Average tax rates are on track to reach a record 28.6 per cent by 2036–37, according to the Parliamentary Budget Office, which says the rise will be "mostly driven by bracket creep". That compares with 24.9 per cent in 2026–27.

The warning, in the PBO's 2026–27 Medium-Term Budget Outlook released on 14 July, has become a flashpoint in Canberra. It is fuelling Coalition calls to index tax brackets and raising questions about how long legislated tax cuts can offset the drift.

What the PBO actually found

The PBO's medium-term outlook looks beyond the four-year Budget forward estimates, out to 2036–37.

On that basis, the PBO projects average tax rates reaching "a historical high of 28.6% by 2036-37". That is a rise of 3.7 percentage points in a decade, meaning the average taxpayer would hand over a noticeably larger slice of each dollar earned.

The PBO also projects personal income tax rising from 47.9 per cent of total revenue in 2026–27 to 53.8 per cent in 2036–37.

In other words, the Budget would lean even more heavily on workers' pay packets over the coming decade.

The PBO also flagged a fiscal catch. If future governments keep handing back bracket creep through tax cuts, as past governments have done, without other offsetting policy changes, a return to surplus becomes unlikely.

These are projections, not forecasts of what will happen. They depend on assumptions about wages, inflation and policy that may change.

How bracket creep works

Bracket creep happens because Australia's personal income tax thresholds are fixed in dollar terms, while wages generally rise each year. As income grows, more of it is taxed at higher marginal rates, and the share of total income paid in tax edges up, even without a real increase in living standards.

Here is a hypothetical example using the 2026–27 resident rates, excluding the Medicare levy.

A worker earning $90,000 pays $4,020 plus 30 cents for each dollar over $45,000, or $17,520 in tax. That is an average rate of about 19.5 per cent.

If that worker receives a 3 per cent pay rise to $92,700 and the brackets do not move, tax rises to $18,330. The pay rise was 3 per cent, but the tax bill grew by about 4.6 per cent, lifting the average rate to about 19.8 per cent.

If instead every threshold and base amount had also risen by 3 per cent, the tax bill would have grown by exactly 3 per cent, in line with income, and the average rate would have stayed the same. That is the basic idea behind indexation.

Repeat that over a decade and the effect compounds, which is what the PBO projection captures across the whole taxpayer base.

The cuts already in law and their limits

The Government points to cuts that are already legislated. The rate on income between $18,201 and $45,000 fell from 16 per cent to 15 per cent on 1 July 2026 and is scheduled to fall to 14 per cent from 1 July 2027, according to the ATO.

Each one-point cut is worth up to $268 a year for anyone earning above $45,000. In the example above, the 2027–28 cut to 14 per cent would reduce that worker's tax from $18,330 to $18,062, roughly offsetting one year of creep on these assumptions.

The Working Australians Tax Offset of up to $250 a year applies from the 2027–28 income year, and a standard deduction of up to $1,000 for work-related expenses starts in 2026–27. Both were legislated in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

Treasurer Jim Chalmers has argued the reforms rebalance the system. In a 21 September speech, he said they reduce workers' share of the personal income tax burden by 2 percentage points.

However, the new measures are mostly fixed-dollar amounts. Unless they are increased, their real value also erodes over time as prices and wages rise.

The Coalition's indexation pitch

Opposition Leader Angus Taylor used his 14 May Budget reply to unveil what the Coalition calls a "Tax Back Guarantee". It would index tax brackets to inflation, with the two lowest brackets indexed from 2028–29 and the top two from 2031–32.

The Coalition says the plan would cost $22.5 billion over its first four years. It says a typical taxpayer would gain about $250 in the first year, rising to about $1,000 a year by the fourth year. It has said offsetting savings will be named before the 2028 election.

That is an opposition policy, not a bill, and the costing has been questioned.

In a Senate debate on 15 September, Liberal National Senator James McGrath, citing PBO analysis, claimed Australians had paid "$65.3 billion more" in income tax over four years because of bracket creep. Those figures are his characterisation of PBO work.

What it could mean for households

For individual taxpayers, the PBO projection is an average. The effect of bracket creep varies with income, pay growth and which bracket someone sits in.

Middle-income earners in the 30 per cent bracket, which runs from $45,001 to $135,000, may notice the gradual rise most as pay increases push more income away from the lower bands. Anyone near a threshold may also see knock-on effects for HELP repayments or the Medicare levy surcharge, which use their own indexed thresholds.

How a household is affected will depend on individual circumstances, and a registered tax agent or adviser may help model the impact.

What to watch next

The next step down in the lowest rate, to 14 per cent, is legislated for 1 July 2027, and the Working Australians Tax Offset begins in the same income year.

The Coalition has promised to name offsets for its indexation plan before the 2028 election, and further PBO costing could shape that debate.

The PBO's next medium-term outlook, together with the next Budget, will show whether the 28.6 per cent projection moves. Any new tax cuts would lower it, but the PBO's analysis suggests that could come at a fiscal cost.