By mid-next year, nearly a quarter of Australians’ earnings will go towards paying income tax and loan interest, as many fixed-rate mortgages mature and bracket creep consumes wage gains.
According to economists, households spent a record 21% of their gross income on home loan interest and income tax in the three months to June, and this burden is expected to rise even further without action.
A near-record 16.2% of household incomes went to income tax in June, a significant increase over the past year. Bracket creep, caused by tax brackets not being indexed to inflation, is to blame.
Stage three tax cuts: Temporary relief for Australians’ tax burden
The stage three tax cuts, scheduled to begin on July 1, 2024, will reduce the income tax burden by about 1 percentage point but will only provide temporary relief.
The rising share of income going to tax and loan repayments underscores the need for tax reform in federal parliament, as it is expected to exert downward pressure on consumption and GDP growth.
Rapidly rising interest rates over the past year have also contributed to the increase in the share of gross income consumed by mortgage interest, which is expected to rise further as fixed-rate loans from the pandemic era roll off onto variable rates.
Combined with interest on consumer debt and the cost of owner-operator business debt, nearly one-quarter of gross household income nationally will be lost to income tax and interest.
Wentworth MP Allegra Spender, who is leading a tax review process, emphasized the importance of addressing the reliance on income tax, particularly as it shifts the tax burden onto younger generations and contributes to growing wealth inequality.