Key Takeaways
- Angus Taylor’s proposal to index personal‑income‑tax brackets to inflation would eliminate “bracket creep” but carries a substantial budgetary cost.
- Independent analysis using the Parliamentary Budget Office’s SMART model estimates the policy would cost $35.3 billion over the first four years (2028‑29 to 2031‑32) and $44.5 billion annually by 2035‑36.
- The Coalition’s previously cited figure of $22.5 billion stems from a simplified “build‑your‑own‑budget” tool that incorrectly delays the tax‑cut effect by one financial year.
- To fund the plan without worsening the budget bottom line, the Coalition would need to identify significant spending cuts—a detail Taylor has not yet specified.
- Labor and Treasurer Jim Chalmers have criticised the plan as an uncosted, unfunded policy that would increase deficits and debt.
- If implemented, the policy would permanently return to taxpayers the amount of inflation‑driven tax increases, replacing the ad‑hoc tax‑cut practice used by successive governments.
Overview of Angus Taylor’s Tax‑Bracket Indexation Plan
Angus Taylor, the opposition leader, unveiled a policy aimed at ending “bracket creep,” the phenomenon whereby inflation pushes taxpayers into higher tax brackets without a real increase in income. By indexing tax brackets to inflation, the plan would automatically adjust the thresholds each year, preventing taxpayers from paying more simply because prices have risen. Taylor framed the measure as a way to return money that Labor’s current policies are allegedly taking from Australians through unnoticed tax increases.
Cost Estimates from the Parliamentary Budget Office
The Parliamentary Budget Office (PBO) provides two modelling tools for estimating the fiscal impact of tax changes. The simpler “build‑your‑own‑budget” tool, which the Coalition has been using, yields a four‑year cost of $22.5 billion. However, the more sophisticated SMART model—designed specifically for income‑tax policies and incorporating detailed behavioural assumptions—produces a markedly higher estimate of $35.3 billion for the same period. The SMART model also projects an annual cost that rises to $44.5 billion by 2035‑36, amounting to roughly $167 billion over the first eight years of the policy.
Why the Two Estimates Differ
The discrepancy between the two figures largely stems from timing assumptions. The build‑your‑own‑budget tool effectively delays the tax‑cut benefit by one financial year, assuming taxpayers only receive the adjustment when they file their returns after the year ends. This mirrors how a one‑off tax offset (like the $250 wage offset announced in the budget) works, but it does not reflect the usual pay‑as‑you‑go system where changes to tax thresholds affect take‑home pay throughout the year. When the SMART model corrects for this lag, the cost rises sharply because the budget feels the full impact of the indexed brackets from the start of each fiscal year.
Implications for Budget Savings
Because the policy would increase the budget’s outlay by tens of billions of dollars, the Coalition would need to offset the cost with spending reductions or other revenue measures to avoid worsening the underlying cash balance. Taylor claimed he had already identified “significant savings” from waste, but he did not specify whether those savings would fully cover the $35.3 billion four‑year gap or the larger annual costs projected for later years. Without concrete offsetting measures, the policy could leave the Coalition with a worse budget position than Labor’s current stance—a scenario the party says it is determined to avoid after earlier missteps in 2025 election costings.
Projected Annual Costs Over Time
Applying the SMART model’s assumptions (including a medium‑term inflation rate of 2.5 percent), the policy’s cost to the budget grows each year:
- 2028‑29: $3.0 billion
- 2029‑30: $6.4 billion
- 2030‑31: $10.1 billion
- 2031‑32: $15.8 billion
- 2032‑33: $22.0 billion
- 2033‑34: $28.9 billion
- 2034‑35: $36.4 billion
- 2035‑36: $44.5 billion
These figures represent the additional expenditure the federal budget would incur if the indexed brackets were implemented without any offsetting savings. Over eight years, the cumulative cost reaches $167.1 billion.
Political Framing and Labor’s Response
Taylor presented the plan as a defensive move against Labor’s alleged “sneaky” tax increases, arguing that allowing bracket creep to run unchecked effectively raises taxes by over $20 billion over four years. He claimed the Coalition would “give that back” by preventing those increases. In contrast, Treasurer Jim Chalmers dismissed the proposal as an “uncosted, unfunded shambles,” warning it would lead to higher deficits, more debt, greater inflation, and increased political division. Chalmers criticized Taylor for refusing to disclose what specific spending cuts would be required to pay for the policy.
The Role of Ad‑Hoc Tax Cuts and Inflation Guarantees
Historically, Australian governments have mitigated bracket creep through occasional, election‑timed income‑tax cuts. This ad‑hoc approach has kept the average tax burden relatively stable over the past four decades, despite fluctuations. Taylor’s proposal would institutionalise this mitigation by guaranteeing an automatic, inflation‑linked tax cut each year, effectively turning a periodic discretionary measure into a permanent feature of the tax system. The policy’s success hinges on accurate inflation forecasts and the political will to find corresponding budget savings.
Uncertainties and Next Steps
Several uncertainties remain. The Coalition has not yet detailed how it intends to finance the policy, nor has it clarified whether the tax‑cut adjustment would be delivered via pay‑as‑you‑go throughout the year or deferred to tax‑return time—a distinction that could alter the cost estimate. Additionally, the PBO emphasizes that neither of its tools replaces a formal costing process, which could be requested by parliamentarians for a more precise assessment. Until these questions are resolved, the debate over the fiscal viability of indexing tax brackets to inflation will continue to shape the broader tax‑policy discourse in Australia.