Inequality isn't Australia's issue - poverty should be our focus

Purveyors of doom were dealt a blow this week when the Productivity Commission neatly punctured the inequality debate with some long-needed facts. It found that, while overall income inequality has risen slightly over the past three-plus decades, social mobility remains high and real incomes have grown right across the income spectrum.

Far from the grand unifying crisis of our times – as it is portrayed by some on the left – it’s tempting to make the non-politically correct observation that this means inequality doesn’t matter.

While that statement would be going too far, at a bare minimum it’s worth asking why some are so worked up about the rich getting richer, since the poor are getting richer, too.

However, instead of examining the Australian evidence, many on the left have merely imported the inequality debates from the United States and Britain, where decades of stagnant wage growth have pushed voters towards the extremes of the left and right. The Productivity Commission makes clear that this simply doesn’t apply in the same way in Australia.

In fact, the evidence in its report suggests inequality should be a second-order issue here. Given Australia is in the top-10 most-equal societies in the OECD, inequality should be less important than poverty and disadvantage.

Too often, the ideas of poverty and inequality are intertwined. In part, this is inevitable, as those who are disadvantaged are always going to have unequal outcomes compared to those who are not disadvantaged.

However, it is also a function of the (flawed) definition of poverty. But defining poverty relative to income effectively makes it a measure of inequality – not poverty. Given that the commission found broad-based income growth, it’s hardly surprising that “relative poverty” hasn’t substantially declined in 30 years. Yet when measured against more objective measures, as in a recent HILDA survey, one finds that poverty has fallen by 70 per cent.

The difference is substantial and important: if “poverty” has not improved despite 27 years of uninterrupted economic growth, you could argue policy settings need to change. Instead, we see even more evidence that the free-market economic reforms of the 1980s and 1990s have delivered for almost everyone.

That might lead you to instead conclude that, far from adopting high-taxing, high-spending, European-style socialism, we need more of what has been working right here in Australia.

The reality is in a resource constrained environment; the government can only focus on so many things. This is particularly true in the welfare space, where policies targeting poverty and inequality can actually clash.

Policies that seek to reduce inequality invariably have a far broader cohort than those that focus primarily on poverty. At the more extreme end, the policy that is arguably most focused on inequality would be a universal basic income (or UBI) funded by a progressive personal income tax.

My research on a UBI shows that, because of the steeply progressive tax rates needed to raise the hundreds of billions of dollars to pay for it, those in the top half of the income-tax distribution would pay many times more in new taxes than they would receive in UBI payments.

Yet those at the bottom of the income distribution, because they are already receiving income-support payments, would see little extra cash. The primary benefit would flow to those who were working and earning just enough not to receive welfare.

Often, policies targeting inequality aren’t effective in combatting poverty because they merely transfer income from middle-income earners to lower-middle-income earners (essentially, a lot of this is just welfare churn).

There is no doubt that broad-based services and payments are more expensive than targeted policies. But there is no guarantee that universal services like health and education, or quasi-universal welfare payments like the age pension, will actually deliver for those in real need.

Indeed, despite sustained real growth in pension rates – and an annual pension spend approaching $50 billion a year – single pensioners with no home and no assets continue to struggle. As do kids from disadvantaged backgrounds, despite record spending in education.

While there are legitimate concerns over punitive effective marginal tax rates, there are good reasons to think the only way to maintain a strong safety net for those truly in need is to support stringent means testing.

At a minimum, this week should cause those promoting a high-taxing, broad-based spending agenda to rethink their goals.

The poor will be better off if we focus on spending what we raise now more effectively and efficiently.

Simon Cowan is research director at The Centre for Independent Studies.