Australia’s Future Prosperity

The United Nations, International Monetary Fund, OECD and other international organisations have published statements on the risks and penalties of rising inequality.


The OECD published concise key findings in response to their own question “Does income inequality hurt economic growth?”  in December 2014.

  • The gap between rich and poor is now at its highest level in 30 years in most OECD countries.
  • This long-term trend increase in income inequality has curbed economic growth significantly.
  • While the overall increase in income inequality is also driven by the very rich 1% pulling away, what matters most for growth are families with lower incomes slipping behind.
  • This negative effect of inequality on growth is determined not just by the poorest income decile but actually by the bottom 40% of income earners.
  • This is because inter alia people from disadvantaged social backgrounds under invest in their education.
  • Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.
  • In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people’s lives.

It is not hard to identify government policies and changes that attack the bottom 40% and increase inequality, which according to the OECD will reduce Australia’s future growth. Opinion polls show the public believe the 2014 budget cuts do exactly that, target low income earners.

Health care is commonly considered a key strategic opportunity to reduce inequality and the OECD specifically refers to it under the heading “How can policy respond?”

“…..policymakers need to be concerned about how the bottom 40% fare more generally. …. Anti-poverty programmes will not be enough. Not only cash transfers but also increasing access to public services, such as high-quality education, training and healthcare, constitute long-term social investment to create greater equality of opportunities in the long run.”

Where is Australia’s health care headed?

  • GP payments (ie additional to bulk billing) are becoming more common and being  forced up by the rebate freeze extension to six years. Increases will have little effect on wealthier Australians but the bottom 40% will be encouraged to put off visits to GPs ie preventative medicine. The result will be increased usage and reliance on State Government Emergency Departments and hospitals, and poorer health outcomes.
    Australians already pay the second highest rate of out of pocket expenses in the OECD representing 18.3% of the total health spend.
  • The rebate freeze on Physiotherapists, Optometrists and other health professions will have similar impact.
  • Government strategies to introduce and extend two tier health services will increase inequality by providing high quality service to wealthier Australians and many of the bottom 40% will have to survive on skeletal taxpayer funded services.
  • The hidden welfare state (see Is Medicare Sustainable) uses taxpayer expenditure to reward wealthier/higher income Australians while offering little benefit to the bottom 40% or cost savings. Clearly the hidden welfare state is increasing inequality.
  • Australia’s taxation system ensures those who can afford to pay more, do pay more. Services provided by governments use these funds to provide high quality health care . On the other hand, privatised services are “user pays” and “profit driven”, imposing extra costs on the bottom 40% and increasing inequality.

In summary, many health care initiatives by both Federal and State governments drive up inequality which is reducing Australia’s future growth.

The OECD’s sixth finding “Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented” indicates there is no national economic benefit in the current health care initiatives. Wealthier sponsors may expect to benefit by reducing taxpayer expenditures but ultimately they will be living in a poorer economy.

The OECD  calculation for an inequality rise of 3 points as in Australia 2001-2008 indicates 2013 GDP was reduced by 2% ie A$28 billion and the cumulative effects after 25 years will be a GDP penalty of around 8.5%.  Had PM John Howard directed less of the government’s mining boom windfall to the wealthy and more to the bottom 40%, the economy would now be stronger.

oecd inequality Howard years

International Monetary Fund

The IMF reports similar findings to the OECD (from Causes and Consequences of Income Inequality: A Global Perspective June 2015).

Executive Summary

…..Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down.

In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels……..


note: EMDCs refers to Emerging Markets and Developing Countries.

No one-size-fits-all.
Policymakers around the world need to consider policies to tackle inequality. Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class is actually good for growth. Our empirical analysis also suggests that the drivers of inequality and their impact differ across countries for different income groups. As such, the nature of appropriate policies would necessarily vary across countries, and would also need to take into account country-specific policy and institutional settings, and capacity/implementation constraints. Recent work by the World Bank (2015) also highlights the importance of adopting a psychological and social perspective on policy making that takes into account what policy is implemented and how.

Squaring equity and efficiency concerns.

Lowering income inequality does not need to come at the cost of lower efficiency. Previous IMF work has shown that there does not need to be a stark efficiency-equity tradeoff (Ostry, Berg, and Tsangarides 2014). Redistribution through the tax and transfer system is found to be positively related to growth for most countries, and is negatively related to growth only for the most strongly redistributive countries. This suggests that the effect of redistribution on enhanced opportunities for lower-income households and on social and political stability could potentially outweigh any negative effects on growth through a damping of incentives.

Fiscal policy can be an important tool for reducing inequality.

Fiscal policy plays a critical role in ensuring macrofinancial stability and can thus help avert/minimize crises that disproportionately hurt the disadvantaged population.At the same time, fiscal redistribution, carried out in a manner that is consistent with other macroeconomic objectives, can help raise the income share of the poor and middle class, and thus support growth. Fiscal policy already plays a significant role in addressing income inequality in many advanced economies, but the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation, removing opportunities for tax avoidance and evasion, better targeting of social benefits while also minimizing efficiency costs, in terms of incentives to work and save (IMF 2014a). In addition, reducing tax expenditures that benefit high-income groups most and removing tax relief—such as reduced taxation of capital gains,stock options, and carried interest—would increase equity and allow a growth-enhancing cut in marginal labor income tax rates in some countries. In EMDCs, better access to education and health services, well-targeted conditional cash transfers and more efficient safety nets can have a positive impact on disposable incomes of the poor (Bastagli, Coady and Gupta 2012). In many cases, this increasing public spending would need to be undertaken in tandem with rising revenue mobilization, reduced tax loopholes, and tax evasion, and lower less- well-targeted spending (such as oil subsidies).

Education policies are key.

In a world in which technological change is increasing productivity and simultaneously mechanizing jobs, raising skill levels is critical for reducing the dispersion of earnings. Improving education quality, eliminating financial barriers to higher education, and providing support for apprenticeship programs are all key to boosting skill levels in both tradable and non tradable sectors. These policies can also help improve the income prospects of future generations as educated individuals are better able to cope with technological and other changes that directly influence productivity levels. In advanced economies, with an already high share of secondary or tertiary graduates among the working-age population, policies that improve the quality of upper secondary or tertiary education would be important. In developing countries with currently low levels of education attainment, policies that promote more equal access to basic education (for example, cash transfers aimed at encouraging better attendance at primary schools, or spending on public education that benefits the poor) could help reduce inequality by facilitating the accumulation of human capital, and making educational opportunities less dependent on socio-economic circumstances.

Fostering financial inclusion safely.

Financial deepening in EMDCs needs to be accompanied by greater inclusion to make a dent in inequality. Governments have a central role to play in alleviating impediments to financial inclusion by creating the associated legal and regulatory framework (for example, protecting creditor rights, regulating business conduct, and overseeing recourse mechanisms to protect consumers), supporting the information environment (for example, setting standards for disclosure and transparency and promoting credit information-sharing systems and collateral registries), and educating and protecting consumers. Country experiences also suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion. The promotion of credit without sufficient regard for financial stability, however, can result in crises, as evidenced by the subprime mortgage crisis in the United States, with disproportionately adverse effects on the poor and the middle class. Moreover, it illustrates the broader point that deep
social issues cannot be resolved purely with an infusion of credit. Policies thus need to strike a balance between fostering prudence stability, and inclusion, while encouraging innovation and creativity.

Well-designed labor market policies and institutions can reduce inequality,and, at the same time, not be a drag on efficiency.

Policies that reduce labor market imperfections and institutional failures that affect job creation can help support poor and middle-income workers. For instance, appropriately set minimum wages, spending on well-designed active labor market policies aimed at supporting job search and skill matching can be important. Better use of in-work benefits for social benefit recipients also help reduce income disparities. Moreover, policies that reduce labor market dualism, such as gaps in employment protection between permanent and temporary workers—especially young workers and immigrants—can help to reduce inequality, while fostering greater market flexibility. More generally, labor market policies should attempt to avoid either excessive regulations or extreme disregard for labor conditions. Labor market rules that are very weak or programs that are nonexistent can leave problems of poor information, unequal power, and inadequate risk management untreated, penalizing the poor and the middle class (World Bank 2012). In contrast, excessively stringent regulations can compound market imperfections with institutional failures, and weigh on job creation and efficiency.

In EMDCs, making labor markets more inclusive and creating incentives for lowering informality is a key challenge.

Workers in these countries often lack equal access to productive job opportunities and do not benefit evenly from economic growth. Many individuals with low skills, in particular, remain trapped in precarious jobs, often in the informal and unregulated economy. In such jobs, even full-time employment tends to be insufficient to lift households out of poverty. Thus, creating accessible, productive, and rewarding jobs is key to escaping poverty and reducing inequality. Informal workers need to have the necessary legal, financial, and educational means to access formal sector employment. Higher formal sector employment also requires better incentives for firms to become formal. Policies to reduce tax, financial, and regulatory constraints can expand formal sectoral employment by reducing the incentives for firms to operate informally, both by increasing the benefits of participating in the formal sector and by reducing the costs of doing so (Dabla-Norris and Inchauste 2008).

Complementarities between growth and income equality objectives.

Reforms aimed at raising average living standards can also influence the distribution of income. Indeed, tackling inequality goes beyond the remit of labor, social welfare, financial inclusion, and tax policies. The key to minimizing the downside of both globalization and technological change in advanced economies is a policy agenda of a race to the top, instead of a race to the bottom—an agenda that includes policies to encourage innovation, reduce burdensome product market regulations that stifle competition and technology diffusion, move goods produced upwards in the value chain, and ensure that this rise benefits everyone. In developing countries, raising agricultural productivity, rapid accumulation of capital, and technology diffusion in labor-intensive sectors can substantially lift growth and ensure that the fruits of prosperity are more broadly shared (Dabla-Norris and others 2013). Sustaining growth in emerging market economies will require more intensive patterns of growth, greater flexibility to shift resources within and across sectors, and the capacity to apply more knowledge and skill-intensive production techniques. Policies to improve skills for all, to ensure that a nation’s infrastructure meets its needs, and to encourage innovation and technology adoption are thus all essential to driving growth and ensuring a more inclusive prosperity.