Bracket creep a big factor in Australian living standards
Latest Household Budget Report by SAS® and NATSEM finds –
- Since 2004-05, households have gained with significant personal income tax cuts but some of these gains will be lost through bracket creep over the next four years
- The Cost of living in Australia increased by only 0.3 per cent and living standards declined by 0.1 per cent in the September quarter
- Over the 12 months to September the cost of living increased by only 0.5 per cent while living standards improved by an on trend 1.6 per cent.
- Household Budget positions improved in New South Wales and Tasmania – but mostly declined elsewhere with the largest fall in WA
In addition to its usual Living Standards focus, the latest SAS-NATSEM Household Budget Report highlights the effect of bracket creep on household budgets over the past ten years and over the coming four years (Budget Forward Estimates). The report for the end-September quarter was released today.
According to Ben Phillips, NATSEM’s principle research fellow, the cost of living barely increased in the quarter and living standards were flat. However, living standards growth remained roughly on trend through the last 12 months.
“The tax system over the past 10 years reduced average tax rates by around 3 per cent for top working age income earners and up to 5 per cent for low income earners. However, the effect of bracket creep to 2018-19 will reduce these gains by between 1 and 2 per cent across the income distribution.
Previous 10 years – 2004-05 schedule adjusted to 2014-15 compared with Current System
2004-05 TO 2014-15: The SAS-NATSEM report shows the impact of applying the tax system from 2004-05 to Australia’s current population – after indexing the 2004-05 system’s tax thresholds – with both CPI and wages (AWE).
The report shows that when compared with a CPI-indexed tax system from 2004-05, households are better off by a total of $31.5 billion each year and $20 billion better off compared with a wages-based indexation.
The average household is better off by $2,200 each year compared with a wages-based indexation. The top decile households are ahead by an average of nearly $4,500 per year while the bottom decile is ahead by $450 per year. The average tax rate of the top income decile is lower by 2.9 percentage points while the bottom decile is lower by 3.6 percentage points.
2014-15 TO 2018-19: By 2018-19 bracket creep will mean that the average household will pay an extra $1,200 per year compared with a wages indexation of the current tax system, and $1,000 per year compared with a CPI indexation. The government will receive an extra $8.9 billion through bracket creep using a CPI indexation measure for tax thresholds or $11 billion using a wages measure.
Households in the top income decile will pay an extra $2,800 per year (a 1.2 percentage point increase in the average tax rate) while the bottom decile will pay an extra $140 per year (1.1 percentage points) relative to a wages indexed tax system by 2018-19.
Phillips said, “We find that due to personal income taxation reductions over the past 10 years, households are ahead by around $31.5 billion a year”. He added that, “Excluding households where the head is aged 65 or more this equates to $3,500 per household”.
He further observed, “Had the Income Tax and Medicare brackets been indexed with average weekly earnings over the period, households would still have been $2,200 ahead”. He said the analysis shows that, had the 2004-05 tax system been indexed and significant tax cuts over the period not been applied, government revenue would have been between $20 billion and $31 billion greater each year, by today.
The new SAS-NATSEM Household Budget Report puts the cost to households of not indexing thresholds (bracket creep) over the forward estimates at 1 to 2 per cent of taxable income by 2018-19. This equates to high income households gaining around $2,800 per annum compared with just $140 for a bottom decile household.
Gains from income tax reductions from 2004-05 to the present were significant for all income groups. On average, working age households in the bottom income decile now pay 3.3 per cent tax compared with 6.9 if the 2004-05 tax system was indexed with wages. The top income decile currently pays 36.1 per cent compared with 39 per cent under wage indexation.
Cost of Living
With only a 0.3 per cent increase, Australia’s Cost of Living index barely moved through the September quarter, and was up only 0.5 for the full year. Income growth was 2.2 per cent through the full year and at 1.6 per cent, the overall increase in the standard of living for households was in line with long term trend. While the only modest rate of income growth for households might be disappointing, the containment of price pressures – as measured by Cost of Living – is helping to maintain Living Standards.
Household Living Standards
The biggest gains in Living Standards over the 12-month period were Tasmania’s 3.8 per cent and South Australia’s 2.7 per cent. At the other end of the scale, Living Standards declined by 0.5 per cent in Western Australia and by 0.2 per cent in Victoria. For the September quarter only, the biggest gain was in NSW – but at only 0.2 percent. The biggest declines were 0.4 per cent in WA and 0.3 per cent in the ACT.
Overall financial gains for the September quarter were made by NSW and Tasmania at $138 and $34 per annum, respectively. All the other States experienced reductions, led by WA, down by $411 per annum. Over the full year, WA went backwards by $532 while Tasmania enjoyed an increase of $2,542. South Australia and Queensland also fared well over the full year.
The quarterly SAS-NATSEM reports are created with the use SAS® Visual Analytics. Cost-free access to them is readily available on the SAS-NATSEM webpage. The reports are interactive and presented in a visual format to bring the raw numbers to life and deliver an immediate understanding of economic trends as they directly affect the daily lives of everyone in Australia.
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- University of Canberra
Principal Research Fellow
The National Centre for Social and Economic Modelling
Tel: +61 2 6201 2760