Economists warn the Abbott government’s first budget will increase inequality in Australia if it tries to reduce the deficit by predominantly cutting spending.
Saul Eslake, the chief economist of Bank of America Merrill Lynch, says it is “virtually impossible” to cut government spending in ways that do not disproportionately affect people on low to middle incomes.
“I suspect at the margin [the budget] will adversely impact the equity of the distribution of income,” Mr Eslake said.
“[But] I wouldn’t overstate that, because some of the measures directed towards the top end – the deficit levy, and the tighter means testing – will work in the other direction.”
While the Abbott government will raise some taxes in the budget – including the politically risky petrol excise and the deficit tax – Treasurer Joe Hockey says spending cuts will do most of the “heavy lifting” to reduce the deficit. Mr Eslake says it is “more or less inevitable” that a budget primarily focused on spending cuts will disproportionately affect the poor.
Senior fellow at the Brookings Institution, Justin Wolfers, has observed the effects on growing inequality in the US and worries about similar consequences in Australia.
“It looks like the Abbott government is moving in a way that will increase inequality,” said Professor Wolfers, an Australian economist working at the University of Michigan.
The Abbott government’s proposed Medicare co-payment on GP visits, increase in the petrol excise and expected tightening of unemployment benefits and the disability support pension, will disproportionately hurt poorer Australians, the economists agree. Other policies that will harm the less well off include abolishing the income support bonus, scrapping the school children bonus and cutting funding from Trade Training Centres.
Mr Hockey’s budget theme of “user pays” – encouraging Australians to pay more for services they receive for free, such as doctors' visits – is a good idea if paired with policies that compensate those made worse off, Professor Wolfers says.
But the problem with the current budget debate is that “the government appears to have heard half that message, which is a move to user pays without any move to redress the distributional consequences of that”, he says.
The global debate about inequality has heated up recently with a book Capital in the 21st Century by the French economist Thomas Piketty, who argues wealthy societies are entering a new, gilded age. The Australian political debate has been led by shadow assistant treasurer, Andrew Leigh, who wrote the book Battlers and Billionaires.
Inequality in Australia has been rising gradually since 1982, with the internationally recognised “Gini” measure increasing from 0.27 in the early Hawke government years to about 0.33 today, says global inequality expert Peter Whiteford. A Gini of 0 means society is equal, with everyone owning the same amount of wealth, whereas a Gini of 1 means society is completely unequal, where one person owns all of the wealth.The United States – where inequality dominates the political debate – has a Gini of 0.38.
Generous tax cuts by the Howard and Rudd governments made Australia more unequal by undermining the tax system that corrects inequality, says Professor Whiteford, who works at the Australian National University’s Crawford School of Public Policy.
Professor Wolfers says Australia’s rising inequality is troubling for reasons beyond morality.
“The most obvious one is that there’s a lot of dollars sitting in the pockets of people who don’t really value them very much,” he said.
Executive director of the Australia Institute, Richard Denniss, says the government’s policies on superannuation tax breaks are favouring wealthy Australians.
“Treasury estimates that about 30 per cent of the cost of tax concessions flow to the top 5 per cent of income earners,” Dr Denniss said.
“Bizarrely, the lowest income earners receive ‘negative tax concessions’ on their superannuation as they are required to pay more tax … than they do on their ordinary incomes.
“Those were addressed by the low-income superannuation contribution [proposed by Labor] but that is now due to be cut by the Abbott government.”
with Fergus Hunter