Key Highlights

  • Removing bracket creep changes a projected 1% of GDP surplus into a 0.7% deficit.
  • The difference is 1.7 percentage points of GDP by decade's end.
  • No. It compares projections under different assumptions about Revenue and economic conditions.
  • Moving tax thresholds with Inflation reduces the extra revenue generated by frozen brackets.

One number from the Parliamentary Budget Office is shaping the argument over whether Australia should index its tax brackets. Without bracket creep, the PBO estimates, the budget would be in Deficit of 0.7% of GDP by the end of the decade, rather than the official projection of a 1% surplus. The figure, shows how heavily future budgets rely on workers drifting into higher tax brackets.

The PBO estimate in plain terms

Bracket creep is the extra tax collected when wages rise but tax thresholds stay put. Over time, more income is taxed at higher marginal rates, even if a worker is no better off after inflation.

The PBO estimated that removing bracket creep would turn the officially projected 1% of GDP surplus into a 0.7% of GDP deficit by decade's end. That is a swing of 1.7 percentage points of GDP.

The estimate does not mean the budget is certain to reach a 1% surplus, and it should not be read as a forecast of where the budget will land. It compares the official projection with a scenario in which bracket creep is stripped out, and both depend on assumptions about wages, prices and spending.

The PBO figure is expressed as a share of the economy, which can make it hard to picture. A simple illustration helps.

Hypothetical example: suppose nominal GDP at the end of the decade were $3 trillion. A 1% surplus would be $30 billion. A 0.7% deficit would be $21 billion. The difference between the two is $51 billion in a single year.

That $3 trillion figure is an assumption chosen for illustration only, not a forecast. The point is the scale: on these assumptions, bracket creep would be worth tens of billions of dollars a year to the budget by the late 2020s or early 2030s.

Who pays the bracket creep

New analysis by the e61 Institute and economist Richard Holden shows the burden is uneven.

Over 10 years, the average tax rate for a $45,000 earner rises from 11% to 16%. A $75,000 earner goes from 20% to 22%, and a $100,000 earner from 23% to 25%. At $190,000 the rate goes from 29% to 34%, and at $300,000 from 36% to 39%.

The $45,000 and $190,000 groups would have "more than half" of their real income growth taxed away. Most other taxpayers face a rise of at least two percentage points.

"The tax increase falls unevenly across the income distribution," e61 chief executive Michael Brennan said.

Those two income points sit just below the thresholds where marginal rates step up, to 30% above $45,000 and to 45% above $190,000. Workers crossing those lines feel the change most, because each extra dollar of pay is taxed at a much higher rate than the dollars below it. For someone moving past $45,000, the marginal rate doubles from 15% to 30%.

Labor's approach: legislated cuts, not indexation

Treasurer Jim Chalmers has favoured handing back bracket creep through periodic tax cuts that can be targeted, rather than locking in automatic indexation.

The lowest rate fell from 16% to 15% on 1 July 2026 and is legislated to fall to 14% from 1 July 2027, applying to income between $18,201 and $45,000. That is enacted law.

A $1,000 standard work-related deduction is also enacted from 2026–27, with draft ATO guidance in LCR 2026/D5. A non-refundable $250 Working Australians Tax Offset is legislated from 2027–28.

The government's argument is that targeted cuts can direct relief to lower and middle earners while keeping some revenue in reserve. The counter-argument is that each cut is eventually eroded unless thresholds move with wages, and that the revenue gained in the meantime is a tax rise nobody voted for.

The Coalition's plan and how it would be funded

The Coalition has proposed indexing tax brackets, phased in from 2028. It is a policy proposal and not law.

For the first three years, the plan would be partly funded by scrapping Labor's $250 offset for wage earners.

The PBO estimate shows why the funding question is central. If bracket creep is worth a swing of 1.7% of GDP by decade's end, fully removing it would need either higher revenue elsewhere, lower spending, or acceptance of a weaker budget position than currently projected. Phasing in indexation would spread that cost over time. Neither side has published detailed costings showing exactly how much of the PBO's 1.7-point swing its own approach would give back, which makes direct comparisons difficult.

How much of the projected surplus indexation would consume depends on design. Indexing to inflation rather than wages, indexing only some thresholds, or phasing it in gradually would each produce a different budget cost from the PBO's full scenario.

Why the number matters beyond politics

Budget projections that rely on bracket creep are, in effect, assuming workers pay a growing share of their income in tax. If future governments keep cutting taxes to offset it, as has happened repeatedly, the projected surplus may never fully arrive.

That makes the official 1% surplus projection sensitive to political choices as well as economic conditions. Financial markets, ratings agencies and economists generally watch the medium-term outlook for that reason, because it signals how much room a government has to respond to future shocks without borrowing more.

For households, the practical effect is that tax relief arrives in steps rather than automatically. Between cuts, a worker receiving pay rises in line with inflation will usually see their average tax rate rise.

What to watch

The Senate Economics Committee is due to report on 13 November 2026 on Labor's trust and housing tax bills, which are part of the government's wider revenue plans.

The Victorian state election on 28 November will also test how tax messages land with voters, although bracket creep is a federal issue.

The Mid-Year Economic and Fiscal Outlook in December 2026 will update the medium-term projections that the PBO estimate is measured against.

The 14% rate begins on 1 July 2027, and the $250 offset applies from 2027–28. The Coalition's indexation would start in 2028 only if legislated.