuts to social security — the budget will break even by the early 2020s and reach a peak budget surplus of 1.4 per cent of GDP in 2039.

“This strong budget position would offer the government the fiscal space to prudently allow for future tax relief, over and above the relief from the negative impacts of income tax bracket creep on workforce participation already allowed for,” the IGR said.

Even under the more frugal scenario, the overall tax burden is assumed to rise to 23.9 per cent of GDP by 2021 — the average level between 2001 and 2008 — owing “largely” to bracket creep.

Workers on average full-time incomes (projected to be a little under $80,000 a year) will be paying the second top income tax bracket of 39 per cent within two years, the report said. It projects the average income tax rate for someone on the equivalent of $ $75,000 a year will rise from 22.7 per cent to 27.4 per cent by 2023.

Spending as a share of GDP is set to exceed 31 per cent of GDP by 2054, beating the post-World War II high of 27.6 per cent. Even under the alternative scenario, spending will rise to 25.9 per cent of GDP, above the long-run average.

The government’s failure to pass reforms to the aged pension — changing indexation and deeming thresholds and lifting the eligibility age to 70 by 2035 — explains most of the difference between future spending. Under the currently legislated scenario age pension spending will rise from 2.9 per cent of GDP to 3.6 per cent — equivalent to $165 billion in today’s dollars.

Around 67 per cent of people of age pension age will still be receiving the pension by 2055, despite what will have been around 70 years of compulsory superannuation.

The IGR stresses actual outcomes could be worse. The modelling assumes economic growth every year for the next 40 years and close to full employment.

The Irish government was projecting its debt to GDP ratio to fall to 30 per cent by 2009 in its 2007 budget. But the unexpected global financial crisis propelled it to more than 120 per cent.