Wages, Taxes, and the Budget

by Jim Stanford and Troy Henderson

The Coalition government’s 2018 budget features a plan to cut personal income taxes for many Australians over the next several years. The government claims it wants to reward lower- and middle-income wage-earners with tax savings.  However, the biggest personal tax reductions would not be experienced until 2022 and beyond (after at least two more federal elections).  And the biggest savings go to those with incomes over $200,000 per year (the richest 3 percent of tax-filers).

Our Briefing Note on the 2018 Budget explores the relationships between wages and taxes, and shows that working to reverse the recent unprecedented wage stagnation is the key to achieving ongoing improvements in living standards – not pre-election tweaks in the tax code.

Our budget analysis finds that:

  • The boost in disposable incomes for most Australians from these changes will be miniscule, not making any measurable difference to their standard of living.
  • The biggest cause of stagnating living standards in Australia has been the deceleration of wage increases since 2012. The budget assumes that wage growth will suddenly rebound in coming years to more traditional rates (of 3.5 percent per year). This assumption underpins the government’s revenue forecasts – but there is no plan for achieving faster wage growth.
  • To the contrary, the government’s continuing labour policies will suppress future wage increases. This includes its own 2 percent cap on wage increases for federal public sector workers; the government is restraining wage growth for its own employees to barely half of what it hopes for the whole economy.
  • Restoring normal wage patterns would boost disposable incomes for Australian workers many times more than tweaks to personal tax rates and thresholds.

For example, for a worker earning $60,000 per year (higher than the median income of Australians), the Coalition tax plan will increase disposable income by $530 by the last year of the budget period (2021-22).  In contrast, annual normal wage increases (of 3.5 percent per year) would boost disposable income that same year by almost $6000 – 11 times as much.

Full report