Get this: it’s the magic of bracket creep – the effect of inflation in steadily increasing your income tax bill even though you’re no better off – that sustains the whole happy illusion that government spending can keep growing without any announced increases in the rates of income tax.
The pollies never have to announce an increase because inflation – even at a low rate – does the increasing without being asked, or much noticed. Bracket creep is the tax increase you have when the politicians have sworn not to increase tax rates.
What few of the people complaining about the cost of living realise is how much of the pain they’re suffering comes from bracket creep. They see prices rising at the supermarket, they see the Reserve Bank increasing interest rates, but they don’t see the taxman quietly increasing the income tax they pay.
Remember Anthony Albanese and Treasurer Jim Chalmers’ incessant boasting about the two financial years in which the annual budget deficit suddenly turned into two surpluses in a row? Much of that turnaround was caused by bracket creep – a point they didn’t think to mention.
Peter Dutton when he was minister for defence in 2021.Credit: ADF
Note, too, that it’s bracket creep which allows governments to announce modest tax cuts before elections, or promise them after elections. Bracket creep quietly but continuously pushes up the average rate of tax on all our income, allowing politicians to look like they’re cutting tax by occasionally giving back some of the bracket-creep proceeds.
But let’s get back to what Dutton did last week. It was yet another effect on this election campaign coming from Cyclone Donald. Trump has not just increase tariffs, he’s pressuring America’s former allies to greatly increase their spending on defence so they’re not as reliant on America’s own defence spending.
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It’s true that we’ve gone for decades spending less than we might have, hoping that the way we’ve slavishly sent troops to just about everywhere in the world the Americans have picked a fight will ensure that, should we ever face a threat from some foreign power, the Yanks will fly to the defence of their loyal Aussie buddies.
This hope has always been dubious, but now Trump has turned on America’s defence allies it has become impossible to believe. So, although just a third of poll respondents think we should increase our defence spending, that’s pretty sure to be what happens.
At present, we’re spending about $56 billion a year on defence, equivalent to 2 per cent of our national income (aka gross domestic product). Labor’s existing plan is for this to rise to $100 billion a year by 2034, or 2.3 per cent of GDP. But the Americans say we should be spending 3 per cent. So last week Dutton promised to raise it to 2.5 per cent by 2030, on the way to 3 per cent by 2035.
Dutton says getting to 2.5 per cent would involve additional spending of a cumulative $21 billion. How would he pay for this? Simple, he says. He’d repeal Labor’s promised tax cut of about $5 a week, rising to $10 a week the following year, which it has already legislated. This would save $17 billion over the next four years, and about $7 billion a year thereafter.
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What? Did you get that? Here’s a politician – a Liberal politician, no less – standing up in an election campaign and promising to increase taxes. By the standards of modern elections, that’s brave. Something Albanese would never dare to do. And that’s not all. If our politicians are serious about greatly increasing our spending on defence on the way to 3 per cent of GDP – and they seem to be – we’re talking really big bucks, not something we could just put on tick.
Speaking of which, we’re already looking at budget deficits totalling $150 billion over the coming four financial years. Do you really think we won’t be paying a lot more tax in coming years?
We’ll be seeing a lot more bracket creep, and far fewer seeming tax cuts.
Ross Gittins is the economics editor.
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