The Parliamentary Budget Office (PBO) has published a “Budget explainer” on bracket creep and its fiscal impact, noting that the Government faces a trade-off between returning bracket creep to taxpayers and allowing bracket creep to reduce debt faster.
The report notes that Commonwealth net debt is expected to peak at 40.9% of GDP in 2024-25 with the introduction of the Stage 3 tax cuts, before declining 3 percentage points by 2031-32. However, the report concludes that if the Governments were to instead introduce yearly tax cuts so that the average tax rate remained at 2021-22 levels, essentially returning all bracket creep to taxpayers, the decline in net debt from 2024-25 would be negligible.
The Stage 3 tax cuts are projected to add around $197bn to net debt in 2031-32. The impact of the Stage 3 tax cuts is expected to be more than offset by bracket creep by 2031-32. In that year, the tax cuts are estimated to cost just over $30bn, while bracket creep is projected to have added $57bn in additional revenue. In the absence of the Stage 3 tax cuts, the PBO estimates that bracket creep over the next decade would reduce net debt in 2031-32 by $276bn (or 8.1% of GDP). [LTN 189, 30/9/21]
[Tax Month – September 2021] 3.10.21