Why high inflation could jeopardise your tax cut in the 2022 budget

High inflation will make the government reconsider giving tax relief to middle-income earners in this year’s election Budget, a big bank says.

In every Budget since 2019, Treasurer Josh Frydenberg offered tax rebates of up to $1,080 as part of a low and middle income tax offset program (LMITO).

Mr Frydenerg’s first Budget was delivered a month before the May 2019 election back when headline inflation was running at just 1.6 per cent – a level well below the Reserve Bank of Australia’s 2 to 3 per cent target. 

Inflation is now soaring at 3.5 per cent, which could make the government think twice about extending the tax cuts program in the March 29 Budget with average petrol prices now at a record high of $2.12 a litre.

Westpac economists Andrew Hanlan and Bill Evans said high inflation would make more tax relief this year unlikely.

‘Higher inflation places upward pressure on government expenses,’ they said.

‘The Budget will include revisions to labour market, wages and inflation forecasts – with all surprising to the upside.’

In the 2022 Budget, 10million workers earning up to $126,000 were given tax relief.

This saw 4.6million Australians earning between $48,000 and $90,000 receive $1,080 as another 1.8million people earning $37,000 to $48,000 were given back $255.

Westpac said the government would be unlikely to extend the low and middle-income tax offsets in the 2022-23 Budget at a cost of $8billlion, so it would come into effect in 2023-24.

‘We have not included an extension to LMITO in our fiscal figuring for this Budget,’ it said.

Instead, the government could give out a one-off payment to low and middle-income earners to cope with higher inflation as an alternative to a tax cuts extension.

Westpac economists Andrew Hanlan and Bill Evans said high inflation would make more tax relief this year unlikely (pictured are shoppers queuing for groceries at Goonellabah in the flood-hit northern NSW city of Lismore)

In every Budget since 2019, Treasurer Josh Frydenberg offered tax rebates of up to $1,080 as part of a low and middle income tax offset program

Westpac said a $4billion cost-of-living package could be delivered at half the cost of extending the tax cuts program for another year.

‘New policy measures are expected to build on current foundations, while at the same time targeted at easing the cost of living pressures for those receiving social security benefits and those on low and middle incomes, including those receiving social support payments,’ it said.

Russia’s invasion of Ukraine is affecting Australian motorists in particular with the national average price of unleaded petrol last week rising by 14.9 cents a litre to a record high of 212.5 cents per litre.

During the past year, regular unleaded prices have risen by 54 per cent from 137.9c/L as of March 28, 2021.

The West Texas Intermediate crude oil price has climbed again to $US114 a barrel- not far off recent 14-year highs above $US120 a barrel.

One Big Switch campaign director Joel Gibson has called on the government to temporarily cut fuel taxes in the upcoming Budget, as New Zealand has done, so motorists are spared from having to pay 44 cents a litre of excise at the bowser.

‘Some are opposed to cutting fuel taxes because they’re concerned about the state of our roads, but there’s no guarantee the money is spent on roads,’ he said.

Russia’s invasion of Ukraine is affecting Australian motorists in particular with the national average price of unleaded petrol last week rising by 14.9 cents a litre to a record high of 212.5 cents per litre. During the past year, regular unleaded prices have risen by 54 per cent from 137.9c/L as of March 28, 2021 (pictured is a motorist in Brisbane filling up)

‘These prices are making people’s businesses and jobs unprofitable and they’re also raising the prices of groceries and other goods. If NZ can provide relief, so can we.’

But workers in general may finally get a decent pay rise with wages growth stuck below the long-term average of three per cent since mid-2013.

Westpac is expecting the Budget forecasts to show wages growth of 3 per cent by June 2023 and 3.25 per cent by June 2024.

From July 1, 2024,  the number of tax brackets will be slashed from five to four for the first time since 1984 under the stage three plan announced in 2019. 

This would see the 37 per cent tax bracket abolished and a new 30 per cent tax bracket created for all individuals earning between $45,001 and $200,000. 

Without a new round of tax cuts for 2023-24, Australian workers would have a year without tax cuts.