Lifting Newstart the best cure for inequality

Lifting Newstart the best cure for inequality

By Leith van Onselen in Australian Economy

February 6, 2020 | 6 comments

new paper from Melbourne University researchers has found that changes to Australia’s tax-transfer system significantly worsened income inequality between 1994-95 and 2015-16:

Research indicates that income inequality has increased since the mid-1990s and no substantial reduction in poverty has been achieved…

During this period substantial fiscal reforms were implemented…

Tax-transfer reforms in Australia between 1994–95 and 2015–16 contributed to a reduction in the income shares of the bottom two deciles of the population (Figure 1)…

Our analysis shows that the Gini coefficient, the most commonly-used measure of income inequality, increased by almost 10 per cent between 1994–95 and 2015–16. This is a sizeable increase, one-third of which is attributable to tax–transfer reforms alone…

These reforms particularly affected the most disadvantaged households and are estimated to have pushed an additional 3.3 per cent of Australians below the poverty line over that period (when the poverty line is set at 50 per cent of median income). If the poorest 20 per cent saw their share of the economic pie decrease, other people must have seen their shares increase. And indeed, the overall income share of the top income decile increased from 22.7 per cent to 24.2 per cent…

Some recent reforms in Australia have reduced the extent of redistribution. These reforms included cuts in top marginal tax rates and increases in the top tax thresholds which reduced the income range taxed at those higher rates. The top tax threshold doubled from $90,000 to $180,000 between 2005 and 2008, while the top tax rate decreased from 47 per cent to 45 per cent in 2006 and several successive tax cuts brought the second highest tax rate down from 43 per cent in 1995 to 37 per cent in 2011…

The result is that two decades of fiscal reforms have made the tax–benefits system less progressive, leading to rising income inequality and no major reduction in poverty despite unprecedented economic expansion

The report also argues that lifting Newstart is one of the best ways to improve income equality:

These findings point to the need for more, not less, redistributive tax–transfer policies in Australia. Such policies should aim to boost the social safety net—starting with the level of the Newstart Allowance—and make the tax system more progressive.

Raising Newstart also makes sense from a macroeconomic viewpoint, given current weak domestic demand:

The unemployed are among Australia’s poorest residents and virtually every dollar of addition income would be spent, thus delivering far more ‘bang for the buck’ to the economy than the Coalition’s scheduled tax cuts.

It’s a policy no-brainer.

Leith Van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.