All pain and no gain in the Coalition's unequal vision

United States President Barack Obama believes it is “the defining challenge of our time”, so why are Australian politicians so blasé about inequality?

The federal budget was a decidedly regressive affair which, despite higher taxes on the rich, leaves most of the heavy lifting to the poor and middle class. Health and welfare spending, which mainly benefits lower-income earners, were drastically slashed, but tax concessions -- which mainly accrue to the already wealthy -- were largely untouched.

This is a budget that promotes inequality. It does so while the rest of the world -- thanks to Thomas Piketty’s Capital in the Twenty-First Century -- is discussing ways to diminish it. The budget follows a period in Australia’s history that has seen some measures of inequality rise to their highest levels in decades.

Despite two decades of unprecedented economic prosperity, measures of inequality and poverty have deteriorated in Australia. A greater share of our income and wealth has been captured by the top of the income distribution and this is only likely to increase if most of the measures in the budget come to pass.

According to the Organisation for Economic Co-operation and Development, Australia’s gini coefficient (a common measure of inequality) is the 11th highest among OECD countries and has increased noticeably over the past 15 years.

Poverty in Australia rose from 11.4 per cent in 1995 to 14.4 per cent in 2010. The OECD average in 2010 was 11 per cent. Poverty in Australia tracks well above the likes of New Zealand and the United Kingdom.

Income growth reinforces how well the ‘elite’ has done compared with the working class. Real income for the bottom 90 per cent of the income distribution rose by just 34 per cent between 1980 and 2010. By comparison, the top 1 per cent has enjoyed income growth of around 178 per cent and the top 0.1 per cent vastly greater again.

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But income understates the level of inequality in Australia. According to ABS data, the wealthiest 20 per cent of Australian households have a net worth that is 68 times as high as the least wealthy 20 per cent. The bottom 20 per cent of households account for just 1 per cent of total household net worth.

From the outset it must be acknowledged that some economic inequality is necessary. Society still needs to reward those with specialised skills and talent, and reward entrepreneurialism, hard work and risk-taking. But a high level of inequality curbs economic growth and promotes poverty; creates crime and terrorism; and erodes the very foundation of democracy.

Consider the implications of inequality on household spending -- which should be interesting not only to households themselves but also to business owners.

Since the wealthy spend a lower proportion of their income than either low- or middle-income earners, it logically follows that higher concentrations of a country’s income and wealth among the few weighs on demand for consumer goods.

Money that is taken out of the pockets of lower income earners is money that won’t be funnelled through department or retail stores and money that won’t find its way to employees, business owners or shareholders. A cut to welfare for the poor is a cut to a business owner’s bottom line.

Obviously there are other economic implications. For example, Rob Burgess noted last week that welfare cuts could reduce rental yields across the country (The budget hit to rental yields, May 15).

It almost goes without saying that providing Australians the opportunity to receive quality education and healthcare, regardless of income, provides benefits that can last for generations.

Perhaps the most troubling aspect of rising inequality is that it gives rise to unequal political representation. Our democracy is founded on the notion of ‘one person, one vote’ and yet a vast majority of people have votes that don’t matter, while a small minority have votes that matter a great deal.

Ever wondered why superannuation tax concessions accrue to those who don’t need them? Or why capital is taxed less than income earned? Or why Australian housing policy benefits homeowners and investors rather than improving affordability?

Tuesday’s budget had no shortage of examples. Why did most of the heavy lifting come from the poor and middle-class? Why was spending cut while tax concessions ignored? Who benefits most from the removal of the carbon tax?

The beneficiaries are, as always, those who have the ear of the government. We know them as the wealthy and influential. The greater a society’s inequality, the greater their relative wealth and influence and the more perverted the decision-making process.

A central aim of government spending and tax policy should be to provide equality of opportunity to as many people as possible (as opposed to equality of outcome). Everyone should have the opportunity to make the most of their abilities and talent regardless of whether they win the lottery of birth.

Last Tuesday’s budget undermined that very notion and, in doing so, has set Australia on a course to become a less equal society. The economic consequences of this shift in policy are vast -- and not simply isolated to low-income earners -- and could include everything from lower growth and higher poverty to higher crime levels and lower house prices.