The Turnbull government has backed away from previously dire warnings about the impact of bracket creep, the phenomenon pushing people into higher tax brackets as inflation lifts their wages.

The finance minister, Mathias Cormann, said wage inflation was low so the problem was “not there to the same extent as it might have been in the past”, allowing the government to scale back its ambition for big income tax cuts.

The Coalition had been building the case for action to tackle bracket creep for months, but now that it has ruled out an increase in the goods and services tax it is seeking to dampen community expectations about its forthcoming tax reform package.

Economic ministers have previously said the government must address bracket creep because it was a stealthy “inflation tax” that would detract from economic growth and workforce participation.

Cormann said on Thursday the government would do “as much as we can sensibly afford”, adding that the dumped option of raising the GST to fund income tax cuts would have allowed the government “to be a bit more ambitious”.



“Given that wage inflation is comparatively low, inflation generally is comparatively low, while the problem is there, it is not there to the same extent as it might have been in the past, as what it might have been if we weren’t in a changed environment,” Cormann told ABC Radio National.

“Our instinct is to deliver lower taxes to deliver personal income tax cuts to address bracket creep, but we will have to make judgments on what is affordable.”

Pressed on the Coalition’s previous warnings about bracket creep, Cormann reaffirmed the phenomenon was “a drag on growth” but low inflation rates gave the government “a little bit of room to recalibrate in a more affordable fashion our ambition in this area”.



Australian Bureau of Statistics figures show the wage price index rose by 2.3% overall in the year to the September 2015 quarter, while the 2.1% rate in the private sector was the lowest since the data series began in 1998. The consumer price index was running at 1.7% in the year to December.

Labor’s finance spokesman, Tony Burke, said the government was “directionless” and had no economic plan.

“This is a government that’s all at sea,” Burke said.

“Malcolm Turnbull and Scott Morrison promised that there would be something different to Tony Abbott and Joe Hockey when they came in. The only difference is we have had no action, and more waffle.”

Morrison, the treasurer, said in January he was passionate about addressing bracket creep as it was “one of the things that is holding the Australian economy back”.

In November, Morrison described it as “a growing problem that impacts on workforce participation”. He said 300,000 Australians were expected to enter the second-highest tax bracket over the next two years, and a failure to cut income taxes would result in half of all taxpayers reaching the top two brackets in 10 years.

The assistant treasurer, Kelly O’Dwyer, also said it was unfair and “really shocking” that the average income earner would soon reach the second-highest tax bracket.

Hockey, the former treasurer, described bracket creep as a “stealth tax” that could detract from economic growth and lead to “negative financial and economic outcomes, for individuals and the nation”.

In May last year, Hockey said the phenomenon could cause “a downward spiral for the economy” and “untold problems in the future” unless it was properly addressed.

But in the past couple of weeks, the government has definitively killed off changes to the GST, citing modelling that showed such a move combined with income tax cuts and associated compensation payments would not generate much or any increase in economic growth.

Last week, the government also published a Treasury briefing paper showing the average personal income tax rate was forecast to rise from 24.4% in 2016-17 to 26.6% in 2020-21.

Reducing the deficit by allowing an increase in the average tax rate could lead to a 0.35% contraction in gross domestic product in the long term, according to Treasury modelling. This impact is measured against a scenario whereby the government cut spending in order to a maintain constant average tax rate.

Addressing the National Press Club on Wednesday, Morrison said the government’s had “rescaled and rescoped” its options to address bracket creep after the decision not to increase the GST.

The treasurer said the government had previously looked at “$30bn worth of income tax cuts [which] would have delivered one of the biggest changes to income tax rates and schedules that we’d seen in 30 years or more”.

“If you’re not dealing with that scope and scale, you’re obviously looking at far more modest measures,” he said.

Morrison added that he and the prime minister remained “deeply troubled” by the prospect of the average wage earner moving into the second-highest tax bracket.



“We may be able to prevent that outcome going forward,” he said, hinting at a potential tweak to the threshold in the forthcoming package.

During a post-speech media blitz on Thursday morning, Morrison defended the government’s handling of the tax debate and likened Labor’s tax plans to “a unicorn”.

The government has indicated it is looking at tax options including reining in the “excesses” of negative gearing, superannuation tax concessions and workplace tax deductions.

Morrison said that there was a “strong case” for reviewing superannuation concessions and that the government was close to a “landing point” on decisions on the details of the reforms, during a speech to the self-managed superannuation industry on Thursday evening.

He acknowledged that the concessions were used predominantly by high income earners.

“High income earners generally have more capacity and inclination to save for retirement. This is a good thing,” Morrison said. “It’s not something that should be demonised or seen as some sort of nefarious practice, which is often I think a point that is implied when people make criticisms of these things.”

“I think it’s great that people are out there saving for their future. I think it’s tremendous. They do it in superannuation and they do it in many other things, including amazingly, negative gearing, which I don’t think is a necessarily a bad thing that people would take those opportunities to provide for their future,” the treasurer said. “But I believe they raise questions about the purpose of the concessions particularly as it relates to superannuation.”

He ruled out making “effective retrospective” changes to super by taxing in the retirement phase.

“If they’re going to change the rules at the other end when you’re going to be living off it, then it’s understandable that people might get spooked.”