Key Highlights

  • The RBA's November forecasts have wage growth at 3.4%.
  • Inflation is forecast at 3.7% in the year to June 2027.
  • Real pay is forecast to fall this year.
  • Bracket creep shrinks what is left of each pay rise under 2026–27 tax rates.

On the Reserve Bank's latest numbers, wages are expected to fall behind prices again. Its November Statement on Monetary Policy, released with Tuesday's rate rise to 4.85%, forecasts wage growth of 3.4% in the year to June 2027, against consumer price Inflation of 3.7%. That means real wages are forecast to go backwards this financial year. The tax system then takes a larger share of each pay rise.

What the RBA forecasts

The RBA's November forecast table shows the following, all in year-ended terms:

  • Wage Price index growth of 3.4% to December 2026 and 3.4% to June 2027.
  • Headline CPI inflation of 4.5% to December 2026, easing to 3.7% to June 2027.
  • Trimmed mean inflation of 3.6% to December 2026 and 3.5% to June 2027.
  • Unemployment rising from 4.4% in June 2026 to 4.7% by December 2026 and 4.8% by June 2027.

On those forecasts, the gap is widest in the near term. If prices rise 4.5% over 2026 while wages rise 3.4%, real wages fall by about 1 percentage point over the calendar year. The gap narrows to about 0.3 points over the financial year to June 2027.

The RBA expects the position to improve later. By December 2027 it forecasts CPI inflation of 2.7% and wage growth of 3.2%, which would mean real wage growth resumes.

Why prices are running ahead

The Board's statement pointed to energy prices. "Global oil Supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation," it said. Higher fuel costs are flowing through to other goods and services.

The Statement on Monetary Policy also said that higher-than-assumed oil prices "will weigh on real household incomes". The RBA forecasts real household Disposable Income growth slowing to about 1% over the year to December 2026.

Bullock was blunt about the reason for Tuesday's decision. "Inflation is too high, and our forecasts suggest it will stay higher for longer," she told reporters.

Higher interest rates add to the pressure on household budgets. In an analysis on Tuesday, Economics Writer Jessica Irvine noted that the forecasts point to Mortgage repayments reaching their highest share of income since the late 2000s. Canstar estimates the average owner-occupier variable rate will rise to 6.74%.

The labour market is no longer pushing wages up quickly. Governor Michele Bullock said the three Board members who voted to hold rates were concerned partly by the lack of any sign of accelerating wages.

How bracket creep works

Income tax thresholds in Australia are fixed in dollar terms and are not indexed to inflation or wages. When pay rises, more of each additional dollar is taxed at the taxpayer's top marginal rate, and the average tax rate rises.

This happens even when a pay rise only keeps pace with prices. When real wages are falling, it adds to the squeeze: the pay rise is smaller than inflation before tax, and the tax system takes a larger share of it.

The 2026–27 resident tax rates, which reflect the enacted cut in the lowest rate from 16% to 15% from 1 July 2026, are:

  • $0 to $18,200: nil
  • $18,201 to $45,000: 15%
  • $45,001 to $135,000: 30%
  • $135,001 to $190,000: 37%
  • Above $190,000: 45%

A Medicare levy of 2% generally applies on top. The lowest rate is legislated to fall again to 14% from 1 July 2027.

Hypothetical example: a 3.4% pay rise in a 3.7% world

Hypothetical example: Sam earns $90,000 in 2026–27 and gets a 3.4% pay rise, in line with the RBA's wage forecast. His new salary is $93,060. For simplicity, the example ignores deductions (including the $1,000 instant work-related deduction) and tax offsets, and assumes the new salary applies for a full year.

Tax on $90,000 under the 2026–27 rates:

  • 15% of $26,800 (the band from $18,200 to $45,000) = $4,020
  • 30% of $45,000 (from $45,000 to $90,000) = $13,500
  • Income tax = $17,520, plus a Medicare levy of $1,800
  • Take-home pay = $70,680

Tax on $93,060:

  • $4,020 in the 15% band
  • 30% of $48,060 = $14,418
  • Income tax = $18,438, plus a Medicare levy of $1,861.20
  • Take-home pay = $72,760.80

Sam's gross pay rose $3,060, or 3.4%. His Take-home pay rose $2,080.80, or about 2.9%, because 32 cents of each extra dollar went in income tax and Medicare levy. His average income tax rate rose from about 19.5% to about 19.8%.

To keep up with 3.7% inflation, his take-home pay would need to reach about $73,295. On these assumptions, he falls about $534 short.

The low income tax offset phases out completely at $66,667, so it does not apply at either salary.

The effect is stronger further up the scale. Hypothetically, on a $150,000 salary, a 3.4% rise adds $5,100 of gross pay, all of it taxed at 37% plus the 2% Medicare levy. Take-home pay would rise by $3,111, from $110,430 to $113,541, or about 2.8%.

The indexation debate

The Coalition has called for bracket indexation. Labor has instead legislated periodic tax cuts, including the two-step cut in the lowest rate.

The difference is one of timing and control. Periodic cuts hand back bracket creep after it has built up, and the government chooses who benefits. Indexation would stop it accumulating automatically, but would take away a source of Revenue growth that governments currently rely on.

Treasurer Jim Chalmers said after Tuesday's decision that cost-of-living relief is being delivered "through the tax system, the health system" and through higher wages. Neither side has put forward a new tax change in response to the RBA forecasts.

What to watch

  • MYEFO in December: updated Treasury forecasts for wages, inflation and income tax receipts, which bracket creep tends to lift. No exact date has been published.
  • Wage Price Index releases from the ABS: whether actual wage growth tracks the RBA's 3.4% forecast.
  • Monthly CPI data: whether headline inflation approaches the 4.5% forecast for December 2026.
  • 1 July 2027: the lowest tax rate is legislated to fall from 15% to 14%.
  • The RBA's next Statement on Monetary Policy, due in February 2027, for a revised real wage outlook.