Australia needs to prioritise tackling inequality

With the opening of Australia’s 45th parliament, the new Coalition government has begun to articulate its economic agenda in somewhat greater depth. Unfortunately, there is already cause for concern. If early signs are any indication, the government has not yet got to grips with the ramifications of growing inequality and is overly concerned with public debt.

The Treasurer’s first significant speech was seemingly short on specifics and long on contradictions. In this light, its chief sound bite—that Australia is facing a growing divide, once benefits are factored in, between the “taxed and the taxed-nots”—assumes a greater significance. And it is worrying one. To suggest that is necessarily unfair for people to be net beneficiaries of the tax and transfer system over their lifetime as a whole is to disavow one of government’s fundamental responsibilities, which is to spread risks—whether of unemployment, low pay, or ill health—across the population as whole. As a matter of fact, it would be the rare nation indeed that was able to discharge this duty without some people being net beneficiaries of government in this sense. Of course, it is possible for the state to be overly zealous in pursuit of this goal, or for an equitable tax and transfer system to be undermined by citizens’ attempts to evade their responsibilities or claim more than they are owed.  But evidence in the Australian case suggests the contrary. Growing inequality is depriving those at the bottom of the means to be included in the “taxed”—a group they would be better off a part of but cannot access. As a result, “reigning [sic] in the growth of welfare spending”, as the Treasurer has proposed, would compound unfairness rather than diminish it.

The other worry is that the government continues to use household budget metaphors to reference the need to tackle the budget deficit and government debt. This may be an attempt to relate the problem to the average voter. Nevertheless, it overstates it. There is generally less reason to be concerned about government debt than household debt for three reasons. First, the government has the capacity to boost economic activity (at least when the economy is below its existing capacity, and perfectly good productive resources are being underutilised as a consequence of an coordination failure). As such, it has the power to increase its ability to meet the real burden of its debt by spending, as greater economic activity means greater tax revenue. Second, governments of monetarily sovereign countries (like Australia, but unlike Greece) need never default on their debt as such because they can always create the money needed to pay it off by fiat. Third, and perhaps most importantly, a proportion of a nation’s public debt is standardly owed to its own citizens. To that extent, it is money we owe ourselves, and there is no comparison to “loading more and more debt on the shoulders of our children and grandchildren” or “living effectively on the credit card of the generations that come after us”. True, future generations stand to lose if we fail to pay down our debt now to the extent that ours is a government “of the people”, but they also stand to gain in their role as private creditors to the extent that that debt is maintained.

Needless to say, none of this represents an unfettered license for the Australian government to borrow and spend. The danger of inflation, and the fact that a majority of Australia's public debt is now foreign owned, represent real, if rather remote, constraints. But the default imperative is not, as generally in the household case, to eliminate as much debt as we can as quickly as we can. Rather, the focus should be on tackling inequality before it begins to have the kinds of implications we have already seen in Britain and the US.