The Coalition’s bold plan to index tax brackets to the rate of inflation should be set at a standard rate regardless of price changes, a leading economist has suggested.

Opposition Leader Angus Taylor on Thursday vowed to stop bracket creep from eroding living standards being eaten up by inflation.

From 2028-29, the Coalition would index the bottom two tax brackets, with the top two to follow from 2031-32.

Westpac’s chief economist Luci Ellis, an advocate of indexing tax brackets, said they should move in line with the Reserve Bank of Australia’s 2.5 per cent inflation target regardless of how much inflation changes that year.

“Indexing the tax brackets for (inflation) isn’t the best way forward,” Ms Ellis told Business Weekend.

“A better way forward is to say, look, the Reserve Bank’s inflation target is 2.5 per cent, so let’s escalate the tax brackets by 2.5 per cent every year.

“On average, that will get the same amount of tax burden.”

She argued this will deliver the appropriate level of tax for the government and can help bring down interest rates.

“When the economy is running too hot and inflation is high, you’ll be taking a bit extra out in tax,” Ms Ellis said.

“And when the economic is weak and inflation’s too low, you will be taking out a bit less tax as a share of the economy.

“You’ll have fiscal policy working hand in hand with what the Reserve Bank’s doing with monetary policy.”

Her call for fiscal and monetary policy to work hand in hand comes as the government’s large spending complicates the RBA’s inflation battle.

RBA governor Michele Bullock said Labor’s large spending, which makes up almost 27 per cent of GDP, had disrupted the central bank’s efforts to limit inflation.

“We have a situation in Australia prior to the (Iran) war, where we had demand above supply,” Ms Bullock told reporters after handing down the May rate hike.

“The ability of the economy to supply the goods and services that were being demanded in total, including by government and by the private sector, was … outstripping the ability of the economy to supply it.”

She continued: “The extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand.”

The May hike marked the third consecutive rate hike this year and undid all three cuts delivered in 2025.

Meanwhile, Mr Taylor has claimed his plan to index tax brackets to the rate of inflation will protect 85 per cent of income earners.

He argued Australians will get about $250 worth of relief in the first year, which will grow to more than $1000 by year four of indexation.

He argued the current system unfairly captured wage growth driven by inflation rather than real prosperity.

Based on Treasury and Reserve Bank inflation assumptions, the average worker has been forecast to pay $440 more in income tax due to bracket creep over the next year.

“When your wages rise just to keep up with inflation – you are no better off. But you pay higher taxes as though you’re better off,” Mr Taylor said.

“The higher Labor’s inflation goes, and the longer it lasts, the more the government takes from you.”