I appeared on a panel about a month ago at the Progressive Australia conference in Sydney, organised by the Chifley Research Centre. Although this wasn’t a stand-alone presentation (I was speaking in response to a keynote speech by Patrick Diamond), I thought my slides might be of interest.
These slides are a small subset of a much bigger chart pack I’ve put together on Australian inequality and redistribution, which I’ll post when I’ve had the time to revise and edit. Some of these slides might be a little fuzzy – you should be able to click on them to enlarge them.
Patrick Diamond’s presentation, and Martin O’Neill‘s response that preceded mine, were focused on the levers government can pull to shape the distribution of market incomes – the “predistribution,” to use the phrase of the moment. I’m quite happy that the British centre-left has renewed its concern with the distribution of pre-tax incomes, rather than taking a view that distributional goals can and should be left to a progressive income tax and transfers alone. Nevertheless, I decided to offer a bit of a defence of those traditional levers of redistribution, particularly in the Australian context.
The “predistribution” agenda (I’ll drop the scare quotes next time) is broad. It encompasses tax policy (with an emphasis on taxing bequests and land), education policy, competition policy, etc. I somewhat airily waved all that away and focused on another aspect of predistribution: the minimum wage. Australia’s is the third highest, in purchasing power terms, in the world. The UK’s is worth nearly $US2 per hour less than ours. My point is that, on this one metric at least, Australia already intervenes in the distribution of market incomes to a greater extent than the UK.
My second point was that I contest the idea that there is a neat delineation between pre- and re-distributive policies. Neither of the preceding speakers even remotely made this argument, but I enjoyed knocking down the strawman just the same. I used the chart above – pinched from an excellent recent paper in the Journal of Economic Perspectives – to make my point. It shows a correlation between the size of the cut in the top marginal tax rate since 1960 and the rise in the share of pre-tax national income going to the top 1% over the same period. What you see is that countries that have cut their top tax rates by a larger amount have seen bigger rises in top income shares. The authors suggest this could be due to the increased incentive to rent seek when tax rates are lower.
The point of showing this chart is to emphasise that changes in the tax system can affect the distribution of pre-tax income. We can’t partition policies into “redistributive” and “predistributive” policies in a clean way.
Next I wanted to make the point that Australia’s circumstances are quite different from the UK’s. Our governments, combined, spend about 13 percentage points of GDP less than the UK’s governments. Our tax/GDP ratio is about 8 points lower than theirs. Their stock of public debt is higher, as are their fiscal deficits. The fiscal outlook there is worse.
The point of reciting all this, which may have come across as impolite to the UK visitors, is that the policy agendas of the centre-left in the two countries will necessarily be quite different by virtue of the fact that we start from quite different places. An agenda that emphasises the ways that government can use regulatory levers to ensure greater equality, rather than relying on greater taxes and public spending, might look a lot more attractive when you’re pushing up against a spending/GDP ratio of 50%. Our public sector is one of the very smallest in the developed world, as is clear on the chart above. I think we have greater capacity to increase equity – if we choose to do so – through measures that involve raising and spending public revenue.
We do less redistribution through taxes and transfers than most other advanced economies. Our tax and welfare systems are very progressive, in that the burden of taxes falls disproportionately on high income earners and welfare benefits are paid disproportionately to the poor, but our overall level of taxing and transfer spending is relatively low, so we don’t achieve as much redistribution as most other countries. This chart shows that our Gini coefficient is 0.135 points lower after taxes and transfers than it is before they take effect – the Gini falls from 0.469 to 0.334. Taxes and transfers reduce inequality to a much smaller extent here than they do in the UK and most other OECD countries. This reinforces my point that if we want to reduce inequality, we have not exhausted the traditional levers.
As an example of a way we could use those traditional levers of redistribution a little more, I pointed to Newstart Allowance. A single adult, with no kids, on an average wage who loses his or her job and claims Newstart will suffer a bigger negative income shock than his or her counterpart in any other OECD country. Newstart is worth about 29% of the after-tax average full-time wage. Although the UK has one of the lowest unemployment benefits in the OECD, a comparable worker there will receive 38% of the average wage, quite a bit more than our 29%. In fact, you could increase Newstart by $50 a week and you’d still fall a little short of the UK’s level.
The predistribution agenda is an exciting development in centre-left thinking and I’m glad Ed Miliband has adopted it with such vigour, but we shouldn’t forget about the tools we have at our disposal to directly boost equality – the progressive tax system and social security payments.
Thanks to the Chifley Research Centre for inviting me along, and Jim Chalmers in particular for chairing the session. Jim recently gave a great First Speech to Parliament, in which he argues strongly for a focus on boosting intergenerational mobility, particularly through education.
Postscript: I think that increasing Newstart is necessary, but not sufficient, as far as reforms to our system of payments to working-age people goes. I don’t pretend that whacking the rate up and leaving the rest of the system as it is is the best way forward.