Yes, we need tax reform, but it offers no easy answers

When we’re reminded that income tax cuts represent merely the partial return of the proceeds of earlier bracket creep, and that the process of clawing back the latest tax cut starts the same day it arrives, it’s easy to join the impassioned cry for tax reform. Sorry, it ain’t that simple.

Surely if we could end the crazy business of bracket creep, we’d pay less tax? Well, yes – but no.

Bracket creep occurs because our income tax scales ignore the reality of inflation. When our wages rise to take account of inflation, we’re no better off in real terms, but we’re often pushed into a higher tax bracket, which raises the average rate of tax we pay on the whole of our income. (If we’re not literally pushed into a higher bracket, our average tax rate still goes up because a higher proportion of our income is now taxed at a higher rate.)

So we’ve long known how to (largely) end bracket creep: do what the Americans do and increase all the bracket limits once a year, in line with the annual increase in the inflation rate. Then, it would only be rises in your real income that pushed up your average tax rate, which is fair enough.

Mission accomplished. Now we’ll all be paying less tax.

Except that the net profit the taxman makes after all the to-ing and fro-ing on bracket creep isn’t just kept in a jam jar somewhere. It’s used to help cover the ever-growing cost of all the services the government gives us, and thus to limit the size of budget deficits and government debt.

So, without the benefit of bracket creep, governments would be forced to keep making explicit increases in the rates of income tax, or to announce new taxes.

Wouldn’t that be an improvement? In principle, yes. In practice, our (politician-fed) aversion to paying higher taxes would just make politics an even bigger shoot-fight than it already is. The pollies would spend more time abusing each other and less time getting on with fixing our problems.

One thing we can be sure of is that it wouldn’t do much to slow the growth in government spending. Why not? Because our demand for more and better government services is insatiable. Because both sides of politics fight every election campaign promising more and better services – and by never showing us the tax price tag on whatever it is they are selling.

How can I be sure tax indexation would do little to slow the growth in government spending? Because that’s what happens in America. They keep running bigger budget deficits and amassing more government debt than the other rich countries (except Japan).

But they get away with it because their economy’s so big, and they’re the centre of the world financial system. A middle-level economy like ours could never pull it off.

So tax indexation isn’t high on my list of desired tax reforms. Bracket creep turns out to be just one of the dirty little tricks by which the politicians who’ve done so much to make our political system almost unworkable keep it staggering along.

It’s easy to agree on the need for tax reform, but its advocates want to reform differing things and have differing motives. “Reform” is a lovely, positive word, but you need to beware of people whose idea of reform is: I pay less, you pay more.

All the alleged reform advocated by the (big) Business Council, for instance, takes that form. They want a lower rate of company tax and a lower top rate of personal income tax – all paid for by a higher goods and services tax.

Spruikers for the highly paid make a big fuss about the government’s heavy reliance on income tax – which they exaggerate – and always claim discourages them from working and investing.

But economic theory doesn’t support these claims, and the empirical evidence – which would be more persuasive – doesn’t either. The people whose behaviour is influenced by the rate of tax on additional earnings are “secondary earners”, who have more ability to increase or decrease the hours they work because they have part-time jobs. But the nation’s executives don’t worry much about them.

No, the tax reform I think we need is higher tax on capital gains, less concessional tax on the superannuation of people such as me, a decent tax on highly profitable mining companies and, probably, a tax on big inheritances.

But don’t hold your breath waiting for that to happen.

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Despite what we're led to believe, tax cuts are no free lunch

Isn’t it wonderful that the Albanese government – like all its predecessors – has been willing to spend so many of our taxpayers’ dollars on advertising intended to ensure no adult in the land hasn’t been reminded, repeatedly, about the income tax cuts that took effect on Monday, first day of the new financial year?

But believe me, if you rely only on advertising to tell you what the government’s up to with the taxes you pay – or anything else, for that matter – you won’t be terribly well-informed. The sad truth is there’s a lot of illusion in the impressions the pollies want to leave us with when it comes to tax and tax cuts.

For instance, none of those ads mentioned the eternal truth that, when we have income tax scales that aren’t indexed annually to take account of inflation, the taxman gradually claws back any and every tax cut the pollies deign to give us. And this slow clawback process – known somewhat misleadingly as “bracket creep” – begins on the same day the tax cuts begin.

So readers of this august organ are indebted to my eagle-eyed colleague Shane Wright, who asked economists at the Australian National University to estimate how long it would take these tax cuts to be fully clawed back, using plausible assumptions about future increases in prices and wages.

A tax cut reduces the average rate of income tax we pay on the whole of our taxable income. A middle-income earner’s average tax rate will fall from 16.9 cents in every dollar to 15.5¢. The economists calculate it will take only two or three years for inflation to have lifted most taxpayers’ average tax rate back up to where it was last Sunday.

So that’s the terrible truth the pollies rarely mention. But don’t let that make you too cynical about the tax-cut game. Just because this week’s tax cut will have evaporated in a few years’ time doesn’t mean it’s worthless today. Actually, as tax cuts go, this is quite a big one. Someone earning $50,000 a year is getting a cut worth almost $18 a week. At $100,000 a year, it’s worth almost $42 a week. And on $190,000 and above, it’s worth $72 a week.

Is that enough to completely fix your cost-of-living problem? No, of course not. But if you think it’s hardly worth having, please feel free to send your saving my way. I’m not too proud to take another $18 no one wants.

Remember, too, that had Anthony Albanese not broken his promise in January and fiddled with the stage 3 tax cuts he inherited from Scott Morrison, most people’s saving would have been a lot smaller, even non-existent.

Everyone earning less than $150,000 a year got more, while those of us struggling to make ends meet on incomes above that got a lot less. In my case, about half what I’d been led to expect.

But the politicians’ illusions are built on our self-delusions. Our biggest delusion is that government works quite differently to normal commercial life. We know that when you walk into a shop you have to pay for anything you want. If you want the better model, you pay more.

Somehow, however, we delude ourselves that governments work completely differently. That the cost of the services we demand from the government need to bear no relationship to the tax we have to pay.

The politicians actively encourage this delusion in every election campaign by promising us this or that new or better service without any mention that we might have to pay more tax to cover the cost of the improvement.

Any party foolish enough to mention higher taxes gets monstered – first by the other side and then by the voters. No one wants to admit that what we get can never be too far away from what we pay.

For the near-decade of the Liberals’ time in government, they drew many votes by branding Labor as “the party of tax and spend” while claiming they could deliver us the services we want while keeping taxes low.

This was always a delusion. So they squared the circle by using various tricks they hoped we wouldn’t notice, such as underspending on aged care, allowing waiting lists to build up and secretly ending the low- and middle-income tax offset, thus giving many people an invisible tax increase of up to $1500 a year.

But the main trick they relied on was the pollies’ old favourite: bracket creep.

Get it? When we delude ourselves that we can have the free lunch of new and better services without having to pay more tax, they resort to the illusion that income tax isn’t increasing by letting inflation imperceptibly increase our average tax rate.

This is the tax-cut game. As an economist would say, our “revealed preference” is for no explicit tax increases, but for tax to be increased in ways we don’t really notice and for tax cuts to be only temporary.

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Contrary to appearances, the stage 3 tax cuts will leave us worse off

It’s time we stopped kidding ourselves about the looming tax cuts. They’re what you get when neither of the two big parties is game to make real tax reforms, and the best they can do is lumber us with yet another failed attempt to wedge the other side.

If you want real reform, vote for the minor parties, which may be able to use their bargaining power in the Senate to get something sensible put through.

The stage 3 tax cuts always were irresponsible, and still are. They’ve caused interest rates to be raised by more than they needed to be, and they’ll leave us with substandard government services, as well as plunging us back into deficit and debt.

Only an irresponsible (Coalition) government would commit themselves to making a huge tax cut of a specified shape more than six years ahead of an unknowable future, hoping they could trick Labor into making itself an easy political target by opposing them.

Back then, the Libs thought the budget was returning to continuing surpluses. Wrong. They didn’t think there’d be a pandemic. Wrong. They had no idea it would be followed by an inflation surge and a cost-of-living crisis.

Only an irresponsible (Labor) opposition would go along with legislating the tax cuts five years ahead of time, then promise not to change them should it win the 2022 election.

Let’s be clear. Just because Prime Minister Anthony Albanese’s changes made the tax cuts less unfair, that doesn’t make them good policy. And just because many families, hard-pressed by the cost-of-living crisis, will be pleased to have the relief the tax cuts bring, that doesn’t mean the tax cuts are now good policy.

Don’t be misled by the Reserve Bank’s acceptance of Albanese’s claim that his changes would not add to inflation. Any $20 billion-a-year tax cut is a huge stimulus to demand, imparting further upward pressure on prices.

All the Reserve was saying was that diverting a lump of the tax cut from high-income earners to middle and low earners wouldn’t make much difference to the degree of stimulus. Why wasn’t it worried about a $20 billion inflationary stimulus? Because it had known it was coming for years, and had already taken account of it, increasing interest rates sufficiently to counter its future inflationary effect.

Get it? Had there been no huge tax cut in the offing, interest rates would now be lower than they are, and causing less cost-of-living pain.

As the Grattan Institute’s Brendan Coates and Kate Griffiths have reminded us, the big loser from the stage 3 tax cuts – whether the original or the revised version – is the budget.

The budget has done surprisingly well from the return to full employment, the effect of continuing high commodity prices on miners’ payments of company tax and from wage inflation’s effect on bracket creep. So much so that it returned to a healthy surplus last financial year. It may well stay in surplus this financial year.

Great. But next year it’s likely to return to deficit and stay there for the foreseeable future. Why? Because we can’t afford to give ourselves a $20 billion annual tax cut at this time. As if we didn’t have enough debt already, we’ll be borrowing to pay for our tax cut.

In theory, of course, we could pay for it with a $20 billion-a-year cut in government spending. But, as the Coalition was supposed to have learnt in 2014 – when voters reacted badly to its plans for big spending cuts, and it had to drop them post-haste – this is a pipe dream.

No, in truth, what voters are demanding is more spending, not less. The previous government went for years using fair means or foul – robo-debt, finding excuses to suspend people’s dole payments, neglecting aged care, allowing waiting lists to build up – to hold back government spending as part of its delusional claim to be able to reduce taxes.

As Dr Mike Keating, a former top econocrat, has said, we keep forgetting that the purpose of taxation is to pay for the services that our society demands, and which are best financed collectively.

So when we award ourselves a tax cut we can’t afford, the first thing we do is condemn ourselves to continuing unsatisfactory existing services, and few of the additional services we need.

Those additional services include education – from early education to university – healthcare, childcare, aged care, disability care and defence. (Another thing the Libs didn’t foresee in 2018: our desperate need to acquire nuclear subs.)

But don’t hold your breath waiting for any politician from either major party to explain that home truth to the punters. No, much better to keep playing the crazy game where the Libs unceasingly claim to be the party of “lower, simpler and fairer taxes” and Labor says “I’ll see you and raise you”.

Anyone who knows the first thing about tax reform knows that achieving that trifecta is impossible. But if the Liberal lightweights realise how stupid repeating that nonsense makes them seem to the economically literate, they don’t care.

All they know is that the punters lap up that kind of self-delusion. Which, of course, is why Labor never calls them out on their nonsense.

The other thing we do by pressing on with tax cuts we can’t afford is sign up for more deficits and debt. Coates and Griffiths remind us that the high commodity prices the budget is benefitting from surely can’t last forever.

If you exclude this temporary benefit, Grattan estimates that we’re running a “structural” budget deficit of close to 2 per cent of gross domestic product, or about $50 billion a year in today’s dollars.

We’re ignoring it now, but one day we’ll have to at least start covering the extra interest we’ll be paying. How? By increasing taxes. How else? Ideally, we’d introduce new taxes that improved our economic efficiency or the system’s fairness. Far more likely, we’ll just be given back less bracket creep.

It’s the pollies’ bipartite policy of not stopping bracket creep by indexing the income tax scales each year that makes their unceasing talk of lower tax so dishonest and hypocritical. They’ve demonised all new taxes or overt increases in existing taxes, while keeping bracket creep hidden in their back pocket.

Which is not to argue we must eradicate it. Most of the tax reform we’ve had – notably, the introduction of the goods and services tax – has come with the political sweetener of a big, bracket-creep-funded cut in income tax. (Would-be reformers, please note.)

Another name for bracket creep is “automatic stabiliser”. When spending is growing strongly and inflation pressure is building, bracket creep is one of the budget’s main instruments working automatically to help restrain demand by causing people’s after-tax income to rise by a lower percentage than their pre-tax income.

The pollies can’t just let bracket creep roll on for forever. You have to use the occasional tax cut to return some of the proceeds. But July 2024 turned out to be quite the wrong time to do it.

So even if the Reserve starts to cut interest rates towards the end of this year, the tax cuts mean rates will stay higher for longer than they needed to.

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The two big parties have wedged themselves into a corner on tax

Politicians want us to think things like the stage 3 tax cuts are matters of high principle: keeping solemn promises or redirecting tax relief to those who’ve been doing it toughest. But the sad truth is, it’s just as much about the two big parties using tax promises and tax scares to damage the other side and win elections.

The great lament coming from the big end of town is that the latest squabbles just go to show how, between them, the two sides have no interest in achieving the major tax reform the country so desperately needs.

And big business is right. The pollies have no interest in proposing any needed but controversial change that would leave them open to cheap shots from the other side. In consequence, our tax system is deteriorating. It’s neither as fair as it should be, nor as effective in raising the money needed to pay for the ever-growing list of services we demand of government.

But before I elaborate, note this: business people, like many of us, use the word “reform” to mean changing the system in a way that leaves them paying less tax while others pay more. Specifically, they want to increase the goods and services tax so that we can afford to reduce the rate of company tax and the income tax paid by people at the top. When they call for “genuine reform” after Labor has halved the intended tax cuts for top earners, that’s what the bosses are on about.

But don’t forget this: Anthony Albanese has gone for the best part of two years happy to let these greatly unfair tax cuts proceed rather than be condemned as a promise-breaker. Only in the past week or three has he changed his tune.

Why? Because party polling and focus group feedback told him all the cost-of-living pain had finally caught up with him. His popularity had slumped, and he was in danger of losing next year’s election, with the rot starting at a Victorian byelection in a month or so’s time.

But while I’m casting aspersions, I have little doubt that, had Albanese allowed the stage 3 cuts to proceed as already legislated, the first person to point to how badly low- and middle-income earners had been treated would have been Peter Dutton.

These days, tricky politics trumps good policy. And neither side has a monopoly on hypocrisy.

It’s been almost a quarter of a century since our last large-scale, controversial tax reform: John Howard’s introduction of the GST. And that brought him within a whisker of being tossed out. Since then, talk about tax has become the biggest and best political football for the two parties to kick back and forth as they try to gain the advantage in election campaigns.

The Liberals portray themselves as what Dutton called “the party of lower taxes”, while damning Labor as “the party of tax and spend”. Many voters find this easy to believe, and it does have a degree of truth, even though taxes were at their highest as a proportion of gross domestic product in the early noughties under Howard.

The main thing that pushes tax collections up is bracket creep, “the secret tax of inflation”, according to Malcolm Fraser, and collections hit the heights whenever a government, of whatever colour, leaves it too long before giving some of it back in a tax cut.

What’s true is that Labor is more inclined to spend on health and education and all the rest, leaving it under greater pressure to let taxes rise. But, as we saw particularly under Scott Morrison, the Libs are more inclined to underspend on things such as aged care, while allowing waiting lists for non-urgent surgery and at-home aged care packages to build up. You hope the dam doesn’t burst until the others are back in power.

The Libs never propose explicit tax increases before elections but whenever Labor wants to pay for something by cutting back concessions to the better-off, the Libs make a meal of it. When, next time, Labor reacts by promising not to make any tax changes, you give credibility to some groundless rumour that it intends to bring back death duties.

What makes unpopular tax reform even more unlikely is the game of chicken the parties play, which they call “wedging”. I propose some extreme tax change I know the other side won’t like, hoping they’ll oppose it. If they do, I accuse them of being opposed to tax cuts. But they invariably see the trap and refuse to oppose my change. Meaning we often end up with a bad policy going ahead unchallenged.

The original stage 3 was partly intended to swing one for the Liberals’ well-off supporters. But also, to tempt Labor to oppose it, proof positive it was the high-tax party.

But get this: now Labor has broken its promise and made the tax cuts far more politically attractive, the wedge is on the other foot. Should Dutton vote against Labor’s broken promise, he’ll be accused of raising the taxes on “middle Australia”.

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Why all politicians want to use bracket creep to mislead you

Another round of tax cuts; another round of politicians saying tricky things about bracket creep. Whether they’re giving some of it back or letting it rip, our pollies on both sides hope bracket creep remains, as it has long been, their dirty little secret.

The latest is the claim that Anthony Albanese’s changes to the legislated stage 3 tax cuts will, over the next 10 years, cause income tax collections to be $28 billion higher than they would have been.

Anthony Albanese’s tax cut rejig will make them fairer. But we’ll have more bracket creep under Labor than we would had under Scott Morrison.

This figure is from Treasury’s published advice to Treasurer Jim Chalmers. What Treasury hasn’t been honest enough to do, however, is to warn us that its projection is based on a quite unrealistic assumption.

So let me tell you how bracket creep works, in a way the pollies never would.

First, understand that the income tax scale assumes there’s no such thing as inflation. It assumes that every pay rise you get results from a promotion or from moving to a better-paid job.

In which case, it would be fair enough to make you pay a higher proportion of your income in tax. It ignores that most of the pay rises we get merely cover the rise in consumer prices, leaving us no better off in “real” terms.

This would be true even if all of us paid the same flat tax rate of, say, 30 per cent. But it’s even more the case because the tax scale is “progressive”: our income is taxed in slices, with the tax rate on each slice getting progressively higher.

That is, the proportion of our total income paid in tax – our overall average rate of tax – increases as our income increases, for whatever reason.

The justification for having a progressive tax scale is to ensure that those who can afford to cover a higher share of the cost of government pay a lot more than those who can’t. Fair enough.

It’s easy to see how a rise in our income that pushed the last part of that income into a higher tax bracket would increase our average rate of tax. That’s how this phenomenon got the name “bracket creep”.

What’s harder to see is that, though moving to what economists call a higher marginal tax rate is the fastest way to increase your average rate of tax, the mere fact that every pay rise means a greater proportion of your total income is taxed at your (higher) marginal rate will still drag up your average rate. That’s even if you’re not pushed into a higher bracket – say, because you’re already on the top marginal rate.

What all this means is that, for as long as the pollies sit back and do nothing, the presence of any degree of inflation means everyone’s average tax rate keeps rising forever.

The dirty secret is, all pollies like bracket creep because it’s a way of increasing taxes without having to announce it, meaning many people don’t notice.

But obviously, the pollies know they can’t get away with that forever. The standard solution to bracket creep – practised by the US, Canada, Denmark, Sweden and other European countries – is to automatically index all the tax brackets each year, raising them by the rate of inflation.

The Fraser government did this for a couple of years in the 1970s before deciding it wasn’t worth it politically. Because the annual tax cuts it produced were small and automatic, the media and the taxpayers took too little notice of them.

So Malcolm Fraser decided it was smarter politics to delay having tax cuts until you could afford to have a big one. Say, every three years or so. And what about having it before an election – or maybe just after an election?

And, what’s more, why give everyone the same percentage cut in taxes when you could play favourites by cutting tax rates on some slices more that on others?

Why not cut the rates for higher brackets by more than you cut them for lower brackets? This would make the tax scale less progressive, which the better-off would love.

This is the way both sides have played the tax-cut game until then-treasurer Scott Morrison came along in the 2018 budget with his tricky plan to cut tax in three stages over seven years.

Note that having tax cuts only every three years or so means the taxman gets to keep a lot of the proceeds of bracket creep. Your eventual tax cut gives back only some of the extra that bracket creep has taken.

What a tax cut does is lower your average tax rate to somewhere closer to what it was at the time of the previous tax cut. And, of course, the day after your latest tax cut, the bracket-creep machine starts pushing your average tax rate back up again.

Note too, that if, rather than raising each of the tax brackets by the same percentage, the pollies start fiddling with the size of the rates applying to some of the brackets, there’s no guarantee that the bracket creep you lost is related to what you get back.

And the truth is, bracket creep doesn’t hit taxpayers towards the top of the scale proportionately to those towards the bottom. Average tax rates towards the bottom rise more than those at or near the top.

That’s because the brackets are closer together – the tax slices are thinner – near the bottom than they are near the top. And, of course, someone already on the top marginal tax rate can’t ever move to a higher rate.

Got all that? Now we can look at the strange design of the three-stage tax cut treasurer Morrison announced in the budget of May 2018, and at Albanese’s broken promise last week not to change stage 3 of the cuts.

As I’ve written several times, stage 1 – the low- and middle-income tax offset – was terminated, without announcement, in the Morrison government’s last budget before the 2022 election. Labor could have made sure everyone knew this, but chose to stay silent.

The stage 2 tax cuts were small and did little for taxpayers in the bottom half. The stage 3 tax cuts, long planned to start this July, centred on moving to put everyone earning between $45,000 a year and $200,000 a year – about 94 per cent of taxpayers – on a marginal tax rate of 30¢ in the dollar.

This, we were assured, would end bracket creep for good and all. Not true – because, as I’ve explained, there’s more to bracket creep than moving into a higher tax bracket. What is true, however, is that this move would have greatly reduced the extent of bracket creep in future.

Trouble is, moving to this radically less progressive tax scale involved no tax cuts for people at the bottom, and only modest cuts for those in the middle, but massive cuts for people on $180,000 a year and above.

Get it? The bottom half, who have contributed most to the bracket creep now being returned, would get precious little of it back, while the top half would clean up. As we know, Albanese’s rejig will make the tax cuts much less unfair.

However, the drawback is that, in future, we’ll have more bracket creep under Labor’s plan than we would have under Morrison’s. That’s the main reason Treasury projects that, over the next 10 years, the taxman will now collect about $28 billion more than he would have without the latest changes.

Just one problem with this arithmetic. It assumes that future governments could get away with letting bracket creep rip for a whole decade without ever having a tax cut to give some of it back. Yeah, sure.

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Albanese uses tax cuts to ease cost of living pressure - a little

 Having trouble deciding the rights and wrongs of Anthony Albanese’s claim to be changing the stage 3 tax cuts in a way that helps ease cost of living pressure without adding to inflation? The air’s been thick with economists making confusing statements on the topic.

For instance, economists at one bank say any tax cut will add to inflation pressure, but canning the cut would allow the Reserve Bank to lower interest rates by 0.5 per cent. Those at another outfit say Albo’s changes will be inflationary because they involve reducing the tax cuts going to high-income earners (who would have saved more of it) and increasing the tax cuts going to low and middle-income earners (who, being harder up, will spend more of it).

Well, let’s see if I can help you decide what to think of the government’s changes. There are three main ways to decide.

The first is a very popular method: let your preferred party do your thinking for you. If you vote Labor, conclude the change must be a good idea. If you vote Liberal, conclude it must be a terrible betrayal of the nation’s trust.

Second, just as popular method: look yourself up in the government’s “what you save” tax table and see how the change will affect you. If you’ll be better off under Albo’s changes, conclude they’re just what the economy needs. If you’ll be worse off than you would have been under former prime minister Scott Morrison’s original stage 3, conclude it will be an economic disaster.

Third, a rarely used method: try to work out which version would, in all the circumstances, have been best for the nation as a whole, regardless of how you personally would be affected.

Adding to this week’s confusion is that, in principle, Albanese’s goal of reducing cost of living pressures without adding to inflation pressure is a contradiction in terms.

Why? Because increasing the cost of living pressure on households is the very stick the managers of the economy are using to get inflation down. It’s deliberate.

When the economy is growing so strongly that the demand for goods and services is running faster the economy’s ability to supply them, prices keep rising.

So the only quick way economists can think of to stop prices rising so rapidly is to slow demand by throttling people’s ability to keep spending. This makes it harder for businesses to keep whacking up their prices.

This is precisely the reason the Reserve has increased interest rates so greatly: to leave people with mortgages with less money to spend on other things.

The government’s been helping with the squeeze by hanging on to almost all the extra income tax we’ve been paying – including because of bracket creep – and getting the budget into surplus.

A budget surplus means the government is using its taxes to take more spending potential out of the economy than it’s putting back in with its own spending.

Get it? The plan is to fix inflation by making the cost of living squeeze worse, to eventually make it better. Sounds crazy, but it’s true.

Albanese and his Treasurer, Jim Chalmers, know this full well. But so many people are feeling so much pain that they’re threatening to vote against the government, so they had to find a way to ease the pain.

This is a major rejig of the planned tax cuts, to ensure much more of the money goes to low- and middle-income earners – who’ve been hurting most – and much less to the top earners.

But hang on. Treasury expects the budget to return to big deficits in the coming financial year. Why? Because the government long ago legislated for the stage 3 tax cuts, costing a massive $21 billion a year.

Clearly, by easing the cost of living pressure on households, the tax cuts will reduce the downward pressure on prices. So those economists saying the fastest way to get the rate of inflation down would be to abandon the tax cuts are right.

But the cuts have been on the books for so long that this easing of pain coming from the budget has already been taken into account by the Reserve in deciding how much interest rates needed to rise. The tax cuts have also been taken into account in the econocrats’ forecasts of how long it will take to get inflation down.

What hasn’t been accounted for is that so much more of the $21 billion a year will now be going to people far more likely to need to rush out and spend it.

In Treasury’s published advice to the government, it acknowledges that these people have a higher “marginal propensity to consume”, but then asserts that this “will not add to inflationary pressures”.

Sorry, not convinced. What I would accept is that the effect on consumer spending isn’t so big it outweighs the other reasons for Albanese’s changes: the need for greater fairness and to keep a “progressive” income tax scale.

The defenders of the original stage 3 cuts claim that, by putting almost everyone on the same, 30¢-in-the-dollar marginal rate of tax, it would put an end to bracket creep.

Sorry, not true. Despite the name, you don’t literally have to move into a higher bracket to suffer from inflation causing your overall, average rate of tax to creep ever higher over time.

That’s why we can’t just go year after year allowing bracket creep to roll on. That’s why we do need to have a decent tax cut this year.

The original version of stage 3 wouldn’t have ended bracket creep, but would have greatly reduced it. Trouble is, it would have done so in a way that favoured high-income earners at the expense of everyone else. This even though bracket creep hits people lower down harder than those higher up.

On page 8 of its advice to the government, Treasury does a good job of demonstrating that Albanese’s way of returning (some of) the proceeds of bracket creep is much fairer.

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Paying tax is good and, for better government, we should pay more

On Friday, a former top econocrat did something no serving econocrat is allowed to do, and no politician is game to do: he set out the case for us to pay higher, not lower, taxes.

For years, politicians have sought our votes by promising smaller government and lower taxes. This often helped get them elected, but it hasn’t worked as promised.

They’ve reduced the size of government by privatising government-owned businesses and outsourcing the provision of many government-funded services. But though they’re always announcing tax cuts, the hidden tax of bracket creep means there’s been no real reduction in the tax we pay. Great.

The man advocating a radically different approach is Dr Mike Keating. He laid out the case for bigger government and higher taxes in a speech to the Australia Institute’s revenue summit at Parliament House in Canberra.

The pollies seeking election by promising lower taxes take it as obvious that taxation is a bad thing – a “burden” which, like all burdens, needs to be minimised.

But Keating says we should remember the purpose of taxation. It’s to pay for a wide range of services that governments provide to us either directly (education, healthcare, child care, aged care, pensions and payments) or collectively (defence, law and order, roads). Some services we get while we’re young, some when we’re middle-aged, and many when we’re old.

Keating says there’s a wide consensus among Australians about the things we expect the government to do for us. “We recognise that all Australians are entitled to basic levels of education, healthcare, income support and shelter, and that governments have a responsibility to ensure the provision of these essential services,” he says.

Recent Coalition governments promising us lower taxes always added the promise that this could be done without reducing “essential services”.

Keating says there’s now widespread acknowledgement that these services that we pay for collectively are critical to building our community and to our sense of community.

So taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that are consumed collectively. Many of the services paid for by taxation add to our quality of life.

Indeed, he says, history suggests that our demand for these services, such as education and health, tends to rise rapidly as economic growth causes our incomes to grow. They’re what economists call “superior goods”. The better off we get, the more of our income we devote to them.

The problem for governments – which politicians themselves have worsened – is the disconnect in people’s minds between our demand for government services and the taxation needed to pay for them. We refuse to join the dots.

“We want increased access to more and better services on the one hand, and less taxation on the other,” Keating says.

So, let’s stop kidding ourselves. If we want more and better services from government, we’ll have to pay for them with higher taxes, just as when we want more or better in a shop or a restaurant, we know we’ll have to pay more.

But assuming we accept that truth, why do we already want the government to be bigger and better?

One way the previous government sought to square the circle of maintaining “essential services” while cutting taxes – including next July’s stage-three tax cuts – is by underspending on those services and hoping no one would notice.

Keating has thought of no less than seven areas where there’s little doubt that we need to spend more.

First, although the previous government acted on the scandals exposed by the royal commission into aged care, and governments have spent more on childcare, both remain underfunded. What’s more, increases in the availability and quality of care services are likely to lead to higher costs because higher wages will be needed to attract the extra workers.

Second, the Albanese government’s increased spending on “social housing” (what in the olden days was called the housing commission) is widely considered to be much less than needed.

Third, federal government grants for public hospitals will probably have to grow a lot faster than presently expected to reduce excessive waiting times. And the Medicare payments to GPs are still too low, risking shortages of doctors, particularly in the country.

Fourth, federal funding for universities hardly grew in real terms over the nine years of the Coalition government, and actually fell per student. Labor will be pressured to make this up. As for vocational education and training – TAFE – the new National Skills Agreement requires the feds to cough up more.

Fifth, unemployment benefits – this week labelled JobSeeker, maybe something else next week – are very low compared with most other rich economies. And the recent leap in rents means the rent assistance paid to pensioners and others on benefits is now far too mean.

Sixth, it’s clear we’ll need to spend a lot more on the AUKUS nuclear submarines and other defence capabilities. This could increase annual defence spending by at least 1 per cent of gross domestic product over the next decade.

Finally, measures to reduce carbon emissions and to fully develop Australia’s potential as an exporter of renewable energy will almost certainly require greater funding than the government is presently planning.

The Grattan Institute estimates that if present tax arrangements aren’t changed to cover the expected additional growth in government spending, the “structural” (underlying) budget deficit will be close to 3 per cent of GDP in 10 years. Keating thinks it’s more likely to be 4 per cent – or $100 billion a year in today’s dollars.

Continuing deficits of this size would be quite unrealistic, he says. He suggests not another review of the tax system, but a major, authoritative inquiry to assess how much revenue is needed to adequately fund all government services.

When the public has a better understanding of what we’d get for our money, then maybe we’ll be more prepared to accept the need for higher taxes.

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Avoiding a tax-cut backlash will be harder than Albanese thinks

Anthony Albanese, who never impressed me when a warrior of the NSW Labor Left, has impressed me greatly by the way he’s conducted himself since becoming prime minister. He wants to raise the standard of political behaviour. Everyone gets listened to with respect, and every election promise he made not to do this, and not to do that, is honoured, no matter how inconvenient.

Having lumbered himself with those promises, Albo is taking the long view. His first term will be used to win voters’ respect and trust, creating a foundation for him to be more comfortably re-elected, with a program of more controversial reform.

Which brings us to the much-debated stage three tax cuts, designed by his political opponents to favour high-income earners at the expense of low and middle earners, something anathema to a Labor government but already put into law.

Many have been urging Albanese and his Treasurer Jim Chalmers to rescind the tax cuts or at least cut them back. But it now seems clear Albanese has made up his mind that the cut, no matter how deleterious, must go ahead. A clear promise was given, and must be kept. Can you imagine the outcry if it wasn’t? Peter Dutton would never let it rest.

Well, I can imagine it. But if Albanese thinks that keeping the promise will mean no outcry, he’s sadly deluded. Once the punters see how little they’re getting compared with how much the fat cats (including a particularly fat economics journo) are getting – once everyone sees the official “what-you-save tax table” published by every masthead – there’ll be a lot of anger.

And guess who’ll be leading the cry. Do you really think Dutton won’t have the front to turn on his own government’s tax cuts? He was trying it out in his budget reply speech last week: “Labor’s working poor”. How about “the struggling middle class”?

Albanese needs to do two things: get Treasury to give him an advance look at that what-you-save table, and get some pollie with a better memory to remind him how “bracket creep” works and how resentful middle income-earners get when they see more and more of every pay rise disappearing in tax.

Because the income tax scale isn’t indexed for inflation, every pay rise you get increases the average rate of tax you pay on the whole of your income – whether or not it literally lifts you into a higher tax bracket. And because the brackets are closer together at the bottom of the scale, bracket creep hits lower incomes harder than middle incomes. But middle incomes are hit harder than high incomes because those people already in the top tax bracket can’t be pushed any higher.

Bracket creep gets greater as inflation increases. The inflation rate’s been unusually high, which has led to higher pay rises, even if they haven’t been big enough to match the rise in prices. Even so, your latest pay rise is having slightly more tax taken out of it than the previous one. So bracket creep is another, hidden reason you’re having trouble keeping up with the cost of living.

If we never got a tax cut, the average rate of tax we pay on all our income would just keep going up and up forever – unless, of course, we never got another pay rise.

This is why every government knows it must have a tax cut every few years if it wants to stop the natives getting restless. But the stage three tax cut we’re due to get from July next year hasn’t been designed to compensate people at the bottom, the middle and the top proportionately to the degree of bracket creep they’ve suffered since 2017-18, when the staged, three-step tax cuts were announced.

Quite the reverse. According to estimates by Paul Tilley, a former Treasury officer, people earning up to roughly $70,000 a year will get tax cuts too small to fully reverse the rise in their average tax rate over the period.

Those earning between $70,000 and $120,000 a year will have their average tax rate cut back to what it was in 2018, whereas those earning more than that – that is, more than 1.5 times the median full-time wage – will get their average tax rate cut to well below what it was in 2018.

Now let’s look at what you save in dollars per week. Albanese says the tax cuts begin at $45,000 a year. The national minimum full-time wage is $42,250. So, people on very low wages, and many with part-time jobs, will get nothing.

On $55,000, you’ll get a saving of $2.40 a week. On the median full-time wage of about $80,000 you’ll get $16.80 a week – that is, no “real” saving. On $120,000, it’s $36 a week.

Meanwhile, me and my mates (and members of parliament), struggling to get by on $200,000 and above, will get a saving of $175 a week, or $25 a day.

Good luck selling that lot, Albo.

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What we weren't told before the election: taxes to rise, not fall

The rule for Treasury bosses is that, as public servants, any frank and fearless advice they have about the state of the federal budget must be given only to their political masters, and only in private.

But last week the present secretary to the Treasury, Dr Steven Kennedy, used a speech to economists to deliver a particularly frank assessment of the Labor government’s budgetary inheritance.

We can be sure his remarks came as no surprise to his boss, Dr Jim Chalmers, who would have been happy to have his help to disabuse us of any delusions lingering from an election campaign which, as always, was fought in a confected fantasy-land of increased spending on bigger and better government services and lower taxes.

Surprise, surprise, the post-election truth is very different. The budget released just before the campaign began foresaw a budget deficit of a huge $80 billion in the financial year just ending, with only a trivial decline in the coming year and continuing deficits for at least another decade.

Neither side admitted to any problem with this prospect during the campaign, but Kennedy’s first bit of frankness about such a leisurely approach was to observe that “a more prudent course” would be for the budget deficit to be eliminated and turned to a surplus. (By the standards of bureaucratic reticence, this was like saying, “You guys have got to be joking”.)

Eliminating the deficit would mean adding no more to our trillion-dollar debt. Running budget surpluses would actually reduce the debt, thus leaving us less exposed should there be a threatening turn in the economy’s fortunes.

The two obvious ways of improving the budget balance are to cut government spending or to increase taxes. Some people love making speeches about the need to absolutely slash government spending, but they usually mean spending that benefits other people, not themselves.

The sad truth is that “waste and extravagance” is in the eye of the beholder. There’s always some powerful interest group on the receiving end of government spending – medical specialists, say, or the nation’s chemists – and they don’t take kindly to any attempt to slash their incomes.

The last time a serious attempt was made to cut government spending – by Tony Abbott in his first budget, in 2014 – the public outcry was so great that the Coalition beat a hasty retreat, and never tried it again.

Instead, it limited its parsimony to quietly restraining money going to the politically weak – the jobless, the public service, overseas aid – but this didn’t make a huge difference to the more than $600 billion the government spends each year.

Kennedy’s next frank observation was that, even excluding the many billions in spending related to temporarily supporting the economy during the lockdowns, government spending as a proportion of the nation’s income is expected to average 26.4 per cent over the coming decade, compared with 24.8 per cent in the decades before the pandemic.

In other words, government spending is likely to grow much faster than the economy grows, to the tune of about $36 billion a year in today’s dollars.

The new government is undertaking a line-by-line audit of all the Coalition’s “rorts, waste and mismanagement”. But, to be realistic, it’s unlikely to find much more in savings than it needs to cover its own new spending promises.

Kennedy said that most of this additional spending is driven by money going to the National Disability Insurance Scheme (by far the biggest), aged care, defence, health and infrastructure. “Further pressures exist in all these areas,” he said.

To that you can add underfunding by the Coalition in tertiary education and healthcare, plus a massive capability gap over the next 20 years or more which can only be fixed by an immediate increase in spending on defence, diplomacy and foreign aid.

Which leaves us with taxes. Higher taxes. Scott Morrison’s promise to guarantee the delivery of essential services while reducing taxes was delusional – a delusion many of us were happy to swallow.

The simple, obvious truth is that if we want more services without loss of quality, we’ll have to pay higher taxes.

Kennedy warned that the expected (but, in his view, inadequate) improvement in the budget balance over the coming decade will rely largely on higher income tax collections. “Inflation and real wages growth will result in higher average personal tax rates.”

This is a Treasury secretary’s way of saying “the plan is to let bracket creep rip”. And unless other taxes are increased, there’s “little prospect” of giving wage earners any relief via tax cuts.

“This would see average personal tax rates increase towards record levels,” he said, meaning more of the total tax burden would fall on wage earners.

The election saw both sides promising not to introduce new taxes or increase the rates of existing taxes (apart from, in Labor’s case, promising to extract more tax from multinationals).

But neither side made any promise not to let inflation push people into higher tax brackets. One way or another, we’ll be paying higher taxes.

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Aged care crisis a clue we’ll be paying higher, not lower taxes

Do you like paying tax? No, I thought not. With so many other calls on our pockets, it’s easy to tell ourselves we’re already paying enough tax – probably more than enough.

Trouble is, our reluctance to put more into government coffers doesn’t stop us demanding the government spends more on additional and better services.

This presents a problem for politicians on both sides. They solve it by ensuring that, particularly in election campaigns, they tell us what we want to hear, not the unvarnished truth.

They’re often promising a tax cut sometime after the election, but also telling us their plans to spend more on this and more on that. What they don’t mention is what might have to happen after the election to ensure the tax cuts and spending increases don’t add too much to government debt.

But we’ve become so distrusting of our politicians that, in more recent years, they spend less time telling us how wonderful their own policies are and more time telling us how terrible the other side’s policies would be. Fear works better than persuasion.

Scott Morrison won the last federal election partly by claiming the Liberals are the party of lower taxes, whereas Labor is the party of “tax and spend”. It worked so well he’s bound to say it in this year’s election campaign.

So, it’s worth examining the truth of the claim. It strikes a chord because it fits voters’ stereotypical view that the party of the bosses must surely be better at running the economy and managing the government’s budget than the party of the workers.

But just because it fits our preconceived notions doesn’t make it true. It’s true that Labor’s record shows it to be a party that spends more on public services, and so has to tax more. What’s not true is that the Liberals are very different.

The record simply doesn’t support their claim to be the lower taxing party. If you look at total federal tax collections as a proportion of national income (gross domestic product) – thus allowing for both inflation and population growth – over the past 30 years, taxes have been highest under the Howard government and the present government.

Most of this has happened without explicit increases in taxes and despite governments usually having tax cuts to wave in our faces as proof of their commitment to lower taxes.

So, what’s the trick? An old one that all of us know about but few of us notice: bracket creep. It works away behind the scenes slowly but steadily increasing the proportion of our incomes paid in income tax. This usually ends up increasing tax collections by more than governments ever give back in highly publicised tax cuts.

Now, however, the aged care sector’s inability to cope with the additional pressures from the pandemic – where they’re so desperate for workers they even want help from the Army’s clodhoppers – offers a big clue about the tax we’ll be paying in the coming three years: more not less.

Ever since the public rejected Tony Abbott’s plans for sweeping spending cuts in 2014, the government has been trying to keep a lid on government spending in areas where there wouldn’t be much pushback.

By this means the Libs have had remarkable success in limiting the growth in government spending overall but, as the Parliamentary Budget Office has warned, they’re holding back a dam of spending. They can’t keep it up forever.

Eventually, problems and pressures from the public get so great, the government has to relent and start catching up. You can see that in this week’s election-related decision to reverse some of the cuts in grants to the ABC.

But a more significant area where the government’s been trying to limit the money flow is aged care.

It’s clear the sector’s problems getting everyone vaccinated and coping with COVID-caused staff shortages have just piled on top of all its existing problems.

The longstanding attempt to limit costs by moving the sector to for-profit providers has failed, with businesses making room for their profit margin by cutting quality. The aged care workforce is understaffed, underqualified, underpaid and overworked.

Most jobs are part-time and casual; staff turnover is high. When a work-value case before the Fair Work Commission is decided, hourly wage rates may be a lot higher.

After the royal commission’s shocking revelations, the government had no choice but to ease the purse strings, spending an additional $17 billion in last year’s budget. But it’s already clear a lot more will need to be spent to get the care of our parents and grandparents up to acceptable standards.

Turn to the national disability insurance scheme and its problems, and it’s clear we’ll end up having to spend a lot more here, too.

And that’s before you get to the failure of the job network – “employment services” – and the chaotic understaffing of Centrelink.

We have a lot of repressed government spending to catch up with. Don’t let any pollie tell you they’ll be putting taxes down.

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We won’t be paying back government debt, but we WILL be paying

If you’re one of the many who worry about how we’ll pay off the massive debt the Morrison government has incurred during the pandemic, the Parliamentary Budget Office has reassuring news.

The budget office – which is responsible to the whole Parliament and so is independent of the elected government – has prepared its own projections of the budget deficit and debt over the decade to 2032.

It’s also assessed our “fiscal sustainability” over the 40 years to 2061, testing the budget against 27 different best, worst and middle scenarios with differing assumptions about economic growth, the level of interest rates on government debt and the size of our budget deficit or surplus.

It finds that the federal government’s debt is projected to keep growing until it reaches a peak equivalent to about 50 per cent of gross domestic product in 2029. After that it’s projected to keep growing in dollar terms, but at a slower rate than the economy is growing, so that it slowly declines relative to the size of the economy, to reach 28 per cent of GDP in 2061 in the middle scenario.

We don’t pay off any debt unless we get the budget back into annual surplus. But this happens only in the best-case scenario, where the debt is completely repaid by 2058. Don’t hold your breath.

So the budget office’s reassuring news is not that we’ll be able to repay the debt – it’s unlikely we will – but that it accepts Scott Morrison’s assurances we don’t have to repay it to keep out of trouble. That, unless our leaders go crazy, we can outgrow the debt and that the interest bill isn’t likely to become a significant burden on taxpayers even though the debt remains unpaid.

These are not controversial propositions among economists. If you find them hard to believe then – forgive me – but you don’t understand public finances as well as you should. It’s a mistake to think that a national government of 25 million people has to live by the same rules as your household.

Households must pay off their debts before they’re too old to work, but governments go on forever and always have most of their population working and paying taxes. Their populations keep growing and getting a bit richer every year, so they can keep rolling over their debts.

They can do what no household can do: pay their bills not by working but by imposing taxes on other households. So stop thinking governments have to pay off their debts the way you and I do.

And stop thinking our kids will be lumbered with massive government debts; they won’t be. Indeed, it won’t be government debt our kids and grandkids will hold against us, it’s our generation’s failure to act early enough to stop global warming.

But that’s not to say government debt doesn’t matter or that it comes without a price tag. In its projections over the next decade and its scenarios over the next 40 years, the budget office assumes that the “shocks” causing ups and downs in the economy in the future will be no worse than those we’ve experienced over the past 30 years or so. Maybe; maybe not. As well, it assumes that present and future governments will be no more reckless spenders than governments have been over past decades.

It judges that our deficit and debt position will be sustainable over the next 40 years – will cause no need for “major remedial policy action” (no horror budgets) – “provided fiscal strategy is prudent”. We can continue to run budget deficits provided they’re “modest”.

We’ll need “a measured pace of fiscal consolidation”. Translation: if governments stop trying to keep deficits low, all bets are off. So governments will need to avoid wasteful spending. And they’ll need to ensure tax collections are sufficient to cover most of any growth in government spending.

It’s here I think the budget office’s projections of an ever-diminishing budget deficit out to 2032 are hard to believe. They’re based on assumptions that government spending grows no faster than the economy grows, but tax collections grow a lot faster than the economy.

How? By letting bracket creep rip. The tax cuts we’ve been promised for 2024 will be limited to high-income earners, and will be the last we see for the decade.

That’s not hard to believe. What’s hard is believing governments can keep the lid on government spending for another decade. We know we’ll be spending hugely more on nuclear subs and other defence equipment, on aged care and on the National Disability Insurance Scheme.

So how is government spending supposed to grow only modestly? Because spending on social welfare – age pension, family tax benefits, disability support pension, JobSeeker and sole parent payment – will fall as a share of GDP.

Get it? The only way we’ll keep on top of our debt and deficit is by driving the disadvantaged further into poverty. If we’re not that heartless, we’ll be paying a lot more tax – whatever we’re promised at the election.

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Key reform needed to fix debt and deficit: ditch stage 3 tax cut

Scott Morrison and Josh Frydenberg won’t admit it. But most economists agree that at the right time, the government should take measures to hasten the budget’s return to balance, even – to use a newly unspeakable word – “surplus”.

Economists may differ on what they consider to be the right time. But, if we’re to avoid repeating the error the major economies made in 2010 by jamming on the fiscal (budgetary) policy brakes well before the recovery was strong enough for the economy to take the contraction in its stride, the right time will be when the economy has returned to full employment, with no spare production capacity.

At that point, the inflation rate’s likely to be back within the Reserve Bank’s 2 to 3 per cent target range, with wage growth of 3 per cent or more. Any further fiscal stimulus from a continuing budget deficit would risk pushing inflation above the target, and could induce a “monetary policy reaction function” where the independent Reserve countered that risk by raising interest rates.

So, better for the government to act before the Reserve acts for it. And if you take the econocrats’ best guess at the level of full employment – when unemployment is down to between 5 and 4.5 per cent – and take the budget’s forecasts at face value (itself a risky thing to do) the right time will be in the middle of 2023.

But the growth in wages and prices has been so weak for so long, that I wouldn’t be acting until it was certain wage and price inflation was taking off.

Even so, since its own forecasts say that point will come towards the end of the next term of government, Morrison and Frydenberg should be readying to give us a clear idea of the steps they’ll take to cut government spending or increase taxes when it becomes necessary.

And, in an ideal world, they would. But, thanks to the bad behaviour of both sides of politics, our world is far from ideal. Former Labor leader Bill Shorten is only the latest to be reminded of the awful, anti-democratic truth that parties which telegraph their punches expose themselves to dishonest scare campaigns.

But that’s just the most obvious reason Morrison and Frydenberg will avoid any discussion of the nasty moves that will be necessary to make the “stance” of fiscal policy less expansionary and, when needed, mildly restrictive, thus slowing the government’s accumulation of debt in the process.

The less obvious reason is that no pollie wants to talk about the policy instrument that’s played a leading part in all previous successful attempts at “fiscal consolidation” and will be needed this time.

It’s what Malcolm Fraser dubbed “the secret tax of inflation”, but the punters call “bracket creep” and economists call “fiscal drag”.

Because our income-tax scales tax income in slices, at progressively higher rates – ranging from zero to 45c in the dollar – but the brackets for the slices are fixed in dollar terms, any and every increase in wages (or other income) increases the proportion of income that’s taxed at the individual’s highest “marginal” tax rate, thus increasing the average rate of tax paid on the whole of their income.

A person’s average tax rate will rise faster if the increase in their income takes them up into a higher-taxed bracket but, because what really matters in increasing their overall average tax rate is the higher proportion of their total income taxed at their highest marginal tax rate, it’s not true that people who aren’t pushed into a higher tax bracket don’t suffer from what we misleadingly label “bracket creep”.

I give you this technical explanation to make two points highly relevant to the prospects of getting the budget deficit down. Both concern the third stage of the government’s tax cuts, already legislated to take effect from July 2024, at a cost of $17 billion a year.

Although this tax cut is, in the words of former Treasury econocrat John Hawkins and others, “extraordinarily highly skewed towards high income earners”, Frydenberg justifies it with the claim that, because it would put everyone earning between $45,000 and $200,000 a year on the same 30 per cent marginal tax rate, it would end bracket creep for 90 per cent of taxpayers.

First, this claim is simply untrue. For Frydenberg to keep repeating it shows he either doesn’t understand how the misnamed bracket creep works, or he’s happy to mislead all those voters who don’t.

What’s true is that the stage three tax cut would greatly diminish the extent to which a given percentage rise in wages leads to a greater percentage increase in income-tax collections, thereby sabotaging the progressive tax system’s effectiveness as the budget’s main “automatic stabiliser”. Its ability to act as a “drag” on private-sector demand when it’s in danger of growing too strongly.

In an ideal world, income-tax brackets would be indexed to consumer prices annually, thus requiring all tax increases to be announced and legislated. But in the real world of cowardly and deceptive politicians – and self-deluding voters – the stage three tax cut is bad policy on three counts.

One, it’s unfair to all taxpayers except the relative handful earning more than $180,000 a year (like me). Two, the biggest tax savings go to the people most likely to save rather than spend them. Three, by knackering the single most important device used to achieve fiscal consolidation, it’d be an act of macro management vandalism.

Think of it: by repealing stage three you improve the budget balance by $17 billion in 1024-25 and all subsequent years. Better than that, you leave intact the only device that works automatically to improve the budget balance year in and year out until you decide to override it.

Without the pollies’ little helper, fiscal consolidation depends on a government that’s still smarting from its voter-repudiated attempt in the 2014 budget, having another go at making big cuts in government spending, and a government that seeks to differentiate itself as the party of low taxes now deciding to put them up.

Good luck with that.

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Election hype about strong growth now back to grim reality

The grim news this week is that the weakening in the economy continued for the third quarter in row, with economic activity needing to be propped up by government spending.

The Australian Bureau of Statistics’ “national accounts” showed real gross domestic product – the nation’s production of market goods and services – grew by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter and now 0.4 per cent in the March quarter of this year, cutting the annual rate of growth down to 1.8 per cent.

That compares with official estimates of our “potential” or possible growth rate of 2.75 per cent a year. It laughs at Treasurer Josh Frydenberg’s claim in the April budget – and Scott Morrison’s claim in the election campaign - to have returned the economy to “strong growth”, which will roll on for a decade without missing a beat.

It suggests Frydenberg’s boast of having achieved budget surpluses in the coming four financial years – and Labor’s boast that its surpluses would be bigger – are little more than wishful thinking, manufactured by a politicised Treasury.

The future may turn out to be golden but, even if it does, the econocrats have no way of knowing that in advance – they’re just guessing - and the road between now and then looks pretty rocky.

Why is the immediate outlook for the economy so weak and uncertain? Not primarily because of any great threat from abroad – though a flare-up in Donald Trump’s trade war with China could certainly make things worse – but primarily because of one big and well-known problem inside our economy: five years of weak growth in wages.

When you examine the national accounts, that’s what you find. Over the nine months to March, the income Australia’s households received from wages grew by 3.5 per cent, before adjusting for inflation.

That wasn’t because of strong growth in wage rates, but because more people had jobs. Weakness in other forms of household income meant that total household income grew by just 2.4 per cent.

But households’ payments of income tax grew by 4.5 per cent, thanks mainly to bracket creep. This helped cut the growth in household disposable income to 2 per cent. Even so, households’ spending on consumer goods and services grew by 2.2 per cent – meaning they had to reduce their rate of saving.

Actually, the last big fall in households’ rate of saving occurred in the September quarter. Since then, households have tightened their belts, cutting the growth in their consumer spending so as to raise their rate of saving from 2.5 per cent of their disposable income to 2.8 per cent.

Reverting to “real” (inflation-adjusted) figures, this explains why consumer spending has grown by only about 0.3 per cent a quarter since June, reducing its growth over the year to March to an anaemic 1.8 per cent.

The bureau noted that the weakness in consumer spending was greatest in discretionary spending categories, including on recreation, cafes and restaurants, and clothing and footwear – a further sign that households are feeling the pinch.

Since consumer spending accounts for almost 60 per cent of GDP, that’s all the explanation you need as to why the economy’s now so weak. But there are other factors contributing.

One is the end of the housing boom. Home-building’s contribution to growth peaked in the September quarter, with building activity falling by 2.9 per cent and 2.5 per cent in the following two quarters. It will keep falling for some time yet.

And business investment is also weak. While non-mining investment grew by 2 per cent in the quarter, mining investment fell a further 1.8 per cent. Overall, business investment was up 0.6 per cent in the quarter, but down 1.3 per cent over the year to March.

External demand is helping, however. With the volume of exports growing, while the volume of imports was “flat to down” - another sign of weak domestic demand - “net exports” (exports minus imports) are contributing to growth.

Even so, total private sector demand (spending) has actually fallen for the second quarter in a row. So, apart from the contribution from net exports, any growth is coming from public sector demand.

It grew by 0.7 per cent in the quarter to be 5.5 per cent higher over the year. This reflects the rollout of the National Disability Insurance Scheme and state spending on infrastructure. It means government spending contributed half the growth in GDP during the quarter and more than 70 per cent of total GDP growth over the year to March.

Note, it’s not a bad thing for government spending to be contributing to growth. That’s exactly what it should be doing when private demand is weak. No, the concern is not that public spending is strong, it’s that private spending is so weak.

Dividing GDP by the population shows that GDP per person fell fractionally for another quarter, and grew by a mere 0.1 per cent over the year to March.

This tells us not that the economy is on the edge of recession – how could GDP contract when a growing population is making it ever bigger? – but that, as Jo Masters of Ernst & Young has said, “growth is being driven by population growth alone, and not increased participation or productivity”.

The economy’s getting bigger, but it’s not leaving us any better off.

Speaking of productivity, the productivity of labour deteriorated by 0.5 per cent in the March quarter and by 1 per cent over the year.

Is this a terrible thing? Well, before you slit your wrists, remember that when employment is growing a lot faster than the growth in the economy would lead you to expect, a fall in GDP per worker (or, in this case, per hour worked) is just what the laws of arithmetic would lead you to expect.

Surprisingly strong growth in employment – most of it full-time – doesn’t sound like a bad thing to me. It’s just hard to see how it can last much longer.

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How canny treasurers keep the tax we pay out of sight

We can be sure that tax and tax “reform” will be a big topic (yet again) this year, but what will get less attention is how behavioural economics explains the shape of the existing tax system and makes it hard to change.

I read that this year we may attain the economists’ Holy Grail of replacing state conveyancing duty with a broad-based annual tax on the unimproved value of land under people’s principal residence.

Economists regard taxing homes whenever they change hands as highly economically inefficient because it discourages people from moving when they need to move, whereas taxing the ownership of land as highly efficient because it’s hard to avoid and is naturally “progressive”, hitting the rich harder than the poor.

Holy grails are, however, wondrous things, but almost impossible to attain. Economists have been preaching the virtues of such a switch for at least the past 30 years, with precious few converts (bar, in recent times, the ACT government).

Why have state politicians been so unreceptive to such a patently good idea? Because politicians instinctively understand what most conventional economists don’t: the wisdom of Louis XIV’s finance minister’s declaration that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

Or, to put it another way, because conventional economists don’t know enough behavioural economics – the study of how the world actually works thanks to human fallibility, rather than how it would work if we were all as rational as economic textbooks assume us to be.

A central element of the political economy of taxation is that what the punters don’t notice they don’t worry about.

And to every revenue-hungry state treasurer (which is all of ’em), the great virtue of conveyancing duty is that when you’re buying a place for $1 million and someone presents you with a tax bill for $40,000, it looks a relatively small amount and the least of your worries right now.

By contrast, when you open your mail one day and find the government demanding to be paid, say, $5000, you tend to get resentful. Because we’ve spent all our lives in a market economy, we’re used to the notion that, if you want something, you have to pay for it.

And with the converse: you don’t shell out good money without getting something you want in return. Annual land tax breaches that rule: you write a cheque for five grand and just post it off into the void. (This was also part of the reason the old “provisional tax” was so unpopular.)

Behavioural economists demonstrate empirically what politically astute treasurers know instinctively: you greatly reduce the hissing if you can whip the tax away without it being seen. This is why, when introducing the goods and services tax, Peter Costello wrote into the act the requirement that retail prices be quoted inclusive of the tax, without the tax being shown separately.

Of course, for wage earners, personal income tax has worked that way for decades. The pay office extracts an estimate of the tax you’ll have to pay and sends it to the taxman before you even see your pay.

After a while, you pretty much forget you’re paying tax on much of what you buy and are being paid much less than you’re earning. Which also demonstrates the wisdom of a saying familiar to treasurers: a new tax is a bad tax; an old tax is a good tax.

We object loudly to almost all proposals for new taxes – land tax on the family home, a road congestion tax and many more. We spent 25 years working up the courage to impose a value-added tax on “almost everything we buy” (during which time we copied the Kiwis’ crafty idea of renaming it the more innocuous “goods and services tax”).

But here’s the trick: once the new tax has been passed and taken effect, it takes only a year or two for us to accept it as part of the furniture. Behavioural economists call this quirk of human nature “status-quo bias”.

And, of course, just about the oldest tax of all is what Malcolm Fraser used to call “the secret tax of inflation” aka bracket creep.

It’s the tax increase you have when you don’t like tax increases.

Our “revealed preference” (not what we say, but what we do) is that bracket creep's our favourite tax.

Which is why treasurers of both colours give us so much of it.

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Morrison optimistic we’ll get much bracket creep

The mystery revealed. Consider this: how does the Morrison government cut income and company taxes and avoid big cuts in government spending, but still project ever-rising budget surpluses and ever-falling net public debt over the next decade?

With publication of the Parliamentary Budget Office’s report on the May budget’s medium-term projections, we now know. Short answer: by assuming loads more bracket creep between now and then.

You may remember that, at the time of budget, I was highly critical of the rosy forecasts and assumptions used in the budget’s “forward estimates” from 2018-19 to 2021-22, and then in its “medium-term projections” out for a further seven years to 2028-29.

They showed the budget’s underlying cash balance returning to a tiny surplus in 2019-20, then the surplus growing steadily to about 1.3 per cent of gross domestic product by the end of the decade.

As a consequence, the government’s net debt would peak in June this year at 18.6 per cent of GDP, then fall sharply to just 3 per cent in 2028-29 as the annual surpluses were used to repay debt.

There you go. Big cuts in company tax and a plan for three cuts in income tax, but we’ll soon be back in the black and eliminating the debt. I thought then it sounded too good to be true.

The budget office, which is independent of the government, is required by its Act to accept the government’s forecasts and macro-economy assumptions for its projections. But the budget papers gave no details of how, according to the government’s projections, the budget surplus would grow from 0.8 per cent of GDP in 2021-22 to 1.3 per cent in 2028-29.

This is what the office’s report tells us. It does so using its own modelling of each of the main taxes and 23 big spending programs, while sticking to the government’s macro-economy assumptions.

The report’s projections show total receipts ending the seven years where they began, at 25.5 per cent of GDP, while total spending grows more slowly than GDP so that it falls from 24.7 per cent to 24.1 per cent.

This implies that all the projected improvement in the budget surplus is expected to come from many years of amazingly disciplined spending restraint. But such a conclusion misses an obvious question: how can total receipts stay growing as fast as the economy is projected to grow when the government is planning to cut the rate of company tax by a sixth (from 30 to 25 per cent) and have three cuts in income tax?

Ah, that’s the report’s big reveal. Its projections show company tax collections declining as a proportion of GDP and “other receipts” also declining, but with this being exactly offset by the growth in income tax collections.

And that would be made possible by the fiscal magic of bracket creep. Remember bracket creep? It was the justification for the tax cuts and, according to then-treasurer Scott Morrison, the tax cuts would “eliminate bracket creep for the middle class”.

Or not. Turns out, according to the report’s projections, there’ll be so much continuing bracket creep as to more than wipe out the benefit from the promised tax cuts.

Taken over the full 10 years – and remembering that the first of the tax cuts began in July this year - income tax collections are projected to rise from 11.2 per cent to 12.5 per cent as a proportion of GDP, a huge jump of 1.3 percentage points.

Over the same decade, the average tax rate across all taxpayers is projected to rise from 22.9¢ in every dollar to 25.2¢. But here’s another important revelation by the report: some people do much better from the tax cuts than others, while bracket creep doesn’t affect everyone equally, either.

The report ranks everyone paying income tax according to their income, then divides them into five groups of about 2.9 million each - “quintiles” – from lowest to highest. It then looks at the way the average tax rate in each quintile is affected by the tax cut and by bracket creep. It looks at the change from 2017-18 to 2026-27.

On average, the three-stage tax plan will cut the average tax rate paid by people in the bottom quintile by just 0.3¢ in the dollar. Those in the second and third quintiles will save 0.9¢, while those in the fourth quintile save 1.1¢ and those in the top quintile save 2.1¢ in every dollar.

(This, BTW, is the proof that the three-stage tax plan does change the progressive income tax scale in a regressive direction, making it significantly less progressive.)

Now, the effect of bracket creep (before allowing for the tax cuts). It raises the bottom quintile’s average tax rate by 1.1¢ in the dollar, then the second and third’s by 5.4¢, but the fourth’s by 3.7¢ and the top quintile’s by just 2.9¢ in the dollar.

Leaving aside the bottom quintile (where most people rely on benefits and earn little income), the big net losers - bracket creep less tax cut – are those in the second and third quintiles. That is, those earning between 30 percentage points below the median income and 10 points above it.

Another name for such people is “low to middle income-earners” – the very people Morrison claimed his cuts were aimed at helping most.

But before you get too steamed up, remember that the budget office is merely exposing the previously hidden implications of the government’s medium-term projection and the rosy assumptions it depends on.

The key assumptions are “above-trend economic growth for much of the period” – which contains a hidden assumption that our record of 27 years without a severe recession will roll on for another 10 – and, in particular, “a return to trend wage growth”.

That is, it will take only a few years before wages are back to growing by 3.5 per cent a year – a percentage point faster than prices – and will stay growing that fast for the duration.

It’s this strong wage growth that does most to produce the bracket creep. So, if you’re not as optimistic about wages grow, you don’t need to be as concerned about bracket creep. By the same token, however, we wouldn’t be making as much progress reducing public debt.

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Budget office fills vacuum left by politicised Treasury

I see the federal Auditor-General has been less than complimentary about the Turnbull government’s cashless welfare card. The cheek! I say the man should be removed and replaced by a Liberal Party staffer forthwith.

Always provided the staffer has done at least a year or two of accounting at uni, of course. Wouldn’t do for voters to gain the impression his chief qualifications were his years of loyal service as a ministerial flunky.

If this ironic scenario seems over the top, it’s not way over. If the present Auditor-General actually had incurred the government’s serious displeasure, it would be more likely to wait until his statutory term had expired before replacing him with someone less likely to provide it – and us – with critical advice.

You don’t have to be very long in the workforce to realise that one of the hallmarks of a bad manager is his (or occasionally her) penchant for surrounding themselves with yes-men. See that happening and you know you’re in the presence of a disaster waiting to happen.

But installing a tame auditor-general wouldn’t be a big step beyond the flouting of convention and good governance we’ve seen the government engaged in over the past two weeks.

Following Tony Abbott’s unprecedented dismissal of the secretary to the Treasury in 2013, and his replacement with hand-picked candidate John Fraser, Malcolm Turnbull and Scott Morrison have now completed the politicisation of Treasury.

What an accomplishment for Malcolm to include when he boasts in his memoirs about the glorious achievements of his reign.

With the sudden resignation of Fraser, he was replaced by Philip Gaetjens, whose service as chief-of-staff to Peter Costello and then Morrison himself was interspersed with his time as secretary of the NSW Treasury, appointed by the O’Farrell government after it sacked the apolitical secretary it inherited from the Keneally government, Michael Schur.

The timing of Fraser’s departure was portrayed as all his own inconvenient idea, which may well be true. But, with the federal election so close, it reminds me of a trick practised by the self-perpetuating boards of the mutual insurance companies of old.

Any director not wishing to serve another term would resign just a few months before his term expired. This would allow the board to select his successor, and that successor’s name to go onto the ballot paper with an asterisk beside it, certifying to the voting punters that he was a tried-and-true incumbent.

Morrison then topped off this innovation in Jobs for the Boys by installing Simon Atkinson, a former chief-of-staff to Finance Minister Mathias Cormann, as a deputy secretary in Treasury.

Worse, Atkinson got the job to replace Michael Brennan, who’s been moved up to be the new chairman of the Productivity Commission, which has had a long and proud tradition of independence, giving fearless advice to governments of both colours.

We’ll see how long that lasts. Morrison tacitly admitted Brennan’s appointment was questionable by using his press release to make Brennan sound like a career public servant, conspicuously failing to mention he’d been a staffer for two Howard government ministers and a Liberal Victorian treasurer, not to mention a candidate for Liberal state preselection.

My greatest fear is that the next Labor federal government will use this bad precedent to behave the same way, thus making the politicisation of government departments and supposedly independent agencies bipartisan policy. What a great step forward that would be.

Fortunately, as trust in the professional integrity of Treasury forecasts and assessments declines, the vacuum is being filled by the rise of the Parliamentary Budget Office, which has the same expertise as Treasury, Finance and the spending departments, but is independent of the elected government.

Just last week it produced a most revealing report on the sustainability of federal taxes, one Treasury would have had trouble getting published even in the good old days.

Its message is that there are structural vulnerabilities limiting the future revenue-raising potential of most federal taxes, with the main exception being income tax and that eternal standby of dissembling politicians on both sides, the supposed evil they only pretend to disapprove of: bracket creep.

This is the last thing either side would want us thinking about before the election.

After all, thanks to the budget’s chronically overoptimistic forecasts and what-could-possibly-go-wrong 10-year projections of endless budget surpluses and ever-falling public debt, they can afford to turn the coming election into a tax-cut bidding war.

Vote for me and I’ll cut taxes more than the other guy.

The budget office has punctured that happy fantasy. After the election, whomever we vote for will have to find a way to cover not just the cost of ever-growing but untouchable spending on health, education and all the rest, but also the tax system’s built-in inadequacies.

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Bracket creep lives to fight another day

An Australian newspaper’s headline on the morning after the budget was SCOMO STOPS THE CREEP. The nation’s most ponderous political pundit intoned that the Treasurer would “eliminate bracket creep for the middle class”.

The man himself claimed his tax-cut plan “ran a sword through bracket creep”.

Sorry, yet another of Scott Morrison’s attempts to mislead us in a most misleading budget. He’s exploiting the public’s hazy understanding of what bracket creep is and how it works.

If you’re not paid to be treasurer, you can be forgiven for imagining that bracket creep occurs when pay rises or other increases in your income push you into a higher income tax bracket, causing you to pay more tax.

At present, the middle, 32.5¢-in-the-dollar bracket starts at incomes of $37,000 a year and runs to $87,000. Morrison plans to raise this upper bracket limit to $90,000 in July this year, then to $120,000 in July 2022, then $200,000 in July 2024.

At the moment, about 53 per cent of taxpayers have the last part of their income falling in that 32.5¢ bracket. But by the time he’s finished, he expects almost three-quarters of people to be in it.

Get it? Someone on $87,000 could see their income rise by 130 per cent before they were pushed into a higher tax bracket.

This is the basis for ScoMo’s claim to be pretty much killing off bracket creep. But it’s not as true as he wants you to believe.

Why not? Because chapter two of the The Idiot Politician’s Guide to Income Tax  explains that you can suffer from bracket creep even if you don’t get pushed into a higher bracket. If that wasn’t true, people on the top, 45¢-in-the-dollar tax rate wouldn’t suffer from bracket creep – and I assure you we do.

How can it happen? It happens because everyone’s income is taxed in slices, and the rate of tax on each slice gets progressively (note that word) higher.

At present, the tax rates start at zero for the first $18,200 of annual income, then 19 per cent for the next $18,800, 32.5 per cent for the next $50,000, 37 per cent for the next $93,000 and 45 per cent for everything over that total of $180,000.

By the time ScoMo’s three-step, seven-year plan is intended to be in place in July 2024, however, it will be zero for the first $18,200 of annual income, then 19 per cent for the next $22,800, 32.5 per cent for the next $159,000, and 45 per cent for everything over that total of $200,000.

Ignoring the complication of the low-income tax offset, at that time someone on $41,000 would pay an average rate of tax on the whole of their income of 10.6¢ in the dollar, whereas someone on $200,000 would pay an average tax rate of 28¢ in the dollar.

Guess what? As the incomes of people at the bottom of the new, huge 32.5¢ bracket rose over time, their average rate of tax would rise from 10.6¢ in the dollar towards 28¢. And that would happen without them being pushed into a higher tax bracket. As an economist would say, their marginal tax rate would be unchanged at 32.5¢.

How can this happen? People’s average tax rate rises because, as their income increases, a smaller proportion of it is taxed at less than their marginal tax rate, while a higher proportion is taxed at their (higher) marginal rate.

For someone who, in 2024, is on $41,000 a year, 44 per cent of their total income would be taxed at zero, while 56 per cent would be taxed at $19¢ in the dollar.

By the time that person’s income has increased to $200,000 a year, however, only 9 per cent of their income is tax at zero, and 11 per cent at 19¢ in the dollar, leaving the remaining 80 per cent taxed at 32.5¢ in the dollar.

So the correct way to understand what economists call “fiscal drag” and punters call “bracket creep” is that it happens because people’s average rate of tax increases as their incomes rise.

What is true, however, is that actually moving into a higher (marginal) tax bracket accelerates the rate at which your average tax rate rises.

Bracket creep is an inevitable consequence of our “progressive” income tax. The term progressive means that as your income rises, the proportion of your income paid in tax gets progressively higher.

But what does most to make an income tax scale progressive is an initial zero-rate bracket. Say some crazed treasurer of the future decided to introduce a tax scale with just a single positive tax rate of 32.5 per cent. That would be still be a progressive tax scale provided it had a zero-rate bracket (a “tax-free threshold”) to start with.

Only if the 32.5 per cent tax rate started at an annual income of $1 would such a tax be a true “flat-rate” tax. Economists would say such a tax was neither progressive nor “regressive” (where the proportion of income tax paid declines as incomes rise) but “proportional”.

When you have a progressive tax scale, as every rich country does, the only way to (largely) eliminate bracket creep is to index each of the bracket limits to some measure of price or wage inflation no less frequently than once a year.

Except for a minor change in the 2016 budget, our tax scale has been unchanged since July 2012. Consumer prices have risen by more than 12 per cent since then, and the wage price index by 14 per cent. That’s a fair bit of bracket creep.

So what are Morrison’s plans for raising the bracket limits? The zero bracket would be unchanged, the 19¢ in the dollar limit would rise by 11 per cent, the 32.5¢ limit would rise first by 3 per cent, then a cumulative 38 per cent and then 130 per cent. The top, 45¢ bracket would rise by 11 per cent.

Whatever ScoMo’s objectives are, fixing bracket creep isn’t one of them.

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Tax cuts: lies, damn lies and bracket creep

If Malcolm Turnbull's promised tax cuts ever eventuate, we can be sure they'll be justified in the name of redressing terrible "bracket creep". But there are few aspects of taxation that involve more deception.

Treasury has been overselling the bracket creep story since the arrival of the Abbott government, while the Turnbull government has been exaggerating how much of it there's likely to be, so as to prop up its claim it's still on track to return the budget to surplus in 2020-21.

Every politician with their head screwed on loves bracket creep. When pressed, however, all profess to think it a bad thing. The punters think they disapprove of it, but their "revealed preference", as economists say (what they do rather than what they say), tells us they prefer it to the alternative.

It's only commentators like me who are free to say openly that, in this imperfect world, bracket creep's a jolly good thing and there ought always to be a fair bit of it.

Bracket creep occurs when a taxpayer's income increases by any amount for any reason. That's because we have a progressive income tax scale – one where successive slices of income are taxed at higher rates in the dollar – that's fixed in nominal terms.

Sometimes the creep happens because the increase in income lifts the last part of someone's income into a higher tax bracket, but it occurs even if this isn't the case. That's because the higher proportion of their income that's taxed at their highest ("marginal") tax rate increases the average rate of tax they're paying on the whole of their income.

If politicians really disapproved of bracket creep they could eliminate it by indexing the tax scale's bracket limits on July 1 each year in line with the rate of inflation in the previous financial year.

If you wanted to allow only for the effect of inflation, you'd index the brackets to the consumer price index. If you were a true believer in Smaller Government, who thought it a crime for a person's rising real income to raise their average rate of tax, you'd index it to average weekly earnings.

That no government has indexed the tax scale in this way since Malcolm Fraser's abortive experiment with it in the late 1970s is all the proof you need that, whatever they say, politicians of both colours quite like bracket creep. Same goes for Treasury.

The pollies' preference is to let it rip, but then make big guys of themselves by giving some of it back about once every three years, just before or just after an election. Only during the first half of the resources boom, when their coffers were (temporarily) overflowing, did John Howard and Peter Costello depart from this approach.

I believe in bracket creep because it's always played a vital role in helping to balance the budget. It's part of the implicit contract between governors and the governed, who want ever-growing government spending, but don't like explicit tax increases, particularly new taxes.

Their unspoken message to governments is: you find a way to pay for the spending we want, just don't wave it in front of our faces. Bracket creep is the tried and true way of squaring this circle, with limited objection from taxpayers.

What few people seem to realise at present, however, is that we've had precious little bracket creep for the past four years because inflation has been unusually low, and wages have barely kept up with it.

Limited bracket creep is the greatest single reason the Coalition government has had so little success in returning the budget to surplus. The government's persistent over-estimation of the bracket creep that will come its way is the main reason it has kept failing to reduce the deficit as forecast.

Yet throughout this government's term, official estimates of the huge extent of future bracket creep have been published, seemingly making the case for big tax cuts. The latest, issued last month by the Parliamentary Budget Office, were reported as though they were established (and scandalous) fact.

In truth, they were mere projections, based on this year's budget projections that wage growth will accelerate to 3.75 per cent a year over the next three years – projections that have been pilloried as wildly optimistic.

I'll let you into a secret unknown to the innumerate end of the media: if your big economic problem is exceptionally weak wage growth, one problem you don't need to worry about is excessive bracket creep. Nor is there any urgent case for tax cuts.

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