Ross Gittins
The Sydney Morning Herald's Economics Editor
August 20, 2014
It doesn’t seem yet to have dawned on Tony Abbott that he was elected because he wasn’t Julia Gillard or Kevin Rudd, not because voters thought it was time we made a lurch to the Right.
The man who imagines he has a “mandate” to mistreat the children of boat people, ensure free speech for bigots, give top appointments to big business mates and reintroduce knights and dames, represented himself as a harmless populist before the election.
The other thing he doesn’t seem to have realised is that just as he has us moving to reduce our commitment to action against climate change and to make the budget much less fair, the rest of the advanced economies are moving the opposite way.
Illustration: Kerrie Leishman.
President Obama is taking steps to overcome Congress’s refusal to act on global warming, the Chinese get more concerned about it as each month passes and the International Monetary Fund is chastising us for our apostasy.
And while we use our budget to widen the gap between rich and poor, people in other countries are realising the need to narrow it.
Wayne Swan, former Labor treasurer, noted in a speech on Monday that “centre-right political leaders across the globe are acknowledging the obvious truth that capitalism is facing an existential challenge . . . only last week ratings agency Standard and Poor’s emphasised yet again that high inequality is a drag on growth”.
In Australia, however, an increasing “vocal minority has decided to oppose any reform, no matter how necessary and no matter how obvious in its benefits to the whole nation, if they perceive it is in their short-term interests to do so.
“This is a recipe for unnecessary political division and widening social inequality, and unfortunately permanent reform failure,” he says.
Australians had done much better than the Americans at matching strong economic growth with social equity but, according to Swan, “we’re witnessing the Americanisation of the Right in this country. Obsessed with defending the advantages of the wealthiest in our society”.
In his various efforts to defend rather than correct his first budget’s unfairness, Joe Hockey seems to be doing just that. Meanwhile, the messages coming from international authorities are very different.
In a recent paper on policy challenges for the next 50 years, the Organisation for Economic Co-operation and Development warned the growing importance of skill-biased technological progress and the rising demand for skills, will continue to widen the gap between high and low wages.
Unless this was corrected by greater redistribution of income, other OECD countries would end up facing almost the same level of inequality as seen in the US today. “Rising inequalities may backlash on growth, notably if they reduce economic opportunities available to low-income talented individuals,” it warns.
Christine Lagarde, managing director of the International Monetary Fund, noted in a speech that the 85 richest people in the world control as much wealth as the poorest half of the global population - 3.5 billion people.
“With facts like these, it is no wonder that rising inequality has risen to the top of the agenda - not only among groups normally focused on social justice, but also increasingly among politicians, central bankers and business leaders,” she said.
“Many would argue, however, that we should ultimately care about equality of opportunity, not equality of outcome.” As it happens, Hockey has defended his budget’s unfairness with just that argument.
“The problem is that opportunities are not equal. Money will always buy better-quality education and health care, for example. But due to current levels of inequality, too many people in too many countries have only the most basic access to these services, if at all. The evidence also shows that social mobility is more stunted in less equal societies.”
Disparity also brings division, she said. “The principles of solidarity and reciprocity that bind societies together are more likely to erode in excessively unequal societies. History also teaches us that democracy begins to fray at the edges once political battles separate the haves against the have-nots.”
Pope Francis put this in stark terms when he called increasing inequality “the root of social evil”.
“It is therefore not surprising that IMF research - which looked at 173 countries over the past 50 years - found that more unequal countries tend to have lower and less durable economic growth,” Legarde also said.
Get that? Until now, the conventional wisdom among economists has been that efforts to reduce inequality come at the expense of economic growth. Now a pillar of economic orthodoxy, the IMF, has found it works the other way round: rising inequality - as is occurring in Australia, the US and almost all advanced economies - seems to lead to slower growth.
Lagarde said other IMF research had found that, in general, budgetary policies had a good record of reducing social disparities. Social security benefits and income taxes “have been able to reduce inequality by about a third, on average, among the advanced economies”.
What can we do? “Some potentially beneficial options can include making income tax systems more progressive without being excessive; making greater use of property taxes; expanding access to education and health; and relying more on active labour market programs and in-work social benefits.”
Perhaps in his efforts to get a modified version of his budget passed by the Senate, Hockey could bring in the IMF as consultants.
Ross Gittins is economics editor.
