Coalition tax plan could cost more than suggested in first few years

Angus Taylor has announced a plan to index tax brackets if elected. (ABC News: Callum Flinn) The Coalition's plan to index tax brackets could cost $35 billion in the first four years, more than has been suggested. The cost would grow rapidly to $44 billion in one year alone in 2035-36. This is both the cost to the federal budget and the cost that would be imposed on taxpayers due to bracket creep in the absence of the policy. Link copiedShareShare articleAngus Taylor's plan to index tax brackets to inflation could cost $35 billion in the first four years, higher than the $23 billion figure the Coalition has been using, and would cost the budget $44 billion every year by the end of the decade. The opposition leader unveiled a plan yesterday to eliminate "bracket creep", the feature of Australia's income tax system that causes taxpayers to pay more over time because tax brackets are not adjusted for inflation. Mr Taylor initially distanced himself from a $22.5 billion cost over four years in an interview on the ABC's 7.30 after his budget reply speech. But the figure was offered by deputy Liberal leader Jane Hume on ABC Radio National, who said the policy had been "fully costed". Labor and the Liberals are offering imperfect but undeniably bold alternative visions for the tax system. It's nice to have something to talk about. Today, Mr Taylor told the ABC's AM it was "over $20 billion" in the first four years, and framing this amount as the "sneaky" extra tax Labor was imposing on taxpayers by allowing bracket creep to run unchecked. "Labor is proposing to raise taxes by over $20 billion over four years, and we will give that back. We will prevent those taxes from going up," he said. He also conceded the Coalition would need to find spending cuts to match the more than $20 billion cost to the budget, saying he had identified "significant savings" already from "waste" but declining to say whether they would fully offset his proposal. But the ABC has confirmed the likely amount the Coalition would need to offset over the first four years of its policy, which would start if elected in 2028-29, is $35.3 billion, more than 50 per cent higher. The difference appears to have resulted from a timing assumption in the "build your own budget" tool made by the independent Parliamentary Budget Office (PBO), which allows any member of the public to cost budget policies. Putting the Coalition's proposed thresholds into that tool gives a cost to the budget bottom line (underlying cash balance) of $22.5 billion, the figure the Coalition has used. But another PBO tool, the SMART model, built specifically for income tax policies and using more detailed information, produces the $35.3 billion. The difference appears to be mostly due to timing. The $22.5 billion figure assumes a tiny cost of just $276 million in the first year, whereas SMART has a cost of $3 billion. When contacted by the ABC, the PBO confirmed the build-your-own-budget tool was knocking the costs back by one financial year, in effect assuming people do not get the tax cuts until they file their tax returns after the year is over. That is how income tax offsets, like the $250 wage offset Labor proposed in Tuesday's budget, work. But it is not usually how changes to tax thresholds work, because these usually arrive in pay packets throughout the year under the pay-as-you-go system. Jim Chalmers announced a $250 annual tax offset for wage earners in Tuesday's federal budget. (ABC News: Callum Flinn) That means the $35.3 billion figure would be the correct one unless the Coalition proposes to make taxpayers wait to receive their tax cut at tax time, rather than in their pay. This detail has not been specified. In general, the PBO advises using SMART instead of the build-your-own-budget tool for income tax policies, because it is more sophisticated. When the year lag is fixed, the costs are similar, and the SMART model actually produces slightly smaller results each year. The PBO warns on its website that both tools are not intended as a replacement for the PBO's formal costing process, which it can do for parliamentarians on request. The ABC understands from multiple sources that the policy was not formally costed by the PBO ahead of Mr Taylor's announcement. The large gap this creates in the first four years is significant because it drastically increases the amount of savings the Coalition would need to find before the next election to offset its election policy. Without doing so, it would present voters with a worse budget bottom line than Labor, as it did in the first two years of its 2025 election costings, a fact that horrified many within the party and which Liberals say they are determined not to do again. The SMART tool suggests the policy would cost $167 billion over the policy's first eight years, with the annual cost escalating rapidly and hitting $44.5 billion in 2035-36. This figure reflects the "cost" to the federal budget but

Coalition tax plan could cost more than suggested in first few years

Key takeaways

More in international