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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.




Illustration: Matt Golding.
Illustration: Matt Golding.






“[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