Where does equality fit in the social democratic agenda?

Author: Senator the Hon Penny Wong is the Leader of the Opposition in the Senate

Thank you for inviting me to speak at the Fabian Society’s AGM.

And thank you to the organisers for suggesting the topic “Where does equality fit in the agenda of a social democratic government?”

This is not only an important topic, it is also very timely.

It is timely given the Abbott Government’s first Budget this week.

Because this Budget starkly demonstrates the fact that equality and fairness do not figure at all in this Prime Minister’s agenda.

The topic is also timely because an important debate about inequality is unfolding around the world.

In recent months Pope Francis, President Barack Obama, and the head of the International Monetary Fund, Christine Lagarde, have all nominated inequality as one of the key challenges of our time.

That is an impressive triumvirate.

And I think it shows that this is a debate which needs to become more prominent in Australia.

For despite Australia’s strong economic performance over the last two decades, more than two million people still live below the poverty line – including 575,000 children.

Yet, at the other end of the scale, the top 1 per cent of income earners in Australia receive around 9 per cent of all income and own 11 per cent of all wealth.

Australia is a nation with a tradition of egalitarianism.

Labor is steeped in that tradition – for more than a century, we have fought for a fairer society.

So for the Labor Party, statistics like these reinforce our commitment to growth and fairness – unlike our opponents, we do not see growth and fairness as mutually exclusive goals.

In a modern economy, Labor also recognises that a critical ingredient for a fairer society is equality of opportunity.

Fairness has always required more than re-distribution. How prosperity is created is as important as how it is shared.

This precept is even more apposite in a world where the global forces of competition and technology drive rapid and sometimes unpredictable change.

In this world, government’s role must focus on enabling our citizens – ensuring people can get the education and skills they need to participate in a fast-moving world.

The Liberal Party has a very different philosophy. For this Government and this Prime Minister, inequality is entirely acceptable.

The Abbott Government already has legislation in the Parliament to scrap benefits for low and middle income earners like the Schoolkids Bonus, the Income Support Bonus and the Low Income Superannuation Contribution.

Now Tony Abbott’s first Budget launches an even more brutal attack on fairness.

The Budget cuts pensions.

It cuts Family Tax Benefit payments for people on low and middle incomes.

It makes people pay new taxes every time they take a sick child to the doctor or go to the chemist for a prescription.

It makes people pay higher taxes every time they fill up their car with petrol.

This Budget will rip thousands of dollars a year out of the pockets of low and middle income families.

It will also rip billions and billions of dollars out of schools and hospitals – institutions fundamental to fairness, opportunity and social mobility.

Perhaps the starkest illustration of the Abbott Government’s philosophy of punishing those who need help the most is the Budget measure cutting off Newstart benefits for young jobseekers.

If you are under 30 and you lose your job, the Abbott Government will not give you any benefits for six months.

You will have no income to feed and clothe yourself or to keep a roof over your head, let alone to travel to job interviews and look for work.

This Budget highlights exactly why issues of equity and opportunity are central to political debate in Australia today – and it is why I am happy to reaffirm that fairness is central to Labor’s agenda.

TRENDS IN INEQUALITY

We know that equality is a hot-button issue when a 700-page treatise by a French economist on income and wealth distribution is a best-seller on Amazon.com.

Thomas Piketty’s new book, Capital in the Twenty-First Century, assembles vast quantities of empirical evidence on inequality, postulates a single economic relationship which explains inequality, and makes some radical policy proposals.

I’m going to come back to Piketty.

But for those looking for a more concise analysis, I recommend my Labor colleague Andrew Leigh’s book, Battlers and Billionaires: The Story of Inequality in Australia, published last year.

In a memorable passage, Andrew asks us to imagine a ladder where each rung represents $1 million of wealth.

If we position all Australians on this ladder according to their wealth, half of all households will be closer to the ground than to the first rung.

A household whose wealth puts it in the top 10 per cent of all households is sitting between the first and second rungs.

A household in the top 1 per cent is on the fifth rung.

Where is Gina Rinehart on this ladder? She is nearly 10 kilometres off the ground.

It’s a compelling way of visualising what statisticians would call a strongly skewed distribution.

Andrew looks at how the distribution of incomes and wealth has changed over time.

He shows there have been three broad phases in Australia.

From the period before European settlement to federation, a growing gap in economic resources opened up between those at the top and those at the bottom.

Then, from federation to the 1970s, this trend went into reverse and the distribution of incomes and wealth became more equal.

The reduction in inequality in Australia from the mid-1940s to the 1970s was as large as the difference in inequality today between Australia and the Scandinavian economies.

The final phase, from the 1980s to the present, has seen the trend reverse once again with inequality in incomes and wealth rising over the last three decades.

From 1975 to 2010, earnings for the median full-time employee in Australia rose by 35 per cent.

But for an employee at the 90th percentile of the pay distribution – someone in the top 10 per cent – earnings rose much faster, increasing by 59 per cent over this period.

By contrast, for an employee in the bottom 10 per cent, earnings rose by only 15 per cent from 1975 to 2010.

Andrew’s research shows the main drivers of rising inequality are globalisation and technology, declining union representation and changes in taxation policy.

Globalisation and technology have contributed to exponential growth in pay for CEOs and other top income earners.

At the other end of the labour market, declining union membership has put pressure on wages of vulnerable employees who lack bargaining power.

And cuts in top income marginal tax rates have contributed to greater inequality in take-home pay – although this has been offset by a progressive welfare system which targets benefits at those on low and middle incomes.

INEQUALITY HURTS GROWTH

The progressive nature of our welfare system reflects Labor reforms dating back to the 1980s.

It ensures the system helps those who need help the most – achieving its goals of redistribution while also ensuring the social safety net is financially sustainable.

By contrast, those on the conservative side of politics disparage and attack

redistribution and argue that there is a trade-off between growth and equality.

In fact, the Liberal Party don’t consider inequality to be problematic.

Recall former Assistant Treasurer Sinodinos’s explanation for the unfairness of the

Abbott government’s superannuation changes.

When asked to explain why the Government was simultaneously cutting tax for high wealth superannuants and hiking tax for 3.6 million low income earners he said: “We’ve always been on the side of those who are aspirational.”

It is true that in a market economy there will always be a degree of inequality.

No-one on the progressive side of politics insists that everyone must be on an identical income, or that there should not be incentives and rewards for risk-taking, innovation and hard work.

But we also recognise that extreme disparities of income and wealth are not justified in a fair society – and that excessive levels of inequality have damaging economic impacts.

Economists are rethinking the notion that there is a one-way trade-off between equality and prosperity.

They are increasingly recognising that excessive inequality – call it “inefficient inequality” – can lead to slower economic growth.

Squeezing the spending power of those on low and middle incomes will mean lower demand, which is bad for growth.

Unequal access to education shuts people out of the labour market and stops them from reaching their potential, which is bad for economic efficiency.

Extreme disparities between rich and poor can undermine social cohesion and erode cooperation and trust, with negative consequences for productivity.

And where inequality arises because vested interests are pocketing super profits due to monopoly power and lack of competition in key markets, then the economy’s efficiency will be diminished further.

Recent research has shown that countries with more equality experience faster, longer and more durable economic growth.

Here is how Christine Lagarde summed up the new economics of inequality:

“Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”

LABOR’S APPROACH

Labor has never accepted the notion that there is an either-or choice between equality and growth.

Pursuit of growth and fairness is central to our values.

Growth is one of the most powerful tools for tackling poverty and inequality because it creates new jobs and more opportunities.

Higher productivity is also central to tackling inequality, because it is the ultimate source of higher incomes in an economy.

And investing in education, skills and healthcare improves both growth and social mobility.

In the Hawke-Keating era, the Prices and Incomes Accord struck a balance between growth and fairness.

Unions accepted wage restraint to improve Australia’s economic competitiveness, which had been eroded by the high inflation of the 1970s.

In return, the Labor Government lifted living standards through the “social wage” – equality-enhancing reforms like tax cuts, Medicare and superannuation.

By contrast, in the Howard era, trade unions, minimum wage protections and the rights of workers to bargain collectively were attacked.

This channelled more of the benefits of growth away from wages.

Under the Howard Government’s industrial relations legislation, the economy’s wages share – the share of total factor income going to employees – fell from 55 per cent to less than 52 per cent.

In today’s dollars, that represents a cut of $41 billion to the annual wages bill – or a cut of $3,500 a year for every employee.

The Rudd Labor Government replaced WorkChoices with the Fair Work Act – and since the Fair Work Act commenced, the wages share has recovered to 54 per cent.

The Rudd and Gillard Governments also tacked inequality through tax cuts and improvements in government benefits.

Our 2009 increase to the age pension reduced the share of people living in poverty by an estimated one-fifth.

Labor trebled the tax-free threshold from $6,000 to $18,200, delivering significant tax cuts for those on low pay like women, young workers and part-timers.

And we introduced measures to boost living standards for those on low and middle incomes like increases to Family Tax Benefits, the SchoolKids Bonus and the Income Support Bonus.

THE COALITION’S APPROACH

These progressive Labor initiatives for redistribution to achieve a fairer society are now all under attack by the Abbott Government.

The Abbott Government’s first budget represents a vicious attack on low and middle income earners in Australia – it is an all-out assault on every single action taken by the former Labor Government to reduce inequality.

It reveals that the Liberal Party has a mindset that cannot even comprehend the needs of people struggling to make ends meet – a mindset that defaults to privilege and inequality as the natural order of things.

Labor not only sought to help people on low and middle incomes by boosting pensions, improving family payments and targeting tax cuts at those who needed them the most.

We also sought to tackle inequality at its source, by helping people overcome disadvantage and develop the abilities they need to realise their full potential.

Labor’s Gonski school funding reforms are an example of policies which focus on improving opportunity and social mobility.

They are designed to ensure children from all socio-economic backgrounds receive a quality school education, improving their prospects for securing decent jobs.

This week’s Budget revealed that the Abbott Government will break its promise to honour the Gonski reforms, and will cut school funding by $6.5 billion over five years.

The Gillard Government also improved access to university education by lifting the cap on student places and investing in equity measures to get more young people from disadvantaged backgrounds into university.

As a result, more than 56,000 students from low and middle income backgrounds commenced university courses in 2012 – a 33 per cent increase from 2008.

The Abbott Government has broken another promise with its Budget moves to increase university fees and require students to start repaying HELP debts sooner – this will make it harder for students from low and middle incomes to attend university.

This Budget will have real and immediate impacts on people on low incomes.

It will drive up inequality in Australia, now and in years to come.

CONCLUSION

The Budget confirms one of the central points of Thomas Piketty’s Capital in the 21st

Century – that trends in equality and inequality cannot be understood independently of politics.

I undertook to come back to Piketty – I have to confess I have not had time to read the new book, but from the reviews it is clear that this is an important work.

It chronicles similar trends in inequality in advanced economies around the world to those identified by Andrew Leigh in Australia.

And it has tapped into public discontent, especially in North America and Europe, about the role of extreme disparities in income and wealth in triggering the global financial crisis.

For Piketty, rising inequality is driven by differences in financial capital rather than human capital.

Ownership of capital – assets like shares, property, brands and patents – is unequally distributed in economies around the world, and most people get their incomes from wages, which tend to move in line with economic growth.

So when income earned from capital rises at a faster pace than the economy’s growth rate, inequality will rise.

Piketty’s analysis boils down to a single relationship: r > g.

In other words, inequality rises when r, the rate of return on capital, is greater than g, the economy’s growth rate.

Piketty puts forward policy proposals which focus on reducing r – measures like a global wealth tax and very high marginal tax rates on top incomes.

For Labor, I believe, the focus should instead be on increasing g – the economy’s growth rate – rather than reducing returns on savings and investment.

This is what Labor did during the Global Financial Crisis.

By using fiscal stimulus to maintain growth, Australia avoided recession and mass job losses which would have had devastating consequences for equality.

As a result Australia is one of only two countries where the incomes of the bottom 10 per cent grew faster than the top 10 per cent from 2007 to 2010.

Labor should not only increase growth, we should also increase people’s opportunities to gain the benefits of growth.

The traditional social democratic approach to fairness has focussed on redistribution through the tax and benefits system.

But social democratic parties also need to focus on what has been called “predistribution” – helping people to earn better incomes from the market economy in the first place, before the tax and benefits system kicks in.

As my Parliamentary colleague Jim Chalmers has put it, Labor needs not only to redistribute wealth, but also to redistribute opportunity by giving people the tools they need to participate in the market economy.

In the economics jargon, these tools are known as human capital.

They include a quality education, mastery of workplace skills, an understanding of technology and the ability to adapt to change and learn new skills.

In a globalised economy, these attributes are critical to people’s life prospects, their ability to succeed in the workplace and their ability to cope with economic change.

A fundamental challenge for those of us who care about fairness is to equip people to participate in the economy, so they can access the benefits of growth and globalisation.

Traditional approaches where people accumulate all of their education and training upfront, before entering the workforce, will not be sufficient.

People will increasingly need to navigate changes in their occupations and careers during their working lives.

This will require investment, reinvestment and renewal of human capital, just as the economy requires constant retooling and upgrading of physical capital.

Investments in early childhood education, schools and universities will open up and redistribute opportunity.

So will closing the gap on indigenous disadvantage and tackling gender pay discrimination.

Labor needs to be the party of redistributing opportunity, developing and advocating policies that allow more people to realise their potential in a 21st century economy.

Labor seeks to reduce inequality by increasing growth, increasing productivity, increasing opportunity, and increasing economic participation and social inclusion.

That is where I see equality fitting in the agenda of our social democratic party.

But more importantly, equality of opportunity must remain an Australian value.

In this principle we bring together the tradition of the fair go and our aspirations for the future.

That is why this Government and this Budget must be contested. At the heart of both is a harsher and meaner nation.