“The increasing reliance on personal income tax to balance the budget limits the government’s ability to provide relief from bracket creep, resulting in higher average tax rates for wage earners, spreading the tax burden unevenly between generations,” the budget office found.
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It noted that older Australians are more likely to derive income from low-taxed savings, investments and superannuation. Younger and working-age people rely much more heavily on wages, which are facing higher tax rates.
“This shift to increasing the burden on the tax mix to income derived mainly from labour poses equity challenges in the context of Australia’s ageing population,” the budget office found.
One of the reasons for the growing reliance on personal income tax is a drop in revenue from a series of excises.
The budget office noted tobacco excise had been written down by $20.8 billion between 2024-25 and 2028-29, while excises on fuel (down $1.6 billion) and alcohol (down $3.6 billion) had also been downgraded.
It said the drop in tobacco excise was partly driven by big increases in excise rates, which appear to have “resulted in an increase in consumers switching to illicit tobacco”.
As a share of GDP, total government spending is expected to be relatively stable at about 27 per cent. This is a step-up from the pre-COVID level of about 25 per cent.
The budget office said spending on the NDIS, defence and interest is expected to grow faster than the economy, offset by programs where spending is expected to fall or grow more slowly.
The interest cost on debt is expected to be the fastest-growing expense facing the government over the next decade, rising by 124 per cent from $38.7 billion to $86.7 billion.
NDIS spending is forecast to grow by 114 per cent to $106.7 billion, with the age pension expected to rise by 62 per cent to $105.2 billion.
Defence spending is expected to grow by 78 per cent to almost $100 billion.
The budget office noted that defence, interest and policies to deal with climate change will continue to put pressure on overall spending.
It said future governments had to look at spending and tax policies to ensure they supported productivity growth.
“The design of spending programs will need to be done in a way so as to avoid the kind of rapid growth seen in the NDIS. On the other side of the ledger, revenue will need to be raised with an awareness of its impact on productivity and growth,” it said.
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The office notes that its numbers assume falls in the cost of the public service and a reduction in spending on grant programs.
It warns that if spending in these two areas grows in line with history, expenses may be 1.5 per cent more of GDP by 2028-29 and up to 3 per cent higher by the middle of next decade.
“If this is the case, budget deficits and higher levels of government debt will continue through the medium term and beyond, with large policy adjustments required to restore fiscal sustainability,” it said.
