The government’s plan to return the budget to surplus is heavily reliant on personal tax increases across every income bracket but hitting middle-income earners hardest, the Parliamentary Budget Office has revealed.

Middle income earners (with an average taxable income of $46,000) will experience the highest average tax increases of any income quintile, jumping 3.2 percentage points, from 14.9% to 18.2% over the next five years.

The PBO’s paper, released on Wednesday, reveals for the first time how the Turnbull government’s projected budget surplus in 2020-21 is relying on specific increases in average personal income tax rates.

The tax hikes reflect a seismic shift in the taxation burden from businesses to individuals. The personal tax increases are necessary to compensate for the government’s controversial $65.4bn company tax cut.

According to the PBO, the average tax rate on individual Australians is estimated to increase by 2.3 percentage points between 2017-18 and 2021-22.

But there are large differences between income quintiles. Taxpayers in the first income quintile (the lowest 20% of income earners) will see their average tax rate increase by 0.2 percentage points over the next five years.

Taxpayers in the second income quintile will see their average tax rate increase by 2.5 percentage points.

Taxpayers in the fourth quintile will see their average tax rate increase by 2.3 percentage points.

Taxpayers in the fifth quintile (the highest 20% of income earners) will see their average tax rate increase by 1.9 percentage points.



The PBO report shows the Turnbull government is relying heavily on “bracket creep” to bring the budget back to surplus. Bracket creep is the phenomenon whereby taxpayers shift into higher tax brackets when their nominal incomes grow, due to inflation and/or real wages growth.

The PBO says the government’s projected budget surplus is relying heavily on more than 1 million Australians shifting into higher tax brackets over the next five years, where their average tax rates will increase.

Projections show over 900,000 taxpayers will move from a marginal tax rate of 32.5% to 37% between 2017-18 and 2021-22.



Similarly, 700,00 people are projected to move from a marginal tax rate of 19% to 32.5% over the same period.

“In addition to the effect of nominal income growth, average tax rates are projected to increase due to policy changes, most notably the policy decision to increase the Medicare levy from 2019-20,” the PBO report says.

Two weeks ago award-reliant workers in the fast food, hospitality, retail and pharmacy sectors lost millions of dollars in income collectively after their public holiday penalty rates were cut in Victoria, Queensland, New South Wales, the ACT and South Australia.

According to the McKell Institute, a Labor-aligned thinktank, those workers may have collectively lost between $4.7m and $9.5m on the grand final weekend, depending on how many were rostered on.

The PBO warned earlier this year that the Turnbull government’s plan to return the budget to surplus on the back of rising personal income tax relied heavily on a sharp acceleration in wages growth over the decade.



It warned the “significant slowdown” in wages growth experienced in the past few years suggested this gamble by the government was subject to “downside risk”.