• Low to middle income earners will shoulder the burden of paying down the budget deficit.
• The Parliamentary Budget Office says personal income tax receipts are projected to increase by 1.3% of GDP over the next decade.
• The average tax rate will rise to 25.2% from 22.9%.

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The federal budget’s return to surplus is mainly being funded by a rise in personal taxes, according to numbers released by the independent Parliamentary Budget Office.

The latest projects show the underlying cash balance moving from a deficit of 1% of GDP in 2017‐18 to a surplus of 0.8% in 2021‐22.

“The main contribution to the projected improvement in the budget position comes from a rise in personal income tax receipts,” says the Parliamentary Budget Office.

Bracket creep is to blame. With increasing wages, a larger proportion of income is taxed in higher income tax brackets resulting in a rise in the average tax rate.

The Parliamentary Budget Office says personal income tax receipts are projected to increase by 1.3% of GDP over the next decade.

The average tax rate will rise to 25.2% from 22.9% even with the cuts to personal income tax from the announced in the May federal budget.

The Personal Income Tax Plan, once fully implemented in July 2024, will extend the 32.5% personal tax bracket to those on incomes up to $200,000 and eliminate the 37% bracket.

The Parliamentary Budget Office says average tax rates will be lower in 2024‐25 than they are in 2017‐18 for all income levels above $37,000.

“Although the impact of bracket creep will be reduced as a result of the Personal Income Tax Plan, taxpayers will continue to experience higher average tax rates as their incomes grow over time,” says the Parliamentary Budget Office.

“Our distributional analysis highlights that the largest increases in average tax rates occur in the low to middle‐income groups.”

The Parliamentary Budget Office says another contributor to the budget position is a projected fall in spending of 0.9% of GDP over the next decade.

The areas where spending will fall include the Family Tax Benefit, pharmaceutical benefits and the Disability Support Pension.

The recent government decision not to go ahead with planned cuts with in company tax rates will also improve the budget balance.

The projections assume that the government’s policy settings stay unchanged from this year’s federal budget.

The underlying cash balance is projected to move from a deficit of 1% of GDP, or $18.2 billion, to a surplus of 0.8%, or $16.6 billion by 2021‐22.

The Parliamentary Budget Office estimates the surplus to reach 1.3% of GDP, or $42.3 billion, by 2028‐29, as this chart shows:

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