Government decides to abolish cold progression (bracket creep)

In the Council of Ministers, the Federal Government decided to take a historic step by abolishing cold progression. What has been discussed for decades is now being implemented: The gradual tax increase will be abolished on 1 January 2023. By 2026, Austrians will save an estimated total of more than 20 billion euros. Two-thirds of the income from cold progression automatically flows back to the taxpayer via income tax and tax credits. The remaining third of the revenue for the coming year is around 600 million euros, which will mainly benefit small and middle incomes.

Austrian Finance Minister Magnus Brunner commented: “We cannot afford not to help now. With inflation staying high for longer, we now need to change entrenched structures to give people more money to live on. With the abolition of cold progression, we end the creeping tax increase. We are giving people back money that inflation has taken away from them. This is how we relieve the burden on Austrians in the long term. So it is an act of fairness that the working people who are affected by the massive inflation are left with more net income from the gross income.”

More net income from gross income

Cold progression refers to the increase in the tax burden that can be attributed to the lack of inflation adjustment in the tax system. If the nominal amounts (income limits, allowances and deductions) are not continuously adjusted for inflation in a progressive tax system, the average tax burden on a person increases even without explicit tax increases simply due to the adjustment of their income to inflation, even if their real gross income remains constant.

In order to counteract the cold progression, the limit amounts for the two lowest tariff levels were raised above the level of the inflation rate (by 6.3%). As a result, low and middle incomes in particular are relieved above and beyond the inflation rate. Previously, citizens were subject to tax from an income limit of 11,000 euros. As a result of the agreement reached by the federal government, this limit will be EUR 11,693 next year. The limit amounts of the other tariff levels are increased by two-thirds of the inflation rate. This corresponds to an adjustment of 3.47% and also relieves people with middle and higher incomes. The deductible amounts, including the associated thresholds and the SI reimbursement, are fully adjusted to the inflation rate. This corresponds to an increase of 5.2%.

The planned relief can be seen on the basis of concrete examples: For example, a pensioner with an average gross monthly pension of 1,582 euros will benefit from the abolition of cold progression next year with 371 euros, and by 2026 a total of more than 3,700 euros. An employee with a median gross income of 3,171 euros will benefit next year from 391 euros more, by 2026 it will be more than 4,100 euros that he will save by abolishing cold progression.

Valorisation of social benefits

In addition, the federal government decided to upgrade social benefits. Therefore, from 1 January 2023 single-earner, single-parent and maintenance tax credits, pensioner tax credits and traffic tax credits will automatically be adjusted to inflation (by two-thirds). Social and family benefits (e.g. sickness, rehabilitation, retraining allowance, study allowance, family allowance, multiple child supplement and child tax credit) will be adjusted for the first time according to the annual automatic valorisation.