As followers of the Evatt Foundation website will be well aware, economic inequalities have been increasing in many countries. These growing gaps have resulted primarily from the phenomenal growth in the income and wealth of the super rich during the last three decades, not directly because of increasing rates of absolute poverty. The top 10 per cent of households has done spectacularly well in the race for riches over that last three decades. The top 1 per cent has increased its share even more spectacularly: in Australia it has nearly doubled its income share. The concentration of accumulated wealth – always more unequally distributed than current income – has become even more extreme.
Some world leaders are evidently thinking that the situation is getting totally out of proportion. President Obama, for example, has made an attack on unjustified inequalities a central theme of his policies during his final term, although it remains to be seen whether this has any significant impact in practice. One American billionaire venture capitalist has been getting international publicity because of his warning that failure to implement more egalitarian policies runs the risk of precipitating revolution.
It is in this broad context that we can usefully consider the Australian federal budget that Treasurer Joe Hockey introduced to the parliament earlier this year. The budget’s central assumptions are the existence of a budget emergency and the need for major cuts in government spending. But the posited fiscal crisis is bogus: the Australian government’s debt is one of the lowest of all the OECD countries. And the expenditure cuts are socially damaging. They are widely perceived a unfair because they hit harder at poor households than rich ones.
These concerns have been given sharper bite by the federal Treasury’s own figures which show that the budget, if fully implemented, would hit the poor harder than the rich. Treasury’s modeling estimates that the total effect of the spending cuts and tax changes would leave the richest third of households $517 a year worse off but make the poorest third $844 worse off. Another recent report from the Australian Consumers Association reveals the intensity of cost-of-living pressures already being felt by a broad swathe of Australian households, two-thirds of whom say they are having to cut back on their spending. Hockey’s ill-judged public statement about poor people being less affected by rising fuel prices because they don’t drive as much showed him to be lamentably out of touch. All this is embarrassing, potentially destabilising, even potentially terminal, for a government that is clearly failing to sell a message about sharing the necessary pain.
Quite apart for the government’s failure to effectively ‘sell’ its policy, it's not surprising that the budget has provoked such widespread opposition. The predictable concerns of those most directly affected by the austerity measures that Hockey announced have been swelled by expressions of broad social concern with the unfairness of it all. Even people who emerge relative unscathed from the tax and spending changes seem to sense that it runs counter to social concerns with equity and social cohesion. It is perceived as violating the cherished Australian ethos of ‘the fair go’.
Toughing it out is an option for the government. Some of the rhetoric expressed by government leaders such as Abbott and Hockey suggests this inclination. There are two obstacles though. One is a Senate in which the government does not have a numerical majority. The other is more subtle because it relates to the prevailing climate of opinion about what is socially acceptable. That climate seems to be increasingly influenced by concerns about the social problems resulting from the growth of economic inequality.
It is not purely coincidental that a blockbuster book on inequality has been making major waves worldwide. This is Thomas Picketty’s Capital in the Twenty-First Century, discussed in articles on this website. The book describes and analyses the trends in inequality across many countries and over many decades. One does not normally look to big statistical academic tomes to find triggers for widespread public concern. But here is such a book, and it has become a publishing phenomenon. Picketty’s timing is evidently spot-on, because his book clearly feeds on, and contributes to, a climate of public concern about how growing economic inequality impairs social justice, social cohesion and social stability .
Numerous other studies by social scientists and epidemiologists in recent years have revealed the statistical and causal connections between economic inequality and a range of social problems, such as mental and physical health, crime and violence. Surveys also show that, in general, nations that are relatively equal in their distribution of wealth have happier people. Australian surveys have consistently shown most people think society should be more equal.
These concerns are not new, of course. They are deeply embedded in traditional small-l liberal concerns to create equality of opportunity. They have pervaded social democratic ambitions for greater equality of outcomes. But they have typically been set aside because of economists warning that pursuing greater equality would impair the material incentives necessary for economic growth. But that conventional warning has recently been killed off. A particularly significant nail in its coffin is a recent IMF report that shows there is no general trade-off between equality and economic efficiency. In other words, pursuing inequality does not impair a nation’s productivity nor its economic growth, contrary to what conservatives had previously asserted.
So, is the pursuit of greater economic and social equality a longstanding concern whose time has come? It previously had traction following the second world war and led to progressive tax policies and the welfare state, but the last quarter-century has seen that liberal and social democratic momentum stalled by a neoliberal backlash. Australian government policies have put more emphasis on trying to foster economic growth and have made the tax system less progressive and redistributive. The resulting erosion of the tax base by ill-judged policies, particularly when Peter Costello was Treasurer in the Coalition government led by John Howard, has left a sorry legacy. Hockey’s budget worsens it by abolishing two significant tax measures – the carbon tax and the minerals resource rent tax - as well as reducing corporate taxation.
The big challenge now facing the opponents of Australian government’s 2014-5 budget, and the Abbott-Hockey policies in general, is to chart a different direction with explicitly egalitarian characteristics. An alternative policy agenda that emphasises greater equality needs to be constructed and, on attaining government, effectively implemented.
The dominant budgetary emphasis needs to be on generating a fairer and more substantial revenue base. As noted, there is no immediate fiscal emergency. Improving the Australian government’s revenue base is necessary in the medium-term. Financing Australia’s need for improved infrastructure and public services needs a more buoyant revenue stream. And it needs to be targeted at those with the ability to pay, especially where their wealth derives from rent-seeking, inheritance and other forms of unearned income.
There are plenty of policies to achieve these purposes if there is the political will to embrace them. In the Australian case, the options include cracking down on the abuse of family trusts and other tax rorts, making the tax arrangements for superannuation less generous to high income earners, dropping negative gearing, increasing the effective rate of capital gains taxation, and extending land and wealth taxes. These are potential tax reforms that could be developed in ways that would be both potent and equitable. Ideally, they would be supplemented by other income policies designed to make the initial distribution of incomes between wages, profits, rent and interest less unequal in the first place.
Is the climate right for this sort of renewed drive to redress unjustifiable and socially-costly inequalities, while also establishing a stronger basis for our collective economic future? Perhaps the current furore over the perceived unfairness of the federal budget signals that the time is coming for a fundamental change of direction.
Frank Stilwell is Professor Emeritus in Political Economy at the University of Sydney and a member of the Evatt Foundation Executive.
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