Young working Australians facing a decade of tax pain

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Young and working Australians will spend the next decade bearing the brunt of higher taxes to pay for essential services and repair the budget bottom line, with the Albanese government facing politically charged choices between tax relief and deep cuts to spending.

A report released on Thursday by the independent Parliamentary Budget Office on the expected state of the budget out to 2035–36 argues that while the nation’s finances are currently sustainable, younger Australians will be the hardest hit by record levels of personal taxation.

Treasurer Jim Chalmers is under pressure to find solutions to budget problems stretching on for the next decade.

Treasurer Jim Chalmers is due to release the final numbers for the 2024-25 budget by the end of the month. He is expected to confirm the budget deficit for the last financial year to be in single digits rather than the $27.6 billion forecast in March.

Chalmers revealed two tax cuts for all workers in the March budget. The cuts start from the middle of next year.

The budget office said even with those tax cuts, and the government’s revamped stage 3 cuts that hit pay packets in 2024, the nation’s average personal income tax rate will climb from less than 25 per cent this year to more than 27 per cent by 2035-36.

Personal income tax is forecast to account for 47.7 per cent of total government revenue this financial year. By the middle of next decade, without any change, the government will depend on working people for 53 per cent of its revenue.

Over this period, the budget will gradually make its way back to balance, largely due to a 90 per cent increase in personal income tax collections, which are on track to reach almost $682 billion.

Bracket creep – the process by which people pay a larger proportion of income in tax as their wage rises – will repair the budget, with the burden falling increasingly on younger people.

“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,” it found.

The budget office noted that older Australians are more likely to derive income from low-taxed savings, investments and superannuation. Younger and working-age people rely much more heavily on wages, which are facing higher tax rates.

“This shift to increasing the burden on the tax mix to income derived mainly from labour poses equity challenges in the context of Australia’s ageing population,” it found.

One of the reasons for the growing reliance on personal income tax is a drop in revenue from a series of excises.

The budget office noted tobacco excise had been written down by $20.8 billion between 2024-25 and 2028-29, while excises on fuel (down $1.6 billion) and alcohol (down $3.6 billion) had also been downgraded.

It said the drop in tobacco excise was partly driven by big increases in excise rates, which appear to have “resulted in an increase in consumers switching to illicit tobacco”.

As a share of GDP, total government spending is expected to be relatively stable at around 27 per cent. This is a step-up from the pre-COVID level of around 25 per cent.

The budget office said spending on the NDIS, defence and interest are expected to grow faster than the economy, offset by programs where spending is expected to fall or grow more slowly.

The interest cost on debt is expected to be the fastest-growing expense facing the government over the next decade, rising by 124 per cent from $38.7 billion to $86.7 billion.

NDIS spending is forecast to grow by 114 per cent to $106.7 billion, with the age pension expected to rise by 62 per cent to $105.2 billion.

Defence spending is expected to grow by 78 per cent to almost $100 billion.

The budget office noted that defence, interest and policies to deal with climate change will continue to put pressure on overall spending.

It said future governments had to look at spending and tax policies to ensure they supported productivity growth.

“The design of spending programs will need to be done in a way so as to avoid the kind of rapid growth seen in the NDIS. On the other side of the ledger, revenue will need to be raised with an awareness of its impact on productivity and growth,” it said.

The office notes that its numbers assume falls in the cost of the public service and a reduction in spending on grant programs.

It warns that if spending in these two areas grows in line with history, expenses may be 1.5 per cent more of GDP by 2028-29 and up to 3 per cent higher by the middle of next decade.

“If this is the case, budget deficits and higher levels of government debt will continue through the medium term and beyond, with large policy adjustments required to restore fiscal sustainability,” it said.