The end of the great Australian complacency?
In which I speculate that the Teals' proposal for income tax indexation is a sign of something larger changing in public policy
For years I’ve complained that the acceptable range of public policy debate in Australia is absurdly narrow. “No government wants to be caught stepping even slightly outside the thin band of mainstream policy ideas”, I wrote in 2017.
The Australian Financial Review’s weekend profile of Treasurer Jim Chalmers is a classic example. Everyone says Chalmers is a deep admirer of Paul Keating and the bold reformist zeal etc. that Keating brought to the Hawke government.
But at the same time Chalmers 1) apparently rejects the neoliberal direction of those reforms, and 2) says that his proudest achievement is making modest changes to a tax cut program legislated by a previous government (which the AFR reports he wanted to scrap entirely).
So what is it about Keating that Chalmers admires? Historians are unlikely to spend much time on the Stage 3 tax cuts.
Either way, as one Labor person quoted in the profile says, "the agenda is small”. But to be fair this could describe every Australian government since Julia Gillard rolled Kevin Rudd.
Bracket creep is complacent and deceitful
The example I’ve always used to describe our policy complacency in Australia is bracket creep on income tax.1 Every single year taxpayers are pushed into higher tax brackets from the simple arithmetic fact that inflation pushes wages up but the tax brackets are fixed. It is outrageous - but it is a long-standing fixture of our tax system.
So it is striking to see the Teals out yesterday calling for income tax to be indexed to inflation.2 As they said in their joint statement:
Bracket creep is a stealth tax on individuals’ incomes resulting from fixed tax bands and the gradual rise in nominal wages over time.
Income tax indexation is obviously a good idea. And it is an obvious idea. I’ve been flicking back through the last decade or so of economic commentary, and income tax indexation is suggested over and over. Sometimes it is mentioned in passing:
Of course, both sides of politics could end much of the political game-playing by committing to index the income tax scales to inflation (editorial in the Australian Financial Review, 2019)
… and sometimes it is advocated more passionately:
the recent bout of significant inflation should jolt both major parties to consider dumping the fiscal tyranny of silently ratcheting up tax on workers every year without passing a law (my friend Adam Creighton in The Australian in 2023)
… but no government ever does it. Worse, it seems no government even considers it.
Their political calculation is simple. Politicians can let the total income tax burden quietly increase as inflation increases, and, every once in a while, pass high profile tax “cuts” to bring it back down. They get all the political benefits of generous tax cuts, while using the fiscal illusion to hide tax increases and avoid political costs.
Politicians would rather pass new laws than administer old ones (they are “lawmakers” after all) so this system suits them nicely.
The Fraser government briefly indexed income tax brackets in 1975. But in the financial crises of the late 1970s they couldn’t keep spending down so felt they had to abandon it. By introducing indexation, Fraser was following the recommendations of the Whitlam era’s Mathews report into taxation. The discussion of indexation in that document goes for 300 pages.
Compare that with our otherwise grand and earth-shattering tax reviews in the last few decades which have completely skirted around bracket creep.
Ken Henry’s 2010 Tax Review was a barnstormer of tax policy detail. It called for a radically simplified tax rate, indicatively starting with tax free threshold up to $25,000, then a 35 per cent tax between $25,000 and $180,000, and a 45 per cent rate above that. Pretty good! Not totally flat but a solid start.
But over time the generosity of these rates would erode as the value of $25,000 and $180,000 eroded.
So even in this apparently comprehensive no-holds-barred review of tax policy, intended to set Australia’s fiscal system up for the long term, there was an assumption that the politically motivated dance of bracket creep and tax cuts was a permanent fact of Australian life.
Same thing again with the Coalition’s 2015 Re-Think tax discussion paper. The Coalition was more bold: at least it was willing to mention the perversities of our income tax thresholds. Even so, this discussion of bracket creep is simultaneously honest and a stunning piece of avoidance. Here’s what the paper says:
Bracket creep and higher personal income taxes can reduce participation incentives for some people … Over time, unchecked bracket creep could potentially reduce workforce participation and the opportunities afforded to the community by higher participation rates.
The current individuals income tax scales will lower living standards over time as more taxpayers fall into higher income tax brackets.
Nailed it. Boom. Mic drop. But nowhere does the discussion paper suggest indexation! And in fact, the question that immediately follows the description of bracket creep is a complete non-sequitur:
At what levels of income is it most important to deliver tax cuts and why?
As an attentive reader might say, “wait, what?”
The Coalition famously never delivered its tax white paper, so we don’t have the benefit of seeing whether that document would have eventually been more courageous.
This is the remarkable thing about bracket creep. It is a fundamental part of our tax and political system. But it is also a bit shameful, spoken about with embarrassment and in hushed tones. Not to be all Australian here, but a mechanism that secretly raises tax every year isn’t very fair dinkum go.3
So what has changed?
I don’t think for a second the Teals would be calling for indexation if they didn’t believe there was an open door to push on. The Teals are hardly radical contrarians. They’re not especially courageous. Something is changing. They’ve just picked up on that change.
Others have felt it too. Ken Henry himself even came out in February declaring that “this is the first time I've ever said this publicly, in fact I think at all. I think it is time to consider indexing tax thresholds for inflation”.
His rationale for doing so is revealing:
Henry expressed alarm about the future of democratic capitalism because the social compact with younger people - that if they worked hard they would be better off later in life, as their parents were - was being eroded by rising income tax burdens and higher public debt.
In other words, the perversities of Australian economic policy are becoming so stark, so undeniable, that we’re going to have to do things differently.
So let’s go back to Jim Chalmers. I think his policy modesty is actually one of the Albanese government’s biggest problems. It is misreading the public appetite for reform. The world we are in now does not reward complacency like it did in recent memory. The old small target strategy is starting to look more like lazy avoidance rather than sensible conservatism.
There’s a bunch of reasons for the change. Inflation is one. If you’re feeling complacent, go buy some olive oil. Try to find some eggs.
The housing crisis is another. It has been remarkable to see, over the last 18 months, the near complete intellectual victory of those who have argued that the problem with house prices is that we’re not building enough houses. The Labor government in Victoria is in a full-blown panic trying to get more houses built before the election in 2026.
And of course we all lived through COVID response, where every liberal democratic norm was smashed in the space of weeks. Nobody trapped in their homes for two years was feeling relaxed and comfortable.
Even the reception of Peter Dutton’s nuclear energy policy suggests the public mood has changed. A few years ago such an expensive project would have been seen as political suicide. I don’t love everything about the nuclear policy, for reasons I’ve published in Crikey, and it is not hugely popular. But the fact that it isn’t a massive drag on the Coalition is an indication of the public awareness that there is an energy crisis and that big proposals might be needed to fix it.
In his book The End of Certainty Paul Kelly depicted an Australia that was leaving the comforts and guarantees of the post-war era and moving into an age of constant reform. There’s long been a debate in free market circles about when that reform period ended - Hewson’s loss in 1993 or the introduction of the GST in 2000.4
Either way, the story of the 21st century so far has been an attempt to re-find the sort of certainties we enjoyed in the past while the world spins around us.
I’m glad our politicians are starting to realise that is not sustainable.
I was shocked visiting Canada a few years ago where indexation is a perfectly normal thing - apparently we are the crazy ones???
The Teals are in no position to actually deliver on this policy of course, but neither am I, and so credit where credit is due.
Most defenses of bracket creep admit it is a dodgy way to prop up government budgets, but say it is necessary nonetheless. Some are more creative.
In a speech last year the Treasury secretary Stephen Kennedy was arguing that “bracket creep has been a helpful stabilising force” for monetary policy policy too. The idea here is that in times of wage rises people move into higher brackets, are taxed more, and this cools demand.
Now, the usual principle in economic policy is that you should have one target, one instrument. We have a whole central bank to cool demand when it sees fit. But Kennedy believes it is also good to have a few secret instruments that voters don’t know about or really understand.
This sort of post hoc rationalisation, where policymakers construct elaborate economic justifications for policies implemented on totally separate grounds, is a tradition in Australian policy. Like how the Four Pillars Policy was introduced to shore up the Commonwealth Bank’s sale price and is now apparently an essential part of our prudential regulatory system.
God help us if the monetary case for bracket creep becomes part of the conventional wisdom.
Or, as I favor, the Rudd-Gillard transition in 2010. Not all bold, visionary reform has to be good.
I agree they won’t ever have to deliver on this promise, but I would rate it much more highly if they were prepared to offer an explanation of how they would ‘pay’ for it through spending cuts.