The Coalition will make a bold play to win back voters with a plan to automatically index income tax brackets to keep up with inflation.

Opposition Leader Angus Taylor will use his first budget reply speech tonight to announce a dramatic shake-up of how Australian workers are taxed by permanently fixing “bracket creep”.

Federal politics live updates: For the latest budget reactions, including what’s likely to be in Angus Taylor’s reply speech, read our blog.

The plan would effectively tie income tax rates to the Consumer Price Index through an automated mechanism that was still being finalised hours before Mr Taylor was due to announce it.

Bracket creep is when inflation pushes wages into a higher tax bracket, causing workers to pay more tax even though their spending power has not increased.

Liberal sources have told the ABC that the policy to be unveiled by Mr Taylor will be phased in over time, starting with the lower tax brackets. 

The tax bracket change will be hugely expensive, but many Liberals believe a bold economic policy idea is the only way for the party to start seriously clawing back support after two dire election losses.

Tax cut policy do-over after election misstep

In the final days of the 2025 federal election, former opposition leader Peter Dutton revealed an “aspiration” to index income tax brackets in the future when the budget position allowed for it.

It later emerged that in his former role as shadow treasurer, Mr Taylor had mulled over an idea to hand taxpayers a refund each year that inflation rose above the Reserve Bank’s target band.

The Liberal Party’s election review highlighted the Coalition’s decision to repeal Labor’s top-up tax cuts last year as a major misstep, finding it damaged the opposition’s economic credentials.

Competing tax policies for 2028

Labor’s federal budget includes an ongoing $250 Working Australian Tax Offset (WATO), which would flow to an estimated 13 million workers every year.

The tax break, which would kick in from July 2028, will cost $6.4 billion in the first two years of it taking effect.

$250 tax break for millions of workers in federal budget 2026

Labor will raise taxes on investment properties and some trust funds, giving the revenue back to workers with a new $250 tax break under reforms it says will “rebalance” the Australian tax system.

The federal government plans to use the revenue raised from sweeping changes to negative gearing, the capital gains tax (CGT) discount, and a new minimum tax on discretionary trusts to pay for the WATO.

Treasurer Jim Chalmers has said these reforms “rebalance” the tax system, which he argued currently treated income earned from assets such as investment properties more generously than money earned from working.

Over a decade, Labor’s tax changes are expected to generate an additional $77 billion in revenue for the budget.

Mr Chalmers said the WATO was only a “down payment” for workers, signalling that more tax breaks in the future were likely.

But Mr Taylor has already vowed to oppose Labor’s tax changes, with the Coalition leaving the door open to repealing them, meaning it would have to find other sources of revenue to pay for its own income tax break plan.

Taylor’s budget reply to focus on tax, housing and migration

Mr Taylor is also planning to announce plans to tie immigration to housing and block access to payments such as the pension, paid parental leave, and the NDIS for anyone who is not an Australian citizen. 

He will pledge to cap net overseas migration (NOM) to the equivalent of one person per new house built, but the Coalition will not decide the critical detail of which visa types would be cut back until they are in office.

a male politician in a suit talking to report

Angus Taylor wants to tie Australia’s migration intake to housing. (ABC News: Matt Roberts)

Mr Taylor will also commit to establishing a $5 billion housing infrastructure fund to accelerate the supply of up to 400,000 new homes.

In its budget, Labor announced a similar plan, committing $2 billion for local infrastructure to support what it estimated would be 65,000 extra homes. 

Mr Taylor will also use his speech to outline a plan to prevent permanent residents and others who are not Australian citizens from accessing government payments. 

“If you’re not an Australian citizen, then you do not get the privileges of an Australian citizen,” he said.

“When you commit to this country, we’ll commit to you.”

Certain social service programs are currently available to non-citizens, including some visa holders and permanent residents, but many involve a waiting period.

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