The great economic lesson of the pandemic was that poverty is a policy choice, and inequality is effectively set at the level the government is content with. When the pandemic hit and businesses shut, unemployment was set to soar and the Morrison government realised that more than a million people were about to discover just how impossible it is to survive on $40 a day.
Not only was this politically untenable, but it was also economically disastrous, because the pitiful jobseeker rate would not be enough to sustain the economy during the downturn.
In response, the government temporarily doubled the rate and instituted the jobkeeper program as a quasi-wage guarantee.
Guess what? It worked. Not only did it keep the economy going despite a massive drop in production, but it also lowered poverty.
We have always known that government benefits reduce poverty and inequality, but this was a great practical example.
The most recent Household, Income and Labour Dynamics in Australia (Hilda) survey demonstrated just how good taxation and government benefits are at lowering inequality when it compared the Gini coefficient (which measures inequality) before and after taxes and benefits.
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Taxes and government benefits effectively reduce the level of inequality by about a third.
But this is only part of the story. The latest distribution of the household income, consumption and wealth survey released this week by the Bureau of Statistic gives us the rest.
The survey provides breakdowns on how much money each household income quintile (ie households broken down into groups of 20%, from the poorest to richest) has, how they get it, what they spend it on, how much tax they pay and how much they – if any – have left over to save.
For example, the richest 20% of households account for 48% of primary income (wages, investments, business profits), spend 33% of all the money consumed on goods and services and save 64% of all household savings:
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The poorest 20%, however, have just 4% of total primary income, spend only 12% of all household consumption and actually contribute -4% of all household savings (ie they are in debt).
The data also reveals how important social assistance (which makes up a majority of what is referred to as “secondary income”) is to low-income households:
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In 2021-22, this secondary income accounted for 47% of the pre-tax income of the poorest 20% of households.
As you would expect, the richer the household, the smaller the part social assistance plays in the total income. But while the above graph suggests a lovely equality, when we look at the average dollar amount of each income quintile, the reality of who has the money is revealed:
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The wages of the richest 20% of households is on average 15 times that of the poorest 20%, but when we add in social assistance it falls to 6.4 times.
When we include the impact of taxes, the average after-tax household income of the richest 20% is down to 5.3 times that of the poorest 20% of households:
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But we can’t stop there, because taxes do not just fund benefits – crucially, they fund government services.
This is an often-overlooked aspect of reducing inequality. While it’s vital to provide people enough money to survive while looking for work or while living with illness or a disability, the provision of government services is what truly prevents society from becoming an inequitable horror show.
The dollar value of services like public education and health are referred to as “social transfers in kind”. When we take these into account, the ratio of the richest 20% to the poorest 20% falls from 5:3 to 3:1.
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Another way to think of it is that social benefits lift the share of national household income going to the poorest 20% of households from 4.1% to 4.7%. Benefits lift it to 8.1%, but once we include public services, it is raised to 12%:
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Public services do as much to reduce inequality as do social benefits.
Taxation, while valuable, does not reduce inequality anywhere near as much. What it does do however is provide the revenue to fund government benefits and services. Reduce that revenue and you inevitably reduce the ability of a government to pay for services – unless they are willing to increase the budget deficit, which we know they are extremely hesitant to do.
This becomes very pertinent when you consider how much revenue is being removed due to the stage-three tax cuts.
The Parliamentary Budget Office estimated the tax cuts in 2024-25 will cost $17.7bn – roughly the same as the cost of the PBS, and $6.2bn more than the federal government will spend that year on public schools.
Yes, high-income earners pay a larger share of tax than others, and more than their share of total income. But the stage-three tax cuts are even more weighted in their favour.
While the richest 20% of households account for 48% of private income and pay 59% of income tax, they will receive 80% of the benefits of the stage-three cuts:
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Income tax is crucial to reducing inequality, but mostly through how much it allows governments to redistribute income though benefits and services. If you massively reduce the level of revenue, as the stage-three tax cuts will do, inevitably government benefits and services will need to be cut.
And when you cut government services, you raise inequality.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
