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Inflation war: Bittersweet trillion-dollar milestone as government cashes in on your hard work

Data shows the federal government is earning record revenue from our inflated economy.

Well, well, well. Look who’s doing rather nicely from all this inflation. Government finance statistics are out and they show Commonwealth government revenue is up.

In fact our beloved governments — state, federal, local — raised over one trillion dollars in revenue between them for the first time in 2022-23. Where is all that revenue coming from, you ask?

Why, dear reader, it is coming from you!

Tax revenue
Tax revenue (Jason Murphy)


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The next chart shows Commonwealth revenues since that is the biggest slice of the pie.


The filling for that pie? Personal income tax, mostly. It is rising steeply.

In fact, personal income tax receipts just rose by the highest amount in history.

Tax revenue
Tax revenue (Jason Murphy)

What’s happening here? Is the rising tax take deliberate or just a side-effect of our high-inflation, high-employment economy?

The answer is: both.

When people are working more and making more money, income tax revenues naturally rise.

A person who is no longer underemployed and has a full-time wage is going to be paying more tax than when they were working part-time.

Also, if your wages are rising at 4 per cent instead of 2 per cent, as they are for the average Australian, you’re going to be paying more tax too.

Remember – personal income tax brackets in this country aren’t indexed to inflation!

As you earn more, more of your pay is in the higher tax brackets, and you pay more personal income tax. Even if those pay rises don’t keep up with inflation. So high wage growth and strong employment naturally raise taxes.

But that doesn’t mean Treasurer Jim Chalmers can escape responsibility.

What has happened is predictable and could have been reversed had he chosen to put tax cuts through.

His masterful inaction is what has left ordinary Australians with a big tax bill and the federal government with ballooning revenues.

Anthony Albanese and Jim Chalmers with a red line showing income tax revenue rising.
Jim Chalmers is preparing to present the Albanese government's Federal Budget, and their pockets are lined with your tax money. (Yahoo Finance)

Here’s where the story gets really interesting: the decision to whack middle Australia with big tax hikes is arguably the responsible choice.

It’s a lot like the decision to raise interest rates. Higher taxes take money out of the economy and make household budgets tougher.

That means less spending and so, less freedom for businesses to raise prices (although of course some businesses have a very comfortable competitive position and seem able to raise prices no matter what.)

In short, the high personal income tax take is part of our attack on inflation.

It’s a painful war to wage, and the fact we’re all wearing Anko and eating lentils is the price we pay for the government’s strategy to get inflation down. (According to Wesfarmers, which owns the Kmart brand, 20 per cent of all clothing sold in Australia is Anko these days! I find that fact pretty amazing — even though my own kids are often decked out in it head to toe.)

The high rate of company tax in 2022-23 is partly to do with high commodity prices: huge profits at our energy and resources companies are causing the federal coffers to fill up.

Previous treasurers have used very conservative forecasts for gas, coal and iron ore prices and when those forecasts turn out to be way too low the cash that flows in is a pleasant “surprise” for the federal government.

There are also profits in other businesses too. Coles, for example, paid company tax of $370 million in the 2022-23 financial year, down from $485 million the year prior.

The third line in the graph above is GST. It is not going up fast.

Its modest growth reveals pretty slow consumer spending. i.e. It shows that after income taxes, we don’t have a lot left over.

And what we are spending is more likely to go on fresh food at the supermarket rather than products that attract GST.

When the Budget comes out, in just a few weeks, we will see how the financial situation stacks up for this year, and the best guess is that the government coffers will be in even better shape.

This era of painful household budgets is a very happy time to be in revenue collection.