While finalising staff payment records to the ATO for the last financial year it stuck me how much of people’s pay goes in tax. People on typical incomes pay around one fifth of their income in tax. For those earning a little more, tax increases to a quarter of income. High earners pay a third or more.

That is a bigger proportion than it was a generation ago and much bigger than fifty years ago. One of the causes of the cost-of-living crisis is the increase in the proportion of income that goes in tax. Politicians rarely mention that of course.

Australia has become a bigger taxing, much more welfare-oriented country than it used to be. We tax our wealth creators more heavily and give far more to the less well-off. Previously Australia was a land of free enterprise with people having more control over what they did with what they earned.

The latest example of our expensive generosity is the NDIS. It is growing uncontrollably, already costing taxpayers more than Medicare. It is on track to cost more than the age pension system in a few years.

The main cause of the increase in income tax as a share of earnings is bracket creep. The income tax thresholds are not indexed to inflation or increased in any logical way. They only increase when a government proposes they should, usually by much less than inflation.

Naturally politicians are uninclined to propose tax thresholds be increased as that cuts the amount of money they have to spend and convince voters they are doing a good job.

There was a huge increase in spending by the former Government in response to Covid. The extra money circulating created increased demand when production was restricted by Covid limitations. That extra cashflow was not cut back quickly and so lead to high inflation.

Central banks around the world have been trying to control inflation since 2022 with elevated interest rates. Some are succeeding, but Australia is struggling.

Rather than help by cutting their spending, our Federal and state governments are continuing to spend heavily on things like the NDIS and energy bill relief. Big pay rises for public servants and the already well-paid dock and construction site workers have also increased costs, adding fuel to the fire.

As a result, there is now a real likelihood of further interest rate increases, contrary to expectations early in the year.

The timing of our new tax cuts, overdue as they are, isn’t good for the inflation fight either. They will put extra money in consumer’s pockets, increase demand, and probably boost prices and inflation. More mortgage pain may lie ahead.