Labor’s surprise ‘top-up’ tax cut is enough for a cup of coffee – and a brazen pitch for votes

More than 12 million workers will receive a surprise tax cut of $268 next year and $536 the following year in a brazen pitch for votes at the election due in May, as Treasurer Jim Chalmers vows to deliver a “soft landing” for the economy and a recovery in living standards.

But workers will have to wait until July 2026 to feel the modest benefits, due to cost $17 billion over three years, amid questions about whether the nation can afford the outlay when the budget forecasts deeper deficits and record debt.

Treasurer Jim Chalmers and Finance Minister Katy Gallagher arrive to enter the budget lock-up at Parliament House in Canberra on Tuesday.Credit: Alex Ellinghausen

The moves are part of a budget that pours $36 billion into more than a dozen big policies over the next five years – including Medicare, cheaper medicines, energy bill relief and aged care – while listing only $2.5 billion in major budget improvements.

The budget deficits will swell to $179.5 billion over five years, while Treasury warns of the economic dangers from a global trade war – without naming US President Donald Trump or the decision he is due to make on April 2 about another round of tariffs.

Coalition shadow treasurer Angus Taylor rejected the new tax cuts soon after they were unveiled on Tuesday night, but he did not rule out an alternative Coalition tax plan when Opposition Leader Peter Dutton makes his budget reply speech on Thursday.

Chalmers defended the new tax relief as a “top-up” tax cut, after the much bigger stage 3 tax cuts last year, as he faced questions about why the government could give workers only $5 a week – enough for a cup of coffee.

“The only way to ensure that these tax cuts flow, and that we strengthen Medicare, is going to be to vote Labor at the election,” Chalmers told this masthead before his budget speech on Tuesday night.

“Whatever Peter Dutton says now, we know from the experience in 2013-14 that you can’t trust these guys when it comes to Medicare and when it comes to the cost of living.”

The Labor attack on Dutton seeks to contrast this year’s tax cut and health spending with the Coalition’s cuts to education and health in the May 2014 budget, when Tony Abbott was prime minister and Dutton was health minister.

Taylor rejected the new tax cuts by saying workers deserved more help to lift their living standards, amid speculation the Coalition would consider a tax plan of its own.

“It will be a budget for the next five weeks, not for the next five years,” said shadow treasurer Angus Taylor.Credit: Dominic Lorrimer

“The Coalition will not support these tax changes that do nothing to address the collapse in living standards under Labor,” Taylor said.

“Seventy cents a day, in a year’s time, is not going to help address the financial stress Australian families are currently under.”

Matt Golding

The federal budget also offers a sweeping change to workplace law to make it easier for people to leave employers by cracking down on “non-compete” clauses, a move that takes on big business and sets up a challenge for the Coalition on whether it backs the change.

Prime Minister Anthony Albanese is expected to call the election within days to take Australians to the polls on May 3 or May 10, but the budget departs from previous election-year documents in funding only $2.5 billion in spending decisions taken but not yet announced – a measure of policies kept secret until the formal election campaign.

The Labor budget agenda is now largely revealed for Albanese and Chalmers to use the campaign to hammer the message to voters about the assistance with the cost of living, in a calculation that it will take weeks to communicate the benefits to the electorate.

Prime Minister Anthony Albanese is expected to call the election shortly after the budget.Credit: Alex Ellinghausen

Albanese has repeatedly likened his election strategy to “kicking with the wind in the final quarter” and has described Dutton as being too slow to run onto the field with major policies.

While the new tax cuts are relatively small, the government sought to amplify the impact by adding the latest changes to the revamp of the stage 3 tax cuts early last year – claiming the total benefit would be worth $2190 from July 2027 for an average worker.

Australians will have to wait until July 2026 for the “top-up tax cut” to take effect, however, and the boost will not be enough to return all the impact of “bracket creep”.

“They are modest in isolation but meaningful in combination,” Chalmers said of the total tax cuts.

A worker on $100,000 a year, for instance, is receiving a tax cut worth $2179 this financial year from the stage 3 tax cuts, but this would rise to $2447 in the year from July 2026 after the “top-up” tax cut begins. It would rise again to $2715 from July 2027.

The tax cut works by reducing the 16 per cent tax rate, which applies to salaries between $18,000 and $45,000, to 15 per cent from July 2026. It then cuts the rate to 14 per cent from July 2027.

This means workers earning up to $45,000 receive some of the $536 benefit in the second year and all subsequent years, but the full benefit goes to every worker over that threshold, no matter how high their taxable income.

Of the $7.4 billion annual cost of the “top-up” tax cuts once they are applied in full, $4.7 billion goes to the workers earning between $45,000 and $135,000 – the key target for both major parties at the election.

While Chalmers acclaimed the dividends from Labor’s economic management in his speech to parliament, the budget papers confirm a fall into deficits after two years of surplus and a deepening in Commonwealth debt, which will reach $1.2 trillion by June 2029.

Interest payments on the debt will rise from $23.9 billion this year to $41.7 billion in the 2029 financial year, surpassing the annual funding Canberra gives the states and territories to run their hospitals.

The forecasts for 2027-28, for instance, have deteriorated from a deficit of $24.3 billion in the budget one year ago to a deficit of $31.7 billion in the update last December. The deficit in that year is tipped to be $37.2 billion, including the $7.4 billion cost of the “top-up” tax cuts.

Independent economist Chris Richardson said he was worried about the absence of tough decisions to manage spending.“Of course, they’re going to give money to middle Australia just ahead of an election, but it’s not necessarily the smart play,” Richardson said.

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