Fiscal drag
Also called: Bracket creep · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Fiscal drag, also called bracket creep, happens when inflation or rising incomes push taxpayers into higher tax brackets (the income slabs taxed at higher rates). This happens when the slabs are not adjusted for price rises. People pay a larger share of their income as tax even though the government never raised the tax rates. Their disposable income grows more slowly, and this dampens spending in the economy.
Example
Suppose a salaried worker's pay rises only in line with inflation. They are no richer in real terms, but part of their income may now fall in a higher slab, so their tax share goes up. In India, raising the income-tax rebate threshold to ₹12 lakh under the new regime (2025-26) partly offsets this effect.
Don't confuse with
- Explicit tax increase: this needs a decision, usually through the Finance Bill. Fiscal drag raises the tax burden automatically, with no change in the law.
Related concepts
- Automatic stabiliser
- Discretionary fiscal policy
- Countercyclical fiscal policy
- Procyclical fiscal policy
- Fiscal stimulus
- Fiscal space
- Austerity
- Structural deficit