2023-24 Federal Budget

The Treasurer Jim Chalmers has handed down the 2023 Federal Budget on Tuesday 9 March 2023.

As in previous years we have provided a briefing from Colonial First State which is an excellent summary of the major announcements. It can be read by clicking this link.

We have also reviewed the Budget, and make the following brief observations:

  1. Given the amount of spending initiatives, inflation is likely to remain high for longer than hoped. We believe, as do many economists, that interest rates will stay high or go higher and homeowners should budget accordingly.
  2. Any rises in middle income wages are likely to suffer first hand from “bracket creep.” Expect to hear that phrase a lot more in coming years. Thankfully though, the Stage 3 Tax Cuts were not repealed, meaning there will be some relief for middle income earners from 1 July 2024.
  3. Tax on earnings on superannuation balances above $3million will be enacted as previously flagged by the Treasurer, (after his conversation with the Australian people).
  4. A raft of increases to recurrent expenditure has been built into the budget. It is therefore imperative that Australia’s revenue also grows over time. We hope that growth is not through higher rates of tax on those who work.
  5. Apart from an instant asset write off for small businesses, and a one-off power bill rebate, we see little of note in the way of incentives for workers.

We have spoken to many of our clients about the dangers of inflation. A big problem is that any increases to wages to compensate for higher inflation is reduced by the effects of taxation.

By way of example, on current income tax brackets – outlined in the table below:

  • A worker on $80,000 per annum who is compensated with a 7% wage rise (roughly equivalent to the current rate of inflation), would receive an extra $5,600 per annum. However, this would be reduced to $3,668 in the hand, after forfeiting 34.5% to the Federal Government in tax. So, they are really going backwards at 2.415% per annum.
  • It is worse for a worker earning $120,000 per annum. A 7% wage rise, or $8,400 per annum, would be reduced to $5,124 in the hand after their 39% tax rate, meaning their real wage rise is only 4.27%, meaning purchasing power is reduced by 2.73% per annum.

The increased cost of living is paid out of after-tax dollars. Increases to mortgage payments, power bills, education expenses must be met from what is left over.

Given that teachers and nurses in Australia are now earning $90,000 to $120,000 per annum depending on their role, we could have a situation where essential workers find themselves in the second top tax bracket very soon. That is “bracket creep” – wages rise due to inflation, but tax scales remain static.

Thankfully for these households and workers, at this stage the legislated tax cuts due to commence on 1 July 2024 have not been altered.

Current (2022-23) year

From (2024-25) year

Taxable income Marginal tax rate Taxable income Marginal tax rate
$18,200 – $45,000 19% $18,200 – $45,000 19%
$45,0001 – $120,000 32.5% $45,001 – $200,000 30%
$120,001 – $180,000 37%
$180,001 and over 45% $200,001 and over 45%

The above rates do not include the Medicare levy of 2%.