The Parliamentary Budget Office has dropped a bomb on the Turnbull government, exposing a huge shift in the taxation burden away from businesses on to individuals in its May budget.

It says the government’s projected return to budget surplus by 2020-21 – and its hoped-for surpluses stretching to 2027-28 – rely on a massive increase in personal income tax to compensate for the government’s controversial $65.4bn in company tax cuts.

The PBO projects the average tax rate on personal income will have to rise from 22.7% in 2016–17 to 25.9% in 2027–28. It equates to a 14% increase in the personal income tax take.

At the same time, it projects company tax receipts will increase from 3.9% of gross domestic product in 2016–17 to 4.6% of GDP in 2022–23, driven largely by forecast increases in corporate profitability, before declining to 4.2% of GDP in 2027–28 thanks to the company tax cuts under the government’s 10-year Enterprise Tax Plan.

However, the PBO also points out the government’s plan to return the budget to surplus on the back of rising personal income tax is relying heavily on a sharp acceleration in wages growth over the decade.

It warns the “significant slowdown” in wages growth experienced in the past few years suggests this gamble by the government is subject to “downside risk”.

The revelations can be found in the PBO’s report, 2017-18 Budget: medium-term projections, released on Wednesday.

This diagram from Parliamentary Budget Office’s medium-term projections report shows a projected rise in income tax receipts. Photograph: Parliament of Australia

It comes four days after 1 July, when controversial Sunday and public holiday penalty rate cuts began to be phased in for retail, pharmacy, fast food and hospitality awards.

It also comes after federal politicians got a 2% pay rise on the weekend and the top 3% of income earners enjoyed a 2% marginal income tax cut, when the temporary budget repair levy was abolished.

Unions estimate the penalty rate cuts will hurt almost 700,000 workers.

The PBO says the government’s projected rise in personal income taxes over the entire medium term relies largely on strong wages growth driving income earners into higher tax brackets.

But the government’s plan to increase the Medicare levy by 0.5% for most taxpayers from 2019-20 also plays a significant role, it says.

The PBO says it projects personal income tax receipts will increase by approximately 1.6% of GDP over the medium term, from 11.1% of GDP in 2016–17 to 12.6% of GDP in 2027–28.

It also assumes that once the government’s technical assumption of a tax-to-GDP “cap” of 23.9% of GDP from 2022–23 onwards is reached, personal income tax receipts are projected to continue to rise as a percentage of GDP, as company tax receipts decline from 2023–24 as a result of the Enterprise Tax Plan.

The PBO has also warned the size of the government’s projected budget surplus in 2020-21 has already shrunk by $1.1bn since the budget was handed down in May.



It says the government’s projected surplus will now be just $6.3bn in 2020-21, rather than the $7.4bn the treasurer, Scott Morrison, announced two months ago.

