All things equal

We should grow the pie, not squabble over slices, writes Stephen Walters.

Discussion about income inequality is growing louder by the day, but not necessarily better informed. There are claims and counter claims over the underlying evidence, conflicting messages from different data sources and disputes about whether inequality is getting worse. And that is before we debate what should be done about it, if anything.

The perception of unequal distribution of the economic spoils is reinforced by the fact that heavily indebted households are saddled with the weakest growth in wages in a generation, at a time of soaring asset prices, which typically favours the wealthy. Meanwhile, there are steep rises in the costs of essential services, which disproportionately hurt lower income households.

Some of the confusion and disagreement stems from conflicting messages from the data. An RBA study back in 2015 showed that income inequality had risen slightly over the past decade. But, the most recent data from the Household, Income and Labour Dynamics in Australia survey (HILDA) undertaken for the Federal Government showed that it hadn’t.

Uniquely, the HILDA longitudinal survey has surveyed the same households since 2001 – many economists consider it superior to other sources. It shows that while household income here rose sharply in the years leading into the GFC, it has fallen slightly since 2009. This adds to the perception that the proceeds of the mining boom passed by many households.

A widely accepted measure of income equality is the Gini coefficient, which measures dispersion across income groups. A coefficient of 1 means one person has all the income – zero means everyone has the same income.

On this measure, income inequality in Australia remains broadly the same as it was in 2001. Our coefficient of 0.296 is in line with the average of the last 16 years and close to the OECD mark. Household income here is slightly less equally distributed relative to most European economies, but more evenly spread than for households in the US, the UK and New Zealand.

Whatever the data disagreements, claims of worsening inequality deliver a potent political message. They help fuel the push for higher taxes on wealthier Australians, in particular. The Opposition, for example, has promised to hike taxes for higher income earners and curb use of discretionary trusts and negative gearing favoured by the wealthy.

Unsurprisingly, the government opposes Labor’s suggested tweaks to the tax system. The partisanship that infects our political debate is painfully obvious and common ground in this important debate is elusive.

It’s true that Australia already boasts a highly progressive tax system. The top three per cent of earners already contribute 30 per cent of the tax collected – the bottom 40 per cent of households pay no net tax at all. And no country ever taxed its way to prosperity. All taxes impose costs that inhibit the rising tide of national income that lifts all boats, not just those carrying the better off.

Squabbling over the spoils of a slower rate of economic and income growth benefits no one. At the extreme, a recession would mitigate inequality by bringing wealthier households back to the pack, but as we learned in the last recession in early 1990s, recessions hurt lower income earners too – sometimes disproportionately.

Clearly, weaker growth is not the answer. Instead, we should develop policies that grow the pie, which means prosecuting a new agenda for reform. Government needs to provide better incentives for the private sector to invest and hire. Firms need to innovate and grow, because we cannot rely on another commodity price boom to come along.

It is important to distinguish here between unequal income and wealth. While income inequality has hardly moved, the RBA study shows that wealth inequality has. This is mainly because of the persistence of exceptionally low interest rates in most parts of the world, alongside other expansionary monetary policy.

Low interest rates help lift prices of property and financial assets, ownership of which is skewed to the wealthy. But even then, the distribution of household wealth in the UK and the US is more skewed than it is here. Perhaps we are not as badly off as some have suggested.