Inequality in Australia

Inequality in Australia

An Economic, Social & Political Disaster

Authorised by S. McManus, 365 Queen St, Melbourne 3000. ACTU D No. 04/2019

Contents

Summary .............................................................................................................................................1 The economic context: global prospects, heightened uncertainty and darkening skies ...............4 Let's not go down the American road: As we approach a national election politicians need to outline their vision to tackle rising inequality in Australia................................................................6 International economic institutions, famous academics and even business leaders support measures to reduce inequality ..........................................................................................................8 What does the evidence show about inequality in Australia? ...................................................... 11 Wage inequality................................................................................................................................ 11 Income inequality............................................................................................................................. 12 Net or disposable income inequality .............................................................................................. 15 Wealth inequality ............................................................................................................................. 18 Inequality between capital and labour ........................................................................................... 23 Occupational Social Mobility: Australia's entrenched inequality................................................. 24 Australia has seen the biggest fall in living standards in 30 years .............................................. 26 Policy implications and recommendations .................................................................................... 28 a) Wages Policy.............................................................................................................................. 31 b) Tax Policy ................................................................................................................................... 32 c) Raise Newstart .......................................................................................................................... 34 d) Increase expenditure on health and education ...................................................................... 34 e) Comprehensive jobs plan ......................................................................................................... 35 f) Tackling excessive corporate power ........................................................................................ 35 Conclusions ...................................................................................................................................... 37

Summary

Extreme inequality ? which is what we are now experiencing in Australia - slows economic growth, creates social havoc and undermines faith in our political institutions.

The Treasurer, Josh Frydenberg, recently noted that we have enjoyed a remarkable 27 years of uninterrupted economic growth and that the majority of Australians have never experienced a recession in their working lives.1 In this major speech setting out the Conservative economic platform for the upcoming Federal election, the Member for Kooyong failed to mention that the vast wealth generated over the last three decades has decisively gone into the hands of the privileged few, and not the many. While some brag about the absence of recessions in the "lucky country" Australian workers have been experiencing anemic wages growth, the slowest of any sustained period since World War II 2. That is a terrible indictment of the Morrison government. The fact is Australia did a better job of providing "a fair go for all" for most of our post war history than we have managed to achieve in recent years, even though profits have sky rocketed and growth has been steady.

Over the last 27 years labour productivity has increased dramatically and every Australian has contributed to that achievement. Yet only the powerful elite in the banks, insurance companies, big business and multinationals have significantly benefited from this additional wealth. Profits, executive salaries and bonuses have soared while average real wage growth has remained glacial. Consequently, workers have been trying to stretch a static pay packet to cover rising energy bills, childcare costs, medical expenses and other necessities of life. The battle to makeends-meet has become an ongoing nightmare for most working families. Living costs have outstripped household incomes over the past three years as weak wage growth delivered the biggest fall in living standards for more than 30 years3

In his speech to the Sydney Institute on the 22nd of January, the Treasurer explained in great detail the Coalitions' plans to transform Australia from the already very unfair income distribution that exists today into a nation with significantly worse levels of income and wealth inequality. Many of the policies he outlined have a remarkable similarity to those pursued by President Trump in America over the last two years. Policies that have exacerbated inequality, caused social deprivation and shaken democracy.

The main focus of the Coalition agenda is on personal income tax cuts for the very wealthy and businesses while promising further attacks on those requiring welfare, the trade union movement and the ability of workers to get a fair wage. In his speech Frydenberg spoke about "class warfare" and his agenda made it clear that the Coalition has its policy "guns" sharply focused on those in the middle and lower parts of the income distribution while cutting the taxes of the wealthy and providing more free rides for the elite.

1 Josh Frydenburg, Speech to Sydney Institute, 22 January 2019. 2 Andrew Stewart, Jim Stanford and Tess Hardy `The Wages Crisis in Australia', University of Adelaide, p 6, 2019.

3 New analysis from Associate Professor Ben Phillips, Australian National University, using ABS Disposable Household income data from the National Accounts, CPI and population growth, 2019.

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The approach of the Treasurer is sharply at odds with the stance taken by the Governor of the Reserve Bank of Australia (RBA). The RBA is an independent institution that is responsible for ensuring sound money and macroeconomic stability. Governor Phillip Lowe has argued on many occasions over the last year that wage growth is too low to fulfill the objectives of the RBA.4 He appreciates that stagnate real wages depress demand and thus represents a fundamental problem for preserving robust levels of economic growth in the current global context.

The Abbot, Turnbull and Morrison Government has tried to deny that inequality is a problem and tried to divert attention from the low wage crises. For example, in late 2018 the current Treasurer argued that the answer to Australia's economic and social problems was "not to redistribute the pie but to grow the pie".5 This simplistic proposition puts the Government directly at odds with the evidence and recommendations of the most respected yet conservative international economic institutions. In the recent past the IMF, World Bank and the OECD have all produced hard evidence demonstrating that high inequality depresses economic growth. Excessive levels of wealth and income inequality weakens the ability of low income groups to buy goods and services, discourages entrepreneurs from investing, reduces the incentive for productivity enhancing technological change, slows economic growth and destroys job. If you really want to "grow the pie" it is important to ensure that everyone is getting a fair slice.

Conservative politicians also try to dismiss concerns about inequality by claiming it is an inevitable global trend. It is true that for the last thirty years income and wealth inequality has been increasing in a majority of OECD countries. But the pace of change has varied significantly from country to country. Common explanations for rising inequality include technological change and globalisation which have impacted all advanced economies. The fact that inequality varies significantly from country to country means that other factors have also been at play. The most important of which concern government policy on labour market institutions, social expenditure and taxation. Some countries have used policies in these domains to mitigate the effects of globalisation and technological change on inequality, while others have exacerbated gaps between rich and poor by simultaneously reducing taxes on the rich and public expenditure on welfare and services that support to middle and low income earners. The countries with the highest levels of inequality have also weakened support for trade unions, collective bargaining and minimum wages.

Scott Morrison says, "if you have a go, you will get a go". The truth is that working people have been "having a go" for decades and building the wealth of our nation. But they have not shared sufficiently in the rewards that stem from this increased productivity. For the last 30 years these rewards have been monopolised by a small elite of wealthy and powerful people. These trends are getting worse not better. In just one year, between 2016 and 2017, the number of Australian

4 The RBA has formal annual inflation target of between 2 % and 3 %. In 2018 the inflation rate (as measured by the CPI) was just 1.8%. 5 Eryk Bagshaw & David Crowe `Treasurer Josh Frydenberg challenges Labor on inequality, lays out new economic focus' Sydney Morning Herald, 15 September 2018

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billionaires increased by over 20% (from 34 to 43)6. It is this group, and their multi-millionaire friends who fall slightly short of the billionaire category, that exert excessive political influence in our country through their ability to control parts of the media and fund lobby groups. This is one reason why public confidence in our political system and other key institutions is being undermined.

If we are to restore faith in democracy and our political intuitions it is imperative to demonstrate that after years of consistent economic growth every Australian should be better off. Unfortunately, that has not been the case. In the last three years we have seen living standards fall for working families while there has been a dramatic increase in the wealth of billionaires78. It is not the "politics of envy" to seek a fair distribution of the benefits derived from rising productivity.

To maintain robust economic growth and ensure that all Australians prosper from rising productivity the ACTU is recommending policy reform in the following areas:

- Ensuring that real wages rise in line with national productivity improvements through the introduction of a new Living Wage, tackling insecure work, restoring penalty rates for 700,000 low paid workers, raising public sector wages and reform the collective bargaining system so it can deliver rising living standards;

- Making sure everyone pays their fair share of tax including corporations and the wealthiest members of our society. This includes reforms to capital gains, negative gearing and family trusts;

- Lifting the very poorest Australians out of dire poverty including through an increase in Newstart and an increase in the aged pension for those without adequate superannuation;

- Increased expenditure on health and education; - A comprehensive Jobs Plan to reduce underemployment and unemployment; and, - Measures to tackle excessive corporate power. The Banking Royal Commission has

shown the extent of corporate excess and law breaking. Australia is also littered by firms with oligopoly power in certain sectors. Stronger competition policy is required to ensure people are not being ripped off by excessive prices.

Boosting the wages of the low paid and middle class makes sound economic sense. In a time of international economic uncertainty boosting domestic consumption by lower income groups is desirable. It will provide greater certainty for domestic producers and help lift business investment out of its recent trough. Balanced growth of this nature will ensure that employment growth remains strong. The combination of these political, social and economic achievements will be reflected in a larger and reinvigorated middle class. The polarisation of the last few

6 Billionaires Report 2018: New visionaries and the Chinese Century, Summary table, slide 17,' UBS / PwC October 26, 2018. 7 New analysis on falling living standards from Associate Professor Ben Phillips, Australian National University, using ABS Disposable Household income data from the National Accounts, CPI and population growth, 2019. 8 Oxfam `The Inequality that Divides Us' Australian Inequality Fact Sheet January 2019 states last year `collective billionaire wealth increased by a massive $36 billion to $160 billion in total. This is equivalent to an increase of $100 million a day. The Australian billionaire wealth increase of $36 billion last year is enough to fund about half of the Australian Government's total health budget for the 2018-19 financial year'.

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decades can be reversed. A more equal Australia will be one that is more harmonious. It will help slow, and eventually eradicate, recent trend towards extremist politics. A more equal and inclusive society will help mitigate a wide range of social problems. It will help restore social mobility and once again allow Australians to believe they live in a country where everyone gets a "fair go".

The economic context: global prospects, heightened uncertainty and darkening skies

Globally most respected economic institutions believe the risk of recession has increased and some pundits fear "winter is coming".9 It is now evident that economic growth in China, the engine of the global economy for the last two decades, is slowing rapidly. Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities. Recent gyrations in financial markets and the inversion of bonds yields in the other main global economic power, the USA, indicate that the current economic up-swing has reached a conclusion. A soft-landing may be possible but many well-placed observers believe downside risks have increased.10 The latest data from both Japan and Germany point to economic contractions and the probability of a disorderly Brexit remains high. Emerging and developing countries also confront a deteriorating economic outlook as commodity prices decline, the cost of borrowing rises sharply and, despite recent rhetoric from Washington and Beijing, international trade tensions remain intense.11 Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges.

The geopolitical environment compounds the economic risks. The two largest Anglo-Saxon countries confront their deepest political divisions in a century. Other western countries that might be expected to shoulder the burden of leadership for liberal, social and democratic principles - such as France - are increasingly paralysed by an increasingly violent movement protesting against excessive income inequality. Germany and several north European countries also confront profound national political challenges that constrain their ability to act decisively and preserve global political stability. Meanwhile the number of armed conflicts and the list of politically extreme national leaders in other parts of the world continues to grow. Because of these political constraints there are realistic concerns that it would be impossible to "mount a coordinated and effective response to a severe global economic slowdown".12

At home we face a national election. It is fair to ask what is the best political and economic strategy to steer Australia through these choppy global waters and maximise our own economic growth, shared prosperity and political stability in the face of these foreign challenges. A

9 International Monetary Fund, World Economic Outlook, October 2018 and discussions at the IMF- World Bank Annual meetings in Bali, October 2018. 10 Lawrence Summers, "We must prepare now for the likelihood of a recession", Financial Times, January 6, 2019. 11 World Bank, Global Economic Prospects "Darkening Skies", 8 January 2019. 12 Martin Wolf, "why the world economy feels so fragile", Financial Times, 9 January 2019.

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sensible response might start by considering policy changes that support greater economic selfreliance and slightly more political independence than has been required over the last 30 or 40 years, while maintaining existing alliances and cooperation with regional partners.

This paper argues that these global conditions enhance the desirability of policies designed to reduce income and wealth inequality. However we can confidently predict that conservative politicians will assert now is not the time to boost wages and increase public expenditure and rather the focus should remain on tax cuts for corporations and the wealthy. In fact, as noted above Josh Frydenberg foreshadowed these arguments when he said "now is not the time to redistribute the pie but to grow the pie". These arguments hinge on the assertion that high inequality is required to boost investment, growth and jobs.

This is simplistic nonsense. The fact is that by sharing economic wealth more fairly we will accelerate economic growth. This is particularly true at a time when international demand is declining and on the domestic front people are starting to cut spending and investment.13 A reduction in income and wealth inequality in Australia will maximise our economic growth potential over the next few years thereby providing scope to maintain high profit levels while ensuring better living standards for lower and middle income earners. As we will see below the ACTU perspective on the relationship between inequality and growth is shared by the International Monetary Fund (IMF), World Bank, the OECD and even some of the richest capitalists in the world.

From a political perspective the current global environment means we should be placing a premium on promoting shared prosperity, cohesive societies and greater integration. This is not the time to mimic those who want to divide their own nations and play to their so-called "base" by exacerbating inequality, attacking immigrants and denying the urgent need for pragmatic climate change and energy policies.

This paper will also argue that a wide range of policy tools should be used to reduce inequality and promote cohesion. By using the widest range of economic instruments the weight placed on any one particular policy will remain modest. We thus need to use wage, tax and public expenditure policies sensibly and pragmatically to reduce inequality and boost growth. This includes tackling the primary income distribution by introducing a living wage, restoring penalty rates, ensuring that casual and precarious workers get a decent income and reforming our wage fixing and industrial relations system.

Our tax and welfare systems also require slight adjustments to reflect best practice in countries that have achieved high and sustained economic growth without massive increases in inequality. A taxation system that is mildly progressive, treats all sources of income in a consistent manner and is fully enforced are rudimentary and fair principles that need to be applied. We also need to better utilise public policies and government revenue to provide the best levels of education, health and social services possible, because these policies have a profound impact on inequality, social inclusion and political stability. Through marginal but simultaneous adjustments to policies on all these fronts it will be possible to maintain a balanced and

13 ABS Cat 8501.0 Retail Trade, Australia, December 2018

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reasonably strong domestic economy as global growth slows and geopolitical uncertainty increases.

Let's not go down the American road: As we approach a national election politicians need to outline their vision to tackle rising inequality in Australia

A national election must be held at some point in the next few months and unofficial campaigning has been underway for some time. The Australian people have a right to expect that between now and election day all political parties will set out their vision for the country and explain the policies they will pursue to translate promises into reality. As part of this process all major political parties should be required to unambiguously declare their views, and proposed policies, regarding: income and wealth distribution; wage growth; penalty rates and support for workers in precarious jobs; ways to promote a balance of power at the workplace that is conducive to higher productivity and greater equity; public financial support for health, education and social services; and other issues that impact on social cohesion and a fair society.

Many politicians will dodge these issues over the next few months. Alternatively they will attempt to move the "goalposts" and reinterpret the issues in ways that suit their own agenda. When politicians fail to give comprehensive and forthright responses to critical policy questions one must look at their past policy record and the signals they have sent through their statements and campaign stunts.

Prime Minister Morrison began his unofficial early election campaign back in November 2018. At that time he began wearing an American styled baseball cap and pretended to tour Queensland on a bus while campaigning about his so-called achievements. In his words and deeds, including those at the G20 meeting late last year in Argentina, our new Prime Minister made clear his admiration for President Trump. More importantly, in the latter months of 2018 he proposed replicating some of the most controversial and dangerous foreign policy decisions made by the current American Administration.

Morrison has also expressed support for a range of domestic policies that replicate the Trump agenda. This is particularly true in respect of: regressive tax policies that will benefit millionaires and multinationals; the rejection of any sensible climate change and energy policies; using immigration to create fear and panic; and acceptance or support of discrimination on various grounds including gender and sexual orientation. Other key priorities of the current Trump Administration that are likely to appeal to a Morrison Government include: dismantling legislation that had made access to health services affordable for the poor and low income earners; the introduction of a pay freeze for the public sector employees; continued rejection of any increase in the Federal minimum wage; and, the elimination or reduction in government programs that help mitigate the social consequences of massive income and wealth inequality.

The United States has levels of income and wealth inequality that far exceed other advanced economies. For example, the top 1% of the income distribution in the USA receive 20 % of total

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