Taylor’s bold budget reply is a mix of sound and dubious policy commitments

Angus Taylor might have reckoned he and the opposition are in such deep doo-doo that he might as well throw everything at Thursday night’s budget reply.

The result was a mixed bag. The promise to index tax brackets is a bold reform that can’t be faulted in principle, although it would come with a big eventual cost and put a financial constraint on a future Coalition government that it might come to regret.

The pledge to restrict access to 17 welfare benefits and payments (and the National Disability Insurance Scheme) to Australian citizens falls into a very different category. It is a clear pitch to those voters on the right who have drifted from the Liberals to One Nation.

“We will remove Labor’s handouts for non-citizens,” Taylor said. “Many Australians would be surprised to learn that non-citizens are eligible for welfare.”

The hit on welfare smacks of a policy not being thought through – more about sending a message than directing welfare spending appropriately while still compassionately.

By including permanent residents in those who would be denied the access, Taylor has used a broad brush for maximum political impact. But this will also open him to maximum criticism, regardless of the grandfathering arrangements he says would accompany the tough approach.

Taylor has outlined more of his immigration policy, saying a cap would be imposed on Net Overseas Migration set by the number of houses built. But he said nominating the actual level of immigration under the Coalition would have to wait until closer to the election. For those hardliners who will still bray for a number, Taylor said: “The Coalition will deliver one of the biggest cuts to immigration in Australian history”.

The tax indexation proposal is something Taylor has favoured for a long time. He pushed the policy with his senior colleagues before the election. Former leader Peter Dutton flew a kite in the campaign but did not carry it through.

After the election Taylor also urged his successor, then shadow treasurer Ted O'Brien, to look at it.

Indexation has only been tried once by a federal government – that of Malcolm Fraser in the 1970s. It was wound back and later dropped entirely by that government.

Read more: View from The Hill: Albanese sensitive on one tax reform that won’t be in the budget

Under the Taylor plan, indexation would be phased in to make it more affordable. Under his “tax back guarantee”, from 2028-29 a Coalition government would index the bottom two thresholds to inflation.

“That will fully protect 85% of income earners, with relief of around $250 in year one, growing to more than $1,000 a year in year four. From 2031-32, we will index the top two thresholds as well. That will fully protect all taxpayers from inflation.”

Taylor dubs the initiative “generational tax reform” and adds, “any government that wants to tax Australians more should have the courage to front up and to take that tax increase to an election”.

The policy is enormously expensive over the long term – the Coalition puts it at $22.5 billion over the forward estimates, but the actual cost would depend on the inflation rate.

For a Coalition government, and especially for someone like Taylor who believes in smaller government, tax indexation is also an internal discipline. Conversely, those who don’t like it point to the advantages for a government to be able to determine when to give tax cuts and how much to give, with the political pluses of timing and visibility that brings.

In the battle over intergenerational equity, tax indexation would benefit younger workers, who currently find themselves pushed into higher tax brackets, making it harder to save for a house deposit.

Economist Richard Holden, from UNSW, recently told The Conversation that “bracket creep” will worsen as a result of the Iran war.

“Many peer jurisdictions, including the United States, do exactly this. Politicians have an incentive not to do so, so they can dish out essentially fake tax cuts,” Holden said. Holden’s comments came after Prime Minister Anthony Albanese had dismissed tax indexation when asked about it at a forum.

The indexation promise sets up a clear difference between government and opposition on tax.

Treasurer Jim Chalmers has signalled the government will deliver, or promise, more tax cuts for the 2028 election.

Read more: Politics with Michelle Grattan: Jim Chalmers says ‘we’re in the cart’ for more tax relief

“Certainly we are in the cart for more tax relief when the budget can carry that, when the budget can afford that,” he said.

But Chalmers’ interest is certainly not in putting the government into a tax corset. Instead, his budget sets up a new taxation architecture that gives the government greater flexibility, rather than imposing greater constraint on it.

This architecture means the Albanese government can target tax relief to a particular section of the community – those in the workforce, as distinct from those whose income comes from assets. The first round of this targeting was the budget’s $250 Working Australians Tax Offset (WATO),

The long-standing push among many experts and others for changing negative gearing and capital gains tax has enabled Albanese and Chalmers to more easily get across to aspiring home buyers the message that Labor’s housing tax changes will benefit them.

The reality is more contested, with the immediate term effect being that these housing tax policies by themselves – leaving aside other policies in the budget relating to housing – will only marginally slow house price increases, while reducing the number of new builds and driving up rents by a small amount.

Looking at the budget generally Ben Phillips, of the Australian National University’s Centre for Social Policy Research, has modelled the distributional impact on households of the budget. His modelling includes the $250 earned income tax credit, the $1000 standard work related deduction, the capital gains tax and negative gearing changes, and the minimum 30% taxation rate for income from trusts.

Phillips concluded the budget changes in the short term have “very little impact on low and middle income/wealth households. The impacts are most substantial for high wealth households only.

"Clearly, the impacts as flagged impact older households more negatively and younger households more positively.”

The changes to negative gearing and capital gains tax will be “slow burns with respect to revenue”, Phillips says, as they ramp up in the 2030s. “The small housing impacts may be more immediate.”

While indexing tax brackets is genuine tax reform, whether Taylor can sell his tax policy in a battle against the government’s housing tax package – with other Labor tax cuts to come – is another matter. He’ll be fighting not just Labor but a rampant Hanson. The indexation policy does not immediately and easily translate into retail messaging. And Taylor is not a natural and energised advocate. It’ll be a challenge.