Where to from Here?: Australian Egalitarianism Under Threat

208 x 140 ‘Those driven by ideology and populist views are now dominating discussion of economic and social policy in A...

Author: Fred Argy

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‘Those driven by ideology and populist views are now dominating discussion of economic and social policy in Australia. This lucid book shows how dangerous this is, as cherished Australian values are threatened, and even equality of opportunity declines. Argy’s balanced approach is a model of what is needed.’ Emeritus Professor John Nevile School of Economics, University of New South Wales ‘Fred Argy has produced a lively and informed examination of contemporary Australian economic and social policy, promoting a well-reasoned and empirically-based case for egalitarianism. It is an excellent example of thoughtful political economy and deserves wide consideration by all of us interested in Australia’s wellbeing.’ Professor Bruce Chapman AM Economics Program, Research School of Social Sciences, Australian National University ‘The successful integration of social policy and economic policy is the big issue for Australia public policy. Although one can have some disagreements with the diagnosis and solutions offered, Fred Argy is a very important contributor to the debate.’ Professor Peter Dawkins Dean, Faculty of Economics and Commerce Director, Melbourne Institute of Applied Economic and Social Research, University of Melbourne ‘This meticulous study deserves wide attention. Fred Argy shows that Australia’s traditional equality is fully compatible with an open, market based economy. We are not destined to mimic US-style economic stratification. Argy brings to this exposition his considerable standing, his unquestioned technical competence, policy experience at the highest level and his personal decency. These qualities are combined in an essay that is lucid, intellectually formidable and of immediate political relevance. It will appeal to all who are seeking fairer economic and social strategies.’ Ian Marsh, Senior Fellow, Political Science Program, Research School of Social Sciences, Australian National University

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Fred Argy had a long and distinguished career in the Commonwealth public service, during which he served as Secretary to the path-breaking Inquiry on the Australian Financial System (Campbell report) in 1979–81, Ambassador to the OECD (1983–85), and senior policy adviser in several departments, including Treasury. His last position in the public service was as Director of the Economic Planning Advisory Commission. Since retiring from the Public Service in 1991, he has been President of the Economic Society of Australia, Project Director with the Committee for Economic Development, Director of Legal & General Australia and a member of the Commonwealth Grants Commission. Although now mainly retired, he is an active participant in Australia’s public policy debate. He is currently a Visiting Fellow at the Australian National University where he lectures occasionally on public policy. He has published widely, including several journal articles and books. His 1998 book, Australia at the Crossroads: Radical Free Market or Progressive Liberalism? (Allen & Unwin), attracted considerable debate. During his period in the public service, Fred Argy was awarded an OBE and an AM for services to economic planning. As well as having a Masters Degree in economics (Sydney University), Queensland University has granted him an Adjunct Professorship and Sydney University an honorary degree of Doctor of Science in Economics.


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Where to From Here? Australian egalitarianism under threat

Fred Argy


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This edition published in 2003 Copyright © Fred Argy, 2003 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Argy, Fred. Where to from here? Australian egalitarianism under threat. Bibliography. Includes index. ISBN 1 86508 852 8. 1. Australia—Economic conditions. 2. Australia—Economic policy. 3. Australia—Social conditions. I.—Title. 338.994 Set in 11/13 pt Perpetua by DOCUPRO, Canberra Printed by Griffin Press, South Australia 10 9 8 7 6 5 4 3 2 1


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Contents Contents

Preface Acknowledgments Introduction

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1. The changing face of Australian egalitarianism

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Inequalities in job opportunities The deteriorating position of low-paid employees Inequalities in access to welfare Declining progressiveness of the tax system Declining progressiveness of non-cash government benefits Regional inequalities The erosion of social capital in the workplace Environmental capital Inequalities of net income and wealth Conclusions

1 6 12 18 19 37 39 41 42 48

2. The economic sustainability of egalitarian policies

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Compatibility with liberal economic reform Economic costs of taxation and government borrowing

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Potential economic benefits from egalitarian policies The international experience Are egalitarian policies becoming less economically affordable? Conclusions

62 65 67 69

3. The social effectiveness of egalitarian policies

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Egalitarianism and the good society The rise in social spending Churning Does social spending crowd out private welfare? Effect on social mobility Does social spending induce a culture of welfare dependency? Is social need diminishing? Is social spending becoming less effective in reducing inequality? Is social spending unfair to future generations? Compatibility of egalitarianism with full employment Conclusions

86 87 89 93

4. Normative values of policy advisers and commentators

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Economists and economic liberalism Economists and hard liberalism The normative values of the ‘Policy Elite’ Conclusions 5. Global capital markets and the policy ‘straightjacket’ Global constraints on fiscal capacity Global constraints on policy choices

71 75 76 77 78 78 84

94 97 99 106

108 109 111

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The new power structure spawned by globalisation Countervailing power? Conclusions

6. Changing community and political values Community attitudes to economic liberalism Community attitudes to egalitarian values The crucial role of political leadership The Liberal Party and the Howard Government The Australian Labor Party How political and community values can diverge Conclusions

7. Where to from here? The changing face of Australian egalitarianism The driving forces The future cultural and political climate for egalitarianism A social reform agenda Ensuring the economic viability of the social reform agenda Cultivating a more propitious climate of opinion A final postscript Abbreviations Glossary Notes Bibliography Subject index

111 115 117

119 119 120 124 125 129 131 133

134 134 138 140 147 153 158 160 161 163 172 190 205

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Preface Preface

hen I wrote my last book for Allen & Unwin,1 some five years ago, the Australian economy was already reaping the fruits of a decade or more of liberal economic reform. But there were warnings that the economic momentum could not be maintained without radical social surgery. The aim of my earlier book was to counter that view. In it I argued that a vibrant and resilient liberal market economy built on competitive individualism could comfortably co-exist with a society built on essentially egalitarian values. An economic revolution does not require a social revolution. This book is an extension of the same theme. It focuses on Australia’s distinctive brand of economic egalitarianism. How is it changing? What is driving change? Where is it heading? And what can governments do about it? I have chosen this theme for several reasons. One is that the facts on egalitarianism are widely scattered and sometimes relatively inaccessible. There seems to be some merit in pulling the evidence together in one place and thus helping readers determine for themselves to what extent Australia is really an economically egalitarian society and how exactly the face of Australian egalitarianism is being transformed. A second reason I have chosen the theme of egalitarianism is that it lies at the heart of Australia’s most pressing social problems: unemployment, the growing numbers of working poor, welfare dependency, neglect of our basic community services, growing inequality of

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opportunity and the erosion of social capital. These social problems are not being effectively addressed because governments are starting with excessively gloomy assumptions about the economic sustainability and social effectiveness of egalitarian policies. In this climate, Australia could end up with a society few really want—for all the wrong reasons. There is here a dual intellectual challenge: to expose some of the myths and half-truths surrounding egalitarian policies, and to explain why they nevertheless persist in the community. The book is in part a response to this dual challenge. A third reason for re-entering the debate on egalitarianism is that since my last book, the question of social effectiveness (how well social spending is achieving its own objectives) has become a major issue in the debate. It needs much more attention than it received in the earlier book. Like the previous book, this one is as much about morality as it is about economics. At the heart of the debate on egalitarianism is a clash of values. Egalitarian values (more equal opportunity, less unequal outcomes) have to be weighed not only against efficiency but also against other social and moral beliefs such as environmentalism, liberty, freedom of choice, proper reward for work and initiative, and so on. These moral conflicts often dominate the so-called ‘economic’ debate but are not always transparent. This book attempts to clarify and occasionally reconcile such conflicts. In short, I have chosen to again address the topic of egalitarianism because it is inadequately researched, intellectually stimulating, politically relevant and morally challenging. In a book of this sort, it is very difficult to maintain a steely academic detachment throughout. Some emotion and passion are unavoidable, and my own pro-egalitarian bias will soon become apparent to the reader. But this book does not consciously seek to preach. There are no moral absolutes in this area. Fortunately, a good many of the questions I am asking—what is happening to our egalitarian society, the economic, cultural and political forces likely to shape its future character and the options available to governments—lend themselves more than most public policy questions to objective treatment. Where I evaluate and prescribe, it is in the main to demonstrate how egalitarian values can be given a higher policy weighting—if that is the way ix


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mainstream opinion wishes to go. But there is no ‘free lunch’ here and Australians may not wish to make the necessary sacrifices.

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Acknowledgments Acknowledgments

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t is hard to thank everyone who contributed to the development of my thinking and collection of information. A limited selection must include: Martin Burgess, Bruce Chapman, Chris Currey, Harry Greenwell, Nicholas Gruen, David Ingles, Julie Smith, Mike Keating, Jonathan Kelley, Simon Kelly, Ian Marsh, Ken Oliver, Dean Parham, John Quiggin, Robyn Sheehan, Richard Teese, Agnes Walker, Louise Watson and Shaun Wilson. If I have overlooked anyone I sincerely apologise. Needless to say the conclusions reached and opinions expressed are solely mine. From Allen & Unwin I want to thank Ian Bowring and Catherine Taylor. Finally, and most importantly, I want to thank my wife, Ida, and my three children, Janet, Steven and Michael, for giving me immense moral and intellectual support throughout.

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Introduction Introduction

ustralia’s distinctive egalitarian society1 drew its strength originally from industry protection, wage regulation, immigration controls, conciliation and arbitration, a pioneering system of old age pensions and ‘state paternalism’ (a strong role for government in advancing individual happiness). The structure was immensely strengthened nearly half a century later by a commitment to full employment, regional development and nation-building and a national system of unemployment and sickness benefits. The society that evolved in the early years after World War II offered a unique blend of security and social harmony—but it was no great paragon of virtue and social justice. It was certainly not inclusive. For a long time it excluded non-whites and indigenous Australians and discriminated against women (being preoccupied with the male wageearner); indeed it ‘institutionalised’ these inequities. It was torn by sectarian hatreds. It flouted intergenerational equity by steadily eroding our natural environment. It restricted individual freedom of choice and entrenched monopoly and sectional privileges. It spawned cumbersome bureaucratic structures and a culture of over-reliance on government, which at times stifled efficiency and innovation and facilitated mediocrity in many industry fields. In short, old-style Australian egalitarianism was fraught with internal contradictions. It took good care of its disadvantaged workers (those with low skills and education and little individual bargaining power in

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the market place) but excluded or denied equality of treatment to many others. In the five decades or so after World War II, successive Australian governments set about trying to resolve many of these contradictions. They began by addressing the social anomalies. They widened the rights of indigenous people. They became more extensively involved in redistributing income across the lifecycle. They introduced Medicare. They facilitated wider access to legal aid and higher education and introduced stronger anti-discrimination laws and affirmative action. Gradually, they adopted a more responsible approach towards the natural environment, thereby giving future generations a fairer go. They took a more liberal stance on gender equality and immigration of non-whites and encouraged Australians to accept more cultural and religious diversity. They widened access to employer-funded retirement benefits. And they maintained social spending at high levels and tightly targeted at areas of need. In the 1980s and 1990s, governments turned to address the efficiency anomalies. They embraced economic liberalism (greater use of markets and individual choice to achieve societal ends). This meant less reliance on some of the old instruments of egalitarianism like protection and regulation. But governments had a range of other effective, marketbased, non-distorting instruments of redistribution available to them, so they did not feel they were abandoning traditional goals and values. Indeed, by making the economy as a whole wealthier and more resilient, economic liberalism made egalitarianism more economically affordable. For a time it seemed that Australia might strike the ‘trifecta’—an economic renaissance, a broad sharing of the productivity gains and a high level of social mobility with more equal opportunity. But it was not to be. Australia is in many key respects a less egalitarian society today than it has ever been in its history. Chapter 1 spells out the evidence at length. It is the longest chapter by far. To some readers, the facts may seem a little too laboriously detailed, but they are indispensable foundation blocks for the arguments that follow. The rest of the book seeks to understand the key forces driving the developments outlined in Chapter 1 and how these forces are likely to impact on the future face of Australian egalitarianism. One key determinant of the future face of egalitarianism will be policy assessments of its economic sustainability. Is redistribution imposing xiii


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rising efficiency costs and is it becoming steadily less affordable? Chapter 2 looks at the issues. Another key determinant will be perceptions about the social effectiveness of egalitarian policies. Are the social returns from egalitarian policies tending to diminish? Are we moving into ‘lower priority’ areas of need, with diminishing equity returns for every dollar spent? Are instruments of social intervention becoming less effective in reducing inequality? These issues are examined in Chapter 3. In Chapter 4 we examine the claim that the Policy Elite are ideologically unsympathetic to egalitarianism—a result of their economic training and backgrounds—and that this is hindering adoption of more active redistribution policies. Chapter 5 discusses the role played by globalisation. Is it destroying the capacity, or severely impeding the willingness, of governments to embrace egalitarian policies? In Chapter 6 we examine the proposition that Australians may be losing their enthusiasm for egalitarianism. What do opinion polls show? And what role do our political leaders play in shaping public opinion? Chapter 7 offers a brief summary of the previous chapters and an overview of the outlook for Australian egalitarianism. It also outlines the broad elements of an egalitarian agenda—one that could both meet the concerns of business and the economic elite and gain electoral support. This presumes that a ‘small l’ liberal or social democratic government might one day be willing to take up the challenge of politically leading the electorate in that direction. Throughout this book frequent reference will be made to key concepts like efficiency, equity, equal opportunity, poverty, economic liberalism and egalitarianism. To assist readers, a Glossary is provided at the end of the book.

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1. The changing face of Australian egalitarianism The changing face of Australian egalitarianism

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ustralian egalitarianism evolved gradually over the first 75 years after Federation. Its main pillars, created through institutional, regulatory or policy mechanisms, were: • • • • • • •

a virtual guarantee of full-time employment for those wanting it; protection of the wages and conditions of workers with no individual bargaining power; an unconditional needs-based welfare safety net; a strongly progressive tax system; generous government provision of non-cash benefits such as health, education and housing; a balanced distribution of regional economic opportunities; and a capacity for even disadvantaged workers to have a say in workplace decisions vitally affecting their wellbeing.

These seven pillars have gradually corroded over the last quarter of a century or more. So far the impact on net income and wealth distribution has been limited for reasons discussed later in this chapter.

Inequalities in job opportunities Australia’s distinctive achievement of the last decade has been to gradually reduce the incidence of ‘cyclical’ unemployment (caused by 1

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economic recession or below-capacity growth). This has done much to temper the effects of other forces tending to generate inequality in Australia. However the level of ‘structural’ unemployment has remained stubbornly high and the distribution of employment opportunities has become more unequal over the last two decades. This is evident in: • • • • • •

the growing incidence of long-term unemployment; increasing numbers of ‘inactive’ people of working age (at the margin of labour force participation); greater unevenness in new job opportunities by skill, age and location; a more unequal distribution of average hours worked; an increasing proportion of part-time and casual jobs relative to full-time jobs; and partly as a consequence of the above, an increase in perceived job insecurity.

Each of these developments will be briefly reviewed in turn. Current unemployment rates (of around 6.5 per cent at the time of writing) are very close to the rates prevailing at the end of the 1970s but with one big difference—today’s unemployed have been without work for a much longer period. Between 1979 and 1999 the average duration of unemployment more than doubled from 25 to 59 weeks for men and from 27 to 44 weeks for women (Landt and Pech 2001, p. 35). As a result, there are now stubbornly high levels of long-term unemployment. Long-term unemployment is most likely to be found among the less educated and skilled, those of non-English speaking background, indigenous workers and those of mature age (over 45). A second important feature of the employment market has been the rise in the numbers of ‘inactive’ people of working age on the fringe of the labour force who are not counted as unemployed. Such inactive workers comprise three distinct groups: •

people unable to work for various reasons such as chronic sickness or disability; • those who would like to work if the right jobs were available in the right places but have given up the job search (often called ‘discouraged workers’); for example, many retrenched older 2

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workers reluctantly retire in their fifties after a vain search for work;1 • people of working age, including some disability pensioners and other welfare recipients (such as those on sickness allowances and parenting payments), who are on various kinds of welfare but do not look for work because they have inadequate financial incentive to do so. Inactive workers have become an increasingly important focus of policy concern. See discussion in Chapter 3. A third important development in the employment market, related to the previous two issues, has been the growing polarisation and uneven distribution of new work opportunities across households, skills, location and age groups. This problem, which is responsible for the high incidence of structural unemployment in Australia, has several dimensions. An increasing proportion of working age couple families have neither partner in employment (‘jobless households’). People living in jobless households—which may include some of the long-term unemployed and inactive workers noted above—account for around 50 per cent of all the measured poor—up from 40 per cent in 1982 (Dawkins et al. 2001). Australia has the third-highest incidence within the OECD of children growing up in households with no adult working (Dickens 2002). Age also has a bearing on employment outcomes. The reemployment problems faced by older workers was noted above. They are the hardest hit by downsizing as their re-employment chances are low (Kelley and Evans 2001). At the other end, there is a youth unemployment problem. Young low-skilled workers have a relatively high incidence of unemployment and face ‘accumulating disadvantage over their working lives’ because of their inability to form autonomous households and build up occupational benefits’ (Macdonald and Holm 2001, pp. 18 and 23). Young people between the ages of 15 and 19 ‘have more difficulty than any other age group in gaining access to full-time work. Australia’s labour market is not as youth friendly as other countries that have better coordinated school-to-work arrangements’ (Dusseldorp Skills Forum 2001). Some 15 per cent of youths (in some states 20 per cent) are 3


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considered ‘at risk’ in the labour market (that is, not in full-time education or full-time employment and therefore less likely to make a successful transition to employment). This proportion shows ‘no sign of real improvement’ relative to the average of the last 14 years. Indigenous people experience rates of unemployment two to three times the national average. Migrants of non-English speaking backgrounds, especially those newly arrived, are also at a disadvantage in the labour market. And regional employment opportunities are unevenly spread (an issue revisited later). The most striking feature of the Australian labour market over the last decade has been the collapse of the full-time job market for new entrants.2 It is estimated that between 1990 and 2000, despite an increase in aggregate employment of 17 per cent, there was a net decrease in full-time permanent jobs (Borland, Gregory and Sheehan 2001). The only types of jobs that increased in that period were: • • •

full-time casual (accounting for 29.3 per cent of the increase); part-time permanent (32.1 per cent); and part-time casual (45.8 per cent).

In fact, virtually the only occupations in which full-time jobs have increased over the last decade have been managerial, administrative, professional and associated professional, with big declines in full-time employment in other occupations such as clerical workers, labourers, etc. (Keating forthcoming). About 30 per cent of Australian workers are now in part-time jobs—the second-highest percentage among 0ECD countries and roughly twice the proportion prevailing in 1980. The trend increase is partly in response to workers’ own preferences. But much of the increase has been involuntary (ABS 6265.0; Yencken and Porter 2001, p. 22) and a response to employer preferences. Deregulation of the workplace gives employers more freedom in human resource management, while residual forms of regulation, relating to unfair dismissals and other statutory award conditions, encourage employers to seek still more flexibility through the employment of temporary workers. Casual workers, who accounted for 75 per cent of the increase in employment during the 1990s, are not subject to unfair dismissal laws if working for a particular employer for less than 12 months and are 4


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not entitled to annual or sick leave. They are employed as and when required.3 Casual workers include young people combining work with education but there has also been significant growth in casual employment among older workers. Nor is it necessarily a stepping stone to full-time employment: the more typical casual worker experiences a series of short-term jobs interspersed with periods of unemployment (according to studies cited by BSL 2002). The distribution of hours worked has become much more unequal. About one-fifth of all part-time workers are ‘under-employed’ and would prefer to work longer hours (ABS 6265.0) and this proportion is tending to increase. At the other end of the spectrum, there has been a marked rise in the proportion of Australians working very long hours (48 hours or more per week), from around 14 per cent of employed people in the early 1980s to around 20 per cent today. Most of that increase occurred during the 1980s and early 1990s (Watson 2002). As a result of the above developments in the employment market, ‘the labour market has become a much more uncertain and changeable place for many people’ (Landt and Pech 2001, p. 40). Not surprisingly, workers as a whole perceive themselves to be less secure than even a decade ago (Kelley, Evans and Dawkins 1999) even though job tenure has not changed significantly. This is sure to be having a serious impact on their level of happiness. Some studies suggest a typical worker would be happy to earn one-third less to move from an insecure to a secure job (op. cit.; Evans and Kelley 2002). The increase in job insecurity is greatest among the unskilled (Saunders 2002, p. 101) and stems in part from the changes in the job market noted above, and partly from two other developments. One is the tendency for short-term oriented company directors and managers to engage in what the Reserve Bank Governor Ian Macfarlane recently called ‘knee-jerk job cuts’ (despite evidence suggesting that job-layoffs as a short-term means to higher profits compromise corporate longterm strategic goals—Age editorial, 31 Dec. 2001). The other is the increase in outsourcing by both private and public sector employers. We are seeing the emergence of a growing class of former employees who call themselves consultants, contractors and entrepreneurs but who are largely dependent on one or two employers and suffer from similar employment or income insecurity. 5


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The trends in the employment market described above—lengthening unemployment duration, increasing numbers of discouraged and under-employed workers, unequal job opportunities, the drying-up of full-time jobs, increased worker dependence on the welfare system and a perceived increase in job insecurity—strike at the very roots of Australian egalitarianism. The right to work is a value deeply embedded in the culture of Australian workers since Federation. To quote two trade union leaders in the 1920s ‘There is nothing more objectionable to the average man than to offer him something for nothing’ and ‘a man loses his manliness’ if he is forced to rely on the dole (Macintyre 1995, p. 6). While the employment trends are driven in part by changing social norms (such as changing family structures) and structural and technological change, much of the blame must ultimately be laid at the door of policy or at least policy apathy (Argy 1998a, p. 147ff; Argy 2001b, pp. 76–78). There are viable policy solutions to many of the problems in the employment market, but governments are not prepared to accept their redistribution implications. In that sense the malaise in the employment market is a societal choice—not a law of economics. This theme is explored further in Chapters 3 and 7.

The deteriorating position of low-paid employees Although the long-term unemployed and under-employed are the most notable casualties of the structural and policy changes of the last two decades, many of those in regular employment have also suffered in relative terms. This is particularly true of ‘disadvantaged’ workers— those with low levels of education, skills and adaptability and no individual bargaining power in the market place. Back in the late 1970s most employed workers worked under a system of awards and judicial supervision which ensured ‘fair’ wages and conditions and a predictable eight-hour day (with provision for paid overtime if they wanted). They enjoyed regular wage adjustments in line with productivity and the cost of living. Their income was also secured against sickness and sheltered from arbitrary or abrupt dismissal or redundancy (subject to notice provisions). As well, they benefited 6


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from annual leave and long service leave. They mostly belonged to a strong trade union and through it enjoyed the benefits of aggressive collective bargaining. A few workers fell outside the system—such as those working for small businesses that evaded the provisions (Mitchell, Murray and 0’Donnell 2001, p. 67) and home workers in clothing and textile manufacturing. But generally the net of protection two decades ago extended widely to most disadvantaged workers. This is no longer true.

Earnings relativities Egalitarians have no great cause for concern about the trend in total labour income (wages, salaries and supplements) relative to income on capital. While the current share of labour income is well below its level in the 1970s (Parham et al. 2000, p. 37), most economists accept that the labour income share was unsustainably high in the 1970s (stemming from wage excesses, a profit squeeze and low productivity growth). So the downward drift after the mid 1970s was predictable and understandable. What is significant is that the labour share stabilised in the 1990s despite rapid productivity growth (op. cit.). Perhaps the slight increase in labour intensity (total hours worked per head of population) and in superannuation contributions helped to boost labour income in that period. But the basic explanation for the stability in the 1990s is that in tough competitive markets, most of the gains in productivity were passed on to consumers and hence indirectly to all the population, including workers. This also explains why the corporate rate of return has remained fairly stable (Parham et al. 2000). Potentially more significant for egalitarianism has been the change in composition of aggregate labour income. The dispersion of earnings among individuals has become more unequal in the last two decades. Between the mid 1980s and late 1990s, payments to skilled workers (including professional and managerial employees) increased from around 37 per cent to 42.5 per cent of total labour earnings (Parham et al. 2000, p. 69ff; Parham 2002, p. 20). Earnings inequality has also increased across households (Saunders 2002, p. 194). This phenomenon is common to many other OECD countries (OECD 2001g, p. 45). 7


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While the increase in overall earnings inequality may partly reflect the increased proportion of the work force made up of low-paid, often under-employed, part-time workers (as noted earlier in this chapter), the same trend appears evident even among full-time workers. Earnings per full-time employee have grown much faster for managers, professionals, trade persons, etc. than for labourers, clerical and service workers, etc. (Borland, Gregory and Sheehan 2001, Table 1.2). The increase in earnings inequality among full-time workers is not the result of a widening in relative award pay rates between skilled and unskilled workers, as full-time pay relativities have remained fairly stable over the last 30 years or so (Barnes and Kennard 2002, p. 58). Rather the explanation appears to lie in four other directions: 1. a contraction in the numbers of low-paid full-time jobs, especially for male workers, and a corresponding increase in the numbers of high-paid managerial, professional and administrative fulltime jobs (Parham op. cit.; Henry 2002, p. 17; Watson 2002; Keating forthcoming); 2. a tendency for overtime hours worked to become more unequally distributed; 3. a reduced opportunity for low and middle full-time wage earners to access penalty rates, bonuses, overtime payments and other over-award payments; and 4. an increased dispersion of pay between firms and industries within any given occupation or skill level. These changes are in turn driven by technological advances (especially the IT revolution), globalisation, changing consumer patterns of demand and labour market deregulation. Deregulation has taken several forms, including: •

a smaller set of legally proscribed awards and a reduced reliance on awards (from two-thirds a decade ago to one-quarter now, OECD 2001g) and an increased reliance on individual or nonunion contracts; • an increase in decentralised bargaining; • a decline in the arbitrating role of the AIRC and the protective role of the HREOC (Argy 2001b);5 and • reduced legal protection, privileges and access rights for trade 8


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unions, which contributed to a declining level of worker unionisation (from one-half 25 years ago to one-quarter now). Fiscal policy apathy in responding to these developments has contributed to the increase in earnings inequality. This is illustrated by the reluctance to adopt compensatory tax policies to ease the burden on low-paid workers. ‘There is a gap in our institutional framework for dealing with inequality’ (Keating and Mitchell 2000, pp. 135 and 140).5 In the context of growing earnings inequality, one needs to note the rapid increase in the remuneration of chief executive officers (CEOs) and senior management. CEO earnings in Australia have typically grown at over ten times the increase in award pay rates over the last decade and are now about twenty times that of the average worker—a ratio exceeded only by the United States (Saunders 2002, p.197). This has happened at a time of cost cutting, general wage restraint and staff retrenchments to rein in wage bills. Statistically, the boom in senior managerial salaries has had little quantitative impact on earnings inequality (although some forms of remuneration such as share options are not reflected in the figures). But it has generated wide perceptions of inequity, especially as the increase is not always matched by performance. Senior managerial remuneration tends to be set in a very thin, imperfect market by a ‘club’ consisting of directors (or committees of directors) and so-called remuneration ‘experts’. Company boards are not at arms’ length from their executives and shareholder disciplines are limited. CEOs are thus able to ‘extract rent’ from the system, that is, obtain more than is needed to keep them in the job—which is why the executive remuneration market was called ‘artificial, manipulated and corrupt’ in an earlier book (Argy 1998a, p. 27). Remuneration is cleverly camouflaged as performance payments but in practice these are only tenuously related to performance and often reward failure. This applies both to annual remuneration and to termination payments (Stuart Wilson, Australian 19 Mar. 2002; Ross Gittins, Sydney Morning Herald 26 Mar. 2002 and 20 July 2002; Richard Webb, Age 3 Nov. 2002). Widening earnings differentials are interacting with the changing employment market (outlined above) and other forces to produce a disturbing rise in household units of working age living in relative poverty. Poverty among dependent children living in working families 9


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was the fastest growing area of child poverty between the 1970s and 1990s (King 1998; Harding and Szukalska 1999, p. 28).6 Since 1996, there appears to have been a further kick-up in the proportion of children of working families living in poor households (Harding, Lloyd et al. 2001). ‘For many households, work no longer provides the basis for family viability’ (Borland et al. 2001, p. 4). On the positive side, the gender wage gap has been tending to narrow, although there remains a significant and unexplainable gap (NATSEM Annual Report 2001). Quality of life of low-paid workers Lower-paid working-class families have not only lost ground in terms of wage incomes. Their quality of life has deteriorated in several respects. One element of that deterioration, which we noted earlier, is the decline in job security. But the insecurity among workers is much broader. It relates to future earnings, the amount of work they will be asked to do, the particular tasks they will be expected to perform and above all the predictability of their working hours.7 Income uncertainty has increased among all workers but more particularly among casual workers, as they have no guarantee of hours worked and are not entitled to sick pay, so they may find themselves without income for a period (pending receipt of any unemployment benefit entitlements). The increased income uncertainty also applies to many former employees who have become ‘independent contractors’ (‘consultants’, ‘subcontractors’ or agents). Some of these people find a new and satisfying lifestyle for themselves, working from home and enjoying some tax benefits. Many end up worse off than when they were employees. They are often dependent on a single firm or two and have to bear many of the risks previously carried by the owners of capital. They are effectively ‘in an equivalent position of social subordination and economic dependence to that of ordinary employees’, yet they have less job security, paid leave and employment protection rights (Mitchell, Murray and O’Donnell 2001, p. 72). One consequence of income uncertainty throughout the life cycle is that people are unable to save or contribute to superannuation or 10


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borrow for a home (the housing issue is discussed further later). This in turn has major implications for their quality of life as they grow older as well as for future wealth distribution. As well as being exposed to increased income insecurity, there is little doubt that hours of work have become much more stressful for many. While average hours worked per employee have not shown any trend increase over the last quarter of a century (Parham 2002, p. 13), a higher proportion of workers work longer hours than a decade ago (as noted earlier). More importantly, hours of work have become more unpredictable. Non-standard working times such as early morning or evening have become very common and only 7 per cent of workers work all their weekday hours between 9 a.m. and 5 p.m. (Venn 2002). Much of the overtime is unpaid (ABS surveys; Saulwick 2002). In many firms, human resource management has come to mean treating people ‘not as whole human beings but as time resources’ and as a result ‘job stress is a rising phenomenon in the Australian workplace’ (Edgar 2001, pp. 55–8). Some economists (Wooden 1999; Murtough and Waite 2000; Kelley 2001) have questioned the extent to which longer working hours are affecting the family life of workers or their subjective wellbeing. These results are not consistent with other academic evidence presented by ACIRRT and others suggesting that workers have suffered from increased stress, fatigue and isolation.8 In a recent ruling the AIRC has acknowledged that full-time working hours in Australia are amongst the highest and fastest-growing in the OECD and that it was ‘having adverse health consequences, particularly when associated with shift work’ (Age report 24 Jul. 2002). While many workers may be happy to trade off longer hours for higher income, the fact remains that: • •

workers are often not given any effective choice; as noted above, a significant section of the work force is not being paid for overtime worked; and • even workers who get paid for the longer hours appear to resent the loss of control over and unpredictability of their hours and say they would be happy to forego future pay rises if it would reduce this unpredictability (Pocock 2001; Fisher 2002; reported comments in the Australian 17 Aug. 2002). 11


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Where to From Here?

It is hard to believe that the quality of life of many of our most disadvantaged workers has not deteriorated significantly. Overall, workers of today are much more exposed to risk than they were, including many of the risks previously confined to capital. Attempts have been made to compile an ‘employment protection index’ which appropriately weights a number of indicators such as job protection legislation (hiring and firing restrictions), collective dismissals protection and company-based protection (such as relevance of strong external unions or the ability of employees to influence manpower decisions). On this index, Australia is almost at the bottom of a list of eighteen OECD countries—with only United States workers having significantly lower levels of protection (Estevez-Abe et al. 2001, Table 4.1, p. 165). The introduction of the Superannuation Guarantee Charge has been one of the few counterpoints for workers’ security but it is proving of little value to casuals and part-time workers on low pay. The Howard Government has now foreshadowed another round of workplace reform, including legislation which (if passed) will have the effect of increasing flexible working hours, reducing union bargaining rights and increasing the likelihood of ‘unfair’ dismissals. As is noted in Chapter 7, there are checks and constraints on federal government power which limit the pace and scope of reform. But a determined government with a strong ideological drive and good opinion management skills can achieve big changes over time.

Inequalities in access to welfare Social protection in Australia is partly provided by employers and voluntary organisations. For example, employers have to meet the cost of many award entitlements such as sickness and maternity leave and make a major funding contribution (much of it compulsory) to the retirement income of employees and to compensation arrangements for work injuries and deaths. Some of the employer benefits, especially superannuation, have improved in size and coverage and employers may be asked to accept new liabilities such as for maternity leave and 12


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workers’ redundancy entitlement funds. Other benefits (like sickness benefits and the unfair dismissal provisions) are under pressure, however. Social assistance is also provided by voluntary welfare groups, churches, etc. much of it funded by private contributions. It is governments, however, that provide by far the biggest component of income support, with over 90 per cent of it funded at Federal level. Australian egalitarianism has traditionally relied on a conjunction of factors such as full employment, needs-based wage regulation, home ownership and subsidising of public services to provide the necessary social protection, with income support providing only residual relief in exceptional circumstances. Today these other pillars of egalitarianism are much attenuated (as this chapter will show) and market inequalities have increased. So the income support system has to bear a more up-front responsibility. Yet one of its key tenets—that welfare support should be available as an unconditional right when need can be clearly demonstrated—is being challenged. The majority of people on welfare remain well protected and have fared relatively well in the last two decades. This is particularly true of the large group of old-age pensioners, who have received regular increments (under both Labor and Coalition governments) in line with, and at times in excess of, the growth in average earnings. The Howard Government has also simplified and broadened assistance to families. Its Family Fund Package will help reduce child poverty and encourage community collaborative programs (Edgar 2001, p. 103). The Government is also responding to community concerns about the growing problem of ‘welfare dependence’—the increasing proportion of working age people receiving welfare benefits9—by introducing a number of social measures to encourage welfare to work, including: • • • • • •

provision of separate entitlements for members of a couple; the Youth Allowance to encourage full-time training or education; the Transition to Work Scheme to help train older long-term unemployed; changes to Job Network to enable it to give more intensive and personalised support to the long-term unemployed; requirements for participation in programs; extensions of eligibility; and 13


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Where to From Here?

•

a proposed working credit scheme.

These measures, many of them innovative and constructive, should help reduce ‘poverty traps’ (an issue discussed in Chapter 3). However, against these positive developments (and overwhelming them in importance), the income support system has gone backwards in a few key respects. First, although (at this stage at least) there is no maximum limit on the length of time people may receive unemployment benefit payments, the eligibility requirements have been gradually tightened to the point where work tests have become very severe. Three decades ago, welfare benefits were universally accessible to those in need and were viewed as a citizen’s entitlement; the only two eligibility requirements were low income and (in the case of the unemployed) a simple activity test to ensure applicants were looking for work. At that point the Australian welfare system was ‘as non-discretionary as was humanly possible’ (Castles 2001). This is no longer true. The harshness of the present system can be seen in: •

a requirement that work must be accepted in any occupation rather than just ‘suitable’ work; and • the imposition of severe sanctions for even the mildest breaches, even when a reasonable explanation is forthcoming. 10 When not breached and penalised, the unemployed often have to put up with long waits and queues and are not always treated by Centrelink staff with sensitivity and dignity (report in Australian 17 Dec. 2001, p. 4 and Brotherhood Comment, Dec. 2001). Welfare groups have also contended that the funding mechanisms for Job Network ‘provide an indirect incentive for providers to report breaches’ (Brotherhood, op. cit, p. 6). Not surprisingly, the number of breaches imposed against unemployed people has tripled in the last four years (ACOSS release 15 Jul. 2002). The OECD notes (2001a, p. 6) that Australia’s eligibility requirements are ‘strict’ relative to other countries, and sanctions are more frequent (OECD 2001g, p. 26). It also warns that ‘people who are pushed by job search requirements to find work may end up in jobs with lower wages than might otherwise be the case’ and ‘staff under pressure may offer rushed advice’ (OECD Policy Brief , Jul. 2001). The 14


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McClure Report on welfare reform (commissioned by the Government) recommended that penalties for non-compliance should be given a low priority and that sanctions should be rare. A more recent report prepared for welfare and other organisations was scathing about breaching penalties, and described it as harsh and unfair and potentially counterproductive in that it hindered people from finding work (Pearce report, Australian, 11 Mar. 2002). The tightening of work tests and penalties falls most heavily on those with low intelligence, poor education and weak English skills. Many are ‘falling between the cracks’ in the so-called welfare safety net, and becoming homeless, destitute or turning to crime. The need for penalties to deter welfare ‘cheats’ is not questioned, but fewer than 1 per cent of people found to be in breach are ever convicted of welfare fraud (Steketee, Australian, 12 Mar. 2002). The breaching system and the fines associated with it are impacting particularly hard on unemployed indigenous Australians (ACOSS media release, 15 May 2002). As part of the mutual obligation, welfare benefit recipients not only have to submit themselves to severe work tests but, while waiting for more permanent work, they must participate in a Work for the Dole program. This latter requirement has some popular appeal (‘giving something back’) and can be morally and economically justified if it is used to develop the individual capacities, skill and work experience of the welfare recipients. However the existing scheme has been criticised on several grounds (Argy 1998a; Kinnear 2000; Moss 2001; Nevile 2002), including that: •

there is no genuine reciprocity, as one side is asked to make additional sacrifices while the other (the government) offers nothing extra; • despite a subsidiary training component, it does very little to improve the employment potential of the participants (and in many ways interferes with their search activities); • it is coercive and punitive (the unemployed are given little choice); and • it unfairly denigrates the unemployed as potential ‘bludgers’, implying that, without pressure and duress, they would generally prefer idleness to work (a claim questioned in Chapter 3). 15


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The Howard Government is seeking to extend a similar set of mutual obligations (work tests, breaching penalties and work for the dole) to certain disability pensioners and sole parents with older children. Secondly, there has been a clawing back in the relative real value of many welfare benefits—especially unemployment benefits. Whereas age pensions are index-linked to ensure they do not fall below 25 per cent of male weekly earnings, unemployment benefits are only CPI-adjusted and are currently about 22 per cent of weekly earnings and falling steadily in relative terms. In real terms, Australian unemployment benefits, which were substantially increased in the 1970s but held mostly stagnant thereafter, are among the least generous in the OECD (Kalisch 2000, p. 10). Mature unemployed Australians have to survive on social security payments that are 70 to 80 per cent below median income and mature age students on Austudy are even worse off (ACOSS media release 23 Jul. 2002). Thirdly, a psychological war has been mounted against welfare recipients of working age. Australian politicians are increasingly stressing the moral rather than the structural causes of poverty, and distinguishing between ‘deserving’ and ‘undeserving’ poor,11 in what is seen as an attempt to shift ‘blame’ and responsibility for conditions such as unemployment from society to the beneficiaries. The underlying message of the Howard Government is that people receiving government assistance are not doing enough to help themselves. A senior minister says, ‘for many people working has become more trouble than it’s worth’ and endorses the view that ‘whether social security recipients go to work is determined mainly by what goes on inside the welfare system and not by economic or social conditions’ (Abbott 2000, p. 39 and 2001, p. 2). This may reflect a mood in the electorate—what Professor Bob Goodin (2000) has called a form of ‘moral panic—people taking fright-cum-offence at the sight of dole bludgers, welfare queens and such like’. But political leaders contribute to this public hostility towards welfare recipients (a point developed further in Chapter 6). Finally, and as a logical extension of the three other developments, a systematic government attempt is being made to transfer at least some of the responsibility for welfare provision to corporations, community groups and 16


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friends and relatives of the poor. This is being done in the name of slogans like ‘social coalitions’ and ‘corporate and community responsibility’ and driven by a perception (recently reflected in the McClure Report 2001) that the community needs to accept a measure of direct responsibility for its own wellbeing. It is a laudable sentiment but it poses risks in practice. It could put excessive pressure on the social welfare sector12 and voluntary charity could gradually come to be viewed as a substitute for government support. By its very nature, much voluntary ‘charity’ (especially corporate) is likely to be selective and moralistic. So, many ‘undeserving poor’ would miss out and others would be subjected to additional psychological trauma. These developments in our social security system—a much tougher set of eligibility criteria and penalties, the erosion of relative benefits for many welfare recipients, deliberate attempts to ‘shame’ recipients and a shifting of responsibility to non-government players—are pregnant with significance. They strike at the very heart of egalitarianism— equal access to welfare benefits as a right. A large number of welfare recipients, notably the long-term unemployed, face an income support system that has become less generous and more conditional, arbitrary, demeaning and moralistic. The welfare developments are also significant in that they are generating pockets of serious hardship in our community13 (see ‘Inequalities of net income and wealth’, page 42). Some of these marginalised and disadvantaged Australians are receiving help from hard-pressed charities. But others are too proud to go to charities and too alienated to rely on friends and relatives, and are being forced into homelessness or a life of crime to survive (Jones 2001). The treatment received from government agencies is also discouraging some proud people from claiming government benefits to which they are entitled. Those who do claim benefits feel humiliated by being unfairly lumped in with the ‘undeserving poor’. Not surprisingly, a recent study found that Australia’s overall level of ‘unemployment protection’ is now among the lowest in the OECD (Estevez-Abe et al. 2001, Table 4.2, p. 168). All this is happening at a time when ‘middle-class welfare’ is growing in relative importance (see Chapter 3). 17


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Where to From Here?

Declining progressiveness of the tax system The erosion of the redistribution system is not just occurring on the social spending side. It is also evident on the tax side. Half a century ago Australia was famous for its progressive income and land taxes. This more than made up for the fact that Australia’s taxes were low by international standards. The total tax burden is still relatively low—around 30 per cent of GDP compared with an OECD average of 37 per cent (Whiteford and Angenent 2002)—but there has been ‘a striking post-World War II decline in personal income tax progressivity’ (Smith 2001). The decline in tax progressiveness is due to tax policy inertia in the face of inflation and real income growth, a reluctance to face up to growing tax avoidance by the rich (such as abuse of trusts) and cuts in the top marginal tax rate (now below that of thirteen other OECD countries). And it also reflects the ‘explosion’ in tax expenditures (exemptions, deductions, etc.) which have eroded the revenue base and benefited middle and higher income earners over the last five or six years. Such tax expenditures include various capital gains tax concessions, a range of family tax benefits, some superannuation concessions (such as those to the self-employed), the first-child tax refund, generous new tax concessions to better-off self-funded retirees and rebates on health insurance premiums. At the same time, the abolition of petrol excise indexation has eroded the indirect tax base. Tax expenditures are now 4.4 per cent of GDP compared with around 3 per cent ten years ago (Smith 2002). The introduction of the goods and services tax (GST) is not in itself regressive as it merely replaces regressive elements of the old wholesale sales tax system. Moreover, the Howard Government generously compensated most low-income families for the effects of the GST. However, there are signs that the GST will increasingly be used as a means of increasing the indirect component of the tax mix. The Federal Government has already foreshadowed that, as GST revenue expands, some specific purpose grants, which are income tax-financed, might be clawed back and some of the costs of delivering government services shifted on to the states.14 This would have a net regressive effect in the long term. Already, due to the effect of vertical fiscal imbalance, state 18


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governments continue to rely heavily (indeed increasingly) on regressive taxes such as gambling taxes (which impact disproportionately on the poor, especially ‘problem’ gamblers). Another important factor tending to erode tax progressivity is globalisation. Because of competitive pressures (between Australia and other countries and within Australia between states) to attract productive capital, we are seeing a shift in the tax burden from capital (wealth, capital gains and company profits) to labour and personal effort. However, the capacity of governments to raise additional revenue from personal income tax is constrained by political and economic incentive concerns (see Chapters 2 and 5). This leaves the way open for an increase in the indirect tax base unless counter action is taken (see Chapter 7). Australia’s tax/transfer system still remains highly progressive. Indeed, on some counts, it may still be one of the most progressive of all OECD countries.15 But it is being steadily eaten away at the edges. The outlook is for further erosion of the tax base as the forces of globalisation intensify and as powerful interest groups pressure governments to further lighten the tax burden on business capital and residential property and reduce the top personal income tax rate.16

Declining progressiveness of non-cash government benefits Relatively poor households, especially those with dependent children, benefit greatly from subsidised or free government services. Traditionally, non-cash government outlays on education, health, child care, public housing, home ownership and government business enterprises have been considered part of the ‘social wage’ and used as a distinctive instrument of redistribution in Australia. ‘The non-cash social wage appears to have played an important role in the redistributive process’ (Johnson, Manning and Hellwig 1995, pp. v and 21). Although the indirect benefits flowing from government services are widely shared across income groups, they are of particular importance to Australians in the bottom three deciles, representing at least one-third of their after-housing final income (Harding 1995). Such benefits also help to 19


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Where to From Here?

improve equality of opportunity in the sense of enhancing future income earning capacity. Non-cash benefits have played an important role throughout Australia’s early history. They assumed special importance under Gough Whitlam (who was prime minister 1972–75). After the Hawke government came to office in 1983, improvements in public provision were offered in return for wage restraint. As a result, in the decade 1984–94, non-cash benefits increased from 18.3 to 20 per cent of gross income (Saunders 2002, p. 130) and had the effect of reducing the standard inequality measure by 17 per cent in 1981–82 and by 23.6 per cent in 1993–94 (Johnson, Manning and Hellwig 1995, p. 18). During the 1990s, however, the distribution of non-cash benefits became more skewed towards higher income households. While the value of the indirect benefits received by the bottom one-fifth of households (from health, education and housing) increased by 37 per cent between 1989 and 1999, the value of benefits received by the top one-fifth rose by 47 per cent.17. One obvious driver of these trends has been fiscal restraint. During the 1990s, real consumption expenditures on public goods (as opposed to transfers), although rising in real terms, tended to decline relative to private consumption and national income, indicating a lower priority for public goods.18 Moreover, with the growing reluctance of governments to borrow over the cycle, public investment per capita (including investment in social infrastructure) fell away in real terms from the mid 1980s to the end 1990s, sowing the seeds of subsequent social infrastructure problems. The declining priority given to non-cash benefits and social infrastructure has implications for current and future education, health and housing inequalities. These are separately discussed below.19 Education Australia has average-to-high education standards on most international comparisons (OECD 2002b). Some of the better schools are world class in terms of literacy and numeracy standards, and tertiary participation is high. But there remains considerable educational inequality. To an extent, differences in educational completion and attainment 20


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reflect unavoidable differences in genetic endowment and motivation. But studies show that socio-economic background and location are also important contributing influences (Lamb, Dwyer and Wyn 2000; Marks, McMillan and Hillman 2001; Roussel and Nelson 2002). ‘The population of non-completors is over-represented by boys from lower socio-economic backgrounds, students from rural areas and students from parents where parents have low levels of education’ (ACER 2000). Gifted students are much less likely to succeed educationally and maximise their potential if they come from poorer, less-educated families. School kids from poor families are competitively disadvantaged from the start. This is because students with affluent parents: • • • • • • •

study in better home conditions; are given more motivational encouragement and time by their parents; have more books at home; stay at school longer; go to schools with better facilities and teachers on average; are less likely to mix with kids with dysfunctional families and behavioural problems; and mix with more academically inclined peers (whom they are encouraged to emulate).

These factors give such students a better chance of scholastic success (see Leseman 2002 Chapter 2). Poor students either drop out early or if they finish Year 12, they show lesser scholastic achievement. Poor school outcomes can affect subsequent performance in the labour market (Ryan forthcoming). ‘A failed school to work transition is recognised as an important risk factor in terms of propensity to long-term unemployment (Spierings 2002). A similar concern arises with tertiary students. Evidence indicates that low incomes and the stress of combining studies with long hours of paid work seriously hamper the education efforts of poorer students.20 On almost all indices, indigenous Australians remain the most severely disadvantaged group in educational terms. For example, seven out of ten indigenous students are below basic literacy and numeracy standards, compared with three out of ten non-indigenous students (Yencken and Porter 2001, p. 26). 21


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Where to From Here?

Educational inequality is not just a ‘rich–poor’ problem. There are also geographical inequalities between students within urban Australia and between urban and rural/remote students. A recent study by the HREOC (2000) found that country students are less likely to finish school, their average performance lags behind that of urban students and they have a more restricted choice of subjects. They also have less access to information and communication technologies. These disparities are partly due to distance from services and increased cost of education, but they also relate to lack of parental encouragement (NFF Forum Winter 2002). A series of studies has shown that education performances are relatively low in almost all outer suburbs of Melbourne because of the more limited choice of schools available (articles in the Age 27 May 2002, 28 May 2002 and 31 May 2002). The spread of education performance is particularly wide in Australia. The poorest-performing students do worse than the poorestperforming students of the high-ranking countries. The distribution of literacy is also wide compared with most European and Scandinavian countries although less than in the United Kingdom and the United States. Australia has one of the strongest relationships between reading ability and social background among OECD countries and is classed, along with Britain, as one of the least equitable countries on this score (OECD 2001b; OECD 2001f, Table F3–1). Are we making progress in reducing inequality in Australia’s education market? In answering this question, two benchmark tests21 can be applied. •

Are the education participation rates of disadvantaged students being lifted? Is wider inclusion being achieved? • Are the gaps in educational attainment between poor and rich students with similar capabilities closing or reducing, so as to improve the relative labour market prospects of the former? Is more equal opportunity being achieved (a more level competitive playing field)? The first (inclusion) test requires adequate overall investment in education by the government and private sector to increase aggregate completion rates and improve learning facilities. The second (opportunity) test requires a concerted and concentrated government effort to 22


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specifically target disadvantaged students, such as students living in homes where no one works or in families with low educational resources and attainment.22 Against these two benchmarks, how has Australia performed? On the inclusion test, Australia has, at least until recently, been making good progress. Investment in education rose strongly in the 1970s and 1980s. As well, school retention rates increased steadily for several decades and tertiary enrolment rates have also been improving. With this has come an associated lift in the number of high secondary and tertiary students drawn from lower socio-economic status groups. More recent trends are less reassuring. Whereas in 1975–76, Australian governments spent 5.6 per cent of GDP on education, by the late 1990s this was down to about 4.5 per cent, despite the great increase in educational participation in the twenty-year period (ABS, and Marginson 2002). Whereas Australian public investment in education was above the OECD average in the 1970s, it is now appreciably below (OECD 2001f). Under-investment relative to other countries is most evident at the pre-primary and upper secondary levels of education (OECD 2002b). In other areas, higher private spending has mostly made up for deficiencies in public investment but private spending is not as helpful in reducing inequality. A related concern is that school retention and completion rates (for all students and for low socio-economic students) peaked in 1992 (SCRCSSP reports). In the case of non-completion rates,23 the earlier down trend reversed itself in the 1990s. Indigenous school retention is languishing well below the average. The proportion of Australian students finishing upper secondary school is now well below that of the United States and Canada (Kelley and Evans 2002, Chapter 3) and below the OECD average (OECD 2002, Table A.1.2). As well, there is evidence of reduced levels of participation in vocational education and training by some disadvantaged social groups (Watson 2002). This may reflect recent Commonwealth cuts in specific purpose funding for vocational education and the diminished training effort of employers (Long and Lamb 2001) following the termination of the Dawkins Training Guarantee levy. Gittins (2002b), citing a report by the Dusseldorp Skills Forum (DSF), reminded us that ‘Australian employers are among the worst in the developed world in creating high-skilled 23


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Where to From Here?

white-collar jobs’. More apprenticeship and trainee places are available but are only being taken up by a small minority of young people (DSF 2001, p. 8) and the attrition rate is high. And the rising costs of university education are making it harder for children of poorer families to enrol. One should not read too much into the recent apparent reversal of the trend in educational participation and investment. For example, the economic climate has a considerable impact on retention rates—the recession in the early 1990s pushed the rates up and the subsequent partial recovery in the youth market could have contributed to the decline. Both Year 12 enrolment and completion rates were fairly stable in the years after 1994 (SCRCSSP 2001). So while there does appear to be some loss of momentum, it is fair to say that on the test of inclusion, and taking a long-term view, progress has been fairly encouraging. The equal opportunity test has proved more difficult to meet. The wide gap in educational attainment between rich and poor male students (measured by relative Year 12 completion rates) has not shown any tendency to narrow during the 1990s, although the female trend is more encouraging (SCRCSSP 2001, Table 3.6, p. 71). Information derived from special programs targeted to students from a low socioeconomic background also shows that on standard retention and performance benchmarks, the gap between these students and all students is either stable or tending to widen (CCQG 2002). Nor is there any reason to expect that educational inequality will narrow in the future. Indeed the opposite is more likely. One key reason is that the competitive advantage enjoyed by nongovernment schools is increasing. This is the product of two interacting forces. On the one hand, resources going to government schools, funded mainly by state governments, have become more tightly controlled in an age of fiscal stringency. The result is a tendency for class sizes and student/staff ratios to increase across all levels of education,24 reducing the ability of teachers to deal with students with special problems. Fiscal constraints are limiting the allocation of special staff supplements to schools with a high proportion of disadvantaged students.25 A recent independent report in New South Wales (by Professor Vinson) paints a picture of ‘a school system under increasing financial and social pressure’ (Sydney Morning Herald editorial, 24 May 2002). 24


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On the other hand, resources available to non-government schools have become relatively more plentiful. In part this reflects the increasing amount of federal and state funding going to non-government schools. Some of the increased federal funding is in response to the relatively strong growth in private school enrolments but as a recent Sydney Morning Herald editorial (27 May 2002) pointed out, the trend in per capita payments to private school students is also outstripping that of government schools. There is much controversy surrounding the Federal Government’s funding allocation formula based on socio-economic status of districts. Many believe it is seriously flawed. It takes no account of private schools’ alternative sources of funding and ignores the fact that private schools often attract well-off families living in areas classified as low socio-economic. As a result, much of the money budgeted for private school funding by the Commonwealth (from $3.7 billion in 2001–2002 to $5.1 billion in 2005–2006) is a form of ‘middle or upper class welfare’.26 No one is denying the right of students in non-government schools to receive federal government subsidies (since state funding largely goes to government schools). Rather, the concerns are twofold: •

the open-ended federal support for all new private schools is encouraging sectarianism in Australian society (Sydney Morning Herald editorial 25 Jul. 2002); and • more importantly, there is a widening disparity in funding relative to need between public and private schools. The retiring head of the NSW Department of Education said recently: Most non-government schools are supported by recurrent public subsidy, direct and indirect, to a level equal to 80–90 per cent of average recurrent government school expenditures per student. On top of which is added income from school fees and often from trust funds, foundations and investments (Ken Boston, Sydney Morning Herald, 13 Jun. 2002).

That is, the total investment on education per student (governmental or private) is much higher for students in non-government nonCatholic schools (that are mainly catering for well-off families) than in 25


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Where to From Here?

government schools (that are mainly catering for poorer families). ‘The elite independent schools, whose mission is to concentrate educational advantage—and that are effectively closed to all but a small minority of families—enjoy total incomes and facilities well in advance of government schools’ (Marginson 2002, p. 6). Consequently, a student in private schooling is able to get much more educational value than one in public schooling and has a greater capability to achieve good educational outcomes. A recent Age editorial (24 Jan. 2002) summed it up thus: It is only common sense that a high school in an economically deprived area with many non-English speaking families and funding of only $7400 per student faces an unequal struggle with a private school that has $14 000 to spend on the largely literate children of educated, aspirational parents.

Worse still, the competitive gap appears to be widening in some areas. A recent Monash University study (reported in various articles in the Age in June 2002 and listed earlier) found that the average performance of government schools was falling behind and that this was producing a rising exodus to private schools. Government schools— especially those in poor working-class suburbs—are losing their better pupils and teachers to the private school system and adding to teacher shortages (Age editorial 2 Nov. 2001 and Peatling in Sydney Morning Herald 7 Feb. 2002). More and more, public schools are being seen as less desirable sites for education. Yet poorer families have no option but to send their kids to those schools. Within the Government’s school system, there seems to be a particular resource gap developing in early education. It is widely agreed in the literature that pre-primary and primary education and junior secondary education provide the key to future educational achievement and labour market opportunity (Argy 1998a, pp. 120–1; Marginson 2002, p. 10). Yet little policy attention at the national level has been given to early education since the Whitlam government in the 1970s. Australia currently devotes a lower proportion of its GDP to pre-primary education than most other OECD countries (OECD 2001f). Uneven access to the new information and communications technologies is further compounding the problem of educational inequality 26


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between rich and poor students. Although more people are using computing and Internet services, availability is partly determined by income and educational attainment. In the absence of policy intervention, the new technologies are more likely to deepen the educational divide than, as some initially expected, to equalise educational opportunities (Marginson 2002, pp. 13–14). There is no indication yet that governments are prepared to intervene heavily to level the digital playing field. Not all the education indicators are negative. Some recent work by Professor Teese, focused on some suburbs of Melbourne, found that disadvantaged students were achieving better outcomes in mathematics and the sciences, although their progress has not been so great as to close or even substantially reduce the gap in outcomes between them and upper middle-class students (unpublished information supplied by Teese). State governments are showing signs of wanting to give higher priority to helping disadvantaged schools.27 Indigenous participation rates are increasing, especially in vocational education and training. The Federal Government is devoting more resources to disadvantaged students and some of its programs are targeted directly at indigenous students. Other programs are expected to have strong impact on the disadvantaged, such as the Literacy and Numeracy Plan, VET in Schools and New Apprenticeships. The renewed focus on numeracy and literacy in schools may indeed prove a breakthrough for disadvantaged children and it appears to be having an impact in terms of improving reading skills and assisting young job seekers. And the establishment of the Youth Allowance removes the earlier disincentive for unemployed young people to study. But the scale of the effort seems miniscule relative to the need. The overall impression one gains is that, although progress has been made with educational inclusion, educational opportunities have in many respects become more unequal over the last decade or so. Relatively poor children are better educated but they face increased life-competition from better-off children. In terms of labour market prospects, they are swimming against a strong tide. This tends to happen in a society with large income and wealth inequalities but governments should be trying to neutralise those tendencies. There is no reason to believe that an increased government role in advancing educational equality would lower overall standards. Indeed, cross-country analysis by the OECD shows that 27


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‘high overall education performance can go hand in hand with an equitable distribution of results’ (OECD 2001b). Money invested in assisting disadvantaged children would save money for governments in the future in health, crime prevention and remediation programs. One key problem has been the injection of market values into education. While an increasingly competitive market for education may offer some potential efficiency gains, the international evidence suggests that it can add to educational inequality (see Marginson 2002, p. 16). Exclusiveness is also encouraged, with children mixing only with kids of similar backgrounds and experiences. Other factors promoting educational inequality have been the limited and relatively declining resources available to promote the position of the educationally disadvantaged and the differential effects of new technology. There is much the public schools can do themselves. For example, many Year 11 and 12 curriculums are unsuited to the needs of disadvantaged kids who do not want to proceed to university and might prefer to continue on to TAFE, traineeships, apprenticeships or the like. There is scope for innovation in that area (Teese 2000; Marginson 2002). But essentially educational inequality is a funding problem.28 Governments serious about promoting equal opportunity need to spend more overall. And they must better reallocate the limited funds available, including some claw back of middle-class welfare in education (such as excessive grants to well-endowed schools and non-means tested subsidies to the universities). It is worth noting that in absolute terms, well-off households receive two to four times more benefit from government spending on education than low-income households, although the latter do better as a percentage of income (Saunders 2002, p. 131). ‘Governments spend too much on people who are predestined for educational success and too little on people who are prone to education failure’ (Economist 21 Nov. 1992 supplement). This topic is revisited in Chapter 7. Health Australia’s health system offers basic medical care for everyone and is in many respects a model for the world. On most broad criteria, it 28


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delivers high-quality and effective health care and while there is a cost control problem it is not as severe as in some other countries. Life expectancy and the average health of the Australian population as a whole have been steadily rising.29 And government health outlays play an important redistributive role (Thurecht et al. 2002). But serious problems remain with the distribution of health outcomes, health financing and access. The incidence of poor health is greater among families with low incomes (ABS Year Book 2001 p. 328; Walker 2001a; Mooney 2002, p. 163), especially if they are unemployed (Kanjanapan 2002, p. 16). The causal relationship between health and socio-economic status runs in both directions: health impacts on income as well as the other way around. But it is clear that if the poor had easier access to affordable heath care, including specialist services, and if they suffered less from financial stress and insecurity, they would enjoy better health,30 and their labour market performance and hence income earning potential would improve. A 1998 International Health policy survey found adults in Australia on below-average incomes were twice as likely to report difficulty accessing care than those on above-average incomes (report in ACOSS, Impact, Mar. 2002). The health status of indigenous people offers a particularly stark example of inequalities. Aboriginals live 20 years less than nonindigenous Australians and are twice as likely to be hospitalised (Australian 31 Aug. 2001). In some states the life expectancy of Aboriginals is falling and ‘the gap between indigenous and non-indigenous Australians continues to grow’ (Editorial Australian 14 Dec. 2001). Some of the health problems of indigenous people are self-inflicted, being due to substance abuse and neglect. But the main reason for high unmet need and inadequate access among indigenous people is insufficiency of public resources and poor targeting of these resources. •

On most measures, Aboriginal health is three to five times as bad as the rest of the population yet the average expenditure on Aboriginal health is only 2.2 times that of the general population and less than that in some cases (ABS Year Book 14 Dec. 2001; Mooney 2002, p. 174). • Aboriginals have fewer hospital procedures (tests and surgery) than whites when admitted to hard-pressed public hospitals 29


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(where most Aboriginals are admitted), even though they suffer poorer health.31 This appears to be partly due to the absence of translators and a reluctance of hospitals to incur the extra costs associated with indigenous care (despite special allowance for this in the system of fiscal equalisation grants). • The shortage of medicos in rural and remote areas, which impacts disproportionately on Aboriginal Australians, is also in part a resource constraint problem. Low-income families in general suffer most from fiscal constraints on health spending. The growing shortage of facilities for aged nursing care, for mental care and for economical dental care are a particular problem for low-income aged households, especially in rural areas. A study by NATSEM (Percival 2001) found that lower-income households spent a much higher proportion of their non-food expenditures on out of pocket health expenses than did higher income households. The World Health Organization tried to assess the ‘fairness’ of health care financing, or, in other words, the extent to which financial contributions to the costs of the health system are distributed according to ability to pay. It examined 191 countries and found that 25 of the developed countries studied had fairer systems than Australia. Health inequalities are significantly higher in Australia than in Western Europe, although comparable with the United States and United Kingdom. One reason for Australia’s relatively high levels of inequality is that it has a relatively large share of private spending on health care in comparison with most OECD countries (Mooney 2002, p. 171). There are also horizontal inequalities in access to health care. Rural people, people in remote areas and people living in outer metropolitan areas have much inferior health care services relative to those living in the more affluent inner urban areas (Access Economics special report, Monitor, April 2002). Is progress being made in achieving greater equity in health care (more equal access for equal need)? Are the key areas of disadvantage— Aboriginality, geographic isolation and socio-economic status—being addressed? As with education, the evidence is not encouraging. •

Whereas in 1983 the incidence of short-term serious health

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conditions experienced by low-income people was 29 per cent higher than that experienced by other Australians, in 1995 it was 45 per cent higher (Walker 2000, p. 15); that is, health inequalities grew in tandem with income inequalities. The health disability gap between rich and poor is greatest for the 35–64 age group and this is also the age group showing the greatest proportional increase in health disability between the early and late 1990s (Walker 2001). As well, there appears to be an increasing gap in death rates between poor and wealthy (Social Health Atlas reported by Kerin in the Australian 15–16 Apr. 2000). • Middle- and upper-income families are increasingly turning to private health insurance and more accessible private hospital services,32 creating a widening gap in quality and speed of access to health care between rich and poor. There is a risk, especially if health insurance coverage is extended, that a two-tier health system will become entrenched, with private insurance offering a superior product to Medicare across a range of health services. Already there are long, and in some states still lengthening, waiting lists for elective surgery in public hospitals (report by Australian Institute of Health and Welfare cited in the Australian 27 Jul. 2001). The president of the Australian Medical Association, Kerryn Phelps, has warned of a growing ‘under-funding’ problem in public hospitals—‘now over $1 billion and rising’ (citing a Senate report in CEDA Chief Executive, Jul. 2002). While total health expenditures have been rising as a proportion of GDP since the 1970s, the share devoted to public hospital services has been appreciably declining (SCRCSSP 2001, p.70; Yencken and Porter 2001, p. 36). Many pensioners have to wait up to four years for basic dental services. • The health gap between indigenous and non-indigenous Australians is increasing—in stark contrast with what is happening in other countries (Mooney 2002, p. 186). This is particularly worrying given the starting point of extreme backwardness. • In some respects, the rural–urban health gap has been tending to widen as can be seen in the distribution of GPs between metropolitan and non-metropolitan parts of Australia (Mooney 31


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2002, p. 173)—a problem the Howard Government is currently seeking to address. • Another factor tending to increase health inequality is the declining percentage of GP services subject to bulk billing (Medicare statistics, Australian, 25 Jul. 2002), which is affecting many lower-income families. GPs who are continuing to bulk bill their poorer patients are affording them less consultation time than patients who pay above the scheduled fee (according to a study reported by Gliksman in the Medical Journal of Australia 2002). Moreover, GPs are increasingly locating in areas where patients can afford to pay. It is significant that claims on Medicare are nearly twice as high in the higher socio-economic suburbs than in the poorer ones (Alan Wood, Australian, 16 Jul. 2002). In brief, our heath system is not responding adequately to the unmet needs of those who are both relatively poor and sick. The health resources provided by the Government are not only too limited but are not always well targeted. Many well-off users of public health services (such as the provision of drugs and hospital care) are being charged at very low-cost recovery rates, which is encouraging wasteful consumption and using up public resources that could be used to improve services to the needy. There are also doubts about the cost-effectiveness of the 30 per cent health insurance rebate.33 It has been estimated that for some health services, high-income earners receive more public assistance per capita than public patients.34 However, a policy of clawing back some ‘middle class welfare’ health benefits could only be implemented on a limited scale as care would have to be taken to avoid accentuating poverty traps and the phenomenon of ‘downward envy’ (Chapter 3).35

Housing services Australia’s high level of home ownership (by international standards) and ease of access to low-cost accommodation has been traditionally viewed as part of the social wage. However, concerns are being expressed that: 32


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•

young low-income families are finding it more difficult to access home ownership; • low-cost rental accommodation is becoming less available; and • the incidence of homelessness is on the increase. Governments have traditionally encouraged home ownership through various tax and welfare concessions and, prior to the 1980s, through regulatory ceilings on interest rates. These government benefits were never well targeted (helping the middle class more than the poor) but, combined with stable full employment in the early post-war decades, they facilitated home ownership, which in turn provided additional security to low-income families and helped to reduce the high concentration of wealth. The tax and welfare concessions are still in place: imputed income is still tax-free, the owner-occupied house is still not part of the pension asset test and new first-home buyers still benefit from government grants. Following financial deregulation in the 1980s, the umbrella of interest rate protection was removed, but deregulation has not been a significant loss from an equity viewpoint. The 1981 report of the Australian Financial System Inquiry (AFSI) exposed the relative futility of using fiscal regulation to facilitate home ownership. It said it would not only impair the efficiency of the financial system but was poorly targeted and even in some cases actually ‘counter-productive’ in achieving social or sectoral objectives. In the case of bank housing interest rate ceilings, for example, the main beneficiaries were not low-income but middle to high-income earners. Indeed there were indirect effects such as on rationing which actually disadvantaged low-income earners by forcing them into second mortgages and alternative higher-cost sources of finance. The AFSI report did not argue that housing was an inappropriate target of policy. Nor did it argue that financial social regulation was totally ineffective in relieving pockets of social need. Its argument was simply that there were more cost-effective ways to help low-income families into home ownership and low-cost housing—including direct fiscal assistance to the target group or the provision of subsidies through the medium of commercial financial institutions (AFSI 1981, Chapters 26 and 37). These arguments remain valid to the present day—even more so in today’s sophisticated and complex financial system. 33


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Despite continued government support, home ownership is becoming less affordable for many. A recent study of housing affordability found that the poorest 35–40 per cent of Australian families cannot afford to buy a three-bedroom house anywhere in Melbourne or Sydney.36 Low- to middle-income families in the 35–44 age group are much less likely to own their homes today than their counterparts in the 1970s and 1980s with similar socio-economic backgrounds (King 2001; Gittins Sydney Morning Herald 28 Nov. 2001). Many working families with low and uncertain incomes are being shut out of appreciating housing assets central to the future life chances of their children. Why are so many young low-income earners deferring or abandoning home ownership as an option? Life style changes (like later marriages) have partly contributed to the trend. Other reasons include: the growing incidence of part-time and casual employment, the associated increase in job and income insecurity, the explosion in house prices in key metropolitan areas where most jobs are found, and reduced affordability and borrowing capacity. The situation is even more precarious among low-income renters. Mean housing costs of renters through state housing authorities have increased from 15 per cent of income in 1988 to 17 per cent in 1998 (ABS 4130.0). Rent assistance is also available to people who rent private accommodation and these people are also experiencing a rise in housing costs relative to income. The problem here has been the decline in the relative supply of low-cost tenanted accommodation over the last 15 years (based on studies by the Australian Housing and Urban Research Institute). The problem is particularly bad in Melbourne and Sydney—and getting worse. A study of housing affordability found an increasing number of Sydney households experiencing housing stress.37 These households are being forced out of the inner suburbs and have to travel long distances to work, which adds to their commuting costs. A declining stock of public housing is forcing many into homelessness. ‘A key cause of homelessness is the decline in affordable private rental housing for low and fixed income households in an environment of shrinking capital funds for public housing’.38 The number of homeless exceeds 100 000 and is steadily increasing (Yencken and Porter 2001, p. 31, and ACOSS Info 319, Aug. 2002). A study by the Department of FaCS (Annual Report 2001, p. 111) 34


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suggested that recent tax and social security changes may have appreciably improved the situation of low-income renters after 2000. But even on the improved figures, the Department found that on average about one-third of households receiving rent assistance paid more than 30 per cent of their income in rent. About 10 per cent paid more than 50 per cent of their income in rent (ACOSS media release, 14 Oct. 2002). On the whole, the housing market has become more unequal since the 1980s. Public policy must accept some of the blame for this situation. In a climate of fiscal restraint, the total ‘indirect benefits’ to households from government outlays on housing, after rising during the 1980s, declined relative to income during the 1990s (ABS 6537.0). As well, the available public funds have been poorly directed. Some of the money has gone into ‘middle class welfare’, especially new homebuyers concessions, and has sometimes had a perverse effect on house prices, adding to the accommodation problems of low-income families. Poorly structured negative gearing concessions have tended to encourage high-rental rather than low-rental private accommodation. Most of the boarding houses in inner urban areas, which once provided shelter for the poor, have been allowed to disappear (Impact Jul. 2002). And government spending on social housing has declined relative to needs (ACOSS Information Bulletin no. 319, Aug. 2002). The change in policy focus from investment in public housing to rental assistance (which began in the early 1990s) may have given households greater choice but it has also created new and difficult social housing problems. As with education and health, this illustrates yet again that free markets for public services do not always work as effectively or efficiently as some economists believe (in part because of the high costs of collecting and evaluating information). Other public services While education, health and housing are key ingredients in long-term inequality, there are many other public services of critical importance to the poor. For example, public transport, while still subsidised, especially for target groups such as pensioners, has in some states been partially 35


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privatised (or franchised to private companies) and the trend is towards increased cost recovery (user pays). As a result, during the course of the 1990s, urban transport prices increased faster than the Consumer Price Index (CPI) in all cities, particularly in Sydney (Productivity Commission 2002, pp. 146–8). There were offsetting gains for some households from improved efficiency and lower taxes but the net impact has almost certainly been regressive. A study by the Institution of Engineers in 1999 (cited by Farley 2001, p. 57) identified serious deficiencies in the road and rail systems, both in major cities and in regional areas. Many of the outer suburbs of the big cities (where the poor can afford to live) are badly serviced by public transport. This is a particular burden on lower- and middleincome working families who are not eligible for welfare concessions and often cannot afford to commute by car. It is a significant cause of welfare dependence (Carlisle et al. 2002, pp. 158, 161). Again, active labour market programs (such as wage subsidies, training programs, job creation, improvements in job placement machinery and more intensive case intervention) provide a valuable public service. Such programs are capable of enhancing both efficiency and equity simultaneously (see Argy 1998a, Chapter 10). Yet, apart from a brief period in the mid 1990s, active labour market programs have never featured strongly in Australia as an instrument of policy. As a percentage of GDP Australia was typically spending only 0.5 per cent of GDP on such programs in the 1980s and 1990s compared with an OECD average of close to 1 per cent and the ratio has declined in recent years in Australia (OECD 2001f, Table 4.1). In fairness, not all labour market programs are cost-effective and the Howard Government has pruned back one or two ineffective ones and concentrated its efforts on welfare to work programs. But the Government’s focus is too narrow and limited (see Chapter 7). Finally, there is concern about the difficulties of access to community services such as child care facilities (especially for out of school hours), aged care facilities and disability services, as well as services for the homeless. These services are under increasing stress despite new government subsidies (see ACOSS Cover Story in Impact Mar. 2002) and it is low-income families that are most at risk. There are also growing deficiencies in the provision of child protection services, with 36


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government agencies ‘buckling under rising reports of abuse and inadequate staff’ (report by Kate Legge in the Australian 8–9 Jun. 2002). Summing up on public services It appears that the key redistributive role traditionally played by public services has diminished over the last decade or two. This is initially the result of liberal reforms (such as increased resort to user pays) and fiscal conservatism.39 More fundamentally, it reflects a deliberate shift in policy priorities away from public to private goods and associated public apathy. The Governor General, Dr Hollingworth, recently bemoaned the ‘diminished level of community interest—in dealing with child poverty and the disadvantage that accompanies it in the fields of education, health and mental health’ (Age, 13 Jun. 2002).

Regional inequalities Regional egalitarianism—spreading the wealth to people in less fortunate areas of the country—was once an important (although never fully successful) dimension of Australian egalitarianism. Today ‘the rift between country and city is wider than at any time in the past 150 years’ (Geoffrey Blainey, ABC Boyer Lectures 2001). On one side of the divide we have the smaller, less buoyant regional towns, the bush, the outer suburbs of capital cities and states with relatively stagnating economies. On the other we have the thriving large regional centres, the inner suburbs of the big cities and the fast-growing states. Regional inequality manifests itself in population movements, income, employment and relative availability of services. The share of population in the big cities has remained fairly stable at 64 per cent for some time, although it showed some increase in the last census. Much of the population drift has been interstate and from many smaller rural areas to ‘sponge areas’ (large regional centres). In terms of income and wealth, we are seeing ‘apparent dramatic increases in regional inequality’—especially between states and postcodes within states (Harding, NATSEM News, Jul. 2000, p. 2). This 37


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trend (discussed in Argy 1998a, pp. 154–5) appears to have accelerated after the early 1990s. A recent broad-based AMP–NATSEM report which focused on the incomes of taxpayers living in affluent and poor households, found that ‘spatial inequality has continued to increase in the second half of the 1990s’ (Harding Australian 25 Feb. 2002). By postcode, growth in taxable income for the top decile was 25 per cent between 1995 and 1999 whereas the bottom three deciles saw taxable income grow by only 16 per cent (Ann Harding, Australian, Mar. 2002 op. cit.). The 2001 Census confirms that wealthy young people are shunning outer suburban life and congregating in the inner urban areas, while poorer families are forced by housing prices to the far outer suburbs (where the commuting costs are higher and there is less scope for property appreciation). Australia’s poorest postcodes have one in three people living in poverty, compared with a national average of about one in ten (NATSEM Annual Report 2001). The distribution of employment opportunities matches the income distribution pattern. Unemployment is high in many country regions, as well as in large parts of Tasmania, South Australia and Queensland, and in some of the outer suburbs of Sydney and Melbourne. ‘The life chances of Australians now depend even more heavily on regional location. Job opportunities vary according to which piece of the patchwork nation you live in’ (Edgar 2001, p. 24). Disparities in economic opportunities between Australian regions are high compared to other developed nations (National Economics study reported in the Age 29 Oct. 2002). And there is a similarly large disparity in access to services such as health, education and finance. This is evident in the closure of many bank branches, small schools and hospitals. A recent study has found that the benefits from the technological revolution of the last two decades in New South Wales ‘are concentrated geographically in a small area’. In this area there are superb facilities, and rising housing prices and rentals are ensuring exclusivity. By contrast, in ‘the expanse of suburbs which lie outside the sweep of knowledge-based industries’, people are ‘relatively poorly served by tertiary education centres, libraries, public transport and other community services’ (Sydney Morning Herald Editorial 5 Mar. 2002). There is growing political awareness of the problem. Prime Minister John Howard recently pledged to 38


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improve rural infrastructures (AAP 9 May 2002) and the Rural Transaction Centres set up by the Government are a step towards improved services. But the policy focus seems too narrow. It is too simplistic to view the problem as simply one of city vs rural. Although the regional divide stems mainly from structural change and realistically will never be fully bridged, many of the geographical disparities could be reduced through more active government intervention (Argy 1998a, pp. 154–6; Walsh 1999). Economists like to argue that governments should pursue equity by focusing on needy households rather than on disadvantaged regions, and to an extent this is true, but it overlooks the wider social and economic spin-offs from regional imbalance (such as on structural unemployment and urban congestion).

The erosion of social capital in the workplace There has been much written about the loss of ‘social capital’. Some of it has been rightly called ‘sentimental pap, ignoring the reality that groups have competing interests and get very nasty’ (Edgar 2001, p. iv). But some ingredients of social capital are critical to wellbeing and to long-term economic performance, and include trust between citizens in their economic and private dealings, a belief that the institutional and policy-making processes are consistent, transparent and accountable, and a sense of active participation in decision-making, at least at the everyday level. These ingredients are all under threat to some degree and the relevant issues are raised in various parts of this book. Here we focus mainly on the workplace, where a long tradition of mateship, unity, trust, loyalty to and from employers and the collective exercise of power have provided the key elements of social capital. Australia does not have the continental European tradition of giving employees a voice in the workplace through work councils (a form of worker participation).40 And there is no legal obligation on employers to inform and consult their workers. Instead, vulnerable Australian workers (those with no individual market power) have in the past exercised some industrial and political clout through other sources (over and above the political system). 39


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First, a consistently strong demand for their services as part of the full employment commitment gave them the ability to readily change jobs if the employer was too demanding or unfair. Secondly, membership of trade unions gave them collective bargaining power in the workplace. The unions sometimes abused their power but they were a unifying influence among workers and an effective means of having disputes and grievances heard by individual employers. Thirdly, disadvantaged workers and minority groups had access to two independent statutory institutions for conflict resolution—the Australian Industrial Relations Commission (AIRC) and the Human Rights and the Equal Opportunity Commission (HREOC). Through these institutions, workers could have cases of victimisation or discrimination heard and redressed. Fourthly, although of lesser significance, workers had a wider, indirect voice in politics through consultative forums. The heyday of consultative, consensual politics was in the early years of the Hawke government. The then prime minister believed that fairness and social cohesion could be enhanced if governments or their agencies were actively involved in consultation with the public (via their representatives) and an attempt was made to achieve a degree of consensus between conflicting interests. With this in mind, the government frequently consulted relevant interest groups but also met regularly and formally through multi-party consultative institutions such as the Economic Planning Advisory Council (EPAC). And governments—whatever their persuasion—stood as generally neutral arbiters in industrial disputes. What do we have now? Full employment is a thing of the past. The work force has become fragmented and competitive. Under the forces of globalisation, structural change and ideological legislative attack, trade unions have lost much of their bargaining power both in the market place and with governments.41 Consensus-promoting bodies like EPAC no longer exist. Conflict-resolving institutions like the AIRC and HREOC have had their powers clawed back, being considered too intrusive and interventionist in the new market environment (Argy 2000, pp. 99–125). And the Federal Government no longer maintains any pretence of neutrality in employer–employee relations. Even some employers acknowledge that the Government is ‘100 per cent employer40


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oriented and employees don’t get a look-in’ (Jay Pandervis, Australian 1 Aug. 2002). As a result, the ability of vulnerable Australian workers to influence what is happening in the workplace—what Galbraith calls ‘the empowerment of workers’ (Galbraith 1996, p. 66)—has greatly diminished. Control has been lost over working hours and conditions and the requirements of the job, while the sense of ‘mateship’ has diminished in a more competitive workplace. The collective voice of workers has been stilled.42 What we are seeing is a marked shift in the balance of industrial power towards large employers, impersonal markets and consumers—and away from workers.43 This trend has further to go, given the public views and intentions of the Howard Government and business groups like the Australian Industry Group (see Chapters 6 and 7). The retreat from industrial democracy and consensual politics has wider implications than its effect on workplace power distribution. It is quite likely that the erosion of mutual trust and loyalty between executives and workers and between top and middle managers is starting to have adverse effects on industrial productivity.44 More seriously, it may be contributing to the loss of sense of community and decline in community trust and confidence in the political process, as well as in many other public and private institutions.45 Mere redistribution of incomes will not allay the anxieties of workers who feel marginalised. It will take something more—a sense of participation in their own industrial future.

Environmental capital Some of Australia’s environmental problems are getting worse, with the most pressing concerns being ‘the loss of biodiversity, land degradation and disturbances in inland water regimes’ (Yencken and Wilkinson 2001, p. 360). There are at least three close links between environmental and social equity issues. First, the costs of degradation and pollution are not equally shared. ‘The rich in every society are best able to choose the best locations and avoid the worst. The poor have no such choice’ (Yencken and 41


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Wilkinson 2001, p. 327). Second, neglect of the environment imposes costs on future generations and is a crucial component of intergenerational equity. Third, broader indicators of social wellbeing such as health are intimately affected by the quality of the environment. For such reasons, a society is not truly egalitarian unless it looks after its natural environment (clean air and water, uncontaminated soils, opportunities to enjoy public space, etc.). Equally, egalitarian governments need to choose environmental policy instruments that are sensitive to their social effects, such as on employment and income distribution. Some of these issues are briefly picked up in future chapters (notably Chapter 3) but, regrettably, this is not a book about the natural environment.

Inequalities of net income and wealth Even the poorest Australians have for the most part enjoyed a substantial improvement in real income over the last two decades. That is, in absolute terms, the poor are much better able to afford the basic necessities of life than their counterparts in the 1970s. This is reassuring, but hardly surprising, given the enormous improvement in national prosperity over that period. Of greater interest is the extent to which lower-income households have shared in the increased prosperity, that is, how they have fared relative to the rest of the community. Other things remaining equal, the growing social inequalities in employment, wages, welfare, etc. outlined in this chapter, might be expected to produce a corresponding increase in net after-tax income and wealth inequality. Has this happened? Unfortunately, we cannot be sure. One reason is that the ABS and other experts are concerned about the quality of the official income data conventionally used for distribution analysis. More importantly, economists cannot agree on an appropriate measure of inequality. Four measures—all using community standards as a benchmark—have been suggested and used. One is a ‘capability deprivation’ benchmark of the kind proposed by Amartya Sen (cited in Henry 2002, p. 13). This includes not just basic 42


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needs but also the capability to participate in the activities of the community with self-respect and without shame. Unfortunately, this measure can be quite subjective and in any case we do not have a trend series on it. It is worth mentioning, however, that although favoured by critics of egalitarianism, a ‘capability’ measure may not produce a result very different from more conventional measures.46 A second, more practical, measure is to use 50 per cent of median income of Australians as the community benchmark—with all those earning below that line treated as being in a sense ‘poor’. On this measure, the trend in inequality has remained fairly stable over the last two decades (Harding, Lloyd and Greenwell 2001). Although the absolute gap between the poor and the median household has widened, the percentage distribution of incomes after taxes and transfers (and after non-cash benefits) has not changed greatly. This contrasts strikingly with the experience of other reforming countries such as the United Kingdom and New Zealand (Smeeding 2002, p. 195). On the other hand, using 50 per cent of mean income as the benchmark, income inequality has shown a tendency to increase over the last decade, especially since the mid 1990s (Harding and Greenwell 2001; Ann Harding, Australian 25 Feb. 2002). Similar results were produced by Saunders (2001).47 The measured rise in equality is not strikingly large but the trend is likely to be understated for various reasons. For example, income distribution data cannot adequately reflect the explosion in CEO compensation (Krugman 2002) and capital gains and imputed rents on owner occupied housing are not normally included in such data. A fourth possible measure is expenditure-based instead of incomebased. A recent study found that, while income inequality has been increasing, current expenditure inequality has remained stable (Harding and Greenwell 2002). So the trend in inequality is not clear. What is clear however is that by international standards, Australia starts with a relatively high level of income inequality. It has a distribution of household market incomes (pre taxes and transfers) that is not untypical of other developed countries. But net disposable incomes (after taxes and transfers) are more unequally distributed in Australia than in all but very few (two to four) of the 21 OECD countries assessed (OECD 2001, p. 196; Saunders 2002, pp. 196 43


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and 208; Smeeding 2002, p. 184). This means that the tax/transfer system has been less effective in tempering market inequality in Australia than it has in other countries (a point confirmed in other studies such as Estevez-Abe et al. 2001). In Chapter 3 it is noted that Australia has a relatively progressive tax/transfer system per dollar redistributed, that is, it uses a highly redistributive formula for allocating benefits, but it spends less overall on redistribution than other countries. Burtless (2001) studied child poverty levels in thirteen OECD countries.48 He found poor children in Australia to be worse off in absolute purchasing power terms than poor children in the other twelve countries studied except for the United Kingdom and the United States. These findings mirror those of the United Nations Development program on poverty rates in developed countries, which show Australia fourteenth-highest out of seventeen countries (Ziguras 2002). Leaving current income and expenditure, what can be said about the distribution of wealth? There is no doubt that the overall distribution of wealth in Australia is very skewed, with the richest 20 per cent of families owning 65 per cent of total wealth—and the poorest 20 per cent owning almost nothing (Kelly 2002b, p. 5). Many Australians cannot afford to own appreciating equity assets (shares, home ownership or investment property) because of low income and low borrowing capacity. Some have superannuation but the amounts are usually too modest to make much difference to retirement income.49 Has the concentration of wealth been tending to increase? Here the story is again a little murky. But on the basis of two recent studies by Simon Kelly (2001a; 2002b), it appears that: • the distribution of wealth (assets less debts outstanding) is more unequal today than it was in the 1960s; • the trend to rising inequality may have levelled off in the 1990s because of the effects of the Superannuation Guarantee Charge; but • on current trends, wealth inequality is set to rise further over the next quarter of a century (in part because of the ageing of the population and changes in home ownership patterns). There has also been a striking shift in wealth distribution by age. Since the mid 1980s those under 45 years old suffered a fall in real average 44


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wealth per adult whereas for those aged 65–74 the increase was 115 per cent. That is, older Australians gained a markedly increased share of wealth. The main reason why those aged less than 45 years have fallen so far behind is ‘falling home ownership rates and the growing value of mortgages for young cohorts’ (Harding, King and Kelly 2002, p. 10). Focusing just on older Australians (65 and over), the picture is again uneven. The wealthiest 25 per cent of older Australians increased their share between 1986 and 1998. The poorest older Australians held their share but the middle half suffered a fall in their share of wealth (Harding, King and Kelly 2002). In short, if one accepts the available data as broadly reliable, the aggregate picture on income and wealth distribution can be summed up as follows: •

the poor as a whole (those in the lowest two income deciles) have shared in the benefits of economic growth; • using the median household income as a benchmark, income distribution has remained fairly stable over a long period, especially if one also allowed for non-cash benefits;50 but • high-income households are getting richer and wealthier at a faster rate than other households; and • Australia remains a relatively unequal society—income wise and wealth wise—compared with most other OECD countries. On the surface, this conclusion does not sit altogether comfortably with the developments outlined in this chapter—growing inequalities in employment opportunities, wages, regional development, etc. However, the contradictions are more apparent than real. First, it is important to be wary of aggregates. In toto the poor and near poor—those in the lowest decile or two—have fared well but many within that broad group or just above it have fallen well behind community standards. Thus it is known that some low-income households such as pensioners have more than held their own relative to the community but other welfare recipients have not done as well. Again it is known that some of the more skilled and enterprising workers have improved their position markedly but many others of working age have joined the ranks of the poor. These include unemployed single 45


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adults and indigenous Australians, many single parents and students and some low-paid workers.51 There are pockets of real deprivation in the Australian community. An ABS survey in 1999 found that around one-quarter of all households in the bottom quintile (i.e. 5 per cent of all households) experienced five or more ‘financial stress’ indicators, such as inability to pay household bills, relying on second-hand clothes, etc. (Saunders 2002, p. 39). A more recent analysis by DFaCS (Bray 2002) focused on indicators of relatively severe ‘hardship’, such as going without a meal or heating. About 16 per cent of all households in the lowest income quintile (some 590 000 people) experienced at least one form of hardship and 7 per cent experienced ‘multiple hardship’. But hardship is concentrated in particular population groups. For example, multiple hardship was experienced in 28 per cent of lower-income sole-parent families in public housing and in 34.5 per cent of lower-income single people aged 25–54 living by themselves in higher-cost private rental accommodation (Bray op. cit. p. 71). Other vulnerable groups are the long-term unemployed—many of them forced to beg to survive, (Age editorial, 4 Nov. 2002). A national census of homeless youth found 26 000 young people aged between twelve and eighteen were homeless in August 2001 (Sydney Morning Herald editorial 18 Jul. 2002). Some two-thirds of Aboriginal families are living more than 120 per cent below the poverty line and many are in what the ABS has defined as ‘real deprivation’ (Year Book 2001, p. 388). The 2001 Census found that ‘economic and social disparities between indigenous and non-indigenous Australians are growing’ (Australian editorial 22–23 June 2002). Secondly, some of the developments noted in this chapter, such as the widening in earnings inequality and the erosion in tax progressiveness, have mainly benefited high income earners. So they would be expected to affect income distribution measures based on the mean (which do show rising inequality) but less so measures based on the median (which do not). The tables below confirm that households immediately above the lowest decile have been distinctly squeezed during the 1990s, with the top income earners doing best of all. Thirdly, there were special factors contributing to the degree of stability in income distribution observed in the 1980s and 1990s. 46


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Table 1.1 Equivalent disposable incomes of individuals: change 1990 to 1997/8 5th percentile 10th percentile 25th percentile 95th percentile Median

+ + + + +

3.2 1.5 0.1 7.9 1.3

per per per per per

cent cent cent cent cent

Source: Harding and Greenwell 2001

Table 1.2 Share of equivalent disposable income 1990 1995–6 1997–8

Bottom 20 per cent

Next 30 per cent

Top 20 per cent

7.3 7.4 7.2

20.9 20.3 20.2

38.1 39.1 39.4

Source: Harding 2001

During the 1970s and 1980s, rising unemployment and increasing earnings inequality tended to increase market inequality (distribution pre taxes and transfers), but a big increase in social spending relative to GDP helped to neutralise these effects. In the 1990s, earnings inequalities continued to rise and social spending levelled out (or even fell a little) relative to GDP (see Chapter 3). This combination should have tended to increase net income inequality. But the broad unemployment picture brightened and partially saved the day—so did the further spread of employer-funded superannuation contributions. Thus, high and rising levels of social spending in the 1970s and 1980s, and falling unemployment and broader superannuation in the 1990s, help to explain why net income and wealth inequality has not increased markedly in Australia in the last two decades despite a continued increase in market inequalities.52 Similar special factors will be needed to prevent a rise in inequality in the years ahead, given the prospect of continued increases in market inequality. Fourthly, many of the developments outlined in this chapter would be expected to show up in quality of life differentials (stress, insecurity, loss of empowerment of low-paid workers, etc.) and a less equal distribution of non-cash benefits rather than in net income differentials. Such effects are not captured by the income distribution data. There is a fifth possible explanation for the apparent anomaly 47


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between growing inequalities in employment, wages, welfare, regions, etc. and the relatively stable aggregate income distribution data (relative to the median). It is that many of the indicators reviewed in this chapter (for example, the trends in education and housing) are ‘forward’ rather than ‘concurrent’ indicators. That is, they impact on social mobility and equal opportunity and point to future inequality trends rather than immediate income effects. Again, much of the ‘hard liberal’ agenda (such as on industrial relations and welfare) is still being frustrated by the Senate—a hurdle which may not be there in the longer term (see Chapter 7). Conclusions In the 75 years after Federation, and especially in the 1990s, Australia put great weight on distributional equity—especially the protection of vulnerable workers—and was prepared to sacrifice considerable efficiency to achieve its equity goals. By the 1980s it was clear that this was unsustainable: higher priority had to be given to efficiency to compete in the increasingly integrated world economy. There were two choices. One was to abandon some of the old distorting methods of redistribution and replace them with more efficient methods while leaving the overall equity goals untouched. The other was simply to scale down the egalitarian values. In terms of the rhetoric and intent, governments (at least until recently) have generally opted for the first approach—to pursue efficiency with social harmony and consensus. In the light of the review of various social developments in this chapter, how successful have they been? The efficiency drive has generally worked well. As is argued later, some so-called reforms were ideological rather than economic in intent and some of the economic-based reforms were not well conceived or implemented (Argy 2001b). But for the most part, the program of bold microeconomic reform, combined with factors such as increased investment in human capital in the 1980s and improved monetary management in the 1990s, has helped produce a remarkable economic renaissance over the last decade. Even on the criterion of equity, Australia continued to make good progress on many fronts over the last two and a half decades. For example, successive governments: 48


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• • •

• • • •

• •

•

made immigration less discriminatory (although there are emerging signs here of regression); extended Medicare; managed for a time to improve the enrolment rates of lowincome students in higher secondary and tertiary education and more recently to lift literacy rates; made employer-funded superannuation benefits more widely available (a great potential wealth equaliser); reduced discrimination against women, older workers and gays; adopted a more determined policy response to the acute disadvantage of Aborigines; extended assistance to some needy families (mainly stay-at-home mothers) and attacked child poverty, both with the Family Package of the late 1980s 53 and some recent Howard Government reforms; improved Job Network’s capacity to provide customised assistance; began to focus on some workers’ grievances such as unpredictable hours, insecure entitlements, inadequate or unaffordable child care services; and made an effort to wean people off welfare and into work through various schemes and incentives (as well as penalties).

Countries such as the United Kingdom and New Zealand that adopted Australia’s ambitious kind of economic reform program ended up with big increases in income and wealth inequality (Sneeding 2002, p. 195). In Australia, however, the increase in inequality has been relatively moderate. This is no mean achievement. However, this chapter has shown that many old pillars of egalitarianism, especially those protecting low-paid workers, have been allowed to steadily erode over time. In particular it has pointed to growing inequalities in: • • • • • •

job opportunities; wages and conditions; access to welfare; the tax system; regional opportunities; and the workplace balance of power. 49


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As well, and most importantly, government outlays on public services like education, health, housing, urban transport and labour market programs have become less of an equalising force during the course of the 1990s. It was inevitable that in an increasingly integrated and rapidly changing world economy, Australia would want to review parts of the egalitarian structure established under the Australian Settlement and by subsequent decades. But governments could have taken stronger fiscal measures to replace the more archaic instruments of redistribution. This did not happen and it appears that it will not. As a result, Australia is in the throes of a major retreat from egalitarian values. In particular, four points need highlighting. First, Australians are becoming meaner towards some of the poor. A considerable number of low-income families, such as the long-term unemployed dependent on welfare, the struggling under-employed, the unskilled workers dependent on ‘safety net’ increases, single parents, indigenous Australians, students living away from home and newly arrived migrants, have lost considerable ground relative to the rest of the community. By Australian standards, they are poor—some very poor. And governments are challenging the basic notion of universal needs-based income support. For those perceived to be ‘undeserving’ poor (such as many of the long-term unemployed), welfare is less generous, more conditional and more moralistic than it has ever been. Many Australians also see other evidence of ‘meanness’. They are for example concerned that the level of Australian foreign aid has been falling away steadily since the 1980s, that we are less welcoming to refugees and Muslims, adopting a far harsher line on migrant family reunion and denying newly arrived migrants early access to welfare benefits. But these are issues beyond the scope of this book. Secondly, the reluctance of governments to borrow in order to invest more in collective services such as education, health, housing, etc. constitutes a major violation of the traditional Australian belief in equal opportunity (see Chapters 6 and 7). This has ominous implications for future social mobility and inequality. Thirdly, the regional and spatial divide has been allowed, in all its dimensions, to grow and grow. At least, some of these problems are getting some political recognition. 50


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Fourthly, and most significantly, we are seeing the emergence of an ‘under-class’ of unskilled, inadequately educated and knowledge-poor Australians of working age. This group includes people who are either chronically unemployed or under-employed and acutely welfaredependent. It also includes people in low-paid, insecure jobs with unpredictable hours and relatively stagnant real incomes and with no voice in the workplace.54 This under-class of Australian workers enjoys less government protection than their counterparts in most other OECD countries. At the other end of the spectrum there is an ‘over-class’ of highly paid upper and middle executives and professionals, thriving on risktaking and demanding an unfettered right to pursue market gain. They have become Australia’s principal capital and wealth accumulators and are now so isolated from the under-class in terms of material wellbeing, quality of life, social attitudes, location and choice of schools, that there is almost an unbridgeable gulf between the classes. The result is a ‘fragmentation of the Australian community and detachment or marginalisation of significant segments of the population from the mainstream’ (Probert 2001, p. 29). These various developments are still unfolding and have not yet had a major impact on income distribution data. Indeed, in policy terms, the anti-egalitarian campaign is in early stages of build-up. Critics of egalitarian policies are putting increasingly fearsome claims to the Australian people that: •

the economic costs of redistribution are becoming too burdensome; • rising levels of social spending are encouraging welfare dependency and yielding rapidly diminishing social returns; • globalisation demands that governments give higher priority to market values relative to egalitarian values; and • the Australian people are fed up with, and rebelling against, egalitarian values. The rest of this book looks questioningly and critically at each of these claims.

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2. The economic sustainability of egalitarian policies The economic sustainability of egalitarian policies

any politicians, business leaders and economists contend that redistribution on even the present restricted scale is no longer economically sustainable. Are such concerns justified? To answer this question affirmatively, one needs to show that (a) current redistribution policies entail a major economic sacrifice and (b) the economic sacrifice is less affordable now than in the past. The bulk of this chapter is concerned with an assessment of proposition (a). It starts by examining the claim that there is an intrinsic conflict between a liberal economy and an egalitarian society, or at least that the latter seriously impedes the former. Then there is a review of other commonly discussed efficiency costs associated with fiscal redistribution. Attention is drawn to some often-overlooked economic benefits from egalitarian policies. And there is an examination of the international evidence on the relationship between scale of redistribution and economic performance. Issue (b) above is, however, no less crucial and is addressed in the final section of the chapter. The focus of this chapter is on the relationship between egalitarianism and broad economic growth, that is, the conflict between equity and efficiency. The separate issue of how egalitarian policies impact on unemployment—which can be viewed as an equity/equity conflict— is deferred until later in Chapter 3 where the social returns are discussed.

M

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The economic sustainability of egalitarian policies

Compatibility with liberal economic reform Many economic and political commentators, both on the Left and Right of the ideological spectrum, claim there is a serious potential for irreconcilable conflict between a liberal market economy and an egalitarian society.1 That is, in general, if you want to get more of one you must give up, or at least accept much less of, the other. If this view were accepted in its starkest form, the economic costs of egalitarian policies would indeed be high because liberal reform has been a key driver of our recent economic renaissance (Parham 2002b). But the true situation is quite different. It is possible to envisage a number of situations where a potential conflict can arise between economic liberalism and egalitarianism. These are reviewed one by one. 1. If redistribution were pursued on such an ambitious scale that it required a very big rise in the tax burden, it could seriously disturb the previously accepted balance between effort, skill and innovation on the one hand and reward on the other. This in turn might destroy the basic premise on which a market economy is founded. Ultimately, it could even prove counterproductive for the poor. This is an interesting academic possibility but this book is not discussing extreme redistribution policies (for example, policies which take Australia closer to Scandinavian values). So it is not of any great relevance here. 2. A second potential conflict may arise if a liberal reform is not just about better means (efficiency and effectiveness) but also intentionally about changing ends—shifting community values. This was not true of much of the reform program of the 1980s and 1990s, which was predominantly about better means (Argy 2001b).2 So the implications for distribution and social structure were either small, short-lived or easily offset through redistribution measures. They were true examples of what this book calls economic liberalism. On the other hand, a few of the reforms of the last two decades, and some currently being proposed, have a wide and ambitious social and redistribution agenda and are only incidentally about efficiency. They are value-laden reforms of the kind this book calls hard liberalism 53


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(see Glossary). For example, some of the privatisation and outsourcing decisions had more to do with reducing the size of government per se (and weakening trade unionism) than enhancing efficiency. Again, some of the more extreme forms of ‘fiscal conservatism’ practised over the last decade have been more about reducing levels of public debt, public expenditure and taxation as desirable ends in themselves than about improving macroeconomic management. And many of the radical labour market deregulation proposals frequently mooted in Australia seek to deliberately break the back of trade unionism, change drastically the balance of power between workers and employers and generate a backlash against welfare. The fact that they might also improve a little the flexibility and adaptability of the economy is incidental to their wider aim. These types of reforms, while often masquerading as economic liberalism, involve large doses of hard liberalism. In short: •

economic liberal reform is, for the most part, compatible with an egalitarian society—pursuing one need not involve sacrificing the other; but • hard liberal reform must of necessity involve a big equity cost, with any efficiency gains being only incidental to their main purpose. This chapter is not about hard liberalism. 3. Even genuine economic liberal reform (directed at better means rather than ends) can initially impact adversely on social equality. This is because it often has the effect of accelerating the pace of structural change and increasing market inequality, especially in the short and medium term.3 For example, freer international trade, the integration of capital markets, more flexible workplace practices and a more efficient government sector all have the potential to disrupt the employment market and put relatively unskilled workers at a comparative disadvantage. Privatisation and wider application of the user pays principle can impact like a regressive tax (for example, by raising urban transport fares). A broad-based consumption tax in lieu of income taxes has the potential to harm low-income earners. And so on. However, this is a short-term and narrowly focused view of economic liberal reform. It fails to recognise that by enhancing efficiency, 54


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such reform increases the capacity of the economy to sustain social programs. It also fails to recognise that many liberal economic reforms are actually socially progressive in their impact. This is true, for example, of: •

lower tariffs on goods principally consumed by low-income families; • public utility reforms (electricity, gas, telecommunications, etc.) that reduce prices and proportionally benefit low-income households more than those on high incomes (Productivity Commission 2002); and • competition policy which reduces the scope for monopoly power.4 Above all, this short-term view of liberal reform fails to recognise that governments have the power to neutralise undesirable social effects through market-friendly redistribution measures—if they want to. The experience of the United States, the United Kingdom and New Zealand in the 1980s and 1990s (Argy 1998a Chapters 11–14; Dalziel 2002) and more recently the experience of Russia and Mexico (Stiglitz 2002), and South-east Asia (OECD 2001g) illustrate how, if governments choose to remain apathetic, social inequality will increase. But they need not. 4. A potential for conflict between egalitarianism and economic liberalism will arise if governments use economically inefficient methods of redistribution. For example, governments have in the past sought to advance social goals through rent controls, foreign exchange controls, bank directions, tariff protection and extensive labour market regulation, and have employed public monopolies as vehicles of cross-subsidisation. These devices sit uncomfortably with a liberal economy and have to be scaled back when an economy is liberalised. But the loss of such regulatory devices does not represent a major retreat from egalitarianism. For one thing, many of these devices became ineffective by the 1980s as a consequence of the communications and information technology revolution that ‘shrank the world’ and increased the sophistication of financial markets. Moreover the tax/transfer system provides a more ‘market-friendly’ mechanism which is at least as effective in addressing social problems and which 55


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sits better with a liberal economy. It also offers greater transparency and accountability and less risk of being ‘captured’ by the beneficiaries. It is true, that some egalitarian goals do not always respond effectively to ‘market friendly’ approaches. For example, if a government wanted to improve the working conditions and job security of workers, it would be hard to devise an effective market-based intervention which would achieve this outcome. So it may require a moderate re-regulation of the workplace.5 But market mechanisms are usually at least as effective as regulation for achieving social goals. 5. There is one potential for conflict that is particularly difficult to resolve. It arises if the cumulative effect of liberal economic reform is to indirectly generate a policy and opinion environment that is less friendly to egalitarian values. This can happen if economic liberalism promotes individualist values and, with globalisation, helps to create a new power structure and culture that is more hostile to redistribution. These are real risks but, as is argued in Chapters 5–7, the risks are manageable and do not require governments to fundamentally choose between economic liberalism and egalitarianism. In short, an egalitarian society can sit comfortably with a liberal economy in the long term. Egalitarianism does not require ‘big government’ with heavy market intervention and regulation. That is why most reformers of the 1980s and 1990s saw no basic inconsistency between redistribution policies and economic liberalism.6 It is also why a majority of professional economists, when surveyed, see no analytical inconsistency in supporting increased social activism while advocating open, competitive markets.7 One can agree with Francis Fukuyama that there is no alternative to a liberal market oriented democracy—without having to accept his (or his supporters’) inference that egalitarian policies are doomed. Similarly, one can agree with Henry (2002, pp. 32–3) that wider market income differentials are often an unavoidable concomitant of reforms which promote productivity—without having to accept any inference that egalitarian policies which redistribute market gains are incompatible with liberal reform. This theme is illustrated later when a social policy program is outlined in Chapter 7. 56


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Economic costs of taxation and government borrowing Even the more market-friendly methods of redistribution, such as through the tax/transfer system, can have some adverse economic effects. Taxes can have macroeconomic costs (for example, they can adversely affect labour supply, innovation and savings), and they can have efficiency costs (for example, they can distort economic decisions and involve administrative and compliance costs). Similarly, government borrowings to fund social infrastructure can have macroeconomic costs (interest rates, etc.). How significant are these various costs in the Australian context? Macroeconomic costs of taxation The extent to which taxes impact on work effort is a matter of debate among economists. Theory is inconclusive because the ‘income effect’ of higher taxes (lower spending power) and ‘substitution effect’ (encouraging a switch from work to leisure) tend to pull in opposite directions—the first leading to an increase and the second to a decrease in labour supply. As to the empirical evidence, it suggests that the labour supply of high-income professionals and managers, especially males, is relatively unresponsive to tax changes. Moreover, most workers do not have the flexibility to vary their working hours in response to changes in take-home pay (Klevmarken 2000). On the other hand, secondary earners and part-time low-paid workers, especially females, do seem to have an elastic labour supply (Apps 2002). So too do some ‘inactive’ workers like single parents who have a degree of choice between work and welfare (an issue discussed in Chapter 3). If such workers could be relatively insulated from tax increases, the overall work incentive effects could be minimised (Apps 1997; Argy 1998a, p. 83–5). Such an approach may not be feasible, however, and in any case there would be potential revenue effects to consider. On balance, therefore, one can accept that higher income taxes may have a slight dampening effect on work effort. There are also possible secondary effects on risk taking and the propensity to innovate. 57


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Another potential macroeconomic cost of higher taxation is the impact on national savings. It is often argued that Australia is systematically under-saving because of ‘policy distortions’. The persistence of chronic, large current account deficits (suggesting a deficiency in savings relative to investment needs) and the trend decline in private savings in the 1980s and early 1990s are both seen as prima facie evidence of ‘under-saving’. These concerns have led some economists to warn against a policy of redistribution from the rich to the poor, as it would tend to worsen the nation’s savings ‘problem’ (the rich tend to have a higher savings rate than the poor). These claims need to be questioned. First, why is it assumed that the policy structure in Australia is pulling down household saving rates below what they would have been in a ‘neutral’ policy environment? With the introduction of the recent goods and services tax, it is less true to say that our tax system is skewed towards income relative to consumption. And while the age pension remains fairly tightly targeted and this may reduce the incentive to save for retirement, compulsory superannuation contributions have the effect of pulling up saving rates. Prima facie all this does not suggest any major policy distortion in favour of consumption. Secondly, concerns about the external account deficit are largely misplaced. Australia’s ‘structural’ current account deficit (net of cyclical effects) has shown definite signs of shrinking in the 1990s (from around 4.5 per cent of GDP to around 3.5 per cent) and capital markets seem more relaxed about the deficit8 (see later discussion). In any case the persistence of structural current account deficits in Australia is not proof of under-saving. It could, and almost certainly does, reflect a stronger rate of economic growth and higher propensity to invest than other countries (Argy 1998a, Chapter 6; Henry 2001). In short, we cannot assume Australia has an under-saving problem due to policy distortions. Anyhow, the causal relationship between saving, investment and productivity growth is far from clear (Chaudhri and Wilson 2000). Nor is it clear that higher taxes adversely impact on saving rates. It depends on the motivation for saving: if, for example, there is a strong desire to maintain bequest levels, higher taxes may increase saving. When one allows for all these uncertainties, it is not unreasonable 58


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to conclude that the macroeconomic risks from moderately higher taxation, are small and manageable. Efficiency costs of taxation Taxes have efficiency costs because they tend to distort the economic decisions of consumers and producers, forcing them into less preferred choices (personal welfare losses). They also involve administrative and compliance costs and encourage avoidance and minimisation practices that are wasteful and distorting. The aggregate efficiency costs of taxation are hard to assess theoretically or to quantify. Campbell and Bond (1997) calculated the economic welfare cost of a 1 per cent increase in marginal tax and found that a project needs a benefit cost ratio in the range of 1.19–1.24 to improve welfare. Other studies have higher figures, for example, Barro (1991) and Freebairn (1995). On the other hand, some studies, such as Perotti (1996) and Putterman et al. (1998) find little or no cost. Many of the studies that highlight the efficiency costs are deficient in some respects; thus: •

they often ignore the economic benefits on the spending side (see later in this chapter); • they assume that in the absence of personal income taxation and public provision of social goods, the economy would find itself in an efficient, distortion-free equilibrium—a questionable assumption as nearly all private market activities involve significant transaction costs, such as advertising costs; transaction costs are particularly high in private provision of health and education (Quiggin 2001c); • the cross-country studies are based on the experience of countries with generally higher tax levels than Australia. Furthermore, the efficiency costs of taxes can in theory be minimised through well-designed revenue-raising instruments; although the ideal taxes from an efficiency viewpoint (such as lump sum taxes) are not always equitable or practicable, there are many relatively non-distorting ‘second-best’ ways of funding egalitarian policies (see Chapter 7). 59


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In short, while there are undoubtedly some potential efficiency costs associated with a moderate increase in the levels of taxation, they are unlikely to be of major significance for the Australian economy. Economic costs associated with government borrowing As noted in Chapter 1, ‘social wage’ spending on schools, hospitals, public housing and community services is an effective means of redistribution—it can contribute handsomely to reduced inequality. Some of this spending is of a long-term capital nature (and so helps future as well as present Australians), so it should logically be financed out of long-term borrowings. To fund it out of revenue would be incompatible with intergenerational equity and sound public financing principles. Many of the capital risks of public infrastructure investment could be assigned to the private sector and this often makes sense. But there should be no prior general presumption in favour of private financing. Private financing is appropriate if capital markets are efficient and better able to manage the risks than governments. But capital markets are not always efficient, for example, there is reason to believe the equity premium has been too high (Grant and Quiggin 2002; article in the Economist reproduced in the Australian, 2–3 Feb. 2002). And governments can manage some risks, such as those stemming from regulation and political changes, better than the private sector and so require a lower risk premium than the private sector would consider appropriate.9 If the private sector is not interested commercially, or sets too high a risk premium, the infrastructure investment needs to be financed by the public sector. This would require net borrowing over the business cycle (‘structural’ borrowing) and almost certainly a trend increase in public debt (possibly even relative to GDP). The possibility of increased structural government borrowing worries some economists on macroeconomic, accounting and intergenerational equity grounds. The macroeconomic objection to running up public debt has not been clearly spelt out. Past concerns were about the external account deficit but the latest Budget papers and statements made by Treasury Secretary, Ken Henry (2001), make it clear that this is no longer so. The change 60


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in official attitude on the external deficit, like the more positive approach to contra-cyclical fiscal demand management, is welcome (a previous book by the author advocated such a change on both fronts; (Argy 1998a, Chapters 5, 6, 7)). But what then is the economic justification for a fiscal stance based on gradual reductions or even stability in levels of government net debt? One pervasive fear is that even a moderate increase in structural net government borrowing would significantly push up average long-term real interest rates and ‘crowd out’ some private borrowing and investment. The main concern for interest rates would be if global markets, fearing a blow-out in external debt and a depreciation of the exchange rate, were to impose a higher risk premium on Australian borrowers. However, the literature suggests that any additional risk premium would be small (Gruen and Stevens 2000, pp. 60–3; Quiggin 2001d) and that the link between fiscal deficit and interest rates is at best inconclusive (Nevile 2000). In a recent study, Treasury finds evidence of a historically ‘significant’ long-term effect on interest rates but acknowledges that its results ‘belong to an era of higher debt’ and are less applicable to ‘an era of low debt’ (Comley, Anthony and Ferguson 2002). Even the global credit rating agency, Moodys, has had a change of heart on Australia’s high and still rising foreign debt. It has decided to change its methodology to recognise that advanced nations with flexible exchange rates, like Australia, were unlikely to suspend sovereign debt repayments or suffer a currency crisis. Accordingly it has adjusted downwards the risk premium on Commonwealth borrowings (the Australian 22 Oct. 2002). And if a moderate increase in structural government borrowing did lead to a crowding out of some private investment, would that really matter? The composition of spending would be different—for example, less private housing and business investment and more public infrastructure (new hospitals, schools and a better natural environment)—but should such a compositional change be a matter of economic policy concern? The evidence suggests a change in mix towards public goods would be welcome to most Australians (see Chapter 6) and would be in the national interest provided governments carried out comprehensive cost–benefit evaluations before approving infrastructure projects. 61


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The evaluations would need to allow for externalities, including the benefits for household productivity (from higher education, better public transport and communications, urban amenities, etc.). The accounting arguments against government borrowing are equally weak. A low-geared business enterprise that aimed to stabilise or reduce its debt over time, irrespective of the investment opportunities available to it, would not be doing its shareholders a favour. And the same principle should apply to governments with low levels of indebtedness. Limits could be set on public debt growth but with the primary focus on stabilising net worth or debt/equity ratios rather than debt levels.10 And the intergenerational equity justification for low public debt is flimsy, for reasons explained in Chapter 3. Future taxpayers have no reason to thank governments who defer important social infrastructure projects (schools, hospitals, public housing and urban and regional community facilities), or arrange inefficient finance by the private sector, simply in order to avoid a rise in net public debt.

Potential economic benefits from egalitarian policies Critics of egalitarianism not only exaggerate the economic costs associated with redistribution policies, they also tend to ignore the positive economic (as distinct from social) benefits. These potential benefits are listed below (in no particular order of importance). 1. High social security benefits, while they may reduce the incentive to move from welfare to work, tend also to have some positive effects on labour market efficiency. For one thing, they ensure that people do not hastily take unsuitable employment out of necessity. High social security benefits also make it easier for workers to maintain their skills as well as their health during the stressful and difficult period of joblessness (Landt and Pech 2001), making them more productive when they re-enter the work force. Generous unemployment benefits may also encourage young people to invest in specific skills, which are less transferable than general skills and which involve a greater risk for the worker if laid off (Whiteford et al. 2000, p. 19; Estevez et al. 2001, p. 145). Many employers rely on specific skills to compete effectively 62


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in international markets. From the perspective of employers, higher unemployment benefits make it easier to hire and fire. 2. Government spending on community services can help sustain or develop human capital and promote economic growth (De-Fraja 1999; OECD 2001a). This is true, for example, of improved health services which reduce morbidity and sickness amongst workers or remove impediments to work due to circumstances beyond the individual’s control (as is the case with many Aboriginal maladies).11 Similarly, outlays on education (which can again be viewed as part of an active social agenda) that are well directed and efficiently implemented should have a positive impact on output per capita growth (OECD 2001d). Such secondary economic spin-offs are often ignored—yet they can be very significant. 3. More equal distribution of wealth and income can help reduce inefficiencies generated by imperfect credit markets. The inadequate availability of credit to asset-poor households makes it difficult for workers to enhance their skills or become self-employed entrepeneurs even if they have the right qualities to succeed (OECD 2001f, p. 14). Conversely, some people with wealth but limited ability may over-invest in skills and entrepreneurship (Putterman et al. 1998, p. 868). Government spending thus serves as a partial substitute for imperfect or missing credit and insurance markets (Benabue 1999; De-Fraja 1999). Even without credit constraints on higher education (and Australia’s Higher Education Contributions Scheme (HECS) already greatly relieves the problem), there would remain a strong market distortion in favour of children of high-income households (see Chapter 1). Education concessions and investment targeted at low-income families could help offset this bias. 4. There is a growing literature arguing that public infrastructure investment often crowds in rather than crowds out private investment (Dowrick and Lau 1998; Smith forthcoming). Many countries have been under-investing in certain types of infrastructure such as new land transport facilities, institutions which promote technological diffusion and innovation, and infrastructure which enhances urban and regional development (see Argy et al. 1999c, pp. 15–18). Social infrastructure has also been neglected and can similarly contribute to economic and 63


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regional development by enhancing the productivity of the work force and by making the region a more attractive living environment for key personnel. As well, it has positive implications for the productivity of the unpaid household sector (Smith 2002 and forthcoming). 5. Growing income and job insecurity, loss of worker control over hours worked and erosion of social capital in the workplace (see Chapter 1) must be adversely affecting productivity. Edgar (2001, p. 54) reminds us of evidence that long, uncertain work hours, stress and a stultifying work culture lead to ‘poor performance, mistakes, accidents, absenteeism and lower productivity’. The increasing demand for worker entitlements is partly a reflection of this insecurity and is generating industrial disputes. Social policies that allay these concerns could in those various ways help lift productivity. 6. Some social support programs have a positive by-product effect on the sustainable unemployment rate. This is true, for example, of active labour market programs and structural adjustment and mobility assistance; they facilitate a better match between job vacancies and jobseekers and lessen the risk of prolonged unemployment and associated ‘hysteresis’ effects—that is, loss of employability (Argy 1998a, Chapter 10; Chapman and Kapuscinski 2000). A reduction in the economically sustainable unemployment rate not only has direct economic benefits in the form of higher annual production and incomes. There are also indirect economic benefits from a lessening of the ‘human’ costs of unemployment such as loss of skills, health problems, tendency to suicide, higher crime and family breakdown (Hamilton and Denniss 2000). Indeed, soundly designed labour market programs are capable of enhancing both efficiency and equity simultaneously. Equity is enhanced because short-term relief to low-income, vulnerable workers is provided and helps them to achieve maximum long-term income potential. Efficiency is enhanced because such programs facilitate labour mobility, increase the ‘speed limit’ of the economy and encourage an increase in labour supply. 7. Redistribution policies promote greater social stability and law and order—outcomes that are highly correlated with economic growth. Putterman et al. (1998, p. 897) suggest that ‘economic equality may 64


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be an efficient substitute for police, prison and property expenses’ and that welfare policies ‘may have contributed to a degree of social harmony that is an important prerequisite for a reasonably smoothly functioning and hence efficient economic system’. 8. Redistribution policies that spread the gains more evenly reduce the risk of a community backlash against new economic liberal reform and ease demands to undo past reforms, such as trade protection. Social policies help create a climate more favourable to future structural change and reform. This is acknowledged by even the most dedicated reformers (see the Economist 16 Jun. 2001; OECD 2001f, p. 16). The various economic benefits from egalitarian policies are hard to quantify but focusing only on the economic cost is lopsided and misleading.12

The international experience There is growing international empirical literature examining the relationship between egalitarian policies and economic performance. Much of the evidence suggests that restrictions on economic freedom and increases in public spending will, beyond a point, become detrimental to economic growth (Tanzi and Schuknecht 2000). However, Australia is not a big spender or regulator. Indeed studies like those of Tanzi and Schuknecht treat Australia as one of the ‘good guys’ and suggest that relatively small-government countries like Australia with well-targeted and means-tested social spending can maintain egalitarian policies without suffering economically.13 Other studies (including Atkinson 1999; Goodin et al. 1999; Goodin 2000) go further and show that even countries with relatively high levels of social spending and taxation (certainly higher than in Australia), such as smaller European and Scandinavian countries, have been able to maintain strong economic performance. Indeed, egalitarian countries like The Netherlands have managed to outperform the United States on both economic criteria and social criteria as well as showing greater social mobility (Goodin op. cit. and John Quiggin in Australian Financial Review 14 Sept. 2001, p. 8). Similarly, Putterman et al. (1998, p. 875) has come to the view that ‘the empirical literature does not support 65


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large macroeconomic costs due to personal income taxation’. These various studies suggest little trade-off between efficiency and equity. Indeed some studies purport to show that redistribution is positive for economic growth (see review in Saunders 2002, pp. 182–3). On the other hand, Burtless (2001) finds that increased wealth in the United States has been facilitated by socially regressive policies (low minimum wages, parsimonious transfer benefits, weak unions and low taxes) but not sufficiently to lift American poor relative to European poor. Others have reached similar conclusions (for example, Ziguras 2002). These studies acknowledge there is a trade-off between efficiency and equity. Not surprisingly, the OECD in its review of the international literature notes that ‘the studies have not led to a convergent view that there is, or is not, a trade-off between the two goals of an equitable society and a rich one’ (OECD 2001f, pp. 38–9). The OECD also reported the results of its own independent work which concluded that: •

there is no correlation between income distribution and economic growth (OECD 2001f, pp. 14–21); but • on the balance of evidence and other things being equal, higher taxation and social spending tend to be associated with lower economic growth (ibid, p. 28), although the negative economic effects are small overall,14 especially for small-government countries. Another important point emerging from the literature is that the efficiency cost depends on the method of social intervention. Thus the OECD (op. cit. sections 2 and 3) accepts that ‘active social spending’ (such as on well-designed labour market programs) may actually promote growth (OECD 2001f, sections 2 and 3), as well as being more effective in the long term in achieving its social goals. Similarly, Tanzi and Schuknecht argue that if the same social objectives were pursued by ‘more intelligent’ means (for example, through more efficient use of the private sector and less ‘churning’), the size of government could be reduced without a social cost. This theme is consistent with the general thrust of this book. 66


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To sum up, the international evidence (contradictory and confusing as it is) is consistent with the view that: •

a ‘small-government’, liberal country like Australia is much less likely than a big-government country to suffer economically from a moderate increase in social spending; and • any economic costs from increased social spending can be minimised by careful choice of instruments of redistribution, both on the revenue and spending sides (a point returned to in Chapter 7).

Are egalitarian policies becoming less economically affordable? In the previous sections, the costs and benefits of egalitarian policies were reviewed. The question to consider now is whether there are forces at work tending to increase the net economic costs of egalitarian policies over time, making such policies less and less economically affordable. One legitimate concern is that, despite significant tax cuts in the 1990s, the Australian income tax burden remains higher now than in the 1960s (Smith 2001; Ann Harding, Australian, 28 Mar. 2002). Other things being equal, one would expect the marginal efficiency costs to be higher, too. Because of the constraints imposed by globalisation (discussed in Chapter 5), an increasing share of the tax burden is tending to fall on work effort. And the effects of higher taxes on work incentives may be getting more severe because an increasing proportion of the work force is now composed of part-time and casual workers. These workers are ‘much more sensitive to tax rates and much more prone to stop working if rates are too high’ than full-time workers who have less working time flexibility (Alan Wood, Australian, 21 May 2002). To complicate things further, Australia faces the prospect of higher taxes because of the need to deal with an ageing population after 2020, increased defence needs, and the costs of environmental repair (such as improving water usage). Economically and fiscally, the effects of ageing and environmental degradation are likely to prove quite manageable in 67


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the longer term. But perceptions are important and could affect the willingness of governments to expand social spending in the future. While the above factors suggest that egalitarian policies are becoming economically more burdensome, there are others pulling in the opposite direction. First, public debt levels are at near-record lows. If one believes in the crude principle that the more a government borrows the greater the risk that the last dollar will crowd out more productive investment, then from a micro efficiency viewpoint there should be much less concern about further borrowing in Australia (to fund social infrastructure). Equally, the macroeconomic costs of government borrowing are likely to be much lower in an era of low public debt; for example, there is less risk of adverse interest rate effects, as Treasury has acknowledged (Comley et al. 2002). Secondly, and as an extension of the first point, there is a prima facie case for arguing that after long years of neglect relative to private investment, the relative economic returns on public infrastructure investment are higher now than in the early 1980s. Thirdly, governments have shifted from inefficient instruments of redistribution, such as public monopolies, protection and regulation, towards more efficient instruments such as the tax and transfer system and ‘active’ instruments that help change human behaviour and in the long term reduce welfare dependence. This should per se tend to make the marginal costs of egalitarian policies more manageable. Fourthly, the structure of taxation has changed since the early 1980s and revenue is less reliant on income tax relative to expenditure taxes. Some inefficient state taxes have also been removed. Above all, any increase in net costs associated with egalitarian policies can be more easily absorbed today because we are that much wealthier. Over the twelve years to 1998, the net nominal wealth of all Australian families almost trebled (Simon Kelly 2001). The average Australian household’s real income has also increased dramatically.15 Continued growth of about this order seems likely in the medium term. But, some will protest, didn’t Australia’s strong economic performance in the 1990s depend on a less egalitarianism policy stance, and wouldn’t a change in that stance weaken future performance? Australia’s economic renaissance of the last decade stemmed from: 68


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• • • • • •

better cyclical economic management (especially monetary management); a big improvement over the last five years in our terms of trade, coupled with excellent agricultural seasons; a consistently under-valued exchange rate; a big investment in education in the 1970s and 1980s; the rapid and widespread adoption of new information and communications technology; and an ambitious program of economic liberal reform which began in the late 1970s and continued into the 1990s.

None of these factors depended fundamentally on a scaling down of the egalitarian structure.

Conclusions This chapter examined the claim that egalitarian policies are no longer economically affordable in Australia. The verdict can be summed up as follows: •

an egalitarian society can generally co-exist well with a liberal economy, although some of the more radical, mainly ideologically driven types of liberal reform need to be somewhat diluted in such a society; • egalitarian policies require higher taxes (than would otherwise prevail) and taxes have some efficiency and macroeconomic costs, but there are some often overlooked economic benefits from egalitarian policies and the net costs are very unlikely to be large; • the net economic costs can be minimised by careful choice of revenue-raising instruments and social programs; and • there is no reason to believe that the economic costs associated with egalitarianism have outstripped the capacity of the economy to absorb them. Many of the concerns expressed in the anti-egalitarian literature do not apply to an economy like Australia’s (with tightly targeted social 69


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spending and a low overall proportion of resources devoted to public spending). It follows that (a) there is no urgent economic need to reduce social spending and (b) there would be no dire economic consequences from a moderate increase in social spending, although some compromises may be necessary (see Chapter 7). The perception that Australian egalitarianism has become much less economically affordable is rather tenuously based. There are no economic imperatives dictating that Australia shift to less egalitarian values.

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3. The social effectiveness of egalitarian policies The social effectiveness of egalitarian policies

T

he debate about egalitarianism is not just about economics. It is also about what ethical values should guide society and the best means of advancing them. Some see egalitarianism as a key ingredient of a ‘good society’ and worth pursuing even if it requires some sacrifice of efficiency and individual freedom. The alternative view is that economic prosperity, individual self-reliance, responsibility and freedom of choice represent higher overriding values. Such issues of moral and social philosophy are beyond the scope of this book but they are touched on in the first section. Anti-egalitarians do not rely solely on economic or ethical arguments. The more formidable line of attack is that redistribution policies are increasingly becoming self-defeating or even counterproductive in achieving the desired social goals. Egalitarian policies are seen as largely ineffectual and often internally contradictory. These views are the main focus of the chapter.

Egalitarianism and the good society Egalitarian policies, as understood in this book, are not about achieving equality of outcomes or even an approximation of it. They have three more limited but important aims: 1. at all times, to maintain a strong welfare safety net; 71


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2. over the medium term, to spread the incremental gains of structural and technological change and reform more evenly across the community; and 3. in the longer term to achieve more equal opportunity and greater social mobility. The first and second goals seek, mainly through taxes and transfers, to mitigate the effects of rising market inequality. The third seeks, primarily through tied government benefits, to reduce market inequality itself and thus get at the root causes of self-perpetuating disadvantage. The three goals are interdependent. For example, equal opportunity is impossible in a society with high and rising inequality. Egalitarians do not want governments to focus solely or even predominantly on greater efficiency (a stronger overall capability to deliver higher living standards); they are not prepared to put all their trust on the ‘trickle down’ effects. Instead, egalitarians want governments to actively strive to achieve more equal opportunity and outcomes as part of building a ‘good society’. That is, a society where citizens have personal liberty (including a minimum financial capacity to exercise freedom) and the fullest opportunity for a happy and rewarding life, and where the institutional and policy processes are widely perceived to be consistent, transparent, fair and just. How do egalitarian policies contribute to a ‘good’ society? 1. Egalitarianism can be viewed as an essential dimension of ‘justice’ (a morally fair way to share benefits and burdens). Even taking the narrowest view of justice, as simply about fair rules and processes, there is need for pro-active government intervention to prevent poverty and facilitate more equal access to education, health, transport, the legal system, information, etc. This is because people are born in different circumstances and do not start life and work on an equal footing. But many see justice in a much broader perspective than ‘process’. Thus, one view, associated with John Rawls (1971), is that gains need to be shared in the way that a community of individuals would have decided behind a veil of ignorance about their own ultimate positions in the social hierarchy. This means looking after the least advantaged. 72


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2. Egalitarianism has a utilitarian rationale. This rationale has several dimensions. Although some people have more expensive tastes than others, lower-income households would generally be expected to have a lower marginal utility, that is, get more satisfaction from each additional dollar consumed, than would higher-income households. This involves an element of value judgment—but so too does the so-called ‘neutral’ assumption that everyone has the same marginal utility (which underpins the single-minded focus on efficiency). Moreover, the interpersonal utility comparisons made by egalitarians are more consistent with common observation and happiness surveys.1 If accepted, the diminishing utility assumption implies that a government wanting to optimise community well-being should seek to redistribute at least some of the incremental gains in efficiency to those who are relatively poor, so long as it does not eliminate the sum total of the gains in the process. Another utilitarian justification for some types of redistribution policies derives from two generally accepted propositions: •

that happiness is a function of actual relative to desired consumption, or one’s achievements relative to one’s aspirations; and • that people’s aspirations are not fixed; they rise with the consumption levels of the community around them. So movements in relative income and consumption are as important as movements in absolute income and consumption in determining human happiness.2 This is seen as an argument for expenditures on collective (public) goods relative to private consumption (Dixon 1997). Moreover, the evidence suggests that an increase in income and job insecurity is deleterious to workers’ personal happiness. For example, surveys have found that a typical worker would be as contented earning $10 an hour in a secure job as they would be in an insecure job earning $14 an hour—people value security of income 40 per cent more than instability and volatility of income (Evans and Kelley 2002). So, other things remaining equal, policies that promote worker security should improve aggregate subjective wellbeing. 3. Egalitarian policies are an important means whereby a society builds up 73


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social capital. They help instil confidence in the legitimacy of the system of government and its institutions and allow greater involvement of citizens in influencing decisions affecting their wellbeing (as noted in Chapter 1). Surveys of happiness show that while happiness may be a little improved by material wellbeing, it is much more affected by social relationships—the level of social support and trust in the community. This latter ingredient is more likely to be found in an egalitarian society—one that attaches importance to public and community goods, collectively consumed, as well as private goods, and that encourages social interaction. 4. An egalitarian society is more consistent with democratic ideals than one with high and rising inequality. This is true in three senses: 1. representative government works more fairly and smoothly if there is reasonable homogeneity in economic circumstances: a concentration of wealth and income inevitably means that some citizens can more actively participate in politics, and influence community norms, than others (Galligan et al. 2001, p.164); 2. large economic inequalities make a mockery of the principle of equality of rights before the law (even with reasonable access to legal aid); and 3. a democratic majority of Australians appear to want to contain social inequality (see Chapter 6). 5. A society with less inequality of opportunity and outcomes tends to be one with greater social stability, less welfare dependence, less industrial disputation (Kelley and Evans 2002) and a lower incidence of crime. Juvenile children of parents under economic stress and living in poorer neighbourhoods are more likely to become delinquent (Weatherburn and Lind 2001). Long-term unemployment among young males has a substantial effect on property crime (Chapman and Kapuscinski 2000). The Governor-General, Dr Peter Hollingworth, sees a link between family poverty and child abuse: ‘external circumstances of deprivation often lead to forms of deprivation behaviour expressing itself in violence, neglect and abuse’ (Age 13 Jun. 2002). These are some of the non-economic reasons why it is believed that governments should pursue egalitarian policies to temper increasing 74


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inequality of outcomes and opportunity. The arguments are subjective and can be challenged by anyone with alternative moral values. For example, those who believe that ‘self-reliance is virtuous’ and that ‘it is morally wrong to use the coercive power of the state to redistribute’ (Saunders 2002). But equally, a credible ethical case can be made in defence of egalitarianism to counter the concern that it involves interference with the individual freedom of some. In the context of this chapter, the key issue is not the moral rights or wrongs of egalitarian policies but whether the social returns from such policies—the equity benefits per dollar of government outlay— have been decreasing over the last two decades, sufficiently to justify a community backlash. In the previous chapter, the economic sacrifice associated with social spending was considered. Here the social effectiveness of such spending is discussed.

The rise in social spending As the table below shows, income transfers (which are of most concern to critics of egalitarianism) have been rising relentlessly for a few decades and account for most of the rise in total government outlays.3 This is also true of the OECD region as a whole. The Australian figures need to be put into historical perspective. The sharp upward trend in income transfers in the 1970s (especially during the Whitlam period), followed a 40-year period of stagnant Table 3.1 Estimated general government outlays, Australia 1965–2000 as per cent of GDP 1965 1970 1980 1985 1990 1995 2000

Total

Income Transfers

24.6 25.2 32.3 37.8 33.0 35.4 31.4

4.2 3.9 6.8 7.4 6.9 8.5 8.3

Merit goods*

10.5 10.4 10.5

Source: Atkinson and van den Noord, OECD 2001a * education, health and other social services

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growth relative to GDP—a period when welfare progress in Australia lagged well behind that of other Western nations (Castles and Uhr 2002, pp. 10–11). So there was an element of catch-up involved. There are two other reasons for caution when reading the figures. One is that the GST compensation package bloated government spending in 2000 and 2001 (Whiteford and Angenent 2002, p. 43) and had the effect of concealing what would otherwise have been a significant underlying trend reduction in social spending over the last decade. The other is that when analysing trends in public spending relative to GDP one must discount for the fact that the cost of delivering a given standard of public service tends to rise faster than inflation. Even so, there is no doubt that social spending has grown substantially relative to GDP—a fact that critics like Warby (2000) like to stress. No one is disputing these facts. But is it true that much of this additional spending has been socially unrewarding and even in some respects counterproductive? This chapter will review eight of the more common reasons given to back the claim that social spending has become less effective as a redistribution device and that it is creating inter nal equity contradictions.

Churning It is often argued that an increasing slice of social spending is going to middle- and upper-income households: the same families are taxed and subsidised simultaneously. This serves no social purpose yet wastes resources and distorts individual consumer preferences. Some universality of benefits is necessary to spread the benefits around and minimise work disincentives arising from the interaction of the tax and social security system. More importantly, it helps mobilise community support for needs-based spending, which is why middleclass benefits are viewed by many as ‘the lifeblood of the welfare system’ (Saunders 2002, p. 59). That said, in many countries universality has been carried to excess (see Cox 2001 on New Zealand, and Tanzi and Schuknecht 2000 on continental Europe and Scandinavia). In general, this cannot be said of Australia, although there are danger signs emerging. 76


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Reflecting Australia’s tightly targeted and means-tested system, there is ‘less ‘‘middle class welfare’’ than virtually all other developed countries’ (Whiteford and Angenent 2002, p. 50). Churning of taxes and cash transfers has been estimated at under 5 per cent (Whiteford, Morrow and Bond 2000, pp. 145–9). Churning is more significant in the dispensation of non-cash benefits such as health and education services. Even so, Australia is not in the big league internationally: for the period between the mid 1980s and mid 1990s, there was no trend increase in overall churning of cash and non-cash benefits (Tanzi and Schuknecht 2000, p. 141; Whiteford, Morrow and Bond 2000, p. 151). That said, churning has been tending to rise strongly in more recent years. Since the mid 1990s there has been a virtual explosion in middleand upper-class welfare. The new tax expenditure measures involving churning have been noted in Chapter 1. The same trend is evident with social outlays such as on family assistance, child care, first-home grants, health and retirement benefits.4 Some of these measures are poorly targeted and prompted one newspaper editorial (Australian, 18–19 May 2002) to say (with some hyperbole) that ‘Australians remain imprisoned in middle class welfare culture’. Some policy retreat from middle-class welfare is desirable (especially as the Government has been curtailing some benefits to the poor to meet its fiscal targets). Tighter means testing of social benefits would be one way forward. The risk is that it might impede further the shift from welfare to work but such effects could be lessened through other means.

Does social spending crowd out private welfare? Another argument often advanced by parties who question egalitarian policies is that the welfare state crowds out voluntary provision of welfare services (Cox 1997). This argument has some plausibility but a recent OECD study (Healy and Cote 2001) questioned its main thrust. In recent years, Australia has seen a decline both in the scope of government welfare support (as noted in Chapter 1) and in community participation. Churches, unions, clubs and other social organisations and welfare groups are complaining of reduced public support.5 77


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Effect on social mobility There is no doubt that ease of social mobility is a key requirement of an egalitarian society. That is why this book frequently stresses the need for governments to actively promote equal opportunity, as a complement to passive income support programs. Critics of redistribution argue, however, that government pursuit of lower inequality outcomes impedes social mobility because it reduces the financial incentive to improve oneself. Intuitively, this proposition seems implausible. Indeed, one would expect that, in all but extreme cases, the reverse would be true: the more unequal the society the less capable it would be of offering genuine equality of opportunity and of facilitating upward income mobility. The cross-country evidence is inconclusive on this issue. The United Kingdom, which has experienced a particularly sharp increase in inequality, is not notably more socially mobile than countries which have experienced less inequality. Indeed, one recent study by the London School of Economics, based on data gathered over the past 40 years, suggested that the opposite may be true. It found that ‘today’s young British are even less likely than their parents to move out of their economic class into which they were born’ (report by Peter Wilson in the Australian 30 Mar. 2002). Again, the United States (the most unequal of Western developed countries) does not enjoy more social mobility than some of the less unequal European countries (Goodin et al. 1999; Headey and Muffels 1999). Australia, as was noted in Chapter 1, is a country with relatively high income inequality in international terms but with relatively wide disparities in education performance and a high and growing incidence of jobless households across generations— hardly indicators of rising social mobility.

Does social spending induce a culture of welfare dependency? People who want to roll back social security (such as Warby and Nahan 1998, p. 11) claim that it is spawning an increasing ‘culture of welfare dependency’. 78


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Prima facie, there is cause for concern. The proportion of people of working age receiving some government income support increased substantially during the last 30 years (from 5 per cent to 20 per cent) and is among the highest in the developed world. Gregory (2002) describes the increased proportion of females aged 15–59 on income support over the last two decades as ‘truly remarkable’. The long-term increase in welfare dependence has been driven by a number of interacting economic, social and demographic developments. These include: • • • • •

•

a trend increase in unemployment (partially reversed in the 1990s); a big increase in the proportion of part-time and casual employment relative to total employment; an increase in earnings inequality among full-time workers; an increase in the proportion of lone-parent families (41 per cent of women are single compared with 29 per cent in 1966); partly as a consequence of the above developments, a rise in the proportion of household units of working age living in relative poverty (King 1998); and changes in social policy such as the introduction of incometested family payments for people in the work force and a gradual liberalisation of income tests that have widened the area of welfare.6

Not surprisingly, then, many economists see the trend in worker welfare dependance as a response to social problems and the impact of economic events (Borland, Gregory and Sheehan 2001, p. 2; Landt and Pech 2001, p. 48). However, welfare critics (such as Peter Saunders (ii), Australian 6 Dec. 2001) argue that the trend increase in welfare dependence is a direct product of an over-generous and over-lenient welfare system. It is the latter argument that will be focused on. No egalitarian disputes the need for vigorous action to deter welfare cheats—those falsely claiming benefits.7 Nor does any egalitarian dispute the need to deal with situations where welfare recipients face high effective marginal tax rates (EMTRs)—that is, where the combination of tax and withdrawal of government benefits markedly reduces the net return from additional work. Over limited income ranges and for 79


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select categories of benefit recipients, high EMTRs (often called ‘poverty traps’ or ‘low-income traps’) can act as work disincentives (McClure interim report 2001, Appendix 4). A number of tax and benefit withdrawal reforms over the last decade, including many Howard Government initiatives are helping to lessen the problem (Whiteford and Angenent 2002, p. 16–17). But the financial disincentive to work still persists for some households and is noted in various economic literature. For example Dawkins, Gregg and Scutella (2001), while attributing the rise in jobless households to a range of factors,8 observe: With fixed costs of employment such as travel to work and child care, the design of the welfare system may act as a huge disincentive for the spouse of a non-employed partner to enter into low-paid employment. Increased targeting of welfare payments in the 1980s, along with an increasing generosity in payments, may be one of the contributing factors to the rising occurrence of the jobless household problem.

In examining the role played by our social security system in encouraging welfare dependence among people of working age, we need to distinguish between welfare recipients who are not required to look for work (the ‘inactive’) and who make up 60 per cent of the total, and welfare recipients who are work tested (the unemployed) and who make up the remaining 40 per cent. There is no doubt that many inactive people of working age—people who could work but are not actively looking for work and hence are not officially classified as ‘unemployed’—lack sufficient work incentive. Many lone parents, secondary earners and people on disability pensions could take up more part-time work but are not doing so because of the way the tax/welfare system impacts on them. Some lone parents average more than twelve years on welfare support, according to a recent study (Gregory 2002 and Arndt 2002). A similar problem exists in the United Kindgom (Dickens, ANU address 13 Mar. 2002). For many, the option of actively seeking work and, like other unemployed, receiving the much lower Newstart allowance and becoming exposed to breaching penalties, is not appealing. To the extent that lack of financial incentive may be discouraging 80


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young inactive recipients from going to work, further welfare reform is indeed necessary. The Government is said to be reviewing various options for reform (Grattan, Sydney Morning Herald 14 Jun. 2002). Some involve further ‘tinkering’ with the existing system to remove work disincentives, anomalies and complexities. Other reforms being considered would involve basic redesign of the system and even complete integration of the tax and social security systems. In the case of lone parents, care is needed to avoid creating ill-effects on children, as some fear has happened in the United States (Arndt 2002). Some economists and politicians go further and express concerns about the work motivation of many of the unemployed, who are expected to actively look for work and are regularly work tested. Words like ‘voluntary unemployed’ or ‘job snobs’ have been coined to describe the unemployed.9 But is work shirking really a significant cause of today’s unemployment malaise? A priori, one would expect not. First, the numbers of job seekers greatly exceed the number of job vacancies–at the last count (November 2001), the supply/demand ratio for all workers was about eight to one overall. It would be several times greater again for unskilled workers, especially if they are poorly located or have personal characteristics unappealing to employers. So it would be very difficult for these people to walk into a job, even with the best will and motivation; and if they did, it would be at the expense of other unskilled unemployed in similar situations. In other words, most of our unemployment is structural (due to a mismatch between the skill and locational characteristics of jobs and job seekers) rather than voluntary in character. In such a situation governments should be trying to generate or create the right jobs in the right places or to facilitate greater mobility (see Chapter 7). Until they do, they have no moral right to blame the unemployed themselves for ‘not looking hard enough for work’. Secondly, the present system of work tests in Australia is one of the toughest in the world and strongly discourages deliberate work avoidance.10 Although benefits in Australia are more open-ended than in other countries, welfare recipients face a real threat of partial or even total withdrawal for breaches of compliance tests (Chapter 1). Thirdly, the evidence shows that the unemployed are most unhappy with their lot: they are more stressed, alienated and less satisfied with 81


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life than employed people, and are suffering ‘profound and debilitating effects’ (Saunders 2002, pp. 98ff; see also Dawkins 1996). It is inconceivable that any appreciable proportion of workers would willingly choose to remain unemployed as a way of life. And a recent DFaCS survey (Carlisle et al. 2002) confirms that the unemployed (on Newstart allowance) have a very strong preference for work. Fourthly, the great majority of unemployed still have a strong financial incentive to work. It is only a few families in special circumstances that might be no worse off or marginally better off remaining on welfare. And, finally, it is far from clear that unemployed persons are greatly influenced by financial considerations in deciding how actively to look for work. For the most part, they would not know the full facts about EMTRs, would much prefer a job to idleness (because of what it does to self-esteem and social contacts) and would tend to look beyond the initial pay to future increases in income over time. Overseas evidence suggests that financial incentives can make a difference but a recent DFaCS paper noted that ‘little is known about the nature and size of such effects’. It also observed that ‘much of the empirical evidence indicates that the behavioural responses to tax and transfer programs are generally not as large as many of the critics of the welfare state allege’ (Whiteford, Morrow and Bond 2000, p. 20). The McClure Report noted (in Appendix 4, p. 49) a paper by two DFaCS officers, David Ingles and Ken Oliver (1999) suggesting that the level of benefits relative to wages was at that time sufficiently low to have ‘little impact on the supply of full-time workers’.11 Many of the cross-country studies showing strong effects of unemployment benefit rates on labour participation are in fact technically flawed (see Atkinson and Micklewright 1991) or of little relevance to Australia. Such studies are unable to disentangle the causal directions, isolate the multitude of variables affecting unemployment levels and trends and allow for institutional differences between countries. It is interesting that an Australian-specific time series study by Debelle and Vickery (1998) found the real unemployment benefit to be ‘insignificant in both the male and female participation rate equations’ (p. 251). A recent review of the literature notes evidence of a weak behavioural 82


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response by the unemployed to variations in replacement rates (Miller 1997, p. 28; Le and Miller 2000, p. 87). As for hard factual evidence of work shirking by unemployed Australians, it is difficult to find and often contradictory.12 Professor Peter Saunders of the University of New South Wales discounts the dire warnings of hard liberals regarding the employment effects of Australia’s social security system. He concludes that ‘welfare reform alone is not capable of achieving anything other than a marginal impact on unemployment’ (p. 264). The outcome of this complex discussion can now be summed up. 1. It is stretching credibility to claim that the numbers of unemployed who are content with their lifestyle on welfare (‘cruisers’ or ‘job snobs’) are sufficiently numerous to have an appreciable effect on total unemployment figures. 2. To the extent that there are some ‘cruisers’, they are almost certainly less numerous now than, say, fifteen years ago, because effective marginal tax rates (EMTRs) have generally fallen and work tests have tightened over the period. 3. So the social security system cannot be blamed for the high and rising incidence of long-term unemployment in Australia. The more basic causes are slow job growth for unskilled workers and the inadequate job readiness and aptitude of many to fill the limited amount of jobs that are available. Ways must be found to overcome these disadvantages (as outlined in Chapter 7) rather than denigrate the long-term unemployed. 4. On the other hand, there may well be a serious lack of work incentive among inactive welfare recipients (who are not formally counted as unemployed) stemming from the interaction of the tax and welfare systems. In that narrower sense, the welfare system may indeed be encouraging welfare dependence and may need reform (see Chapter 7). 5. Here too, however, the welfare system cannot be blamed for the trend increase in welfare dependence because work disincentives have not got worse for most inactive recipients over that period. For example, typical EMTRs faced by sole parents have not risen in the last fifteen years: they are much the same now as they 83


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were when EPAC studied the problem in the mid–1980s (EPAC 1988) and in some cases lower. 6. The increase in welfare dependence can be mainly attributed to a changing economic environment (such as the drying up of full-time jobs), changing social norms (such as on family values) and policy changes which have widened eligibility and added to the population of middle-class welfare recipients.

Is social need diminishing? Critics of egalitarian policies infer from the hefty increase in social transfers that Australia must be getting diminishing marginal social returns from redistribution. And to a limited extent this view is correct. The proliferation of ‘well off’ benefits was noted earlier. Some of these have eroded the tax base but others, such as the first home-owners scheme, the large increase in private school funding, improved universal family benefits and increased access of seniors to the Health Card,13 have all tended to swell the level of ‘social’ spending (broadly defined). In that limited sense governments are now meeting less pressing social needs and getting less benefit from the last dollar. But middle class welfare still accounts for only a small proportion of total social transfer payments. ‘Well off’ benefits aside, much of the increased social spending over recent decades has been in response to increased social need and does not per se imply diminishing returns: (a) The increase in social expenditure was (at least in part) an attempt by governments (voters) to offset new market forces that were tending to increase inequality. For example, as noted in Chapter 1, earnings dispersion widened during the 1980s and 1990s (Parham et al. 2000 and OECD 2001f, Table 2.1; Whiteford and Angenent 2002, p. 84). Between the 1970s and 1990s the standard measure of market income inequality (before taxes and transfers) increased by more than one-third. (b) A proportion of social spending in the 1980s and 1990s was merely a form of substitution for old instruments of redistribution such as a ‘fair wage’, ‘occupational welfare’, full employ84


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ment, a wide spread of home ownership, industry protection, cross-subsidisation, banking regulation and rent controls (Chapters 1 and 2). For example, the trend increase in unemployment and under-employment between the 1960s and 1990s required compensatory social spending of an extra one percentage point of GDP (Tanzi and Schuknecht 2000, p. 43). (c) Demographic and societal changes have had a big influence. Some 40 per cent of the increase in social outlays relative to GDP over the period 1970–1997 was due to spending on retirees (OECD 2001f, Tables 3.1 and 3.2).14 Decomposing the increase in spending on age pensions, we find that over the period 1965–96, the relevant population increase accounted for more than half of the increase in real expenditures, and in the period 1985–95, it accounted for the bulk of the increase in real pension expenditures. Major changes also occurred in societal norms over the last four decades. For example, in the decade to 1995, the marked increase in spending on sole-parent pensions was fully explicable by a shift in eligible population (demographics and the changing incidence of sole parenthood).15 (d) The Goods and Services Tax (GST) required an increase in spending to make it distributionally neutral and this bloated social spending figures in 2001. (e) Non-government sources of social support (the nuclear family, the local community, public-spirited volunteers, trade unions, schools, churches and benign employers) have all been tending to contract, adding to demands on government.16 In short, after lagging behind other Western nations in the early post-war decades, the coverage and level of benefits per beneficiary did improve appreciably in Australia during the 1970s and 1980s. However, most of the increase in spending in the last decade reflected an increase in the eligible population stemming from structural changes in the labour market, an ageing population, new family norms etc. A bigger response was needed from governments simply to meet unchanged community expectations: ‘the social security system had to pedal harder and faster to undo market inequality’ (O’Donnell 2001, p. 42). Indeed, in view of all these factors tending to increase social need, it is surprising that social spending has tended to stabilise relative to 85


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GDP during the course of the 1990s. It is also significant that declines are projected in the next three Federal Budgets. The notion that Australia is getting low social returns from government spending is particularly ironic given the country’s ‘smallgovernment’ status and tightly means-tested welfare system. Australia devotes 8.3 per cent of GDP to income transfers and the OECD 12.8 per cent. Even if one broadens the notion of social expenditure considerably to include health, labour market programs and other social services, Australia’s level of social spending remains well below the OECD average. And that conclusion stands even if one were to include mandated private social expenditure (such as compulsory contributions in Australia) and to adjust for the impact of the tax system on benefit income (OECD 2001f; OECD 2001i).17 International studies that are critical of welfare and redistribution (for example, Tanzi and Schuknecht 2000) make it clear they are not concerned about ‘small-government’ countries like Australia, Japan, the United Kingdom and the United States. They strongly imply that, other things being equal, the returns from an increase in government social outlays or regulation are likely to be correspondingly larger in such countries than in other OECD countries. It is only in ‘big-government’ countries like France and Sweden that an argument can plausibly be made that social spending can be cut without great social detriment. In short, it is impossible to infer from present ‘record levels’ of social spending that such spending is ‘too high’ or that Australia has ‘over-indulged’ in welfare.

Is social spending becoming less effective in reducing inequality? Critics of welfare use another sweeping argument to support their view that social spending is producing diminishing returns. Look at the results, they say. Despite record levels of social spending, Australian levels of inequality are as high now as in the 1960s and on many measures higher (see Chapter 1). So, the argument goes, such spending is palpably not working, at least from a longer-term viewpoint.18 This argument is a total non sequitur. Inequality has remained fairly 86


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stable because social spending has remained at high levels. Studies have shown that improvements in welfare benefits in Australia in the late 1980s were highly effective in reducing inequality below what it would otherwise have been. Without these interventions social inequality would have greatly increased (Harding and Szukalaska 1999; Saunders 2001) as it did in the United States, the United Kingdom and New Zealand in the 1980s and 1990s. Moreover, studies of the redistribution effects of non-cash benefits such as health, education, etc. (Johnson et al. 1995; Estevez-Abe et al. 2001) have shown clearly that such spending is very effective in assisting the disadvantaged. A recent NATSEM paper on Austudy (Walker et al. 2001) reinforced this impression. Cross-country studies show that public spending on transfers to the non-aged population had a tempering effect on rising inequality and child poverty rates (Putterman et al. 1998, p. 873; Burtless 2002). Treasury Secretary, Ken Henry (2002, p. 15) cited the results of various such studies and saw them as confirming the vital and potent role of redistribution policies in offsetting the effects of rising market inequality. Indeed, Australia’s social security and tax systems are among the most progressive in the OECD. Both the aggregate outlays on social programs and the level of benefits are low by international standards, but each dollar goes further in producing social results (see Whiteford and Angenent 2002, pp. 47–50). All this will not satisfy critics who start with a belief that there is an in-built bias in the political system in favour of spending because of pressures from numerous interest groups.19 Such a belief might have had some validity in the 1960s and 1970s but it is much less credible today. Indeed, with rigid fiscal targeting, and with a shift in the power structure towards business and finance interests that strongly favour lower taxes over higher spending, the opposite may be true (see Chapter 5).

Is social spending unfair to future generations? As was briefly noted in Chapter 2, increased revenue will be required, relative to GDP, to pay for the cost of an ageing population. The revenue gap may not be as great as official projections suggest (see Chapter 7) but will still be very significant. The projected revenue gap will start 87


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to emerge significantly after 2018, peak around 2040 and will then be sustained for several decades. This prospective gap has opened up a new avenue for critics of egalitarianism: social spending needs to be cut to ensure fairness between generations. One counter point is that taxpayers in 40 or 50 years’ time are likely to be much richer than today’s taxpayers, so they should be able to afford to pay higher taxes. The more relevant equity issue is whether the current generation has in recent times been fair or unfair to future generations. This is not easy to assess. One test of intergenerational equity is the value of physical wealth and liabilities bequeathed to future generations. On this test, it is arguable that this generation has been generous. By striving for fiscal balance over the business cycle, state and Federal governments have been effectively funding their public infrastructure investments out of revenue, thus leaving future Australians long-life assets with no additional debt to be serviced. And compulsory employer superannuation contributions are helping to further lessen the burden on future governments. On the other hand, the Federal Government has a large and growing unfunded liability for the superannuation of its employees which is being left to future generations to gradually pay off. Moreover, the current generation is being less than generous about the stock of natural wealth (quality of our air, water, ecological systems, etc.) that will be bequeathed to future generations. After decades of neglect, the 1980s were a turning point for the natural environment in that it became a higher priority issue for the community and governments. However, the growing preoccupation of the public with other issues has seen a lessening of concern with the environment during the 1990s and this is reflected in some environmental degradation.20 So the record on intergenerational fairness is patchy. Assuming that governments feel they need to make some contribution to the future revenue gap, will cuts in government spending help? Spending cuts by the present generation in order to help build up fiscal surpluses will only relieve the burden on future generations if lower public debt translates into lower external debt.21 But this will not happen if lower public debt simply leads to proportionally higher 88


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private debt, as has happened over and over again in Australia over recent decades. If there is to be greater medium-term fiscal restraint (larger structural surpluses), there are fairer and more effective options than cutting social spending and thus bequeathing a legacy of social instability to future generations. One would be to cut the burgeoning tax expenditure programs (tax concessions, rebates and deductions). These have been adding steadily to middle- and upper-class welfare, eroding the revenue base and making the tax system more complex and less efficient. Another option would be launch a serious attack on blatant tax minimisation and evasion practices such as artificial income-splitting devices, the use of trusts and many forms of negative gearing. Again, governments could help people on low incomes to save better for their retirement. Finally, a greater effort to entice inactive persons of working age out of welfare into work would make sense. These issues are picked up again in Chapter 7. In short, the ageing of the population does not require a cut in the kind of social spending that is of concern in this book (social transfers for the disadvantaged and equal opportunity programs). However, public perceptions do count and governments may well use the ageing population problem as a lever to create a climate of opinion unfavourable to egalitarian policies. The Treasurer, Peter Costello, has already started the ball rolling by warning present Australians not to ‘steal from their children’ (Australian 7 May 2002).

Compatibility of egalitarianism with full employment A pervasive proposition among critics of egalitarianism is that social measures to alleviate inequality only make the task of reducing unemployment more difficult. The measures serve one equity objective but frustrate another. Governments, it is said, cannot hope to reduce the high and persistent levels of long-term unemployment—the greatest single cause of poverty—without accepting some increase in income inequality. 89


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The argument (see Kasper 2002b, for example) runs broadly like this: •

most of the present unemployment in Australia is of the hardcore type which does not respond to aggregate demand management—it is supply-driven; • such unemployment can only be solved in the long term by allowing greater wage and workplace flexibility and putting pressure on welfare recipients to search more actively for work, whatever the short-term effects on income inequality; • attempts to achieve the same employment outcome through other forms of government intervention that do not increase inequality in the short term would be bound to fail. The first premise is broadly correct. Perhaps it is too dismissive of aggregate demand deficiency as a source of unemployment22 but the need to address such unemployment is diminishing. The second and third premises are more controversial. Earlier in this chapter it was strongly disputed that a reluctance to actively search for work (a form of ‘voluntary’ unemployment) is an important cause of structural or long-term unemployment and that reduced welfare benefits offer a serious solution to the unemployment problem. The critics are on firmer ground when they focus on the wage–employment relationship and the need for wage and labour market flexibility. A number of the long-term unemployed are low-productivity workers who find employment difficult at current wage levels (‘classical’ unemployment) and who could benefit from a less inflexible wage structure and over-regulated workplace. But it is hard to determine how many of the jobless are classically unemployed. A large proportion of the 385 000 people on unemployment benefits for more than 12 months appear to have the following characteristics: • •

insufficient skills and experience to fill available vacancies are living in an economically recessed region and unable to afford the cost of moving; or • have personal traits unattractive to employers, such as too old, too long out of work, or an inadequate knowledge of English. 90


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For such people, the wage costs of employment are of peripheral significance, especially in a climate of sustained wage restraint that has been experienced in Australia over a long period. This makes the prospective wage elasticity of demand for labour hard to assess and with it the merits of wage restraint as an instrument of employment policy. One view suggests that an increase of 1 per cent in the wage bill is likely to reduce the number of jobs by about 0.75 per cent after some time (Dawkins 2002) and ‘wage moderation would have a significant impact on employment growth’ (Lewis and MacDonald 2002). Another view suggests that the response of the labour market to wage cuts would be muted, so substantial changes would be needed to have an impact (Gregory, Klug and Martin 1999; Nevile 2000, pp. 27–8). Some of the estimates of employment gains from wage flexibility and lower welfare benefits are based on inter-country comparisons, especially between the United States and European experiences. However, the popular notion that high unemployment in Europe (relative to the United States) is primarily attributable to rigid labour laws market (and over-generous welfare) is a gross over-simplification. The main cause of high unemployment in Europe has been rigid monetary policy and other failures of macroeconomic management (see Baker and Schmitt 1999). In any case, Australia has a much more flexible labour market (and less generous welfare system) than Europe. The New Zealand case is also interesting. The new Labour Government that won office in 1999 partially re-regulated wages and conditions, raised the minimum wage, restored or increased welfare benefits and raised taxes on the well-off to pay for its reforms. What was the result? The third-highest job growth in the Western world and a fall in the unemployment rate to below the Australian rate (as at mid 2002). In short, the international evidence suggests that long-term unemployment is caused by a complex range of factors. It is simplistic in the extreme to attribute it simply or predominantly to wage rigidity and the welfare system. While there would certainly be some employment gains from an increase in wage flexibility and lower welfare, it would involve major social costs for some low-paid workers in employment—as has happened in the United States (see Burtless 2001 and Krugman 2002). 91


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A group of five economists has sought to deal with the equity concerns through a ‘wage-tax trade-off’ (Dawkins 1999 and 2002). The proposal is that minimum award wages be frozen for a few years and the tax and social security system used instead to increase the incomes of wage earners in low-income families. The proposal has support among many economists (including Argy 1998a, pp. 147–8) but there remains some unease, mainly because of adverse effects on the labour force participation of secondary earners (Borland 2001; Apps 2002) and uncertain long-term distribution effects (Argy 1999; Belchamber 1999; Nevile 2000). The wage/tax proposal is perceived by governments (and the media) to have a high revenue cost in the short term (although in the longer run, the up-front cost could be clawed back). It is probably unrealistic, therefore, to assume that it could be implemented on such a scale that big inroads would be made into the problem of long-term unemployment. Wage/tax trade-offs should only be viewed as one small element in a wider employment package (and that is indeed how the five economists view their proposal). The last of the propositions put forward by critics of egalitarianism is that any alternative employment packages involving active government intervention are bound to fail. This proposition completely lacks credibility. In Chapter 7, an alternative package is devised that is capable of bringing about the desired employment outcomes, albeit with some efficiency sacrifice, without the kind of increases in social inequality one could expect from a package that relies predominantly on wage cuts and welfare reform alone. The Howard Government’s policy stance seeks to reduce unemployment predominantly by reducing the cost of labour and producing more ‘job willing’ people through reforms to the welfare system. The package that is proposed in Chapter 7 seeks also to create more suitable jobs and produce more ‘job capable’ potential workers through education and training. Ultimately, it is the community, through the ballot box, that will decide what efficiency/equity/employment mix it wants. The main point that is being made here is that full employment and Australianstyle egalitarianism are not intrinsically incompatible.

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Conclusions This chapter has focused on eight social criticisms of egalitarian policies, all of them designed to show that redistribution policies are increasingly becoming self-defeating or even counterproductive in achieving their own goals. Some of the concerns of welfare critics are justified, in particular, the ever-increasing proportion of social spending going to the middle class and the lack of work incentive among some inactive welfare recipients. But other parts of the critique of egalitarianism have been rejected. Social spending still has the potential to be highly effective as a redistribution device—indeed, more than ever. It does not necessarily encourage a pervasive ‘culture’ of welfare dependence among the unemployed. Although social spending is at record levels, there is no reason to believe that it is addressing low-priority needs. And egalitarian policies can be reconciled with an effective assault on unemployment. Egalitarianism has not lost its essential social rationale.

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4. Normative values of policy advisers and commentators Normative values of policy advisers and commentators

T

he two previous chapters acknowledge that the ‘sacrifice ratio’ (the economic price needed to achieve a given equity outcome) may have increased a little. But it was argued that in an increasingly affluent society, this is not a convincing justification for clawing back our egalitarian system or for resisting moderate social improvements. But are academic arguments about costs and benefits really important in determining the future of egalitarianism? Some think not. They argue that the power game—in particular the role played by the economic policy elite and by global business interests—will be more crucial. The impact of global interests is discussed in Chapter 5. This chapter focuses on the claim (by writers such as Pusey 1991 and Edwards 2002) that the cards are stacked against egalitarianism because economists in influential policy positions see the world through blinkered ideological spectacles. The chapter starts by examing the predominantly liberal attitudes of economists as a whole. The key ideological divisions among liberal economists are then outlined. The rest of the chapter focuses on a narrower group of policy advisers and commentators who are in special positions of influence and authority (the ‘policy elite’). Economists and economic liberalism Surveys of the profession consistently find that economists are predominantly pro-market in their approach to economic policy. More than

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three-quarters support a few key policy propositions such as the need to pursue competitive free markets, lower tariffs, market deregulation and the like. And more than three-quarters oppose the use of market-distorting instruments such as wage regulation to pursue equity goals, preferring other, more ‘market-neutral’ instruments such as cash benefits, the tax system and equal opportunity programs (Argy 2001a). In short, most economists are committed to ‘economic liberalism’.1 They believe that interfering with the operations of markets (through regulations, protection and cross-subsidisation through public monopolies, etc.) involves some economic costs and that there are usually better ways of achieving social ends without the same sacrifice of efficiency. But being an economic liberal says nothing per se about one’s ideological values. In its intent and (if well managed) in its execution, a liberal economic reform is value-neutral: it simply widens the choices available to the community. Whatever a nation’s values and goals, these can be achieved better if national resources are used and allocated efficiently. Economic liberalism is based on four basic tenets: •

other things being equal, an efficiency improvement is a good thing—not for its own sake but as a means of achieving a range of societal goals, such as greater material prosperity, an improved natural, living and working environment, increased leisure, etc.; • competitive markets are generally better at optimising efficiency (subject to the usual provisos—see Glossary definition of ‘efficiency’); • the higher the level of efficiency, the larger the size of the cake available for redistribution; and • how the cake is distributed in practice and how much of it is controlled by governments is a matter for the community to decide through its elected government. Critics who believe economists are obsessed with efficiency and have anti-egalitarian values have labelled such economists as ‘economic rationalists’. One such critic defines economic rationalism as having two characteristics: 95


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• •

‘putting economic considerations above all other values’; and embracing ‘an ideological commitment to small government and free markets’ (Edwards 2002, p. 4).

On the above definition (which fits the usage by Pusey (1991) and other critics), the ‘economic rationalism’ under attack is more akin to ‘hard liberalism’ than economic liberalism (see below and glossary). It is true, however, that the line between economic and hard liberalism—between science and ideology—is a fine one. One can easily slip into the other. For example, as already noted, economic liberal reforms tend to indirectly promote individualist values and, in conjunction with globalisation, help to create a new power structure that may then constrain the willingness of governments to spend on social goals. In such ways, economic liberalism can indirectly generate a policy environment that is less friendly to egalitarian values. So a set of economic reforms intended only to improve the means of achieving given goals may end up requiring some modification to the goals themselves. Again, the pursuit of better means (how we organise the economy in order to enhance efficiency) is sometimes inextricably tied up with ends (the weight given by society to different values). As Edwards (2002, p. 130ff) rightly points out, key elements of quality of life, such as the jobs we do and the hours we work, come from how we do things. Improving efficiency may unavoidably mean more insecurity for employees and increased work stress. And it might not be economically viable or logistically feasible to rectify such quality of life effects without some form of regulation, such as limits on work hours or minimum redundancy payments, which could in turn claw back some or all of the efficiency gains. Where situations of intrinsic conflict between means and ends arise—and they are the exception rather than the rule—economic liberals are confronted with a trade-off. They can choose to dilute the reform and sacrifice economic efficiency or proceed with the reform and accept the adverse equity consequences. The choice depends on normative values much more than on economic analysis. It is a judgment best left to politicians. 96


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Economists and hard liberalism The key issue addressed in this chapter is not whether economists are liberal in their attitudes—it is known they generally are—but whether in addition they have normative values that are predominantly antiegalitarian and this biases their policy judgments The issue matters because public policy debate among economists can often be ‘tainted’ by ideology (moral, philosophical and spiritual beliefs). The ideological underpinnings are not always transparent, as the debate is normally couched in economic language and conducted in terms of technical arguments. But what often seems to an observer like a lack of professional economic consensus, conceals a disagreement about social values.2 The ideological dispute among economists is hard to categorise. At the risk of simplification, however, we will group them into two camps. On one side are those who believe that goals such as economic freedom (freedom to spend one’s money as one wishes, to decide how and where to invest, etc.), small government, meritocracy, self-reliance and individual responsibility are overwhelmingly superior to egalitarian values. These economists are sceptical of the role of government and believe that efficiency should be given priority over distributional equity. Some would even want to redistribute from the poor to the rich (through a flattening of the tax structure) if they believe it would improve efficiency.3 Nonetheless, they are prepared to sacrifice efficiency, if necessary, to promote their own ethical values (such as self-reliance). In a previous book (Argy 1998a), such economists were called hard liberals. Equally, however, there are economists who, while believing firmly in the dynamic effects of competition and free markets, want governments to actively intervene to promote equality of job and educational opportunity, a wider distribution of the fruits of growth and social harmony. These economists are (like hard liberals) prepared to sacrifice some market efficiency to promote these ethical goals. They were called progressive liberals in my previous book (Argy 1998a). The disagreement between the two camps is not fundamentally about economic analysis (the nature of economic relationships) or about how the world works but rather about normative values: what weight 97


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should be given to different values and to efficiency relative to equity. The disagreement is also about the effectiveness and integrity of governments.4 To describe the ideological dichotomy among economists as one between hard and progressive liberalism is to over-simplify the societal choices being debated in the profession. The dichotomy ignores, for example, the rising, although still limited, popularity of communitarianism and environmentalism (see Glossary). But a little simplification is helpful for the discussion in this chapter. Against the above background, are economists predominantly hard liberal? Is there a systematic ideological bias against egalitarianism? Surveys of the profession have tried to flush out the values of economists. The results are quite revealing. First, and least surprising, economists overwhelmingly believe governments need to be concerned about distribution of incomes. In one recent survey (Argy 2001a), only four of the 77 respondents said they disagreed with such a role for government. More significantly, some 60 per cent said governments should seek to reduce existing levels of inequality or at least stop further increases in inequality. That is, they were in favour of active redistribution policies. Only 20 per cent objected to such policies. Respondents also expressed a strong commitment to the natural environment and their responses showed they were as keen to improve the living and working environment as to increase GDP per head. The views of economists are less clear on other normative questions but again, a high degree of social sensitivity is revealed. When asked, in general terms, if they wanted to see a reduction in government regulation, those who agreed matched those who disagreed. And when asked if they favoured a reduction in ‘government outlays as a percentage of GDP’, those who said ‘No’ outnumbered those who said ‘Yes’ two to one. Similarly, when asked if reducing the size of government was a high priority, those who said ‘No’ outnumbered those who said ‘Yes’. Earlier surveys of economists revealed similar attitudes (Argy 2001a). So the view that economists as a group are hard-hearted and ideologically opposed to government is untenable. Indeed, the group 98


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seems if anything to lean more towards ‘progressive liberalism’ than ‘hard liberalism’. This is, however, based on a head count. Some economists clearly have more intellectual clout, better access to policy-makers and more resources at their disposal than others. In the next section the focus is on the ‘elite’.

The normative values of the ‘Policy Elite’ In terms of effective influence on policy, it is not what the mass of economists think that is important. It is what a narrow band of economists in positions of influence and authority—what we call the ‘Policy Elite’—think. They exercise influence either because their strong professional reputation gives them an ability to influence public opinion or because they are strategically located within the policymaking machinery. They are an ‘elite’ not because they are politically powerful or rich but because their views carry weight with politicians and the community at large, or both.5 On this definition, the Policy Elite is made up of six distinct groups: • • • • • •

prominent academics who actively participate in the public policy debate; key media people; an inner circle of senior civil servants and central bankers engaged in national economic policy work (the official family); international financial and economic institutions like the OECD and the IMF; independent economic think tanks; and business economists with a high public profile able to mould public opinion.

The academics Prominent academics who actively participate in public policy debate can have a significant influence on policy. Some become consultants to the government sector (which has progressively downsized its own 99


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research staff) and directly influence policy decisions but their more important role is as opinion makers. For the most part, they steer clear of ideological debates. When they do make their values transparent, these tend, as one would expect, to range across the full ideological spectrum. Academics have always prided themselves on their professional independence and freedom to speak out freely on social or environmental issues that they consider important. There are concerns that these qualities are under threat because of the increasing dependence of universities on business and governments for funding. The fear is that this will influence the type of research output social scientists produce, the way their findings are slanted and the kinds of public comments they make (Kayrooz et al. 2001; Barry Jones in the Age 26 Apr. 2002). Adele Horin (Sydney Morning Herald 25 May 2002) believes ‘a frightened silence has enveloped the universities’. These are important issues that need careful monitoring. A by-product effect might be a less favourable future climate of opinion on egalitarianism, but at this stage that is drawing a long bow. The media In the last decade or so, a major transformation has occurred in the way the media operates. Commercial concerns dominate above all else. This is perhaps one reason why proprietors are increasingly allowing their sub-editors, editors and individual journalists considerable discretion in the presentation of news. When Rupert Murdoch was asked which political party his newspapers would endorse for the 2001 Federal Election he said, ‘Ask my editors’. In terms of the ideological views expressed by editors, there is no consistent pattern. This is partly because of the conflicting pressures on them. They are well aware of media proprietors’ views and no doubt take them into account. They cannot afford to offend business interests (and this is usually reflected in editorials which tend to be anti-union and in favour of lower taxes). Equally, however, they dare not offend their wider readership: ‘today, readership profiles are likely to have a greater influence on the decision than what the boss thinks’ (Mark Day, Australian, Media Supplement, 25 Oct. 2001).6 100


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Leading economic and political commentators exercise significant influence in their own individual right. But, as one would expect in a pluralistic society, they too are an ideologically diverse group. Although some media critics claim to see an ‘overwhelming bias of the journalistic profession towards the liberal progressive consensus’ (McGuinness, Sydney Morning Herald 8 Dec. 2001), this is far from self-evident. The Australian press has a good mix of both ‘soft’ and ‘hard’ writers in the opinion columns. The electronic media (radio, television and the Internet) also offer a diversity of views on current affairs and talk-back programs. Of these, the commercial radio talk-back hosts (the ‘shock jocks’) have the greatest power to mobilise and organise public opinion. The common perception is that the ABC tends to lean towards the left, the commercial television and radio stations (the ‘shock jocks’ in particular) tend to lean to the right and the Internet has a good mix of both. The radio shock jocks clearly carry more ‘clout’ than the others (Australian Financial Review, Power 2002). But one can exaggerate the degree of overall media bias. The alleged systematic left-wing bias of the ABC has not been substantiated, although it gives exposure to a wider range of views and perspectives than other media. Nor has the so-called right-wing bias of commercial television and talk-back programs been substantiated. In both cases it is easy to pick particular programs to prove what one wants to show, but this is not systemic bias7. All in all, the present media picture is reassuringly balanced and there is truth in the observation that ‘the media are very important conduits—but do not set the agenda’ (Marsh 2002, p. 3). This can change if there were to be an increased cross-media concentration of power or the role of the ABC as a source of diversity was seriously threatened.8 Another concern is that in today’s commercially oriented, cost-conscious media, journalists are becoming increasingly underresourced, leaving them more open to manipulation by shrewd politicians and powerful interests—an issue revisited in Chapter 6. The official family The official family (inner circle of top government advisers on economic policy) principally comprises Treasury, the Reserve Bank of Australia (RBA), at times the prime minister and Cabinet and key ministerial 101


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office minders. Treasury was once the key player. However, the more ‘medium-term’ orientation of fiscal policy and increasing reliance on monetary policy to smooth the economy’s business cycle has lessened its role relative to the RBA. Treasury remains a powerful force in strategic economic and fiscal policy (and in that role it is largely unchallenged within the bureaucracy) but the RBA elite is now mostly in control of short-term economic management.9 It has been said of the official family that, because of its neo-classical training and social backgrounds, it is single-mindedly obsessed with efficiency and tends to share the individualistic values and antiegalitarian prejudices of other rich, confident, self-made people (Pusey 1991; Edwards 2002). That is, they are not just economic liberals (like most other economists) but also mostly hard liberals. This argument is hard to accept. Pusey’s own survey findings showed that senior econocrats were sensitive to social welfare and distribution considerations (Argy 1992). In any case, the role played by officials in determining policy is not as important as the Yes Minister television series would have us believe. For one thing, the bureaucracy is far from monolothic in its thinking and even within the central coordinating departments there is often lively internal dissension. More importantly, the big decisions relating to goals and values are made by ministers (Cabinet), with the help of their office minders, and the role of bureaucrats is mainly to suggest various cost-effective means of implementing these decisions. Sure, the policy advisers have a big advantage in terms of access to information but the suggestion that they use this advantage to pursue a hidden ideological agenda of their own is really a caricature of what really happens. The political independence of officials (as opposed to ministerial minders) has sometimes been questioned. Davis and Rhodes (2000, p. 87) observed that ‘a few empirically-based assessments of politicisation do not support the interpretation that the Australian Public Service is politically selected—secretaries are still appointed largely from within the public service—the influence of the Westminster model remains strong’. Recent developments have, however, renewed concerns on this front. The new short-term contractual arrangements in the public service and associated performance pay for departmental secretaries make it more likely they will tell their ministers ‘what they want 102


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to hear’ (Grattan, Sydney Morning Herald 28 Mar. 2002). The recent Tampa affair revealed a tendency for senior officials (often unaccountable to parliament) to be ‘politically protective’ towards their master—to the point of withholding important but politically damaging information from them in an electorally sensitive period.10 Politicisation of the senior bureaucracy, to the extent that it exists, may mean that once a government is in power, it can enlist the full force of the public service to advance its ideological agenda. One can see current evidence of ‘conformity’ in the changed public stance of the Federal Treasury on some key policy issues. For example: •

it is more relaxed about the external account deficit (thus reducing the political embarrassment of a government which played up the external debt problem prior to 1996); • it is more supportive of contra-cyclical demand management (thus providing a sensible rationale for the Howard Government’s spending spree in 2001 just prior to the election); and • it favours a policy of stabilising or reducing net public debt over the long term (which is consistent with the Howard Government’s low social spending agenda). But conformity can work in both directions. If a Labor government were to come to power with socially progressive values and a different set of fiscal norms, Treasury would no doubt be able to take a public stance which was not inconsistent with the new government’s strategy. What is being said here is that politicisation, although regrettable to the extent that it is occurring, has only a remote bearing on the issue that is being considered here, which is whether senior advisers tend to be predominantly hard liberal and consistently pressure governments in that particular ideological direction. On that issue it is important to remain sceptical or agnostic. Senior economic advisers within the official family are certainly economic liberals for the most part. But this alone does not mean most of them are hard liberals eager to advance their own ideological goals. International organisations International organisations like the IMF, the WTO, the OECD and, to a lesser extent, UN bodies like the ILO also help to mould public 103


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opinion with their various publications and ministerial communiqués. The research papers produced by these institutions are mostly models of professional integrity but key policy recommendations (which are determined at the highest levels) can have an ideological bias. The IMF, in particular, has shown a tendency in the past to give efficiency overwhelming priority over equity concerns. There is also a suspicion that it promotes smaller government, deregulation, privatisation, etc. not just as a means to greater efficiency but also as an end in itself. For example, in its latest annual report on Australia (Australian Financial Review, 19 Sep. 2002), the IMF praised the economy’s performance. Nonetheless, it made three recommendations with radical implications for income and wealth distribution: •

cut the top marginal personal income tax rate from 47 to 30 per cent; • reduce the role of the award system to allow more downward wage flexibility; and • further tighten welfare eligibility requirements. These are socially insensitive and regressive recommendations. Yet, if the arguments in this book are accepted, the economic benefits they offer are likely to be mostly small. Clearly, efficiency is being given a very heavy weight relative to equity. In that sense, the recommendations, although couched in economic jargon, are heavily value-laden. The IMF’s set of values and beliefs reflect the dominant role of the United States (the ‘Washington consensus’). Although the United States casts only 17 per cent of the IMF board’s votes, it exercises strong indirect influence on other member countries and it contributes heavily to the resources available to the Fund. The noted American economist, Paul Krugman, believes that the view that the IMF is merely a ‘branch of the United States Treasury Department’ has ‘considerable justification’ (Sydney Morning Herald 2 Jan. 2002)—a view also endorsed by Jeffrey Sachs (The Economist 10 Sept. 2002). Even conservative journals like the Economist concede, for example, that lending by the IMF and the World Bank may be ‘driven by political considerations’ and that these organisations have sometimes been used to ‘help useful, if unsavoury regimes’ and ‘punish potential American enemies (29 Sept. 2001, p. 77). The Economist also observed that ‘the confidence with 104


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which the Fund and the Bank advised, or required, countries to abolish capital controls now looks misplaced in many cases’ (Survey 29 Sept. 2001, p. 24). Similarly, the fact that organisations like the OECD depend heavily on the United States for financial support may partly explain why the views of the OECD on labour market deregulation and welfare reform (like those of the IMF) sometimes border on hard liberal ideology. The United States also has a big say in senior appointments to these bodies.11 International organisations like the ILO and the various UN human rights, social and developmental offshoots appear to have more socially progressive leanings. But their influence on social and economic policy is comparatively small. Independent think tanks Research bodies and think tanks which are truly ‘independent’, that is, not directly associated with a particular political party or movement and without a consistent ideology or vested interest in the results of research, seem to be on the decline. Those that remain are a mixed group. Government-owned arms-length think tanks have been gradually depleted. The Productivity Commission (PC) remains alive and well. Its publications impact on both elite opinion and the wider public. The PC may be a little constrained in what it studies and perhaps in how it says things but it cannot be told what to say and cherishes its professional integrity (Argy 2000). It is a strong champion of economic liberalism (better use of markets to advance given ends) but it is not openly ‘ideological’ in the sense of promoting particular social goals and values. The background of many of the Commissioners suggests that they may be predominantly hard-liners on social issues but the staff is selected strictly for its professionalism. The PC papers (like those of the now-defunct Economic Planning Advisory Commission) are not always politically correct. There are a growing number of independent university-based think tanks and non-profit research foundations that release regular research reports and commissioned papers. They are academic in their approach. In addition there are a number of ‘independent’ think tanks that are commercially based and have at times acted as ‘hired guns’. But, in 105


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general, they do not run a consistent ideological line and closely protect their professional reputations. The more ideologically committed think tanks are covered in Chapter 5.

Business economists Business economists with a high public profile (those who actively participate in the public policy debate) impact on policy in the same way as think tanks—by helping to shape public opinion. These economists cannot stray too far from the favoured philosophy of business, which (for reasons discussed in Chapter 5) leans towards hard liberalism. A recent survey of economists found that, on average, business economists do have a tendency to take a harder line on inequality than others in the profession. For example, business economists are more enthusiastic about reducing the size of government and less positive about reducing social inequalities than either academic or government economists (Argy 2001a). But the differences are not marked. Business economists generally try to avoid taking a blatant ideological stance on issues if it is likely to damage their professional reputation or credibility.

Conclusions Professional economists are, as a rule, economic liberals but this alone says nothing about their values. When their values are probed, it is found that in aggregate they are not predominantly or systematically anti-egalitarian. However, the focus of this chapter has been on the Policy Elite— those economists in positions of special policy influence and authority. They seem to be somewhat less sympathetic to egalitarian values than is typical in the profession. Some recent developments may accentuate this tendency. These developments include the increasing role being played by business economists and commercial think tanks relative to more arms-length government and academic think tanks; the increasing dependence of universities on business funding; the continued ideolog106


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ical slant of key international bodies; and political and right-wing pressures on the ABC’s independence. But most ‘elite’ economists are quick to challenge ideologically based ideas that are paraded as economic dogma. So there is no reason to believe that the Policy Elite is, or is likely to become, a key player in the changing face of Australian egalitarianism. It is not central to the concerns of this book. This conclusion is partly a reflection of the way the policy elite have been defined (in terms of their independence, professional expertise). As the next chapter shows, there are some private think tanks whose mission is to single-mindedly and actively propound a particular ideology (often that of their main donors). They are, effectively, instruments of ideological propaganda and some are part of the shifting power structure spawned by globalisation.

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5. Global capital markets and the policy ‘straightjacket’ Global capital markets and the policy ‘straightjacket’

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he previous chapters discussed some of the forces that could impact on egalitarian policies in the future—concerns about economic sustainability and social effectiveness and the views of the economic elite. In this chapter, the impact of globalisation and the associated shift in power structure in Australia are considered. Globalisation refers to the closer economic integration of national markets through increased trade and increased mobility of capital.1 The focus here is specifically on the latter—the increased integration of world capital markets, or what has been called financial globalisation. Financial globalisation is a product of: •

technological change—the exploding information and communications technology revolution, which is ‘shrinking the world’ and increasing the interdependence of countries; and • economic liberalism, discussed in Chapters 2 and 4. It has produced two key outcomes: •

Multinational companies (MNCs) have become much more important, accounting for two-thirds of world trade and a third of world output. They also have much more freedom and choice as to where they locate their production base and where they invest in the world. • Portfolio (financial) capital has greatly expanded relative to direct investment and relative to the volume of trade. It can 108


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roam across national borders at much greater speed and in much greater volumes than before. One should be careful not to exaggerate the level of mobility of key factors of production or the extent of Australia’s world economic integration. Some MNCs are truly footloose but most are not; few professional and scientific workers are really mobile. Equally, financial markets are far from fully integrated, as is evident from the fact that investment portfolios are over-weighted with domestic stocks, and external account deficits have not shown a long-term tendency to grow (Keating 2000b, pp. 9–15). Nonetheless, world financial markets are much more integrated than in the past and capital can move more swiftly and flexibly across borders than it did. This is a new and important phenomenon. Globalisation can affect social outcomes because, like liberal reform, it can have disruptive short-term effects on employment and distribution (Visco 2001). But this would not matter if governments were willing and able to take the necessary counteraction to neutralise these effects. So the more relevant question is whether globalisation either (a) removes or greatly reduces the capacity of governments to pursue egalitarian policies; or (b) alters the evaluation parameters in such a way as to affect social policy preferences and priorities.

Global constraints on fiscal capacity In Chapter 2, it was argued that a liberal economy can co-exist with an egalitarian society. While some efficiency/equity trade-offs are needed, most of the efficiency gains from economic liberalism can be obtained without sacrificing a society’s egalitarian values. Exactly the same can be said of the relationship between globalisation and egalitarianism. There is no doubt that globalisation affects the policy mix that can be used. For example, regulatory barriers to financial flows become much harder to enforce in a sophisticated capital market like Australia’s. The impact of fiscal policy becomes less predictable, while monetary policy acquires more clout because of the quick and sensitive response of financial and currency markets (Argy 1995, pp. 21–3). Some taxes, 109


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such as these on mobile capital, become less effective and more risky. And wage regulation can only be used with moderation. However, this still leaves governments with a range of marketfriendly instruments of redistribution, such as direct income support payments and spending on the ‘social wage’, and a range of financing options (see Chapter 7). Globalisation does not preclude governments from spending and taxing and even from running structural fiscal deficits over the business cycle (Economist: survey 20 Sept. 2001, p. 22). Indeed, a globalised economy has less need to reduce government spending and taxes in response to balance of payments pressures, as a floating exchange rate normally provides the necessary safety valve and automatic adjustment mechanism. Of course, by constraining the mix of instruments that governments can use, globalisation can indirectly affect their willingness to redistribute. For example, the inability of a globalised economy to tax mobile capital means that the burden of taxation must fall heavily on households and this makes the politics more difficult. In that sense, globalisation may well have the effect of constraining the size and role of government. This may be what the Secretary of Treasury, Ken Henry, had in mind when he said that the political pressure on tax rates would remain ‘downwards’ because of the increasing effects of ‘ international mobile capital and internationally mobile labour’ (Australian 22 May 2002). Similarly, at the state level, governments compete with each other for footloose international capital and this may constrain their willingness to spend. Nonetheless, governments have not lost the capacity to sustain an egalitarian society. They still have the ability to tax and spend and can attract capital by offering a better standard of public services, a more cohesive society, etc., in exchange for higher taxes and government debt, if the will is there. Global capital markets do not make this fiscally impossible or even difficult provided governments select their instruments sensitively. Even in the highly integrated economic world of the 1990s, world financial markets tolerated wide differences in social policy and priorities (Saunders 2002; Smeeding 2002, pp. 184ff). At worst, if egalitarian policies are carried too far, it could mean a higher risk premium on sovereign borrowings, but the evidence suggests this premium is not large for a country like Australia (see Chapter 2). 110


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Global constraints on policy choices More significantly than any effects it has on redistribution capacity, globalisation, in conjunction with economic liberal reform, is likely to impact on the preferences and priorities of policy makers. In part this is because it tends to encourage individualist values in the community (an issue returned to in Chapter 7). More importantly, globalisation affects the power structure and this in turn creates a new set of risks that need to be taken into account in any policy evaluation. The basic reason why governments have become more sensitive to global capital markets is that these markets can ultimately determine (mainly indirectly) the political climate of the country. Financial globalisation has spawned two new and powerful interest groups: •

faceless fund managers (equity, bond and currency traders and pension funds) able to move billions of dollars across national borders ‘with the click of a mouse’;2 and • large multinational companies with the ability to more easily relocate their plants and technology across the world in search of the lowest production costs. These two groups, in conjunction with the more traditional business corporations and associations, constitute a formidable new power bloc that will be called ‘Finance’ for short.

The new power structure spawned by globalisation At the risk of over-simplification, and without denying the philanthropic and ‘small ‘‘l’’ liberal’ views of many individual business executives, it can be confidently said that Finance tends to have an anti-egalitarian bias.3 That is, its leaders and key players are likely to give much more weight to efficiency and competitiveness relative to equity than, say, the average Australian. The reasons are obvious. Finance has a commercial interest in opposing higher taxes, higher spending and borrowing, and business regulation of most kinds—all relevant to egalitarian policies—because 111


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these have the potential to raise costs and reduce competitiveness or otherwise squeeze profits. Moreover, middle- and high-level executives in Finance belong to the ‘over-class’. They are relatively rich and thrive on free markets, profit-seeking and uncertainty. Their remuneration is closely linked to the behaviour of their company shares and they personally invest heavily in equity markets. They make little or no use of the major institutions of the welfare state—social security, public hospitals, public schools, etc. They tend to believe that only the private sector creates wealth. They are thus totally ‘detached from egalitarian workplace cultures’ (Probert 2001, p. 32). Finance executives and professionals have been joined in the last decade by a rapidly growing army of self-employed small business people, many of them previously employees. Such people tend to be individualistic and unfriendly to egalitarian ideas (Saunders 2002, p. 79). The anti-egalitarian bias of Finance is reflected in the opinions and prescriptions of its spokespeople and main players.4 Governments are being urged to cut ‘unproductive’ public spending; to reduce the regulatory burden on business (including laws governing trade practices and working conditions); and to speed up the pace of labour market reform. Additional ‘tax reform’ is advocated, meaning a less progressive tax structure, with reductions in the top marginal rate of tax, further contraction in capital taxes (on corporations, capital gains and in stamp duty) and an expansion in the consumption tax base. Budget surpluses and severe constraints on public debt are demanded and a higher priority is given to low inflation, relative to low unemployment, than would be true of the community at large. The main ideology of Finance is thus intrinsically hostile to social spending and regulation.5 How does this ideology then impact on policy? In the past, business groups and leaders exercised policy influence through direct contact with government (lobbying). Lobbying remains a helpful tool and one that business groups are likely to excel in better than other competing interests. However, with the proliferation of interest groups and social movements, it has become too hard for governments to manage the process of interest integration at the political level (Marsh 2001, p. 161). As a result, the contact between 112


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senior ministers and interest group representatives is less direct and less institutionalised and more focused on ‘macro’ issues (the overall economic, fiscal, monetary and regulatory environment) than on specific industry issues. A second vehicle used by Finance to influence policy is active participation in the public policy debate—opinion management. In that role Finance is now able to speak more cohesively and with more unity of purpose than in the past. Moreover, its views carry authority and credibility, especially with the media. Comments by a bank chief or a leading fund manager or the head of a large multinational are certain to attract prominent coverage in the media. It is true that the views of business leaders are viewed with suspicion, and indeed hostility, by many Australians (Cornell, Australian Financial Review 15 May 2002) and recent revelations regarding fraud, mismanagement and executive remuneration have not helped the public image of business leaders. That is why think tanks are used as fronts. Finance can use its superior resources to generously fund think tanks that disseminate news and information helpful to its cause.6 In the United Kingdom, United States and Canada, think tanks such as the American Enterprise Institute, the Heritage Foundation, the Hoover Institute, the Institute for Economic Affairs, the Adam Smith Institute and the Fraser Institute provide ‘a vital arena for fusing academic theories with practical policies and for spreading the gospel (of the New Right)’ (Self 1993, p. 65). In Australia, think tanks like the Institute of Public Affairs, the Institute of Private Enterprise, the Centre for Independent Studies, the Menzies Research Centre and the Tasman Institute start with values which are predominantly anti-egalitarian. Such think tanks are quite frank about their aims, which are often built into their terms of reference or mission statements.7 The right-wing think tanks financed by business seek to discredit popular ‘left-wing’ causes such as welfare, Aboriginal land rights, the environment and trade unionism. The popular media tend to run hard with the press releases from these groups, so these can be quite influential in shaping public attitudes. For example, a bemused public will not know what to make of the persistence of high unemployment in the face of strong economic growth, so attempts to ‘link’ 113


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unemployment to socially progressive policies such as worker protection are bound to make some impression. Again, it is easy to cultivate a perception that welfare dependence has increased and to give an impression that it is all due to excessive largesse in welfare benefits. The output of right-wing think tanks usually has a core of professional credibility and may sometimes help to restore balance to a debate, for instance, on the measurement of poverty. And there lies their strength. But by far the most important advantage enjoyed by Finance in influencing public opinion is that its members have individually and collectively the power to drastically affect the economic, financial and political climate. This power has increased in the new globalised economy. Governments, the media and intelligent observers generally know that large multinational companies have the power to move capital around from state to state or country to country and have many more options available in today’s more open and integrated world economy. And they are well aware that global fund managers can have an even greater impact on the economy than MNCs because of their potential effects on financial markets, asset prices and interest rates. An increasing number of Australian working-class families now have an interest in shares and property, either directly or through their superannuation fund (over 50 per cent of Australian households own shares either directly or indirectly). Many families have developed an ‘equity culture’ and pay close attention to the warnings of international fund managers. So do politicians, because increased financial market instability creates a hostile political climate. In all the above ways, Finance exercises considerable policy power. This is not to imply a conspiratorial type of coalition at work. The power of Finance depends neither on collusion nor on ability to combine cooperatively. Despite evidence of interlocking and networking among Australia directors, any coalitions of the component interests are bound to be loose, fragmented and uncoordinated. Financial markets are competitive and impersonal. Yet Finance is a mighty power bloc in the sense that it has the ability to send ‘signals’ to government which only brave politicians could ignore. Finance exercises its ideological power through its implicit threat to create economic and financial disruption and political instability. ‘Markets’, as Alan Kohler put it, ‘are 114


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anybody or nobody in particular’ (Australian Financial Review 25 Nov. 2000). So, without going the full way with views such as those of Thomas Friedman—that, to placate the new power structure, governments must don the ‘golden straightjacket’ (1999)—one must accept that governments need to show special policy sensitivity to the concerns of Finance.

Countervailing power? Finance is not the only group trying to influence policy. Trade unions, environment groups, consumers’ and welfare groups and various leftwing interests put counter views and they too are backed by numerous think tanks.8 Are they an effective counterfoil to business? Trade unions have been traditionally able to use their collective market power and potential impact on the economy to pressure governments at times. In the 1980s and early 1990s, under the Accord with the Labor government, they also had special access to senior ministers and were consulted on many major policy developments. But nowadays trade union market power is much more constrained as a result of structural change, new industrial relations legislation and falling membership. The old ability of the union movement to call widespread strikes on political or industrial issues, once not inconsiderable, has greatly diminished. And the Accord is now dead and unlikely to be revived. Environment and conservation groups have at times been important in determining political outcomes. This was especially true during the 1980s. But recent polls suggest that the natural environment (as opposed to the living environment) now ranks lower in priority among Australians, except in areas like water degradation and salinity (Wood, Australian 28 Jan. 2002). This is evident, too, in the lesser role given to environmental issues in the political debate in recent years. Welfare groups such as ACOSS and the Brotherhood of St Laurence still pack a powerful punch: their publications are credible, readable and widely discussed (and this book has drawn heavily on their work). But their authority seems to be diminishing. The reputation of churches has suffered as a consequence of some high-profile scandals. Welfare 115


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organisations are increasingly (and unfairly) being viewed as ‘vested interests’ seeking to build up their own empire. When they protest at government policy, it is now more sotto voce because of the ‘commercial’ contracts many of them have with governments. And welfare issues have sunk lower as a priority for most Australians (see Chapter 6). The so-called single-issue ‘social movements’, sometimes referred to as NGOs (non-government organisations), are seen by many as a more important counterfoil to Finance than any of the groups discussed above. They are not based on industry or occupation or class and draw on deeper currents in society related more to ‘values’ and normative goals. Thus we have movements seeking to protect the rights of women, gay men, lesbians, animals, the environment, ethnic groups, indigenous groups, etc., and we have advocacy groups supporting euthanasia, legalised heroin and abortion, and opposing some aspects of globalisation, etc. While their ideas are hard to categorise, they predominantly espouse socially progressive policies. Some critics (mainly from the Right) have expressed concern that ‘NGOs seriously challenge the legitimacy of elected governments’ and some want to see them regulated ‘to test the representative credentials of those who purport to represent civil society’ (Gary Johns, IPA September 2001). However, Marsh (2001) takes a different view. He argues that to talk of these groups as ‘some alien sectional minority’ who have subverted the public interest in favour of their selfish and unrepresentative concerns and who have ‘excluded a majoritarian but muted voice’, is ‘fundamentally wrong’. ‘The pluralisation of society’, he says, ‘is the fundamental fact, and the proliferation of interest groups and issue movements is its organisational expression’ (ibid, p. 163). Some social groups are well organised and make effective use of media channels such as the Internet (as was evident in the effective campaign against the Multilateral Agreement on Investment a few years ago). ‘The political impact of the social movements can hardly be understated. Every wholly new issue on the political agenda in the past decade or so was originally championed by a social movement’ (Marsh 2001, p. 6). Without denying the importance of any of these groups, it is fair to say that they are really no match for the powerful Finance sector. The interests they represent are too fragmented, their resources are 116


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too limited, their standing with the media limited and their potential to impact on the broad economy rather remote. The more subtle policy power of business and global markets remains paramount.

Conclusions Globalisation has dramatically changed the external economic pressures on governments. It has led some economists to put forward two propositions. The first is that in today’s globalised economy, governments no longer have the fiscal capacity to set their own social priorities. This extreme view is mostly rejected here—at least for a developed country like Australia with low public debt, a strong financial system and a flexible exchange rate system. Globalisation does not destroy or seriously weaken the sovereignty of Australian governments. However, governments now face a new set of economic, financial and political risks in pursuing egalitarian policies because of the new power structure created by globalisation. This indirectly affects the policy preferences of governments. It adds to the number of political hurdles in adopting and implementing egalitarian policies (by narrowing the tax options and generating increased uncertainity about the response of financial markets). But that is a long way from saying that governments are helpless pawns of global capital. It is a distortion of reality to argue that once an economy has been opened up, governments are forced to don a ‘golden straightjacket’ which reduces the choices of those in power to only slight nuances of policy9 or that ‘markets now decide what governments may or may not do’.10 Governments do need to maintain ‘friendly’ policy regimes. This means, for example, ensuring inflation levels, levels of regulation and corporate taxes, are not too far out of line with the rest of the world. But it does not mean striving to match the country with the lowest overall tax and spending levels relative to GDP and lowest burden of business regulation. Nor does it mean striving for consistent budget surpluses and zero public debt. The danger, however, is that governments might be losing perspective. Overcome by fear of what global financial markets might do, they adopt an over-conservative fiscal and regulatory stance. To rationalise 117


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their actions, they then tend to exaggerate the economic costs of globalisation and thus help create a climate of unreasonable community hostility to social policy, job creation, labour market and regional programs. When they behave like this, governments are unnecessarily impairing their own ability to pursue full employment and other egalitarian goals. They are not showing themselves as good economic liberals or good global citizens. They are unwittingly or deliberately playing into the hands of ideological liberals who want governments to change their social priorities. ‘When governments claim that globalisation ties their hands . . . they are conning voters’ (Economist Survey of Globalisation 20 Sep. 2001, p. 30).

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6. Changing community and political values Changing community and political values

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n a democracy, strategic policy reversals such as a retreat from egalitarianism, however slow and gradual, ultimately need the support of the electorate. Are we seeing a shift in Australian electoral values and beliefs and if so why? Community attitudes can shift spontaneously in response to endogenous cultural or demographic changes and then impact back on political attitudes and outcomes. On the other hand, community attitudes are known to be fungible and easily influenced by political and policymaking processes. This chapter explores Australian attitudes1 and the political dynamics at work.

Community attitudes to economic liberalism The economic liberal reform program, which commenced in many countries during the course of the 1970s and 1980s, initially encountered fairly strong community hostility. Some of this hostility endures, especially on issues like privatisation of public services (Haywood 2002), reduced protection and labour market deregulation (Saunders 2002, p. 108), but it seems to be diminishing. Opinion surveys suggest that public opinion is becoming generally more tolerant of economic liberal ideas. There appears to be a clear majority preferring competition to planning and regulations as a way of running an economy. Even 119


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on protection, the opinion response is very sensitive to the way the question is asked (Norton 2001, p. 242). The experience with One Nation suggests that there may be suppressed anger that has not yet been given a chance to express itself fully because the public has not been presented with real choices and options. However, the fact that there is strong bipartisan support for economic liberal ideas and that minor parties and independents with a fierce dislike of such ideas have failed to make major headway in the Senate suggests that community feeling against well-conceived economic liberalism is not too intense.2 The community’s more tolerant (if still far from friendly) attitude to many forms of economic liberalism may have been greatly helped along by factors such as: • • •

• • •

the collapse of collectivist experiments in Eastern Europe; the strong support for economic liberalism within the policy elite; the perceived positive employment experience of economies which embraced liberal reform such as the United States, United Kingdom and, for a time, New Zealand; the strong performance of the Australian economy over the last decade and associated improvement in material prosperity; the sustained bipartisan political support for market liberalism in the Parliament; and changed public perceptions of the effectiveness of traditional methods of intervention, such as banking and exchange control, in the face of technological change and globalisation.

These represent changes in the community’s ‘reality filters’, or beliefs about how the world works (Saunders 2002). Unless these reality filters change again (which seems very unlikely), the climate for economic liberal reform is likely to remain tolerant or at least fatalistic.

Community attitudes to egalitarian values While Australians are becoming more resigned to economic liberalism, which is basically about methods of policy intervention, the more 120


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interesting question here is whether Australians are also becoming more disposed to hard liberal policies, which are about the social goals of government. Is the average Australian attaching relatively more importance than in the past to values such as efficiency (material wealth), individual responsibility and freedom of choice? The evidence on these questions is still inconclusive and even contradictory at times. At the general level, recent opinion polls suggest that: •

a majority of Australians wish to see less inequality (Newspoll in Kelly 2000); • more Australians than not are prepared to sacrifice some economic growth for a fairer income distribution (AES Poll 2002); • Australians generally do not support the conservative view that poverty is internal to the individual and reflects a moral failing (CESC poll in Saunders 2002, pp. 155 and 263); and • there is strong support for the proposition that ‘too much emphasis is being put on improving the economy and too little on creating a better society’ (CESC poll in Saunders 2002, pp. 74ff). At this general level, the picture is clearly encouraging for egalitarians. Even the trend is heartening. For example, support for the proposition that ‘income and wealth should be redistributed towards ordinary working people’ has been growing steadily over the previous twelve years, with some 55 per cent now agreeing compared with 45 per cent in 1987 (AES 2002). However, when social spending is linked to taxes and decomposed, the picture becomes somewhat murkier. Are Australians willing to forego lower taxes or even pay higher taxes in exchange for higher social spending in the broad? In the 1960s the answer to this question was overwhelmingly yes. But between the early 1970s and late 1980s, there was a sharp decline in support for higher social spending and a strengthening preference for lower taxes (Saunders 2002, pp. 73–4). The trend partially reversed itself in the 1990s: those preferring lower taxes to higher social spending fell steadily between 1987 and 2001 (AES 2002; Wilson and Turnbull 2001, p. 399). Other surveys also find a revival of ‘support for modest tax increases to fund higher levels of social spending’ (CESC 2001 in 121


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Saunders 2002). However, the recovery is still only modest. Support for lower taxes still appears to outstrip support for higher spending (in some polls by nearly three to one), and the percentage preferring higher spending remains far below what it was three decades earlier (Saunders 2002, p. 74). So it can be said that Australians, in choosing between higher social spending and lower taxes, are less egalitarian than they were in the 1960s but more egalitarian than at the start of the 1990s. When one decomposes ‘social spending’, one finds that Australian attitudes are far from uniform across all areas. For example, using CESC survey data, Saunders (2002, p.108) finds that there is good support for additional spending on some labour market programs, while Withers and Edwards (2001) and Mooney (2002) find strong community support for improved basic services such as education and health. And polls show continuing support for assisting needy retirees and the disabled. For all these forms of social spending, Australians seem prepared to forego lower taxes and even pay a little more tax. However, Australians are becoming less well disposed to policies which provide unconditional welfare assistance to groups like the unemployed, sole parents, Aborigines and newly arrived migrants (Withers and Edwards 2001).3 A majority of Australians accept the view that ‘it is easier to get social security these days’ and seem happy to see less spending on ‘welfare’. And a substantial proportion agree with propositions such as ‘fewer people want to work these days’ (Saunders 2002, p. 104) and ‘young single unemployed are getting too much from the government’ (p. 111). Most are happy to see penalties imposed on those unemployed who breach the rules, such as not turning up for interviews (Saunders 2002, p. 239), although many believe the penalties should be smaller than they now are (Newspoll cited by Horin Sydney Morning Herald 17 Jun. 2002). As well, a large majority supports ‘Work for the Dole’ schemes for younger unemployed workers and the long-term unemployed (Saunders 2002, p. 235) and this is particularly evident among those of lower socioeconomic standing (with low incomes and working in manual and lower service occupations). What seems to be happening is that ‘the [younger] unemployed may have become distinguished as ‘‘undeserving’’ welfare beneficiaries and further differentiated from the working poor’ (Wilson and Turnbull 2001, p. 400). This mood is not helpful to certain kinds of redistribution. Low122


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paid workers and their families in particular seem to be venting their anger at the unemployed, perhaps because they feel excluded from the benefits of economic reform and growth. ‘In the politics of grievance, those who work very hard but have little to show for it, start to blame anyone who doesn’t work’ (Probert 2001, p. 41). What is clearly emerging from the polls is that although a majority of Australians remain committed to egalitarian values, it is more equality of opportunity than outcomes that Australians have in mind (Mackay 1999; Evans and Kelley 2002). Following the Federal election in 2001, Paul Kelly almost pronounced the death of egalitarianism. He said the concerns of ‘the intellectual class’ for the battlers, the disaffected, the losers from economic change and those doing it tough in the regions are proving politically ‘out of tune with the people’ (Australian 12 Dec. 2001).4 Australian values do seem to be drifting away from some forms of egalitarianism. Saunders sees no crisis of legitimacy but concludes nevertheless that ‘Australians are becoming more accepting of inequality and see less need for additional redistribution’, perhaps ‘out of a misplaced faith in the egalitarian nature of our society’ (2002, pp. 203–4). Survey-based research of Australian values by the Brotherhood of St Laurence (Comment Aug 2002) finds that while ‘assisting others’ is considered socially desirable, this view ‘does not necessarily translate into personal action’. Australians are however more positive about the work of agencies in the areas of education and health, confirming again that there is more support for equal opportunity programs than for programs which simply seek to reduce inequality and relieve poverty. Reinforcing this negative attitude towards passive redistribution is a strong thread of social conservatism in the community. Some believe this attitude is strengthening. For example, Tony Abbott calls it a ‘tectonic shift’ in the political landscape. It manifests itself in wanting to put more onus on individual responsibility, moral discipline and family values and it is creating a climate receptive to ideas like Work for the Dole, penalties for welfare breaches, less generous support for single parents, etc. The issues are discussed further in Chapter 7, which explores the outlook for egalitarianism. 123


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The crucial role of political leadership Political leadership, or the ability to lead the nation in new directions, can have a major impact on community values. For political leadership to seriously explain a community drift away from egalitarian values, you need to have a well-established government led by people with a strong commitment to liberal individualistic values, and with political management and leadership skills of a high order. This happened in the United Kingdom under Margaret Thatcher in the 1980s. It is arguable that it is happening in Australia under John Howard. Given the two-party and electoral system in Australia, elections are seldom fought on basic ideological differences. Elections are essentially won on issues of leadership, management capability and trust. The ‘philosophy’ of a government is normally of secondary importance in getting elected. Nonetheless, under the surface, there are important ideological differences between the major parties. These differences are certainly not as marked as those between ‘hard liberals’ and ‘progressive liberals’ within the economics profession (as outlined in Chapter 4) but the differences are very significant nonetheless. Conflicts of ideology may not be apparent during elections but they can become crucial after a government has gained the electorate’s confidence and is firmly in the saddle. Once elected, a government can claim the ‘right to govern’ and is in a position to initiate policies, some of them ideologically slanted, which were not formally part of its electoral mandate. Governments have enormous financial resources at their disposal (including the ability to intervene in court cases and spend taxpayers’ money on PR campaigns in pursuit of their ideology). They have easy and often uncritical access to the mass media and greatly influence journalistic output (Kohler 2002). They can release selective information and research reports. And they have a great ability to obfuscate. If, with the aid of these tools, a government is successful in winning public support for its policies, the Opposition parties (and the Upper House) are often forced into a defensive stance of compliance, whether there was a ‘mandate’ for these policies or not. This explains why many writers (such as Zaller 1992) believe that 124


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the political process is crucial. ‘Values are neither given nor constant but are themselves a function of the policy-making process that they are supposed to guide—argument and persuasion play the key role in norm setting and problem definition’ (Majone cited in Wilson and Turnbull 2001, p. 394). Similarly, Marsh (2003) believes ‘the formation of public and sectional opinion is to a large degree an artefact of the political system’ and in determining the options that enter public debate, ‘political elites are far and away dominant’ (2003, p. 14). McAllister and Wanna (2002, pp. 28ff) show how citizens’ expectations can be easily moulded by politicians and policy. Donald Horne (2001) argues that the public rhetoric of political leaders can be much more powerful a force for social action than law or policy. And Castles and Uhr offer a convincing ‘politics matters’ explanation of post-war shifts in social spending (2002, pp. 21). Two more recent developments have further strengthened the potential role of political leadership in Australia. One is that ‘tribalism’ in the electorate—the number of committed people on both sides of politics—is diminishing. According to Prime Minister John Howard, the uncommitted voters made up 20 per cent of the electorate some decades ago but now make up 40 per cent (report by Mark Davis, Australian Financial Review 12 Jun. 2002). If true, this means people are more prepared to switch their vote in response to specific issues or values, irrespective of old allegiances. The other development is the post September 11 sense of insecurity; it provides an ideal setting for a clever opinion manager to exploit and capitalise on.

The Liberal Party and the Howard Government Against this background, what role has the Howard Government played in moulding Australian attitudes to egalitarianism? Historically, the Liberal Party cannot be firmly labelled ‘anti-egalitarian’. It has not let its adherence to individual responsibility and small government override the need for a decent social safety net and it has sought to encourage equality of opportunity (Roskam 2001, p. 267). Indeed, many significant social reforms were initiated under Liberal governments. Deakin introduced statutory federal provision for old-age pensions (1908). In 125


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the Menzies era (1949–66), child endowment was introduced, as well as free milk for primary school children, subsidies for voluntary organisations, the Commonwealth Scholarship Scheme and Federal funding of universities (Justice Kirby describes education as ‘Menzies’s greatest legacy’—Age 27 Jun. 2002). In 1976, Fraser introduced family allowances as cash payments, which advantaged those families which paid little or no tax. Liberal governments have also been responsible for introducing wider egalitarian policies such as wage protection, industrial arbitration, workers’ compensation and state education (Roskam 2001, p. 276). That said, progressive social initiatives (at federal and state levels) have more commonly been introduced in years when Labor held the reins of office, while periods of ‘welfare passivity’, such as between the two world wars, are usually dominated by Liberal governments (Castles and Uhr 2002). ‘Liberals have been more reluctant to resort to welfare measures to achieve social outcomes than has Labor’, reflecting their concerns about the wider consequences for welfare dependency, the work ethic and taxation (Roskam 2001, p. 271). The first impulse of Liberals is always to ‘help the individual to help himself’ (Staley and Nethercote 2001, p. 3). But the Liberal belief in individual freedom is not applied consistently. Whereas on economic issues, Liberals have less faith than social democrats in the ability of governments to spend and regulate in the public interest, the opposite is true of their stance on social and moral issues. Here they appear more willing to override individual choice—for example, on such issues as drug usage, censorship, IVF, euthanasia, suicide, law and order, sexual preferences, etc. Since its election in 1996, the Howard Government has shown itself prepared to more actively apply traditional liberal values such as selfreliance and individual responsibility than other Liberal governments from Deakin and Menzies through to Fraser. While seeking to preserve ‘continuity’ and ‘ensure hard-won gains are not lost’, it is prepared to ‘embark on drastic change provided it’s designed to restore people’s values and traditions’ (Tony Abbott Australian Financial Review 8 Jan. 2000). The Howard Government does not justify its reform agenda purely in economic and pragmatic terms (such as to reduce the burden of 126


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excessive taxation). It adopts a strong moral crusading tone. Again, in the words of Tony Abbott: Our policies sometimes feel wrong because we rarely articulate the ethical principles they uphold. Big ideas don’t succeed because they appeal to people’s self-interest but because they speak ‘to the better angels of our nature’. The challenge is not to demonstrate that something might make people better off but that it will help to shape better people and build a better world. Reform is about those sturdy values of responsibility, self-reliance and neighbourliness —about building a society where everyone is a contributor (Tony Abbott 2000, p. 38).

The Prime Minister has described himself as ‘a modern conservative’, with a firm belief in ‘strong families, entrepeneurial opportunity, hard work, Protestant work ethic, etc.’ (Grattan 2000, p. 455). Like Tony Abbott, Howard has argued for assistance to be limited to the ‘deserving poor’—those ‘prepared to take responsibility for themselves and their families’.5 Grattan (2000, p. 439) describes Howard as ‘aspiring to be a social engineer’, with a desire to ‘leave a social legacy’. The strong moralistic undertone of the Howard Government’s pronouncements, its desire to restore past values, its reformist zeal and the fact that its ministry includes very few ‘small l’ liberals (compared with say the Fraser government)6 are all reflected in its reform program (actual or proposed). Although not as radical as the earlier Fightback! policy of 1991,7 its policies have included: • •

• • • •

a retreat from positive discrimination in favour of disadvantaged groups; a strong preference for shifting the tax base away from income to consumption (which admittedly has economic merit as well as ideological appeal to hard liberals); a reluctance to take on suspected tax cheats (abusers of trusts) but a zealous pursuit of suspected welfare offenders; a major rethink of the scope and purpose of government welfare; a declared preference for allocating excess surpluses to tax cuts rather than spending increases; a strong presumption in favour of privatisation and outsourcing as a matter of principle; 127


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• •

zealous pursuit of zero public debt; a deep hostility to trade unions, including implicit or overt support for employers who try to ‘break’ unions and introduce individual or non-union bargaining; • a deep desire to improve managerial flexibility even where it means a sacrifice of workers’ rights and quality of life; • an aversion to ‘rights’ institutions such as the AIRC and the HREOC and international bodies like the UN and the ILO which seek to set minimum labour or social standards. These are all ‘hard liberal’ policies. They are about changing goals and values, with a decided bias in favour of the private sector relative to the public sector and individualism relative to egalitarianism. They go well beyond straight economic liberalism and are not just about means to ends. And the Howard Government still has unfinished business. It has foreshadowed another round of workplace reform, including legislation which (if passed) will have the effect of increasing working hours flexibility, reducing union bargaining rights and increasing the likelihood of ‘unfair’ dismissals. It is threatening tougher action to address welfare dependence. It must be remembered that, but for the disciplines of an unfriendly Senate, there would be now on the books much tougher legislation on the tax structure (for example, through a different GST package), on trade unions, award deregulation, welfare, and so on. If fully realised, the reform agenda would amount to a social revolution. It seeks to fundamentally change the industrial balance of power between employers and workers, to walk away from the ‘workers’ welfare state’ and redefine the principle of needs-based welfare. Whether one likes the results or not, there is much to be said for political leadership that thrusts the community into new ideological territory if it captures a changing mood in the community and minority rights are fully protected. And much of the Liberal social philosophy has struck a responsive chord among Australians. Howard is probably right when he says that his views reflect ‘mainstream’ social values and morality such as ‘a commitment to personal responsibility, the work ethic and the traditional family’ (Mendes 2001). It is also true that many Australians share his ideas on mutual obligation, social partnerships, the importance of home ownership, mandatory detention of 128


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asylum seekers, immigration, opposition to IVF for single women and a ban on euthanasia. These ideas are said to match ‘the agenda of the outer suburbs’.8 The danger is that ideological leadership will be pursued through manipulative means or under the false guise of economics. For example, industrial relations reform can be facilitated through a systematic vilification of trade unions9 and exaggeration of the economic benefits of labour reform. Welfare reform can be facilitated by a campaign of systematic vilification of dole recipients and disability pensioners for ‘rorting’ the system. Spending restraint can be made more palatable by deliberately exaggerating the evils of budget (‘black hole’) deficits and public debt and by painting an alarmist picture of the future fiscal stresses stemming from an ageing population (the need to avoid ‘robbing our children’). The constraining effects of globalisation on social priorities can be deliberately over-stated. The economic costs of safety net wage increases or unfair dismissal legislation or higher social security benefits can be magnified. The economic benefits of privatisation and outsourcing can be set unrealistically high. And a harsh policy towards certain asylum seekers (the ‘boat people’) can be given extra credence by associating it with a terrorist threat.10 Through such means, politicians can greatly influence public opinion and lead it in new directions. The Howard Government serves as a brilliant example of what political leaders, with both strong ideological convictions hostile to egalitarianism and ‘the ability to ruthlessly exploit incumbency by garnering widespread public support’,11 can achieve. It illustrates well the fungible and reflexive nature of community opinion.

The Australian Labor party In time, a Labor government will take office. Will that do much to revive political enthusiasm for egalitarian policies? The success of Howard’s new conservatism in Australia and the Blair Government’s adoption of similar policies in the United Kingdom have (unwittingly or deliberately) forced the Federal Labor Opposition and state Labor governments to adopt a more cautious stance on egalitarian issues. 129


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But the transformation of Labor began some time ago. From the 1980s onwards, the Australian Labor Party (ALP) retreated from the notion that full employment was a top-priority goal to be pursued by every available instrument (demand management, job creation in the public sector, active labour market programs, etc.). It diluted the centralised wage-setting arrangements and gave up the idea of using incomes policy as a means of reconciling full employment with sustainable wage demands. It retreated from the notion that social benefits should be available unconditionally to all those in need. It is now scaling back its support for trade unions. It is stepping away from any forms of corporatism. It is increasingly embracing the Blair ‘ethical socialism’—a view of the state as rewarding individuals and families for ‘recognising their responsibilities to each other’ and ‘balancing rights with responsibilities’, such as work or training in return for unemployment benefits (Rentoul 1996, p. 478). Labor also firmly believe taxes should not increase (and, indeed, it is promising to ‘return the impact of bracket creep’—Ross Peake, Canberra Times 23 Nov. 2002). In pursuing fiscal surpluses, Labor state governments seem more concerned with the government’s credit rating and media reception rather than sound economic and social debt management policies.12 Some of these policy developments can be reconciled with an overall egalitarian structure. Others represent a more fundamental rethink of its philosophy. The Labor Party has clearly moved a long way towards the centre and centre right. To an extent, this shift mirrors the changes in Australian society. As Paul Kelly says (Australian 14 Jun. 2002), ‘the old politics based on labour versus capital, socialism versus capitalism and state power versus the market’ has become ‘increasingly obsolete’. Voting patterns have become more ‘detribalised’. Many aspiring Labor leaders like Mark Latham (Age 1 May 2002) see the shift as an inevitable and overdue response to the realities of the new market environment, such as the ‘fading away’ of the old blue-collar work and organised labour constituency and the emergence of self-employed workers. But the challenge for Labor is to find an alternative set of ideas which distinguishes it from the Liberal Party. It used to be egalitarianism. If that is no longer the core distinctive value of Labor, then what is? Conscious of this dilemma, some Labor-oriented commentators 130


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believe the Party needs to focus less on ‘the bottom 10–20 per cent’ and instead embrace an aggressive environmentalist anti-growth agenda (for example, Hamilton 2002). That would indeed help it to distinguish itself from the Coalition but it would mean a long period in the wilderness because the mood of the electorate is not yet anti-growth. Labor will no doubt continue to preach egalitarianism. It will profess a stronger commitment to redistribution, worker protection and trade unionism than the Coalition and it will advocate a wider role for government in education, health, transport, regional infrastructure and industry development and in safeguarding the quality of the living and working environment.13 But as it seems unwilling to gather the necessary revenue and debt capital to finance its goals, its egalitarianism will be more rhetoric than practice. So the search for an ALP identity will continue. In the meantime, elections will be principally determined by minor product differentiation and leadership qualities, with egalitarian values given second-order priority.

How political and community values can diverge A priori, one might expect that, with a clear majority of Australian households earning a net income less than the national average, there would be strong electoral support for government programs that strove for greater social equality. As noted earlier, the opinion polls broadly confirm this expectation, although the support is mainly for policies that advance equal opportunity. Yet, either out of idealogical conviction, out of fear of what global markets might do or out of deference to a powerful minority interest, politicians from both major parties have been beating a retreat from egalitarian policies. How do they get away with it? One answer that this chapter has offered is political leadership. Electoral politics is multidimensional in a pluralist society. At any one time, the electorate has concerns about a range of issues. Egalitarianism is only one and it can often be subordinated to other issues such as border security, immigration, moral and religious issues, law and order, the ‘privileges’ granted to Aborigines, law and order, the high tax burden and so on. These ‘other’ issues can overwhelm egalitarian 131


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concerns during a heated election climate. And after it has been elected, a government can claim a ‘mandate’ for an anti-egalitarian agenda, such as on labour market and welfare reform, even though the election had not been principally fought and won on that agenda. Further, voters are ill-informed on most public issues—understandably so, given the cost of acquiring information (Bartels 1996) and political leaders have huge resources and a huge capacity for obfuscation and misinformation. The new and powerful interests created by globalisation can also employ their own resources to influence public opinion and policy (see Chapter 5). ‘Information’ is presented purporting to show that egalitarian policies are either economically costly or socially counterproductive, or that global pressures will make egalitarian policies unsustainable. Voters are inclined to accept such warnings if they come with an aura of authority. As a result, new social norms can be forged. Again, governments can defuse political tensions by ‘silencing’ groups likely to protest most loudly. The Hawke government used the Accord to placate the trade union movement. The Howard Government over-compensated age pensioners for the effects of the GST and developed a ‘partnership’ with church and community groups on management of the employment service and welfare delivery, thus imposing limitations on their freedom to criticise. Finally, governments can divert concerns about inequality by imposing ‘arms-length rules’ on themselves (such as inflation targets, fiscal balance, no increase in public debt) and binding themselves to international trade or investment agreements. These disciplines are represented as necessities in a globalised economy and used by politicians as a way of distancing themselves from responsibility (Argy 2000). In short, governments can ‘legitimise’ a social program that is out of line with dominant Australian values by: •

capitalising on the intrinsic limitations of any democratic system (difficulties of defining a ‘mandate’ and imperfect information); • skilfully managing people’s perceptions of how the world works; and • adopting various ‘arms-length’ policy devices to distance themselves from political responsibility. 132


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This is one perspective. Others might view recent political developments quite differently. They might argue, for example, that the so-called ‘aspirational voters’ who aspire to riches even if currently poor, are becoming a significant force in the electorate and that such people do not like redistribution policies that frustrate the scope for economic enterprise and opportunity—whatever their own immediate advantage. On that perspective, politicians are effectively responding to the true wishes of the people when they oppose policies of fiscal redistribution. The alternative view put earlier—that there is a gap between policy values and community values and that it is overcome by ‘political leadership’—appears more plausible. But it is not possible to demonstrate this conclusively.

Conclusions Most Australians retain a strong commitment to egalitarian values. They seem happy to forego lower taxes to pay for passive assistance to the needy retired and disabled and to improve public and community services. That is, they are fully supportive of government programs which enhance equality of opportunity and look after the ‘genuine’ needy. But they seem more reluctant to pay for welfare assistance to younger unemployed and inactive workers. More generally, a majority of Australians seem to prefer lower taxes to higher social spending. This could reflect a fundamental shift in values and beliefs and prove the start of a new cultural trend. Or it could simply reflect clever political leadership, backed by powerful interests. Either way, the pressures may prove difficult to resist.

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7. Where to from here? Where to from here?

Australians have always viewed themselves as egalitarians. It has been part of the rhetoric of prime ministers of all generations and political persuasions. Faith in democratic egalitarianism and in the state as a vehicle for social change was ingrained in the so-called Australian settlement and was gradually translated into an impressive array of socially progressive policies. But Australian-style egalitarianism has always suffered from internal contradictions. For example, in the first 70 years after Federation, Australian society took good care of its disadvantaged workers (those with low skills and education and little individual bargaining power in the market place). But it excluded non-white and indigenous Australians. It discriminated against women. It allowed social security benefits to lag well behind those available in other Western nations. It was torn by sectarian hatreds. It flouted intergenerational equity by neglecting our natural environment. And widespread protection and regulation restricted individual freedom of choice.

The changing face of Australian egalitarianism During the last quarter of a century, some of the contradictions have been resolved but others have been created. Australians invested heavily in education. They rid themselves of all forms of discrimination based 134


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on gender, colour or ethnicity, and began to address the underlying causes of Aboriginal disadvantage. They became more aware of the need to stop the steady degradation of our natural environment. Governments started to make a credible attempt to improve literacy standards. After the 1960s Australia began the slow process of catch-up in terms of social security benefits (with special focus on family assistance) and made many worthwhile welfare reforms, including an attack on institutionalised ‘poverty traps’, and more individualised delivery of services. Aggregate real wages broadly kept up with national income from the late 1960s to the late 1990s. After a trend rise in unemployment in the 1970s and 1980s, Australia, almost alone in the world, was able to avoid the scourge of economic recession and reduce the level of ‘cyclical’ unemployment over the last decade. And consumers’ freedom of choice was broadened. When one looks at social outcomes in other liberal market economies like the United States, the United Kingdom and New Zealand over the same period, it has been no mean achievement for Australia to achieve the kind of efficiency/equity balance that it has. This may in part explain why Australians have more faith in their political institutions than citizens of most other countries (McCallister and Wanna 2002). This book is not, therefore, meant as a lamentation. There is much to be proud about. However, there is no mistaking the underlying trend and direction towards a less egalitarian society and less egalitarian policies. The book has reviewed some key socioeconomic indicators and found evidence of large or growing inequalities in: • • • • • • •

job opportunities; wages and quality of life of lower-paid workers; access to the welfare system; the tax system; education, health and housing; regional opportunities and standards; and the distribution of industrial power in the workplace.

While the retreat from egalitarianism has been a gradual, orderly 135


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one, not a wholesale rout, the retreat is still continuing and a series of small changes can add up to something very significant. Australian society no longer guarantees full-time jobs for everyone who wants to work. New work opportunities are increasingly becoming polarised. Disadvantaged workers (those people of working age without individual market power) are finding themselves either shut out of employment or in mostly insecure and uncertain jobs. Their wages are not keeping up with community standards. They are no longer in control of their own working hours and family time. They have lost all sense of participation in workplace decisions affecting their wellbeing. As well, with rental accommodation less affordable and home ownership less accessible to them, they are being shut out of appreciating assets central to the future life chances of their children. They and their kids are falling further behind the rest of the community in education and health standards. If they live outside the key urban centres they have poor facilities and even poorer employment opportunities. They benefit from a progressive tax system but this advantage is steadily eroding. If they become unemployed they are at the mercy of a welfare system which has become conditional, demeaning and moralistic. In today’s Australia, one sees confident, job-rich, knowledge-rich and asset-rich households, often with two incomes and childless, who thrive on the challenge of uncertainty. But one also sees a large number of households with unemployed, under-employed or low-paid workers who are under-educated, asset-poor and ill-equipped to compete in a capitalist jungle. Furthermore, an increasing proportion of Australian children are to be found in these latter households.1 The disadvantaged workers that were looked after so well in the first 70 years of our nation’s history have become the big losers. So, from a social perspective, the last few decades have been a mix of good and bad. What is the overall balance sheet? In terms of poverty alleviation, Australia generally deserves high marks. Relatively poor households are enjoying, on average, a much higher standard of living than twenty years ago. They have benefited greatly from Australia’s economic renaissance, including economic liberalisation and globalisation. However, a true egalitarian society tries to ensure that all citizens can participate in community activities with dignity, self-respect and without shame. By making a distinction 136


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between deserving and undeserving poor and providing unequal access to welfare, Australia is failing this requirement and going back to old colonial and early Federation values. And there remain some pockets of real hardship which Governments are turning a blind eye to, as noted in Chapter 1. On broader inequality criteria—how the incremental income and wealth gains stemming from structural and technological change and reform have been distributed across the population—Australia’s performance has been fairly patchy over the last two decades. On some measures, inequality has not bounded away and Australians have widely shared in the fruits of economic growth. But the managerial and professional class has gained a disproportionate share, while low-paid workers and the long-term unemployed have slipped well behind rising community standards. There are some indicators suggesting that inequality of net incomes and wealth across households, already high by international standards, is now on the increase in Australia. It is on the criterion of equality of opportunity, however, that Australia may be actually going backwards. The gap in employment, education, health, housing and regional opportunities does not seem to be closing. Indeed, on some measures, the gap is widening. And worker empowerment—‘the right to join together and assert a counterrailing authority’ (Gailbraith 1996, p. 66)—has steadily diminished. Australia is drifting further away from a truly level playing field. To genuinely achieve more equal opportunity, governments need to adopt additional positive discrimination measures that specifically target the disadvantaged, including school students from poor families, the long-term unemployed, Aboriginals and migrants with language difficulties. This is not happening. Nor does it look like happening. Yet Australians, while sceptical of equality of outcomes as a societal goal, fervently believe in more equality of opportunity! Many of the human rights that are of greatest relevance to Australian society, and that are embodied in the International Covenant of Economic, Social and Cultural Rights, have been significantly eroded or are seriously threatened. These include the right to work, the right to have just and favourable conditions of work, the right to the highest 137


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attainable standard of health and education, the right to collectively bargain and the right to social security.

The driving forces A key aim of this book has been to explore the reasons for the apparent reluctance of governments to embrace more active egalitarian policies, and to speculate on whether the retreat will continue or reverse itself. Chapter 2 examined the possibility that egalitarian policies may have become less economically affordable. It was concluded that, on the scale and in the form practised in the 1980s and most of the 1990s, Australian egalitarianism remains well within economic capacity and a moderate incremental expansion should not significantly impair our underlying economic growth performance. Chapter 3 challenged the view that egalitarian policies are no longer as effective in achieving their own social objectives. It acknowledged that middle-class welfare has been growing excessively in recent years and that our social security system may be encouraging welfare dependence among ‘inactive’ beneficiaries. These two problems need to be addressed but they do not explain or justify an overall scaling-down of egalitarianism. Australia’s well-targeted social security system remains potentially highly effective as a redistribution device. Nor is it true that governments need to accept some increase in income inequality if they want to deal effectively with structural and long-term unemployment. Those who (like Tanzi and Schuknecht 2000) infer from the historical experience of the OECD over the last twenty years that social spending is yielding diminishing social returns have in mind ‘biggovernment’ countries like Belgium, Norway and Sweden, or ‘mediumsized government’ countries like France. They do not have in mind ‘small-government’ countries like Australia, which is indeed viewed as a model for the others. Taken together, Chapters 2 and 3 suggest that the sacrifice ratio (the efficiency costs per unit of equity) has not changed dramatically over the last two decades. Indeed, given the huge increase in affluence, egalitarianism should be less—not more—burdensome now. Chapter 4 discussed the possibility of a systematic ideological bias 138


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in the advice offered to politicians by the economic policy elite. It was found that professional economists are, as a rule, economic liberals but not predominantly or systematically anti-egalitarian. To a lesser extent this is also true of the policy elite. Recent changes in composition of the elite (the increasing role of business economists and business-funded think tanks, the growing dependence of academics on business funding and contractual arrangement affecting senior policy advisers) may be creating a less favourable intellectual climate for egalitarian policies at the federal level. But the policy elite are likely to remain a bastion against ideologically driven policies masquerading as economic dogma. Chapter 5 examined the effects of globalisation. The view that governments no longer have the fiscal capacity to set their own social priorities was rejected. However, it was acknowledged that globalisation had fundamentally altered the power structure in Australia. This in turn imposes new political risks and limits the range of redistribution instruments that can be used. But that is a long way from saying that governments have become helpless pawns of global capital. Global capital markets need to be handled with sensitivity but can be managed without a major reordering of social priorities. If governments allow themselves to be intimidated by markets, it is because they are either misguided or want to use globalisation as an excuse for anti-egalitarian policies. Chapter 6 explored the possibility that the normative values of Australians might be fundamentally changing. It was found that the evidence was inconclusive. If one had to sum up the current community attitude, it is that: •

Australians do not support equality of outcomes as an ultimate social goal—they know this spells mediocrity and uniformity; but, in general, • they do want to alleviate ‘genuine’ poverty; • they do not want to see income and wealth inequality increase and would be generally happier to see it decrease a little; and • they strongly support the principle of equal opportunity. This is consistent with an egalitarian commitment of sorts. But the commitment is more fluid and less passionately held and there may be more reluctance than in the past to make the necessary sacrifices to achieve egalitarian ends. This means that public opinion is very open to 139


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influence by politicians and well resourced interest groups, especially those with high-level opinion management skills. In short, egalitarian values on the scale of the past do not involve a high and increasing economic cost burden. They need not yield diminishing social returns. They are not incompatible with a globally integrated, liberal economy. The policy elite is unlikely to have a major contraining effect. Public opinion is showing no decisive trend and can be swayed either way. These various forces and how they are perceived will play some role in shaping the willingness of governments to redistribute the benefits of economic growth and smooth the social effects of change. But political leadership will be crucial in deciding the future of egalitarianism in Australia.

The future cultural and political climate for egalitarianism In reviewing the outlook for egalitarianism, several economic unknowns have to be faced. Will the pattern of structural and technological change continue to favour skilled workers? Will the world economy be prone to recessions or will it evince the kind of resilience and stability it showed in the 1990s? What will happen to labour force participation rates? Will the projected slowdown in labour force growth make it easier for governments to reduce hard-core, structural unemployment and shift market power back to workers? Will the role of trade unions continue to decline? Will governments need to commit additional funds to defence and the environment, leaving less room for other spending? These economic and demographic forces will have a significant bearing on future egalitarian outcomes, but more crucial will be the interaction of cultural and political factors. So, this chapter will focus on the latter. Cultural factors Egalitarians can draw some comfort from the community’s continuing support for most types of social spending, especially provision of public services. Governments have found it easy to target particular welfare 140


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recipients such as those receiving unemployment benefits because a change in policy in that area only impacts directly on a small percentage of the population. It should be much harder for politicians to attack areas of social policy that affect most Australians at different stages of their lives, such as health, education, family benefits, age pensions, wage regulation, etc. ‘Policies that pose a broader threat to social protection are more likely to run into political resistance’ (Wilson and Turnbull 2001, p. 402). Some, like Hugh Mackay (ABC talk-back 27 Aug. 2002), see evidence that young Australians are less materialistic and more community conscious than their parents. But this is not yet clear. Another positive for egalitarianism is that as a country’s wealth increases one might expect its citizens to give higher priority to fairness. This might make them question the present level of fiscal conservatism. Until now, the policy of running cash surpluses and running down public debt has been popular with voters and the media because it has been perceived simply in terms of ‘balancing the books’ and ‘eliminating black holes’ (all meaningless but effective slogans). This attitude has been carefully nurtured by conservative politicians and has been one of the greatest impediments to egalitarian policies. But recent editorials have become more questioning.2 And so have some of our leading economic journalists. One of them recently railed at the Federal Government for getting itself ‘hooked on the economically illiterate notion that the ideal state for a government is zero net debt’ (Ross Gittins, Sydney Morning Herald 17 Jun. 2002). The suggestion that when debt levels reach zero levels, governments may have to use their fiscal surpluses to acquire private sector securities (including shares) has caused consternation even among conservatives. A third cultural force that bodes well for egalitarianism is the emergence in recent years of a strong organised anti-globalisation protest movement capable of influencing public opinion, especially through the new medium of the Internet. Currently focused on trade, it is conceivable that a similar Internet-based protest movement will develop on issues like poverty, inequality and worker protection. If it became better-focused and less anarchic and irrational, such a protest movement could have some impact on governments and on the recom141


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mendations of international bodies like the IMF and the World Bank (see also Argy 1998a, Chapter 8). There are also some developments in economic thought that might be helpful to the climate of opinion on egalitarianism. These developments include the reassessment of monetarism, public choice theory and small-government theory. There may also be signs of a rethink of the economic benefits of radical labour market deregulation even among free-market economists. However, it is hard to see changes in economic thought having a decisive effect on policy thinking in the future, so long as the messages from economists remain mixed and confusing to both the general public and politicians. Sadly, the more populist opinion makers in the economic debate, especially the talk-back hosts, are likely to be more influential than professional economists. While there are some egalitarian-friendly cultural forces at work, there are many more with negative implications. One danger stems from the pressures on governments to claw back ‘middle-class welfare’, including a challenge to the notion that free health care should be available for everyone and a suggestion that universities should move further down the user-pays road. Such measures are easy to justify in economic and immediate equity terms, but they could reinforce the phenomenon of ‘downward envy’—the tendency among low-paid workers to resent people on welfare—and sour the public mood against many forms of redistribution. People pushed into using private schools, private hospitals or private security will tend to resent paying any taxes at all. Already, middle and higher income groups in Australia get less from the welfare state than in most other OECD countries. The lack of direct contact with the welfare system by the middle class is partly responsible for the lack of support for anti-poverty measures in the United States (Gilens 1999). The same cultural attitude could develop in Australia if governments continue to target social benefits more closely at the needy. A second negative is that globalisation, liberalisation and structural and technological change, although having no direct implications for the nation’s social priorities, will continue to create an opinion climate unfriendly to broad-based egalitarianism (Chapter 5). The growing ‘equity culture’ makes Australians less sympathetic to hikes in taxation or higher levels of government borrowing or improved worker protec142


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tion regulation, if such measures seem likely to adversely affect share or property values. At the very least, the equity culture is ‘changing attitudes towards economic freedom by aligning workers’ interests more closely with those of companies’ (Economist 10 Mar. 2000).3 Despite recent setbacks in share markets, the interest in equity investments among middle-class families is likely to continue to grow over the long term. Globalisation also gives an air of respectability to demands for lower corporate and income tax rates. For example, Malcolm Turnbull (investment banker and Liberal Party Treasurer) is reported to have called for ‘a big cut in income tax rates to stem the flow of talented Australian workers heading overseas’. The fact that Australia has a net inflow of skilled, professional workers and that few of these workers are mobile except in a short-term sense, does not deter this sort of allegation. It has superficial credibility in an environment of anxiety over international competitiveness. And it is guaranteed good media exposure if uttered by a ‘big name’ even when it is no more than a convenient fig leaf to conceal naked ideology. As well, the traditional solidarity of workers is becoming more and more fractured, with sharp divisions opening up between the old industrial workers and the new workers in knowledge, service and culture industries; there is also the decline in membership of trade unions. These factors are further breaking up the constituency in favour of egalitarianism. Policies of privatisation and outsourcing are broadening the small business constituency. The self-employed tend to favour low government spending, taxes and regulation, and have a strong work ethic. More generally, a liberal economy inevitably creates more insecurity and generates a culture that gives weight to competitiveness, choice and responsibility. These values can easily drift into hostility to egalitarian policies. There is also a cultural legacy from the past: once anti-egalitarian policies are implemented, they tend to become entrenched. Australians accept change better in retrospect than in prospect and have a propensity to support whatever status quo is in place (Bean 1991; Saulwick Address 3–5 Oct. 1996). Policies, once in place, shape citizen expectations and preferences (McAllister and Wanna 2002). No less 143


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importantly, financial markets and the conservative media do not look kindly at policy reversals that harm the interests of investors. Finally, and more controversially, it has been argued that Australians have a stronger ‘individualistic culture’ and a more socially conservative streak than most other countries. Some studies suggest Australians are second only to the United States in their support for core values such as self-reliance and personal independence (see, for example, Saunders (ii) 2001). This is disputable (Saunders 2002, p. 78), but if true, such a cultural environment may prove unfriendly to any attempt to expand welfare entitlements or public services. Equally unfriendly to future social progress is the ‘fond belief’ of most Australians that we are already an egalitarian society, so there is not need for further distribution (Hugh Mackay in the Age, 14 Feb. 2001). Political and institutional factors The institutional and political forces impacting on egalitarianism are, like the cultural forces, mixed and conflicting. One strong safeguard against a further appreciable retreat from egalitarianism will be the system of government, with its numerous checks and balances. The Senate, which the Howard Government does not control, has in the past been unfriendly to radical workplace deregulation and has prevented a much more vigorous legislative onslaught on tax progressiveness (for example, by modifying the original GST package), trade unions, award deregulation, welfare, and so on. The Federal system provides another set of checks. The Liberal party and its Coalition partner have rarely controlled state and federal government concurrently and, at the time of writing, Labor held power in all of the states and territories. State governments have the power to neutralise or thwart some federal government plans, although in key areas of social policy they are usually small players.4 Auditors-general and the media can be important in correcting blatant misinformation. The judiciary provides protection against abuse of constitutional power. And, of course, democratic elections provide the ultimate safeguard. There are some highly respected political scientists like Ian Marsh who foresee a continued erosion of public support for the major parties, with a shift towards minor and independent parties which better reflect 144


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the pluralised character of Australian society. This will act as a further constraint on extreme anti-egalitarian policies and raises the possibility that a coalition of socially progressive minor parties will one day be in a position to exercise parliamentary clout even in the Lower House. A further possibility is that the Howard Government will become more socially progressive. It is, for example, showing interest in alleviating pressures on the family from the demands of work (Shanahan, Australian 28 Jun. 2002), although its concern is more to preserve the institution of the family than to reduce inequality between families. Alternatively, we could get a Liberal government under different leadership and with an increased proportion of ‘small l’ liberals (of the Malcolm Fraser, Fred Chaney or Ian Macphee schools) that could be differently inclined.5 Some see evidence of a ‘softening in the wind’ within the Liberal Party (Totaro, Sydney Morning Herald 22 Apr. 2002). And a socially bolder Labor government might emerge either in 2004 or 2007. On the other hand, there are powerful reasons to expect the political momentum to run further against egalitarianism. At the federal level, Australia will continue to have an ideologically driven government in power until at least 2004 and incumbency will offer many opportunities. One is the opportunity to manipulate the media (Kohler 2002). Another advantage of incumbency is the opportunity to implement reform that is then hard to reverse. The government has already foreshadowed further welfare and industrial relations reforms with significant societal implications. And there is on-going pressure to reduce the tax burden. More fundamentally, incumbency confers the power to control appointments to statutory bodies like the ABC, the Electoral Commission and the High Court. The government can use incumbency to break down some of the present checks on its political freedom and flexibility within the Australian system of governance. There is already a strong drive by the Howard Government to reduce the ‘activist’ role of Federal courts and to increase the conservative representation on the High Court (Taylor and Gordon, Age 22 Jun. 2002). As well, Canberra seems prepared to use its financial powers to dictate industrial relations policy to the states via its control of specific-purpose payments worth some $22 billion a year to the states—a direct threat to the fiscal sovereignty 145


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of the states. The Liberal Party has also expressed concern that the government is being unduly constrained by ‘the composition and powers of the Senate’ (although current divisions within the Democrats might lessen the government’s problem). The Government has two options—a double dissolution at an electorally opportune time and in the longer term a constitutional amendment to resolve deadlocks between the Senate and the House simply by a joint sitting rather than by first dissolving both Houses.6 As for the federal Labor Party, it is undergoing a value reorientation towards the so-called ‘aspirational’ voter who puts greater value on low interest rates and rising share and property wealth than on the rights of workers and redistribution. It has set its face strongly against taxing and borrowing. In adopting that course, it is responding in part to the ‘multi polar and fragmented’ nature of the political climate and the realities of globalisation and multiplicity of family types.7 As was noted in Chapters 2 and 3, the looming prospect of an ageing population, coupled with increased defence and environmental responsibilities, is likely to act as an on-going constraint on government social spending for some time. The Intergenerational Report released with the Budget papers (Treasury 2002) warned that net government spending will need to rise by 5 percentage points of GDP by 2041–42 simply to fund the same standard of services and level of benefits as is now enjoyed.8 Much of this increase is in fact driven by the costs of new medical technology rather than the effects of population ageing. That is, it represents a deliberate community choice to devote more resources to health—one which is unrelated to ageing. Moreover, the projected revenue gap has been overstated9 and will only start to show up in fifteen years’ time (from about 2018 see Chart 4 of Budget Paper 5), so there is plenty of time to work out what needs to be done.10 But politicians may choose to use this as a convenient lever to pursue small-government policies (‘don’t cheat on your children’). Nor are we likely to see any diminution in ‘opinion management’ by those with a strong vested or ideological interest in scaling down egalitarianism. Indeed, the agenda for reform of interested parties is getting more radical with time. An editorial in the Australian (5 Apr. 2002) stated baldly that the agenda of the future ‘will have to be less preoccupied with statistical inequality of wealth and income’. The 146


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Australian Industry Group has sought bans on industrial action that ‘adversely affects business’, with tough implementation of fines or jail terms even on individual workers (Burrow, Australian 26 Jun. 2002), effectively removing the freedom to strike. Opinion leaders, as already noted, frequently demand big cuts in income tax. And right-wing scholars remind us that ‘government has given people more freedom to produce but it continues to place heavy burdens on their freedom to consume’ (Norton 2001, p. 237). The ‘reform’ vision is becoming bolder and bolder, with more and more deregulation and less and less social spending. And it comes from people with political clout. In short, while there is a positive story to be told on the outlook for egalitarianism, it is also easy to paint a quite different scenario. And the outcome of the political and cultural ideological conflict will have a crucial bearing on the future of Australian egalitarianism.

A social reform agenda Despite the cloudy outlook for egalitarianism, a government could come to power one day that is prepared to restore egalitarian values to a higher order of priority. What sort of reform agenda could be devised that is economically and politically viable? Although this book is not about prescribing an integrated, comprehensive policy response to the broad and complex questions raised here, the rest of this chapter offers some general thoughts on: •

what might be the key features of a more egalitarian social reform agenda; • how to implement such an agenda without undermining the dynamism of the economy; and • how to nurture a climate of opinion more friendly to egalitarian policies. We start with a minimalist social agenda designed solely to prevent further increases in inequality, and then an agenda is examined that seeks to go further. 147


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A minimalist social response A minimum requirement of an egalitarian strategy would be to ensure that the prospective incremental benefits of future structural and technological change and reform are widely distributed, especially among those that are currently most disadvantaged, and that the natural environment is safeguarded for future generations. This can be called a ‘containment strategy’. Under a containment strategy: • governments would, before proceeding with any major new economic reform program, obtain an independent assessment of the short and medium term distribution and environmental effects; • if the effects were expected to be socially regressive or environmentally damaging, an attempt would be made to compensate up-front some or all of the losers (as was done with the GST reform) and to impose appropriate environmental safeguards; • if compensation proved impracticable or the environmental damage irreparable, the reform program could be ‘diluted’ (deferred, phased-in or watered down)—that is, some efficiency traded off for equity; and • an independent review would be conducted at regular intervals to evaluate the social and environmental impact of economic reform and structural change, and to recommend appropriate policy adjustments. This approach is not very different from what has traditionally happened on an ad hoc basis in Australia, but with strong pressures for change, even this modest stance is now under threat. A further discussion of the options available under a minimalist strategy can be found in Argy 1999 and Productivity Commission 2001. A more far-reaching social reform agenda Depending on how public opinion evolves in the years ahead, governments might want to go much further than a minimalist, incremental social agenda. If so, who and what should be targeted? 1. The agenda would have to include some poverty relief measures. As 148


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Hugh Mackay says, ‘the spirit of egalitarianism is responding to need because it is there’ (Mackay 1999, p. 61). An egalitarian strategy would be a mockery without some attempt to relieve the lot of the most disadvantaged on welfare. Although public opinion is ambivalent about passive welfare assistance for the poor, Australians are basically compassionate people when the situation is well explained to them. The poor are to be found amongst recipients of unemployment benefits (especially single persons living alone),11 students, homeless people, people with disabilities, indigenous Australians, sole parents and particular population groups in rural and remote areas with high unmet needs. But clearly some research and information gathering is needed first. The federal government could set up a task force, drawing on welfare groups with grassroots knowledge, to identify the worst areas of poverty in Australia, following up the good work already being done by the Department of FaCS (see Carlisle et al. 2002). Well-aimed action could then be taken in conjunction with the states. 2. A second target should be the ‘working poor’—under-skilled, low-paid workers in full-time jobs with low individual market power. They are the people most left behind by the reforms of the last three decades and most likely to be affected by further reform and structural change. Government wage supplementation would be one way to assist them. The options include negative income tax, earned income tax credits, other wage subsidies and a reform of the income tax structure (Ingles and Oliver 1999). The work environment of these workers has also deteriorated (with unpredictable and often long hours, job and income security, stress, etc.). This problem needs to be taken out of the confrontational industrial relations debate and honestly evaluated and addressed. Hopefully, it can be done through the voluntary cooperation of all the main parties (employers, workers and governments). It could require some changes to existing regulatory standards (see later). 3. A third target would need to be the long-term unemployed and underemployed. A serious attempt would need to be made to reintegrate them into the work force. For the reasons stressed in Chapter 3, this should not come about principally through wage deregulation or so-called 149


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welfare reform, although these policies, in moderation and with sufficient safeguards, have a role to play. The following measures offer a more balanced response to longterm unemployment over the medium term:12 • • • • • •

• • •

• • •

more extensive investment in training, retraining and education to lift the employability of workers in low demand; early intervention to assist school-leavers and displaced workers at risk; the allocation of more resources to regional development; increased incentives for the unemployed to move geographically; wage subsidies for low-productivity workers; more intensive case management of long-term unemployed, including increased resources and improved incentives and funding for Job Network to target its assistance more effectively at the long-term unemployed (Productivity Commission 2002a); greater pressure on employers to change their negative attitudes on recruitment of older workers and long-term unemployed; a more growth-oriented macroeconomic policy; some job creation programs targeted at less skilled workers and at neglected areas of community service (teachers’ aides, aged care, environmental repair); payroll tax relief for employers recruiting low-paid workers;13 occasional wage–tax trade-offs; and on-going efforts to ensure welfare recipients have adequate incentive to work.

It has been argued that Australia’s failure to restore full employment stems in part from an excessively laissez-faire approach to industry policy and competitive capability (Borland 2001, p. 20; Wanna and Withers 2000). While it would be a retrograde step to go back to the old paternalistic policies on tariff protection and financial regulation, some rethink at the edges of industry policy would seem desirable. Favourable demographics over the next 40 years will see a marked slowing down in the growth of the working-age population relative to the population generally, forcing employers to look more sympathetically at older workers and the long-term unemployed. This means the extent of policy intervention required to achieve a given employment 150


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outcome—say a 4 to 5 per cent unemployment rate—will gradually diminish over time. 4. Governments would need to actively promote more equal access to education, health, housing, etc. This would require strategic early intervention and prevention policies in these areas to assist families with children at risk of long-term social and economic disadvantage. For example, in education, one possibility would be comprehensive literacy and numeracy testing of all government secondary students, followed by strategic funding and management of individual students in danger of falling behind. This could include improved access to electronic information services, the removal of participation barriers to education or training re-entry, and the use of well-targeted ‘learning accounts’ or vouchers. Health and housing inequalities highlighted in Chapter 1 also need to be targeted and public transport made more accessible and affordable for low income families in outer suburbs. 5. An important aim of social reform should be to improve the lot of our indigenous people. Compared with the 1960s, the position of Aboriginals has improved greatly in many respects, such as in terms of legal status and access, political and social rights and levels of economic support. It can now be said that Australia no longer discriminates against its indigenous people (at least not intentionally) as part of official policy. However, governments still refuse to take the extra step of ‘positive discrimination’ in their favour to redress past injustices and allow their children to start life on a more level playing field. In particular, governments need to make a more determined effort to lift low Aboriginal completion rates both at school and universities and to widen their access to key public services such as health, education (especially pre-school education), housing, high-quality child care, public transport and other urban and community services. Above all, the employment difficulties of indigenous people require a well-designed and determined response. Indigenous people need to be specially targeted through labour market programs and encouraged to develop a greater sense of empowerment and entrepeneurship, as advocated by many indigenous leaders themselves (Noel Pearson, Sydney Morning Herald 5 Mar. 2002; Geoff Clark, Australian 9 Mar. 2002, p. 6). 151


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The kinds of measures that are currently being applied in the Cape York Peninsula could serve as a model (Pearson, Age 30 May 2002). 6. An egalitarian agenda could seek to temper the effe cts of high levels of wealth inequality as a means of reducing impediments to genuine equality of opportunity. Low-income families could be assisted to build savings and improve their capacity to draw on credit (Latham 2002),14 and low-paid workers, especially those with precarious employment, could be given better access to the present highly subsidised superannuation arrangements.15 A flat rebate paid into superannuation funds (as proposed by ACOSS) or the establishment of a well-targeted lifelong savings scheme (Yencken and Porter 2001, p. 71) would be both more effective in encouraging national savings and more progressive in its impact. 7. Governments could strive to promote a more balanced (yet economically viable) regional spread of employment opportunities through infrastructure investment, relocation of some public services and private sector incentives, and by facilitating social entrepeneurship. The danger is that regional policies could become a vehicle for ‘pork barrelling’ by politicians. Some independent institutional mechanism would need to be set up (perhaps similar to the Commonwealth Grants Commission) to ensure the credibility and effectiveness of the policy. 8. The welfare dependence problem (the increased reliance of people of working age on social security assistance) has four distinct causes: • • •

long-term inability to obtain jobs; cultural alienation (indigeneous people); lack of sufficient financial incentive or motivation to transfer from welfare to work; and • the spread of middle-class welfare. The first two dimensions were considered separately above. Middleclass welfare is more a financing than a social issue, and is discussed later (see p. 157). As to the lack of financial incentive or motivation to work, it was argued in Chapter 3 that the phenomenon is mainly found among the inactive population of working age—those on welfare who are not required to actively search for work and are not work tested. 152


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To address that problem, it would mean reinventing egalitarianism in a new form, one designed to encourage a positive change in behaviour. Welfare recipients of working age could be encouraged to move from welfare to work through earned income-tax credits (or variants of it), active labour market programs, a rationalisation of welfare income tests16 and social entrepreneurship (see pp. 155–6). These types of policies are in effect correcting for market failure such as impediments to labour mobility and information deficiencies. An increased policy emphasis on such ‘active’ social policies to reduce welfare dependence would promote an egalitarian society by: • • •

reducing the element of downward envy; freeing up some resources for other areas of social need; and relieving the psychological pain imposed on those who are genuinely unemployed and have been unfairly labelled ‘cruisers’ or ‘bludgers’.

With the right behavioral incentives in place, governments could afford to adopt a more compassionate version of mutual obligation— one which genuinely seeks to build up the employment potential of the recipients, is based less on compulsion and more on incentives and does not seek to blame the victim. In such a revised form, mutual obligation could even be extended to some disability pensioners and single parents.

Ensuring the economic viability of the social reform agenda Egalitarian policies cannot be applied in a relatively stagnant and inefficient economy so the government would need to ensure that: • •

the economic base is vigorously expanding; and methods of redistribution are as economically inoffensive as possible.

Maintaining economic vibrancy A strong economic performance can be sustained by: •

continuing to run an essentially pro-growth macroeconomic 153


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•

•

• •

•

policy, with accommodating monetary policies (as in recent years) and a fiscal stance quickly responsive to early signs of recession, as in 2001,17 while ensuring ‘responsible’ fiscal and inflation outcomes over the business cycle; maintaining an essentially liberal market environment and proceeding with further liberalisation where there are still important efficiency gains to be made and the social costs are manageable; developing a wider economic role for government in innovation (for example, by addressing deficiencies in the market for venture capital); insisting that all new public investment be subject to rigorous cost/benefit analysis; ensuring government service provision is as much output as input focused (for example, more spending on law and order does not necessarily equate with better crime outcomes) and, where appropriate, done in partnership with the private sector; and taking care to minimise efficiency costs when pursuing redistribution (see below).

This economic strategy can be generally reconciled with social reform. Many liberal economic policies are quite positive for egalitarianism. This is particularly true of competition-enhancing reforms, because they not only promote efficiency but also weaken the potential for monopoly power and abuse and so are good for equity. It is important, therefore, for governments to resist demands from big business to dilute competition regulation and the role of the Australian Consumer and Competition Commission (ACCC). Business cannot preach market reform in general and then block individual reforms that impede profits (and executive remuneration). Fortunately, there is evidence that public support for business regulation to prevent anticompetitive practices is stronger than ever.18. But some occasional conflict between liberal reform and egalitarianism is inevitable (as noted in Chapter 2). Where it arises, governments must seek acceptable trade-offs and compromises and minimise potentially adverse economic effects from redistribution by choosing the instruments carefully—the subject of the next section. 154


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Choosing the instruments of redistribution Some of the instruments of redistribution need not make much demand on recurrent revenue. 1. One possibility would be to tap more into local and community capacity. Governments would effectively become facilitators of community regeneration and social entrepreneurship as part of a jobs creation strategy.19 The authorities could find the people and create the organisations to enable local communities to solve their own problems, provide them with moderate financial support or guarantees and then use them as a catalyst, for example, to encourage the business community to invest more in depressed suburbs and towns. It could be part of a wider plan to create opportunities for greater community participation in governance through a dispersal and devolution of power, increased citizen participation and broad consultative (consensus-building) vehicles. But in truth, those who assume that social entrepeneurship can play a big role in dealing with Australian inequities are being a little naive. It is only one small step. And it is pregnant with dangers; over-reliance on it might lead to very uneven social results. 2. Socially progressive governments (state or federal) should not be afraid to make greater use of medium-term public borrowing (over the business cycle) to fund social and environmental infrastructure needs. Governments should balance revenue against recurrent expenditures (their net operating account) over the economic cycle (preferably on an accrual basis). However, at present their fiscal targets go well beyond that. Their professed aim (mostly realised in practice) is to achieve an overall fiscal balance or surplus (zero or negative net borrowing) over the business cycle. Such a target requires that revenue be used to finance capital expenditure as well as recurrent expenditure over the long term. It requires governments to save enough (run big enough operational surpluses) to cover their full investment needs plus a bit more wherever possible. This is fiscal conservatism gone mad.20 It implies steadily declining public debt. Yet there are no macroeconomic, accounting or intergenerational equity principles justifying such an approach (for reasons explained in Chapters 2 and 3). 155


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The medium-term budget strategy of federal and state governments should be basically determined by the community’s preferred mix of public and private capital goods and the relative risk management abilities of the public and private sectors in financing, having regard to the specific characteristics of each project. (At the federal level, governments might also wish to make a contribution to national saving if a convincing case could be made for it.) The budget strategy should not be determined by ‘small-government’ ideology or by ill-founded fears of global market retribution. 3. Nor should a socially progressive government be afraid to use social regulation in limited doses. Some otherwise liberal economists (such as Freeman 2000; Tanzi and Schuknecht 2000, p. 252) see a significant role for regulation in a market economy.21. In this book (for example, Chapter 2), regulation has been viewed more as a last resort option; however, a role for it is appropriate when: •

unfettered market competition looks like damaging the quality of life of workers or the environment; and • fiscal incentives to address such problems are difficult to devise or implement. It would not be very productive for governments to try to achieve greater earnings equality through tighter regulation of award wages (apart from regular increases in the award safety net) and a bigger wage role for the AIRC. The efficiency costs would be high, while the equity gains would be uncertain because of perverse employment effects and poor targeting (Chapter 3). Relative changes in the rates of pay traditionally set by the AIRC have contributed little to the widening dispersion of earnings (Keating 2002). As noted in Chapter 1, rising earnings inequality has been driven more by changes in the employment market. If governments want to reduce earnings inequality, they should focus on training, education and employment policies and on wage supplementation through the tax system. On the other hand, strong labour regulation may be the only way to ensure a worker-friendly and family-friendly working environment, especially where the main bread-winner is a casual worker (Hancock 2001). One way would be to use the corporations power to legislate minimum labour standards or even a Bill of Rights, but this may prove 156


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hard to implement. The alternative approach would be to introduce new award regulations, such as on working hours or redundancy payments, within the existing industrial relations system. Done on a small scale (no one is advocating a return to the 1960s or 1970s), re-regulation would entail a small efficiency cost but a big social welfare gain. Similarly, regulation may be the only ultimate way to safeguard freedom of association and the rights of access of trade unions. Some union leaders indulge in undesirable practices (just like some business managers) but, as an institution, trade unionism is a vital chain in ensuring the wellbeing of workers. Unions give vulnerable workers greater bargaining power, help to monitor and police the legal rights and entitlements of members and offer them a grievance- resolving mechanism. Non-union enterprises can have work councils. 4. Governments could review many of their present social spending priorities and especially the burgeoning expansion in ‘well-off’ welfare (see Chapter 3). One good example is in education (see Chapter 1). Governments could reduce both their generous funding of wellendowed private schools and the level of public subsidies to universities while still covering the ‘public good’ component of education. The funds could then be reallocated to programs that target lower-income students more closely.22 Similarly, health subsidies are ripe for compositional change (see Chapter 1), housing concessions could be better targeted at low-income families, and within the transport budget there could be scope for a reallocation of public funds from roads to public transport. And some universal family benefits could be means tested. Even drought relief could be better targeted and corporate welfare (stemming from inter-state rivalries for new projects) scaled back. 5. There is scope for greater international collaboration to limit tax competition and strengthen existing international conventions and pacts on environmental, labour and social standards. The tide of opinion may be turning on such issues. Even hard-nosed IMF leaders are beginning to tentatively acknowledge this.23 That said, there is no immediate likelihood of coordinated international action on these fronts. Devices such as those outlined above could serve as substitutes for revenue-raising measures but they have only limited application. So a 157


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wider egalitarian agenda would require additional revenue; the challenge here is to minimise the economic costs. Ideally, the revenue-raising method used should have a neutral effect on economic choices of households and businesses. This would mean avoiding an increase in the tax burden on mobile capital and on personal effort (especially hard-hit PAYE taxpayers). Taxes that minimise such distortion could take four basic forms: 1. Taxes on unimproved land values, on intergenerational gifts and bequests, on accrued capital gains transferred by inheritance and on other relatively immovable assets.24. 2. Base-broadening measures that remove poorly targeted and inequitable tax exemptions and deductions and achieve a more comprehensive income tax base (Freebairn 2002). As noted in Chapter 3, many middle- and upper-class welfare benefits that have grown markedly in recent years (such as capital gains concessions, the health insurance rebate, superannuation, concessions on employee shares and options, senior citizens’ tax offsets and the first child tax rebate) are in the form of ‘tax expenditures’. Eliminating or scaling back many of them would promote efficiency, effectiveness and simplicity as well as widening the revenue base. 3. A serious attack on blatant tax minimisation and evasion practices such as artificial income-splitting devices, the use of trusts, negative gearing and abuse of employee shares and rights schemes.25 More resources might need to be given to the Tax Office. 4. Hypothecated taxes—levies earmarked for specific purposes— can be efficient; for example, if they target environmental pollution. Others, such as income tax levies, might involve some efficiency costs (and reduce fiscal flexibility) but would help to ‘reconnect’ citizens to the tax system generally and make new or additional taxes more acceptable.26 Cultivating a more propitious climate of opinion As noted frequently in this book, the value system of the community is neither clear nor finite. It can easily be changed by a combination of 158


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education and information. A socially progressive government (small ‘l’ liberal or social democratic) would need to actively cultivate a more propitious opinion climate for its policies. This does not mean ‘opinion management’ of the dishonest or misleading kind. There are enough honest facts and arguments that political leaders can use to influence people’s opinions. Truth is the best propaganda in the long term. To start with, a government could disabuse the public of various myths that are taking hold in Australia. This book has provided some of the raw material to enable governments to refute questionable claims such as that: • •

• • •

•

globalisation and economic liberalism demand a scaling down of egalitarian goals (Chapters 2 and 5); redistribution policies involve a high net economic cost (Chapter 2)—and most economists disapprove of such policies (Chapter 4); redistribution policies are in any case socially unrewarding or even counter-productive (Chapter 3); running budget cash deficits over the medium term is a sign of fiscal and economic irresponsibility (Chapter 2); the persistence of high levels of structural unemployment is mostly due to over-generous welfare and wage rigidities (Chapter 3); and Australians are rebelling against egalitarian policies (Chapter 6).

Apart from challenging such claims, a progressive government could highlight the positive contribution made by the social security system not only to wellbeing and social capital, but also to risk management and economic efficiency (Chapters 2 and 3). To help further generate a positive climate of opinion, governments need to address the perceived small gap between rewards for work and welfare, which is fanning much discontent among low-paid workers (see Chapters 3 and 7). As well, the political rhetoric could shift to equality of opportunity and its close links to outcomes, as this is most likely to strike a responsive chord in the community. Finally, a socially progressive government would need to work hard to prevent excessive media concentration and to safeguard the independence of universities and the ABC (see Chapter 4). 159


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A final postscript Australians have much to be proud about. And it would be easy to write a book singing the praises and thanking our blessings. But many also agree with Hugh Mackay that ‘there are too many homeless, disadvantaged, dispossessed, distressed, drug-addicted, unemployed and unsupported people in our backyard for us to feel smug, just yet’ (Sydney Morning Herald, 4 May 2002) One aim of this book has been to shake Australians out of any smugness by exposing the facts on Australian egalitarianism. Another has been to allay public fears about the economic risks of a more socially active agenda and about its impact on welfare dependence. There is no completely ‘free lunch’ in public policy. But nor are there any strong economic or global imperatives dictating where (or along what path) our society should be heading. And the potential social returns from a modest redistribution of the gains and sacrifices are as high as they have ever been. This book may therefore help Australians rid themselves of the many false demons surrounding the subject of inequality and social spending. They can then let their hearts and consciences speak more freely. That said, the times are not right for ‘true believers’ in egalitarianism. It is unlikely that any Australian government—irrespective of its persuasion—will want to markedly increase the scope or level of redistribution. The economic, cultural and political ‘hurdles’ outlined in this book may well prove too hard for politicians to overcome, even if the will were there. But it is not unrealistic to expect that the steady erosion in our egalitarian policy values will be at least arrested and that over a long period of time some elements of the egalitarian agenda outlined earlier in this chapter will be implemented.

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Abbreviations Abbreviations

ABC ABS ACCC ACCI ACER ACIRRT ACOSS AER AES AFSI AIRC AMA ANOP ANU ASM BCA BSL CEDA CEO CEPR CESC CIS

Australian Broadcasting Corporation Australian Bureau of Statistics Australian Competition and Consumer Commission Australian Chamber of Commerce and Industry Australian Centre for Education Research Australian Centre for Industrial Research & Training Australian Council of Social Service American Economic Review Australian Election Study Australian Financial System Inquiry 1981 (Campbell Inquiry) Australian Industrial Relations Commission Australian Medical Association Australian National Opinion Poll Australian National University Australian Social Monitor Business Council of Australia Brotherhood of St Laurence Committee for Economic Development of Australia Chief Executive Officer Centre for Economic Policy Research, RSSS, ANU Coping with Economic and Social Change survey Centre for Independent Studies 161


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CSIRO

Commonwealth Scientific and Industrial Research Organisation CUP Cambridge University Press DFaCS Department of Family and Community Services DSF Dusseldorp Skills Forum EMTR effective marginal tax rate EPAC Economic Planning Advisory Commission (previously Council) GDP gross domestic product GPPP Graduate Program of Public Policy GST goods and services tax HECS Higher Education Contributions Scheme HREOC Human Rights and Equal Opportunity Commission ILO International Labor Organization IMF International Monetary Fund IPA Institute of Public Affairs IPE Institute of Private Enterprise LSAY longitudinal surveys of Australian youth MNCs Multinational companies MUP Melbourne University Press NATSEM National Centre for Social and Economic Modelling NBER National Bureau of Economic Research OUP Oxford University Press OECD Organization for Economic Cooperation and Development PAYE Pay As You Earn tax PC Productivity Commission RBA Reserve Bank of Australia RSSS Research School of Social Sciences, ANU SCRCSSP Steering Committee for the Review of Commonwealth/State Service Provision TAFE tertiary and further education VET vocational education and training WTO World Trade Organization

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Glossary Glossary

Communitarianism (sometimes called mutualism) This is a body of opinion which stresses the importance of ‘social capital’—trust, cooperation, devolution, local community initiative, social engagement and citizen participation (Cocks 1999; Hamilton 1998 and 2002; Healy and Cote 2001). Economic liberalism A liberal economy is defined as one which: •

relies heavily on competitive markets to allocate resources, except where there is clear evidence of market failure and, even then, only provided governments are well equipped to correct the failure; and • generally chooses ‘market-neutral’ methods of intervention, such as direct budgetary assistance to targeted users, in preference to choice-distorting devices such as regulations and barriers to competition, to achieve its social ends. A liberal economy assumes a minimal role for government in resource allocation but it is consistent with an active macro-economic, social and environmental role for governments. Economic liberalism is largely ‘value-free’ in two senses. First, its belief in the efficiency benefits of competitive markets has a strong scientific basis and has the overwhelming support of professional economists (see Chapter 4). Secondly, its reform agenda seeks only to change the methods of policy intervention used by governments—not 163


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their policy goals or priorities. It is concerned with means (how best to achieve given goals most effectively and efficiently), not ends (the intrinsic merit of the goals). Many of the economic reforms of the 1970s, 1980s and 1990s in Australia fell into the category of economic liberalism. This is true of: • •

• • •

• •

the opening up of pubic sector service delivery to more competition from the private sector; the transfer of some equity risks from the public to the private sector where the latter was considered better able to manage those risks; the exposure of private markets to greater domestic and external competition; removal of the more ineffective capital and foreign exchange controls; deregulation of the banking and financial system (although with tighter prudential safeguards) where this improved economic management and produced a more efficient range and quality of financial services; the roll-back of inefficient workplace practices; and shifts to more market-based methods of policy intervention—in particular, less use of regulations, controls, protective barriers or cross-subsidisation of public services and more use of market incentives such as direct subsidies and other direct budgetary payments that impact on the market more neutrally.

The intention of these reforms was to: • achieve economic outcomes more consistent with the preferences of consumers; • increase pressure on managers to improve efficency and innovate; and • help achieve desired national policy goals more effectively and efficiently. The intended efficiency gains from economic liberalisation have not always been realised (Argy 2001b). For example, the effects of financial deregulation have been generally positive for efficiency and macroeconomic stability but the freeing up of short-term portfolio capital flows 164


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has been a mixed blessing (Argy 1995; Argy 1998, pp. 130ff; Baghwati 1998 and de Brouwer 1999). Economic rationalism This term has been used by some writers in a sense that is synonymous with economic liberalism (see above) but by others in a sense close to hard liberalism (see below). In view of this confusion, it is not a term much used in this book. Efficiency For the purpose of this book, a policy reform will be considered to have improved ‘efficiency’ if winners from the reform are sufficiently numerous that they are capable in principle of compensating the losers and still remain better off. Actual compensation (redistribution) does not need to take place to achieve the increase in efficiency. Increasing efficiency is therefore compatible with growing inequality. This criterion of efficiency is individualistic. It is concerned only with each individual’s wellbeing, not with relative wellbeing. And, reflecting the principle of consumer sovereignty that is at the core of much welfare economics, it is each individual’s perception of their own welfare that is the benchmark. A reform that increases efficiency must (by definition) improve aggregate wellbeing—but it does not necessarily maximise it. A redistribution from winners to losers may well achieve an even higher level of wellbeing. An increase in national efficiency can stem from: (i) improvements in allocative efficiency, that is, a reallocation of resources from activities of low net value to consumers to activities of higher net value; (ii) improvements in technical efficiency (sometimes called productive efficiency), where firms get more output from the same productive inputs (labour or capital); (iii) a lift in dynamic efficiency, where firms are able to respond to changing market conditions and technological developments with greater speed and flexibility; or (iv) a mix of all three. Egalitarianism The focus of the book is on economic egalitarianism within Australia. It is not concerned with civil liberties, political rights 165


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of minorities, the detention of illegal refugees, access to the legal system, etc. Nor does it address inequality between nations and Australia’s foreign aid program. And it is only concerned with the natural environment in so far as it impacts on the issue of intergenerational equity. Economic egalitarianism is not about achieving complete equality of outcomes across households. This is neither achievable nor desirable, as people have different capacities, skills, attitudes to risk and income/leisure preferences, and need incentives to acquire skills, innovate, etc. In this book, an egalitarian society is one which has institutional or policy mechanisms in place to ensure that: (a) there is an effective welfare safety net in place at all times to eliminate any risk of deprivation or hardship; (b) in the medium term (within five years or so), the incremental productivity gains from change and reform are widely shared across the population and any sacrifices required are distributed fairly in accordance with people’s capacity to bear; (c) in the long term, the structural causes of poverty and inequality and the factors impeding equality of opportunity are addressed; and (d) there ae adequate opportunities for the voice of workers to be heard. Under principles (a), (b) and (d), egalitarianism is simply about preventing further increases in inequality; it is about containment. But principle (c) is about creating conditions, through greater social mobility and more equal opportunity, which lead to less inequality in the long term. Egalitarianism is a multifaceted concept. So attempts to improve one facet can have the perverse effect of lessening another. A classic example often quoted by economists is where governments set very high minimum wages in order to improve the relative position of low-paid workers, and in the process make it harder for unemployed unskilled workers (who are the most disadvantaged in the community) to compete in the market. Conflicts can also arise between egalitarian policies and inter-generational equity. Such conflict can be minimised by careful selection of the instruments of redistribution. 166


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Environmentalism Sometimes called the ‘Fourth Way’ (Clive Hamilton 1998) or ‘post-materialism’ (Doug Cocks 1998). It stresses the importance of promoting the natural and living environment and quality of life, even if it means some sacrifice of material prosperity. Some warn of ‘the perils of abundance’. Equal opportunity A policy and institutional framework designed to encourage greater equality of opportunity is one which seeks to ensure that every citizen—and especially every child—has an equal chance to develop their capacities to the full, irrespective of family income, location, gender, ethnicity, etc. It usually entails: •

active discouragement of all forms of discrimination (on the basis of race, religion, sex or national origin); • promotion of more equal access to essential services like employment, health, education and housing opportunities; and • affirmative action at times to narrow the competitive gap between different groups of individuals, for example, between young students in poor and rich households. The main objective of equal opportunity programs is to narrow the disparity in market incomes (pre-taxes and transfers), thus reducing the need for passive social assistance in the long-term. But genuine equality of opportunity is unattainable in a society with widening inequality of net income outcomes, so some passive redistribution is also necessary. Equal opportunity and passive social programs thus complement and reinforce each other. Equity ‘Equity’ encompasses egalitarianism, which is about greater equality. But it is commonly used in a broader sense to embody other (often conflicting) notions of justice or ‘fairness’ such as adequate reward for effort, superior ability or risk-taking, a fair return on property, enhancement of individual liberty and looking after future generations. To quote one view: ‘humanitarian care, alleviation of human suffering and tolerance are important human values; but so are security, civil order and fairness and consistency in the application of laws and rules’ (Owen Harries, Australian 4 Feb. 2002). Equity/equity conflicts are as common as equity/efficiency conflicts. Although the various notions of equity are kept in mind, this book 167


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may sometimes use the term ‘equity’ and ‘egalitarianism’ interchangeably. Externalities This refers to the impact of market transactions (private and public) on the wellbeing of third parties (bystanders) that are not directly involved in the market transactions; this impact is ignored by buyers and sellers and is not accounted for in the price and market system. If the effect on bystanders is adverse (for example, by increasing pollution), it is called a ‘negative’ externality in the book. If it is beneficial, it is called a positive externality. An economic reform designed to encourage a more competitive market may not enhance ‘efficiency’ if it produces large negative externalities and these are not otherwise neutralised. Globalisation The gradual fusion of separate national markets (including especially global capital markets) into a single global market place through increased mobility of capital and goods and services. This book focuses specifically on the former—the increased integration of world capital markets, or what has been called financial globalisation. Hard liberalism Hard liberalism is one form of ideological liberalism. It stresses three inter-related sets of values. First, it assigns special moral weight to individual freedom of choice, responsibility and selfreliance, whatever the differences in individual capacity to exercise choice and freedom. ‘Mere incapacity to attain a goal is not a lack of freedom’ (Berlin 1969, pp. 131–3). Secondly, hard liberals view forced redistribution as morally unjust, as a form of confiscation (as in Kasper 1998, pp. 99 and 131). They claim that it is impossible to compare the marginal utility of different persons (as this involves arbitrary ethical judgments) and in any case it is not ‘equitable’ for individuals to be denied the fruits of their effort and enterprise. So the state should simply ensure there are fair rules and processes in place, such as adequate competition laws to prevent abuse of monopoly power, and then largely stand aside from distribution issues (apart from establishing a basic subsistence safety net). Thirdly, hard liberals are suspicious of governments as an institution. They argue that while in theory governments have a legitimate role to play in correcting market failure, in practice they have neither the competence nor the knowledge nor the integrity to intervene effectively 168


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in economic or social affairs. They see their role as being to ‘to defend the sphere of individual freedom from the encroachment of excessive government’. Some of the economic reforms of the past decade or so (in Australia and other countries) have been of the hard liberal kind. In the opinion of the author, this applies to: • • •

• • •

attempts to promote individual bargaining in the workplace as the sole or preferred method of bargaining; attacks on the rights of trade unions to have access to workers; the single-minded pursuit of outsourcing, and privatisation and the use of private sector financing for new infrastructure projects without firm cost–benefit evaluations; opposition to any public debt increase over the business cycle; pursuit of low taxes and low government spending as ends in themselves; and opposition to most forms of social regulation such as protection of workers’ quality of life in the workplace.

Ideological liberalism A government reform program initially based on value-neutral notions of economic liberalism can become ‘ideological’ if: •

parts of the policy program seek not only to improve efficiency but also to deliberately re-order social priorities, either through positive action (such as to restructure the tax system) or through inaction (such as failing to compensate a large group of already disadvantaged losers); and • those policy parts rely heavily on value judgments rather than objective economic analysis. See also under Hard liberalism and Progressive liberalism. Mutualism See communitarianism. Poverty As used in this book, this term does not just refer to a state of absolute deprivation (inability to afford the essentials of life). It also refers to a situation where a household is so far behind the typical household in income and wealth that it does not have the capability to participate in the activities of the community with dignity and 169


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self-respect, and without shame. It is forced to deny itself ‘socially perceived’ necessities. Progressive liberalism This is another form of ideological liberalism. Like hard liberalism, it supports liberal economic regimes but its values are diametrically different. First, it rejects the notion of freedom as simply an absence of government restriction or coercion. It sees freedom in terms of people being able to actively participate in the life of society, controlling their working hours and conditions, and having the resources and capability to make rational choices. Progressive liberals argue that unless people have a capacity for choice—a set of meaningful options—freedom is a sham. For example, without government support, teenagers from poor families will have less education, less access to the new IT and communications technology and more limited employment choice than those from better-off homes. Progressive liberals want to ensure that more freedom for one group, such as employers and skilled, knowledge-rich employees, does not mean less freedom for another group, such as vulnerable unskilled employees, as is the case when one frees up labour markets too zealously. For these reasons, progressive liberals believe governments need to intervene to ensure reasonable equality of opportunity. By doing so they can enhance economic and political freedom, promote the selfdevelopment of citizens, remove obstacles to the good life and create a genuine level playing field in the market place. Secondly, progressive liberals are more concerned about distribution outcomes than their ‘hard’ counterparts. They warn that the legitimacy of policy and the cohesion and stability of society require that the fruits of government reforms are shared fairly widely across the community. Policies and societal institutions should not confer long-term advantages on one group of persons over another. In any case, equality of opportunity, in the fullest sense, is impossible in a society with unduly unequal outcomes. Thirdly, they are less cynical about the competence and integrity of governments. While acknowledging that competitive markets are better at allocating resources than governments, they believe governments generally have a comparative advantage over markets in macroeconomic management and distribution and can often play a meaningful role in 170


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offsetting market failure in resource allocation (where social and private costs and benefits diverge markedly). Ironically, when it comes to ‘moral’ issues, progressives have less faith than hard liberals in the moral judgment of government (or at least its ability to read the electorate’s predominant moral beliefs). This may be because progressive liberals have a more optimistic view of humankind than hard liberals, who believe in the inherent moral imperfection of human beings. Think tanks These are organisations that apply disciplinary skills or perspectives to practical issues. See Marsh 1995 and 2001b.

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Notes Notes

Preface 1

Australia at the Crossroads: Radical free market or a progressive liberalism?, Allen & Unwin, Sydney, 1998.

Introduction 1

Egalitarianism is defined in the Glossary. It should be noted that this book is about economic inequality, not political or legal inequality.

Chapter 1 1

2 3 4 5

And often find themselves without much superannuation and living in much poorer living conditions than they were accustomed to. Report by NSW Committee on Ageing reported in the Age by Adele Horin 11 Feb. 2002. The term ‘employed’ means gainfully employed for one hour or more per week, and ‘full-time’ employment means employed for 35 hours or more. Casuals are not all in ‘precarious employment’ and they receive a wage premium by way of compensation. As noted in the text, however, deregulation had only a small effect on relative rates of pay traditionally set by the AIRC. Keating and Mitchell point out that the gap could be remedied if governments were to commit themselves to ‘supplement low wage earners so that their disposable incomes kept pace with increases in average weekly earnings in the

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Notes

6 7

8

9

10

11

12

13

same way as is already true for pensions’ (2000, p. 140). They are in effect calling for some kind of tax-based incomes policy which could achieve the same distribution goals as the old centralised wage system but with much more wage cost restraint. The reliability of such conclusions may be affected by sampling error and should correctly be seen as ‘a best guess’. The Australian Council of Trade Unions and the Australian Centre for Industrial Relations Research and Training (ACIRRT) submitted evidence to the reasonable hours test case before the AIRC. (See Pocock 2001). Apart from ACIRRT (1998), Pocock(2001), and evidence collected by the ACTU, the Department of Family and Community Services has published soem data from a Household, Income and Labour Dynamics Survey. It confirms that ‘working parents are under pressure’ and that there are ‘tensions within families about the share of family workload and the balance of work and family responsibilities’ (Fisher 2002). For example, 45 per cent of full-time male workers surveyed agreed that ‘working leaves me too little time or energy to be the kind of parent I want to be’. The proportion of working age people receiving welfare benefits has risen from 5 per cent 30 years ago to 20 per cent now. Some 60 per cent of these are not required to look for work (Government statement www.together.gov.au). The issue is discussed in Chapter 3. A person can be breached if he or she is not contactable or fails to attend an interview. At the time of writing, the first breach, although often due to innocent carelessness, resulted in a loss of 18 per cent for 26 weeks; the second in a 24 per cent reduction for 26 weeks; and the third in a total loss of income for eight weeks (ACOSS media release 15 Jul. 2002). The unfortunate people suffering these penalties would in many cases suffer ‘absolute’ deprivation—not just relative poverty. To give two examples (one already cited on p. 16): ‘For many, working has become more trouble than it’s worth’ (Tony Abbott, December 2000 quoted in Roskam 2001, p. 285). ‘It is neither fair nor moral to expect the hard working men and women of this country to underwrite what can only be described as a destructive and self-indulgent welfare mentality’ (Jocelyn Newman, the previous minister for FaCS). An editorial in the Sydney Morning Herald (22 Mar. 2002) said it was ‘disturbing’ that Mr Costello had refused to meet the Commonwealth’s share of the modest wage increase awarded to social and community workers (their first for ten years). The editorial says that, given that the Prime Minister was calling for a social coalition which draws upon the unique skills of individuals, families, business and community organisations, ‘he should put public money where his mouth is’. According to reports by St Vincent de Paul, Anglicare and UniCare, and ACOSS. See also Canberra Times 31 Aug. 2000.

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14

15

16

17 18

19 20

21 22 23

24 25

The Commonwealth recently cut state grants to offset federal losses of petrol excise revenue stemming from the abolition of automatic indexation. As well, the Federal Finance Minister, Nick Minchin, noting the growing costs of health and welfare, said recently that ‘the states should pick up more of the burden as their revenue from GST grows over coming decades’ (Australian 21 May 2002). DFaCS paper by Whiteford and Angenent 2002. The authors contend that ‘while the total level of transfers in Australia is the third lowest among these countries, the level of net transfers (i.e. net of tax) to the poorest 30 per cent is the third highest’ (p. 54). The paper uses data for 1995. Note for example the pressure to reduce property taxes in the states such as land tax on high-value homes in Sydney and stamp duty on residences and business—referred to in a recent article as ‘a growing Australia-wide backlash against post-GST property taxes’. This is, of course, sheer hype as most ordinary Australians are not greatly affected by state property taxes such as land tax. Again, note the growing pressure from business interests to ‘slash’ personal income tax rates (Peter Jonson in the Australian 29 May 2002; Malcolm Turnbull in the Australian, 20 Aug. 2002). See ABS 6537.0 and analysis by Ann Harding in the Australian 25 Feb. 2002. Net of transfers, general government outlays in Australia represented 30.3 per cent of GDP in 1985, 26.1 per cent in 1995 and 23.1 per cent in 2000 (derived from Atkinson and van den Noord OECD 2001). The discussion which follows, apart from the specific sources cited, draws on Budget Papers and SCRCSSP Reports on Government Services 1995–2001. Papers by the Australian Catholic University, by the Vice Chancellors Committee (reported by Lawnham in the Australian Education Supplement 17 Apr. 2002) and by Melbourne’s Centre for the Study of Higher Education (Australian 27 Jul. 2002) forcefully bring this out. The tests used here are broadly those suggested by Marginson 2002. Austudy in Australia is a good example of the kind of assistance targeted at lowincome students. Non-completion refers to the numbers of young people who do not continue at secondary school beyond Year 10 or 11 or who leave during Year 12 without obtaining a Year 12 certificate. Rates fell from about 60 per cent in the early 1980s to 24 per cent in the early 1990s but increased by about 6 percentage points during the 1990s (Lamb, Dwyer and Wyn 2000). Kelley and Evans (2002, Chapter 3) say that ‘according to our analysis, the downturn (in Australian education completions) is actually larger than it looks, since it is big enough to have offset a presumed continuing increase stemming from economic growth’. Interestingly, university enrolments do not show a similar trend and Australian enrolment rates are high by international standards. Professor Don Anderson (Canberra Times 1 Jun. 2002) highlights the problems emerging for universities. The Disadvantaged Schools Program that provided staffing supplements to schools with a higher proportion of disadvantaged kids was wound up in many

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26

27

28

29

30

31

32

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states during the 1980s, although it still operates in New South Wales under a different name—the Priorities Schools Program. The total resources allocated are ‘small scale’ (Marginson 2002). Brendan Nelson, the Federal Minister for Education points out that each student who attends state schools receives more per capita government funding than each independent and Catholic student (Age 10 Jun. 2002). But the analysis of Ken Boston (former head of the NSW Dept. of Education) also allows for indirect subsidies and points to the narrowing gap in government funding and the additional private resources available to non-government school students. For example, the New South Wales Carr Government, in allocating educational funds, is targeting high schools with special crime and social problems (Gerard Noonan, Sydney Morning Herald 5 Jun. 2002). A Sydney Morning Herald editorial (15 Jun. 2002) commended the various innovations in state schools, some of them designed to deal with the particular needs of slow learners and the problem of high school drop-outs. The National Goals for Schooling to which all governments are party, ‘cannot be delivered under current financial arrangements’ (Boston, Sydney Morning Herald 13 Jun. 2002). There are, however, stresses in the health system. These include: shortages of many medical specialists; the rise in mental illness and decline in facilities for mentally ill patients (Australian 29–30 Apr. 2002); drug-related problems; suicide and asthma among our youth (Margaret Dean, Canberra Times 29 Jan. 2002). The latest Harris Interactive/Harvard School survey of health-care systems found that ‘one in five low income Australians admit not going to the doctor or specialist or failing to fill a drug prescription because they could not afford it’ (report by John Kerin in the Australian 4 Jul. 2002; see also Schofield 1997). Based on a separate study of New South Wales hospitals in the Sydney Morning Herald 5 Nov. 2001 and a recent study in the Medical Journal of Australia (reported in the Australian by Sarah Stock 21 Jan. 2002). Despite incentives for lower-income families to take up private insurance, this is not happening to a great extent (according to a report cited in Canberra Times editorial 19 Jan. 2002). True, private insurance membership has risen strongly and there has been a simultaneous easing in public hospital admissions, that is, the strain on the public hospitals has been lifted a little, although the extent of that is a matter of controversy. But it is estimated that the introduction of Lifetime Health Cover (which sets a premium ‘loading’ on those who become insured later rather than earlier) has been responsible for 85 per cent of the growth in the private insurance market. The insurance rebate played a smaller role and in any case it is ‘wasted’ on many higher-income people who would have insured anyway, as well as being inequitable. It has been estimated that for every $10 spent on the rebate by the government, only $2.50 benefits the public hospitals (Ross Gittins, Age 13 Nov. 2002). For example, it has been argued that ‘higher income adults using private dental

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insurance and dental care may receive nearly five times the public subsidy received by the aged pensioner seeking public dental care’—John Spencer, cited by Neal Blewett in Australian 18 Mar. 2002. And it is estimated that the gross income of the two higher income quintiles is supplemented annually by $12 billion of health benefits (Moore 2002). A recent study found that a previously tightly means-tested Health Card discouraged the transition from welfare to work for some people (ACOSS Impact, Sept. 2001). Cited by ACOSS media release 17 Jan. 2002. Also see recent study by Urban Development Institute reported in Canberra Times 21 Mar. 2002. The study was recently prepared by the University of Sydney’s Urban Frontiers Program (reported in Sydney Morning Herald 10 Dec. 2001). Studies cited in Brotherhood of St Laurence ‘Comment’, April 2002. There has been a gradual decline in overall levels of Commonwealth payments to the states (Julie Smith CEPR discussion paper forthcoming) and in relative spending on public goods (note 18), as well as an increasing emphasis on public debt reduction (Chapter 2). The problem is compounded by a reluctance to make use of private capital for social infrastructure (a policy which may now be changing—Australian Financial Review 11 Feb. 2002, pp. 52–3). The Blair Government is showing more support for the EU Social Chapter, which gives a voice to ‘social partners’ (bodies representing companies and unions) and endorses the establishment of work councils for worker consultation. Trade union membership has more than halved from 50 per cent of the work force 20 years ago to less than 25 per cent today. The loss of a sense of empowerment was probably a factor in the outcome of a recent ballot of workers organised by Rio Tinto that led to a rejection of the company’s workplace proposal. The vote revealed concern about both individual contracts and non-union agreement. It was felt that such arrangements left workers ‘with little power against the company’ (Bachelard, Australian 5 Apr. 2002). The Workplace Relations Minister, Tony Abbott, sees the imbalance of power quite differently. He recently expressed concern about ‘the inequality of power between large unions and smaller enterprises’ (Australian 1 Jul. 2002). In that narrow sense, he may well be right. But of course he is looking at a small part of the landscape, since 75 per cent of workers are not even unionised and there are many ineffective unions. Interestingly, productivity growth in the manufacturing industry has been slowing of late (Parham 2002, p. 7). See Davis 2000, pp. 239–40; and Economist 17 Jul. 1999, p. 55ff. Interestingly, The Netherlands, a country with the most extreme system of proportional representation and truly consensual in its approach to the workplace and government, does not show a similar trend. On Australia see p. 135. For example, a low-cost budget standard constructed by researchers at the Social Policy Research Centre under Peter Saunders in 1998 sought to determine what

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income was required, with frugal and careful management, to enable a household to participate in community affairs in line with minimum expected standards in Australia. It found that those earning below 50 per cent of median income were earning appreciably less than this relative poverty line. Saunders (2001a) examines the data comprehensively for the ABS, drawing on the Luxembourg Income Study, and concludes that the increase in market inequality since the mid 1980s ‘has been moderated but not eliminated by the social security and tax systems’ (p. 289). However, there is still some debate even among statisticians on what the figures produced by Harding, Saunders and others mean, so some caution is needed. There are concerns about sampling error, problems in defining income and the fact that the ABS Survey of Income and Housing Costs (SIHC) does not produce the same results as the Household Expenditure Survey (HES). SIHC shows a lesser increase in inequality in the late 1990s (ABS1370). Henry (2002) acknowledges that both HES and SIHC have limitations but states that he ‘would dissent particularly heavily the HESbased results reported by NATSEM’. Kids in families with incomes at the tenth percentile of the income distribution. The Howard Government has offered to pay up to $1000 per annum for those earning up to $20 000 and less than $32 500 on a dollar for dollar basis. But many of these potential beneficiaries are unlikely to be in a position to make substantial undeducted super contributions unless they have a well-paid spouse. Saunders and NATSEM, unlike Johnson et al., did not take account of trends in the social wage. Several studies have found an alarming level of poverty among tertiary students. See review of the literature in Patrick Lawnham, the Australian Education Supplement 17 Apr. 2002 We will argue in Chapter 7 that both these factors are unlikely to be sustained in the decade ahead without changes in public policy. This provided a tightly means-tested family allowance supplements, uniform rent assistance and a child disability allowance and involved a commitment to index all family related payments (See Gruen and Grattan 1993, p. 275 ff). These particular developments have even led some economists to the view that ‘Australia enters its second century in a state of social crisis’ (Borland, Gregory and Sheehan in Work Rich, Work Poor 2001).

Chapter 2 1 2

See ‘Economic liberalism’ and ‘Egalitarianism’ in the Glossary for a definition of these terms. Not all the efficiency expectations were achieved. For example, some misjudgments were made with the program of privatisation and outsourcing (Argy 2001b). Nevertheless, in overall terms, the reforms were largely successful in

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lifting productivity and improving macroeconomic performance (Argy 1998a and 2001a; Dowrick 2001). The argument here is not that liberal economic reform is the sole, or even the most important, potential source of rising market inequality. Obviously other factors like technological change, changes in patterns of spending, globalisation, etc. play a big part. Which is why attempts by big business interests in Australia to weaken the powers of the ACCC can have ugly effects not only on efficiency but also on equity. Some economists (such as Tanzi and Schuknecht 2000 and Freeman 2000) argue that certain forms of regulation are often preferable options—an issue returned to in Chapter 7. Henderson 1999b, Report of the Inquiry into the Financial System, AFSI 1981, 1.88. See surveys of economists in Argy 2001a. The perception that external deficits are intrinsically bad is beginning to change at last. It is important to stress that the relevant criterion is the ability to manage the risks associated with the project—not the credit-worthiness of the borrower. The mere fact that governments can raise capital more cheaply (at lower interest rates) is irrelevant. As liberal economists rightly point out, a proper evaluation of the public sector cost of capital (relative to the private sector) needs to allow for the implicit taxpayer guarantee to cover future project risk. The effective cost of capital hinges on the intrinsic risk characteristics of the project and the ability of the owner to manage those risks. A fuller discussion is in Argy et al. 1999, pp. 31–3. Revenue can finance a portion of capital expenditure if governments feel they need to contribute to net national saving, although the argument for even that limited proposition is far from conclusive. That said, some 40 per cent of health expenditure is spent on treating older retired persons; an increase in this form of spending might improve the health, life expectancy and quality of life of these persons but the implications for economic growth are rather unclear. This argument is also developed in Argy 1998a and 1999a. Some libertarian think tanks such as the Fraser Institute, the Institute of Public Affairs and the Centre for Independent Studies consider that even Australia is under-performing economically because it does not enjoy quite the same level of economic freedom as the United States (Kasper 2002a). But for reasons explained elsewhere (Argy 1998a, pp. 165–168), it is hard to accept the underlying presumption of these studies that additional doses of economic freedom necessarily improve economic performance, irrespective of the level of freedom at the start. For example, an increase in passive spending by 1 per cent of GDP would cumulatively reduce GDP over a period of some 25 years by 0.7 per cent. By

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comparison, an increase of one half-year in the average years of schooling in the working-age population would increase long-run GDP by over six percentage points. To illustrate, over the 1990s, average incomes showed a cumulative increase averaging about $7000 per household (Gary Banks, Australian 18 Feb. 2002) and the average real wealth of Australian households increased by some 50 per cent over the last decade (Simon Kelly 2002b, p. 13).

Chapter 3 1

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Headley and Wearing (1992, pp. 78ff) find that while there are differences in perceived general wellbeing between socioeconomic groups (with the poor reporting less life satisfaction), these differences are not large. This is also true of the findings of the Australian Personal Wellbeing Index (reported by Ross Gittins in Sydney Morning Herald 4 Sep. 2002). But the results are still significant for three reasons. First, the surveys do not distinguish between the long-term poor (the main focus of this book) and those who are temporarily poor. Second, once the wellbeing index is decomposed, it turns out that low-income families have a higher incidence of depression and are ‘clearly more dissatisfied with their jobs and standard of living’, but the poor report less dissatisfaction with their personal relationships (Headley and Wearing pp. 79–80). The surveys were conducted in the 1980s and there is now much more concern about personal relationships due to work stress than there was at that time. Thirdly, a small difference in ‘average’ wellbeing between social groups is consistent with appreciable differences at the margin (that is, in the satisfaction derived from each additional dollar). For example, see Dixon 1997; Frank 1997; Headley and Wearing 1992; and Argyle 2001. There is more discussion of related issues in Chapter 6 and in Argy 1998a. The trends need to be adjusted for shifts from tax benefits to cash outlays (as occurred, for example, with family allowances in the 1970s). The ‘baby bonus’ goes to families with incomes of between $50 000 and $75 000 and the first-home owners scheme was not means tested and gave benefits of up to $7000 to rich young professionals buying homes of $1m or more (Australian 10 May 2002). Self-funded retirees earning up to $50 000 have been given access to the Health Card, cheap prescriptions, phone bill concessions etc. See John Hewson ‘Join the Club, No Thanks’, Australian Financial Review 18 Jan. 2002. The number of volunteers performing community services did increase in recent years but this has more to do with the Sydney Olympics, fighting bushfires and ‘clean up’ campaigns than helping the needy. See Chapter 1 and note 4 above. Two points should be made, however. The numbers found to have cheated are

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quite small—less than 1⁄2 per cent of Centrelink’s 6.3 million clients—and efforts made to catch them are out of proportion to those made to catch tax cheats, where the savings are likely to be infinitely greater. These factors include an increase in ‘assortative mating’ by education (couples having similar educational qualifications) and what they call ‘locational factors’ (the economic isolation within our cities of households with low socioeconomic status). Dawkins also noted the contribution of demographic factors, notably the strong growth of single person households, including lone parent ones (Australian 25 Feb. 2002). For example, Christopher Pearson observed that ‘the welfare system is a major contributor to the unemployment impasse’ (Age 11 Mar. 2002). A senior Minister, Tony Abbott, said: ‘there are people for whom working has become more trouble than it’s worth’ and that welfare reform is ‘an important part of any effective strategy to tackle unemployment, particularly the hard-core unemployment’. The author is aware of anecdotal claims of young people turning up at interviews ‘with pins in their noses’ or otherwise looking unkempt and unemployable. Equally, however, employment officers on the ground do not perceive that as a common or widespread problem, although it undoubtedly exists. The authors did warn, however, that the increasing dispersion of earnings, if it continued, could create work disincentive problems. Since that paper, reforms have been introduced to alleviate the potential problem. A survey of unemployed people commissioned by the Department of Family and Community Services (DFaCS) (the Wallis Report June 2001) concluded that ‘the ethos of actively looking for work is widely held by Newstart Allowance and Youth Allowance unemployed customers’. A DFaCS paper, examining the growing dependence phenomenon, said: ‘Some people might interpret the increased incidence of employment among income support recipients as indicating adoption of part-time work supplemented by income support as a ‘‘lifestyle’’ choice. However, administrative data show conclusively that very few income support recipients adopt this pattern of income support reliance’ (Landt and Pech 2001, p. 47). Again CESC survey data confirms that unemployed Australians, like the unemployed elsewhere in the world, suffer from stress and low levels of subjective wellbeing compared with people in jobs (Saunders 2002, p. 97). So why would they prefer to remain unemployed? On the other hand, the government has recently released the results of a study which indicated that as many as one in six job seekers was ‘cruising’, that is, enjoying their freedom and leisure and not actively looking for work. This finding is based on an attitudinal survey of a sample of 3500 job seekers. The method of neatly categorising the unemployed into eight exclusive groups is highly subjective—one that could have yielded different outcomes if the questions had been put differently. The Federal Government is also asking state governments to extend their pensioner concessions (on energy, water, sewerage rates, car registration, trans-

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port, etc.) to all those eligible for the Seniors Health Card (which now embraces couples earning $80 000 a year). Although there was an improvement in benefit rates in the 1970s and 1980s, rates did not improve in the 1990s and eligibility conditions became generally less generous. The Howard Government widened some benefits in the last two Budgets. The source of these figures is an unpublished DFaCS paper by Whiteford, Morrow and Bond (2000). A book by Robert Putnam, Bowling Alone, has attempted to show quantitatively the ‘disappearing togetherness’ of modern societies. It has been argued that this phenomenon is in good part caused by excessive involvement of the state and that a lesser involvement would help rebuild social capital (Economist 31 Mar. 2001, p. 54). The credibility of that argument has been questioned in this Chapter. The unadjusted social expenditure data ignores three important considerations— how income taxes and social security contributions reduce the net income received by benefit recipients; the impact of indirect taxes; and the role of tax breaks with a social purpose. If these are allowed for and Australia is seen to have a ratio of ‘net’ social outlays to GDP of 21.9 per cent (a little higher than the gross figure) but still one of the lowest of the major OECD countries. It is, for example, much lower than the European and Scandinavian countries and even lower than the US (23.4 per cent, much higher than its gross figure). Such a view is put for example by Peter Saunders (ii) of the Centre for Independent Studies in Policy, Winter 2002, p. 37. A variation of the same theme is that because inequality has not increased much, and because affluence has increased, the Labor Party should stop worrying about the ‘bottom 10 or 20 per cent’ (Hamilton 2002). The present Governor of the RBA argued in a talk to CEDA (27 Apr. 1995) that such a bias exists. There has been a gradual increase in the number of endangered or extinct species, in land clearance and in greenhouse gas emissions during the last decade. As well, land degradation is still tending to rise and many rivers and dams are close to their maximum sustainable extraction limits. One bright spot is that air quality in Australia has improved. (Sources: ABS, ‘Measuring Australia’s progress’, March 2002; Hamilton and Denniss 2000; Ross Gittins’s article in Sydney Morning Herald 24 Apr. 2002). When public debt is domestically funded (has no net effect on external liabilities), interest is effectively paid by one group of Australians to another group of Australians. The debt servicing charges have no net impact on national income and hence on the standard of living of future Australians. It is only if public debt growth leads to a corresponding rise in net external debt that servicing costs become a net drain from the national income of future generations. See Dungey and Pitchford 1998 and 2001; Nevile 2000; Chapman and Kapuscinski 2000; Song, Freebairn and Harding 2001; and Argy 1998a, Chapter 3.

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There are some well-respected names in the profession (such as John Quiggin and Hugh Stretton) who want to see less emphasis on market-oriented, procompetition policies, more public ownership, selective increases in protection and regulation, etc. They correctly remind us of the pervasiveness of market failure and the limitations of liberal reform. But even they do not question the critical role of competitive markets in allocating resources. John Hyde, in a review of Coleman and Hagger Exasperating Calculations (2001), took the authors to task because ‘they feign a value-free objectivity that is not quite real. They are classical liberals—and it shows’ (Policy March 2001, p. 32). See, for example, Peter Jonson’s article in the Australian opinion pages, 29 May 2002. For a fuller analysis of the differences between hard and progressive liberalism, see Glossary. So defined, the term ‘Policy Elite’ is narrower than the so-called ‘power elite’ which include interest groups, politicians and anyone wielding power for a range of reasons including their wealth, hereditary rights, position or channels of influence, collusion, etc. The Elite wield power for their professional skills or talent. This is perhaps what the Minister for Communications, Richard Alston, meant when he said, with more than a little hyperbole, that ‘the imperatives of commercialism’ would prevent media giants from using their products to push a particular line. ‘If you went too far in either political direction you would lose half your audience’ (cited in Sydney Morning Herald 17 Jan. 2002). The perception that the ABC is consistently left-liberal in its leanings has not been borne out by actual studies of its programs by various independent inquiries. The latest is the National Audit Office, which found its news and current affairs programs ‘independent, accurate and impartial’, with a robust control of political and electoral broadcast matters to ensure neutrality (Australian 9 Apr. 2002). ABC political journalists vigorously and critically question politicians of both persuasion (Left or Right). That is their job. Individual ABC programs are often slanted but it is not consistently in one direction (especially if one looks beyond just the current affairs programs). Similarly, while it is easy to demonstrate the anti-egalitarian bias of commercial TV and radio by focusing on particular programs (such as the highlighting of dole cheating or bludging in a program aired by Channel 9 in February 2002, and the two well-known Sydney talk-back hosts), it would be unfair to generalise. What can be said is that ABC radio offers more diversity of views and programs than the commercial stations. The threat to the ABC comes from three sources. The ABC Board is stacked with committed Liberal supporters (Mike Steketee, Australian 2 Aug. 2001). Some of these non-executive directors have shown a willingness to interfere with program choice and presentation and to comment on editorial content and tone (Richard Ackland in Sydney Morning Herald 10 May 2002). And there is a

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systematic and vigorous campaign on the Right to portray the ABC as biased towards the Left. A suggestion to make the selection process for chief executives and directors of the ABC more transparent and arms-length deserves serious consideration. There are three constraints on RBA officials: the government’s ultimate veto power; the need to take account of financial market signals (Argy 2000 pp. 114ff) and the role played by the independent board (which is somewhat limited). It is also worth noting a revival of interest in short-term fiscal demand management, which might herald a bigger role for Treasury. The Tampa was the Norwegian vessel that rescued a number of refugees or professed refugees in 2001 and sought unsuccessfully to land them in Australia. Also known as the ‘children overboard’ affair because of a related incident when refugees allegedly threw their children overboard—an event subsequently found to be untrue. What came out was the high level of secrecy and protectiveness of the senior bureaucracy during the run-up to the election. The forced resignation of the winner of the 2001 Nobel for economics, Joseph Stiglitz, as chief economist of the World Bank in the late 1990s was widely attributed to United States pressures—given his softer views on market liberalisation.

Chapter 5 1

2 3

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A more encompassing definition is offered by Hurrell and Woods (cited in Keating 2000b): ‘the process of increasing interdependence and global enmeshment which occurs as money, people, images, values and ideas flow ever more swiftly and smoothly across national borders’. The Economist (29 Jan. 2000) defines globalisation as ‘a diminishing role for national borders and the gradual fusion of separate national markets (including especially global capital markets) into a single global marketplace’. Total pension fund assets represent almost 50 per cent of world GDP and are continuing to grow at a faster rate than GDP. Business opposition to progressive social policies is less evident in countries like Germany, Austria and The Netherlands with so-called ‘coordinated market economies’ (a term used by Estevetz-Abe et al. 2001). These are consensual societies where different elements of business cooperate with each other and with government in policy development. In such countries, business groups have made a major contribution to the development of social policy. For example, see ACCI release in Sydney Morning Herald 2 Jan. 2002; release by the ACP in Australian 14 Feb. 2002, p. 23; and the Business Council’s Aspire Australia agenda (Canberra Times 8 May 2002). Peter Jonson, a prominent company director, has urged governments to cut the top marginal rate of tax to

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30 per cent even though it would lead, at least in the short term, to a ‘further stretching of relativities of income and wealth’ (Australian 29 May 2002, p. 15) While strongly in favour of ‘smaller government’, business is not always on the side of the angels when it comes to economic liberalism. The major business groups and leaders pay lip service to the benefits of competition, yet strongly advocate a curtailment of the powers of the ACCC and a more relaxed stance on mergers and takeovers. In this, they are opposed by small business groups. There is, for example, a close association between the Centre for Independent Studies and the Business Roundtable in New Zealand; almost certainly the same links exist with Australian business. See, for example, the references to the role of the CIS in the interview with Greg Lindsay and comments by Wolfgang Kasper in Policy, vol. 17, no. 4, pp. 30 and 37 ff. Think tanks like the Australia Institute and the Whitlam, Chifley and Evatt Foundations start with normative values of the more egalitarian kind but they are much less well funded and their views do not attract the same widespread media attention. So it is not surprising that such think tanks are mostly struggling to have their voices widely heard (that is, other than by the converted) while those with unfriendly views towards egalitarianism are thriving in numbers and have the ability to receive mass media attention. The Australian Financial Review Magazine (Jul. 2002) claims with some justification that ‘The Centre for Independent Studies is today the most influential think tank in the country . . . no think tank is as quoted by so many, so often’. This is a view put by Friedman 1999; Ohmae and Reich cited in Keating 2000b, p. 11; and Frankel 2002) Reported statement by Jerry Jordan, former adviser to Ronald Reagan and head of the Federal Reserve Bank of Cleveland (Australian 23 Nov. 1999).

Chapter 6 1

The first two sections of this chapter draw on a range of opinion polls. The major ones are: • the Australian Election Study (AES); • the ANU’s International Survey Program; • Angus Reid Poll for the Economist (Economist 2 Jan. 1999); • Australian Social Monitor (ASM), Melbourne University; • the Coping with Economic and Social Change survey (CESC), Social Policy Research Centre, UNSW, reported in Saunders 2002; • the Withers et al. and Withers and Edwards surveys listed in the Bibliography; • various Newspolls, AC Nielsen surveys, ANOP surveys, Worldwide Attitudes, etc.; and

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• departmental surveys such as those made by the Department of Family and Community Services (Australian 14 Aug. 2000; Canberra Times 12 Dec. 2000). It is possible that voters are being put off by other parts of the agenda of these minor parties (Greens, One Nation, Democrats, etc.) but if so, it suggests their desire to roll back economic rationalism is less important to voters than other goals. Australia’s voting system is of course a big hindrance to minority parties seeking to win seats in the Lower House. But the experience of New Zealand and many European countries indicates that even a proportional voting system does not necessarily produce a significant reversal of economic liberal policies. When comparisons are made with a similar survey in 1994 (Withers et al. 1994) the hostility to ‘other welfare’ (such as government help for unemployed, single parents, indigenous people, newly arrived migrants, people with disability and those on public housing) seems to have hardened. And this is confirmed by a recent confidential survey for the government by the DFaCS (Australian, 14 Aug. 2000; Canberra Times 12 Dec. 2000) on attitudes to policies on the unemployed. More than one-third are in favour of penalising people if they refuse to move to areas where job opportunities exist (Sydney Morning Herald 4 Dec. 2000). As well, Australians appear to have become progressively less concerned about the environment generally (based on ABS surveys, reported by Alan Wood, Austra lian 28 Jan. 2002), although not about specific problems like salinity and water quality. Prime Minister John Howard in a speech to the Melbourne Press Club, reported Australian 23 Nov. 2000. To quote an editorial in Australian: ‘Robert Menzies used to say he saw the Party as a bird with two wings, and to fly it needed both of them. But one of those wings—the moderate one—has been severely clipped’ (28 Jan. 2002). This advocated reductions in some categories of welfare spending of up to 20 per cent through measures such as tightening the means test, cessation of unemployment benefits after nine months and extension of the waiting period for unemployment benefits. The then leader, John Hewson, also advocated major cuts in size of government, more independence for the RBA with a lower inflation target and a rapid acceleration in labour market reform, trade liberalisation and privatisation. Louise Dodson in Age 15 Mar. 2002. A former senior policy adviser to the Howard Government sees it as ‘pandering to middle-class insecurity’ (Greg Barns, Sydney Morning Herald, 28 Mar. 2002). A good example is Tony Abbott’s article in Australian of 26 Mar. 2002 (many of whose views were echoed subsequently in an editorial). In the article, Abbott threatened to take a more activist stance against trade union militancy and support the cause of employers, especially the smaller ones. He justified this by referring to the ‘bottomless pockets’ of unions, their propensity to ‘violence’ and ‘physical intimidation, their ‘contemptuous’ failure to pay judicial fines, etc. Of course these descriptions may well apply in some cases but it is the broad generalisations from the particular to the general which is so damaging. There

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are many instances of employer and managerial abuse too—but only a few leftwing extremists would generalise from individual cases to all business. Yet ‘there is much evidence to support the claim that given face-to-face contact, Australians remain tolerant and easy-going about race—if their politicians give them half a chance’ (Gerard Henderson, Sydney Morning Herald, 26 Mar. 2002). Denis Shanahan Australian 15 Feb. 2002. A recent example is the advice given by the Premier of New South Wales, Bob Carr, to Federal Labor. He urges them to give high priority to ‘fiscal restraint, low interest rates, balanced budgets, light touch regulation and private investment in roads and other infrastructure’ (cited in Australian Financial Review, editorial 11 Feb. 2002). In his recent book (2002, pp. 160–3) Carr stresses the overwhelming importance of protecting the State’s AAA credit rating and of debt reduction. Which is why Labor still attracts a high, although it seems a declining, proportion of blue-collar workers’ votes (Australian 3 Feb. 2001).

Chapter 7 1 2

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4

Recent studies show that rich women are having fewer and fewer children while the poor are as fertile as ever (Sydney Morning Herald, 7 Jul. 2002). For example, the New South Wales Government’s record of running eight budget surpluses in a row (and funding capital spending out of recurrent revenue) has been attacked in a Sun-Herald editorial (9 Jun. 2002). After pointing to deficiencies in hospitals, schools, police and child facilities, it said that ‘voters should not be impressed by the surplus mantra; it (a surplus) may be the toast of Sydney’s CBD but it won’t raise much of a cheer among needy families’. The sale of public assets has created a new and ever-growing class of low-to middle-income share investors and has made Australians the greatest share owners in the world (about half the population). While their holdings do not amount to much in most cases, they, nevertheless, become more cognisant of where the interests of investors lie. Thus the Economist (21 Oct. 2000) pointed to evidence that in the United States ‘shareholders are exercising more political influence’ and that they have ‘distinct priorities—notably a preference for school vouchers, tax cuts and less regulation’ and they are ‘driven by fear of leftist rhetoric’. There are four big limits on state government ambition in egalitarian policies. One is that state governments compete with each other. A second is that many state governments do not control the Upper House, which tends to be conservative. A third is that they have limited funding sources and still depend heavily on Federal support. And a fourth is that, constitutionally, the Commonwealth still has great ability to override the states on many issues. For example, in industrial relations, an attempt is being made to bring most workers under

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10

federal jurisdiction and to financially ‘bully’ state governments into adopting a more employer-friendly industrial relations agendas (for example, see Colebatch, ‘Abbott’s threat to cut state funds’, Age 10 Jun. 2002). As well, the Federal Industrial Relations Minister is demanding that the Victorian Government comply with national building industry labour standards before any federal cash will be spent on state projects (Crosweller in Australian 14 Jun. 2002). Fraser’s views are eloquently expressed in Kelly 2001 (interview p. 31ff.) and Chaney’s views are well captured in Byrski 2001 (interview p. 236ff.). Macphee had a brief article in Australian 7 Feb. 2002 in which he mooted the possibility of a third political force with ‘small l’ ideas. The main focus of his article was on a more humanitarian policy towards refugees, greater disengagement with Asia and a more active attack on environmental problems. The new leader of the New South Wales Liberal Party, John Brogden, is said to be a social progressive. At the time of writing there was the threat of a double dissolution election on the issue of border protection and asylum seekers. If that were to happen, it is conceivable the composition of the Senate would become more friendly to the Howard Government. The Government could then use its numbers to push through much more radical social and industrial relations legislation. Paul Kelly, Australian 14 Mar. 2002. Increased age dependency will be associated with declining youth dependency (Kinnear 2001), but savings from the latter will only cover a small part of the increased costs created by the former. For example, the projections assume that productivity growth will revert back to its long-term trend line, that is, it will slow appreciably relative to the trend of the last decade, and that senior workers will maintain the same level of participation in the work force as in the past. But why should productivity slow? And why will older workers—healthier, more active and facing a longer life span and highly sought after by employers in a tight labour market—not want to increase their work involvement? Male participation rates for those aged 35–64 have been falling over the last twenty years and can, especially with some official encouragement such as retraining support, return to former levels. As the Secretary of Treasury, Ken Henry, said in a recent speech, the scenario that retirees will ‘want to spend the remaining 25 to 30 years of their lives unemployed’ is ‘implausible’ (Henry 2002). There is a wide menu of policy options to choose from. For example, governments could: • increase the full-pension eligibility age for new retirees; • lift the bonus paid to people of retirement age who delay their retirement; • reduce the high marginal effective tax rates faced by retired people on incomes in excess of the tax-free threshold; • raise the amount of work retired persons can undertake before they begin losing their pension; • improve and assist retraining facilities for older workers;

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11

12 13

14 15 16 17

18 19 20

• attract more young immigrants; • widen the scope of compulsory superannuation, so as to reduce the number of Australians dependent on the age pension; and • resort more to more means-tested user-pays charges for health services. Employers will also need to overcome their cultural prejudice against older workers and they could be given an incentive to do so. The McClure Report on welfare reform (2001) acknowledged the need to raise the benefits payable to the unemployed to the same level as those payable to disabled persons. Instead, the Government in its 2002/3 Budget sought to do the opposite: bring down the benefits payable to those less disabled to the same level as the unemployed. As discussed in Argy 1998a; Borland 2001; Dawkins 2000; Keating 2000b; CEDA’s Pathways to Work (CEDA Bulletin March 2001); and Bell 2000. Borland (2001) is sceptical of the employment merits of a freeze on safety net wages, even with compensatory payments, as proposed by Dawkins and his fellow five economists. Borland suggested a better option might be to exempt some low-wage employees from payroll taxes. Argy 1998a saw a role for both payroll tax and tax credits (pp. 97–8 and 141). Ideas along these lines are also suggested by O’Donnell (2001, pp. 47–8). Recent steps by the Howard Government in that direction, although small, are welcome. Which need not involve huge additional outlays (Keating and Lambert 1998). Two papers by Dungey and Pitchford (listed in the Bibliography) find that demand was excessively curtailed in the 1980s and much of the 1990s. The economics editor of the Australian Financial Review, Alan Mitchell, observed that in the last cycle of monetary tightening ‘Australia was accused of erring on the side of protecting the economy against inflation—the RBA can afford to worry more about unemployment this time around’ (Australian Financial Review 13 Mar. 2002). Mitchell argued that the ‘natural’ rate of unemployment—the lowest rate sustainable with low inflation—is now much lower than it was, due to economic reform, a strong rebound in productivity growth and more intense competition. He cited evidence that ‘pushing through the natural rate could lower it further’. Similar views were expressed earlier by Argy (1998, Chapters 3 and 15). Fortunately, short-term fiscal and monetary management has been almost faultless in recent years, especially in response to the 2001 slow down. Quantum Market Research survey, reported by Cameron Stewart, Australian, 8–9 Jun. 2002. An example is the Playford partnership—a government/private collaborative venture to lift the depressed area of Peachey Belt (ACOSS Impact, May 2002). Labor premiers assume (rather simplistically) that public debt growth is political suicide. See Bob Carr 2002, p. 160. And they see no inconsistency between advocating ‘giving the under-serviced working class suburbs their fair share of services’ (Carr 2002, p. 141) and in the same breath vetoing any suggestion of higher public debt.

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21

22

23 24

25

26

Tanzi and Schuknecht argue that regulation, although less accountable and more economically costly, is sometimes an acceptable substitute for taxing and spending (2000, pp. 134, 203, 252). Richard Freeman (2000) argues that employment protection laws are not only the most effective way to prevent employee exploitation, but have little effect on overall level of employment or efficiency, that is, they have fewer economic costs than generally believed. The Howard Government has said it will look at university fees and possibly remove the cap on undergraduate fees. This proposal (surprisingly rejected by the Labor Opposition) could free up some government resources. See Stanley Fischer, the First Deputy Managing Director of the IMF, in IMF Seminar and Panel Discussion 1999, p. 3. Taxes on luxury owner-occupied homes transferred by inheritance have been suggested. Death duties (common in many countries including the United States) are highly progressive in their incidence and can help reduce the growing concentration of wealth. They are also relatively efficient taxes (because they do not distort the incentive to work and innovate and even the effect on saving is ambiguous) and could also assist in combating tax avoidance. But such taxes may not be big revenue raisers. A recent proposal to tax discretionary trusts as companies was ditched by the Howard Government! The reasons given are ‘industry concern’ and fears that any action might ‘impinge on regular usage’ of trusts. But the reality is that ‘reforms aimed at outlawing unfair use of trusts have been gutted by a Government too timid to take on vested interests such as farmers and small business’ (Steve Lewis, Chief Political Reporter of the Australian, 29 Aug. 2002). The contrast between the Government’s treatment of suspected tax cheats and its treatment of suspected welfare offenders could not be more stark. Hypothecated taxes offer a unique form of participatory democracy. The evidence, both in Australia and in the United States (Economic Policy Institute, Issue Brief 135, 22 Sep. 1999), is that most citizens don’t trust governments, so they don’t generally approve of higher taxes to pay for vague, unspecified government spending programs. But if they are asked to pay more tax to fund specific, well-defined government programs, they appear quite willing and supportive. Hypothecated taxes can capture well this desire, provided the government did some polling research beforehand to ascertain exactly what forms of government spending were most popular. As noted in Chapter 6, surveys suggest that Australians are willing to pay higher taxes in return for specific improvements in community services which they approve of. They have readily accepted taxes such as the Great Barrier Reef Levy, the guns levy and the stillborn Timor levy. So why not a health levy, a broader environment levy (or various ‘green taxes’), an education levy and even a poverty levy?

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Subject index Subject index

Aboriginals discrimination against xii, xiii education 21, 23, 27 employment 4 health 29–30, 31, 63 poverty 46 target of reform 151-2 academics 99–100, 105–6, see also elite; economists ageing of population see inter-generation equity arbitration system see wages; workers Australian Broadcasting Corporation (ABC) 101, 106–7, 182–3 Australian Competition and Consumer Commission (ACCC) 154, 184 Australian Council of Social Services (ACOSS) see welfare groups Australian Council of Trade Unions (ACTU) see trade unions Australian Chamber of Commerce and Industry (ACCI) see business Australian Industry Group (AIG) see business Australia Institute 184 Australian Labor Party (ALP) 126, 129–31, 144, 145, 146, 189, see also state governments; Carr Government Australian Industrial Relations Commission see wages; workers Australian Medical Association see health

Balance of Payments see external balance and debt Brotherhood of St Laurence see welfare groups Budget see government borrowing bureaucracy see official family business 100, 106–7,111–15, 146–7, 184, see also executive remuneration Carr Government 175, 186, 189 Centre for Independent Studies 113, 184 Chifley Foundation 184 churches see welfare groups commonwealth Grants Commission 152 community attitudes opinion polls studied 184–5 changing opinion climate 121–2, 140–4, 146–7, 158–9 views on economic liberalism 119– 20, 185 views on egalitarianism 120–3, 139– 40, 186 community services see government services communitarianism 98, 163 Department of Family and Community Services see FaCS disadvantaged workers see workers disabled persons see social spending East Asia 55

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economic freedom see economic liberalism economic liberalism community attitudes to 119–20 explained 163–5 distinction with hard liberalism 53–4, 95–6 potential conflict with egalitarianism 53–6 role in generating prosperity 53, 164– 5, 177–8 economic rationalism 95–6, 165, see also economic liberalism; hard liberalism economic reform see economic liberalism; efficiency; hard liberalism economists and economic liberalism 94–6 and hard liberalism 97–9, 165 and progressive liberalism 97–9, 142 see also elite Economic Planning Advisory Commission 40 education economic effects 62–4 extent of inequality 20–8, 174, 175 target of reform 28, 151 trends in inequality 22–7 efficiency balance with equity 48–9, 154 defined 95, 165 target of reform 153–4 egalitarianism community and political attitudes to 119–33 passim, 140–7, 158–60 defined 71–2, 165–7 economic implications 52–69 passim, 138, 153–5 and employment 89–93 evolution of xii, xiii, 1–51 passim, 134–5 future of 134–60 passim, 140–7 and globalisation 107–18 passim and the good society 72–5 myths about 159 pillars of xii, 1, 135 policy instruments 155–8 political influences on 144–7

retreat from 1–51 passim, 49-51, 135–8 revenue sources for 158 social effectiveness of 71–93 passim, 138 see also social spending elite defined 94, 99, 182 normative values of 99–106, 138–9 employment among inactive workers 2–3, 80–1, 83–4 and egalitarianism 6, 89–93 job distribution 1–6 jobless households 3 long-term unemployed 2, 14–15, 173 target of reform 149–50 environment and egalitarianism 41–2, 98, 167 erosion of capital 41, 88, 181 future call on government resources 140, 146 opinion polls on 185 role of conservation groups 116 target of reform 147–8 equal opportunity evaluation of performance 137–8 explained 72, 167 and government services 20–37 passim target of reform 151, 152 equity 167–8, see also egalitarianism Europe 65, 76, 78, 91 Evatt Foundation 184 executive remuneration 9, 113 external balance and debt 58, 60–1, 88–9, 103, 178 Family and Community Services (FaCS) 1–48 passim, 71–93, 149 financial markets see financial deregulation; globalization; business financial deregulation 33–4, 55, 164–5 fiscal policy see government borrowing foreign debt see external balance/debt Fraser Government 126, 145, 187 gender equity xii, xiii, 10, 135

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globalisation defined 108, 168, 183 future pressure on egalitarianism 141–3 and the power structure 111–8 passim, 139 and social policy 109–11, 139, 143 good society and egalitarian values 72–4 defined 72 government borrowing arguments against 61–2, 186 as contra-cyclical device 153–4, 188 and intergenerational equity 62, 88-9, 181 outlook for 141 role in egalitarian society 50 target of reform 155–6 government services 19–37 passim, 50, 174, 176, see also education; health; housing; public transport Governor General, Dr Peter Hollingworth 37, 74 hard liberalism and business/finance 111–2 defined 97, 168–9 future of 140–7 passim influence on elite 99–107 passim as practiced in Australia 53–4, 127–8 Hawke/Keating Governments 20, 48–9 health extent of inequality 28-32, 175, 176 and private insurance 31, 32, 175 target of reform 32, 151 trends in inequality 30–2 homelessness see housing housing extent of inequality 32–5 homelessness 34–5 target of reform 35, 151 Howard Government ideology 124–9, 145 leadership qualities 124, 128, 129 policies on: education 25, 27, 189 egalitarianism 48–9, 123, 125–8,

employment 36, 92 industrial relations 39–40 rural disadvantage 31–2, 38–9 superannuation 177, 188 taxation/budgets 18, 127–8, 189 welfare 13–15, 17, 80, 81, 188 views of: John Howard 125, 127–9 Peter Costello 89, 129 Tony Abbott 16, 123, 126, 127, 129, 180, 185–6, 187 human rights 40, 137–8 income and wealth distribution by age 44–5 data limitations 42, 173, 177 by income and wealth 43–8 target of reform 152 trends 43–8 ideological liberalism 169, see also hard liberalism; progressive liberalism immigrants 50 indigenous people see Aboriginals industrial democracy see workers industrial relations see wages; workers industry policy 150, 154 insecurity jobs 5 incomes 10–11 Institute of Public Affairs 113 Institute of Private Enterprise 113 intergenerational equity 62, 87–9, 146, 187–8 international collaboration 157 International Labor Office 103, 105, 157 International Monetary Fund (IMF) 103–4, 157 Keating Government see Hawke/Keating Government labour market programs see employment Liberal Party of Australia (LP) 125–6, see also Howard Government

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media bias 100–1, 182 Menzies Government 125–6 Menzies Research Centre 113 Mexico 55 microeconomic reform see economic liberalism middle class welfare see social spending monetary management 69, 188 multinationals see business mutual obligation see work for the dole neoclassical economics see economic liberalism Netherlands 65 New Zealand 49, 55, 76, 87, 91, 135 non-cash government benefits see government services non-government organizations (NGOs) 116–7 OECD 103, 105 official family 101–3 opinion polls see community attitudes policy elite see elite political leadership 124–5, 129, 131–3, see also Howard Government poverty defined 169-70 extent of 42–3, 45–6, 176–7 target of reform 148–9, 188 see also income; wealth distribution privatisation see economic liberalism; government borrowing Productivity Commission 105 progressive liberalism as practiced in Australia 48–9 explained 170–1 influence on economists and elite, 97–9, 99–107 passim future of 140–7 passim public debt see government borrowing public infrastructure see government borrowing public opinion see community attitudes Public Service see official family public transport inequality of access 35–6 target of reform 151

regional inequalities in education 22 in health 31–2 in income and employment 37–9 target of reform 39, 152 regulation retreat from 48, 54–6 role in egalitarian society 156–7, 189 Reserve Bank of Australia 101–2, 181, see also monetary management Russia 55 savings 57–8, 156, 178, 189 Senate 145–6, 187 share ownership 142–3, 186 social capital 39–40, 135, 181, see also communitarianism social entrepreneurship 151, 155 social infrastructure see government services social mobility 78 social movements see NGOs social reform past developments 13–15, 48-9, 134–5 future possible agenda 147–58 passim social spending and churning 76–7 and the good society 71–5 and intergenerational equity 87–9 as means to higher employment 92, 150 and middle-class welfare 77, 84, 138, 142, 157 and social need 84–6 economic benefits 62–5 economic costs 54–62 effects on: future of 140–7, 188 private welfare 77 statistical deficiencies 181 social mobility 78 trends 75–7 welfare dependence 78–84, 122, 138, 152–3, 173, 179–80 social wage see government services

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state governments on education 25–8, 175, on borrowing 130, 186, 189 on taxation policy 18 power of 144, 145–6, 186–7 superannuation and Howard Government 177, 188 contribution to egalitarianism 44, 47, 49 taxation inequities 158 Tasman Institute 113 taxation decline in progressiveness 18–19, 174 economic costs of 57–60 future revenue sources 157–8, 189-90 increasing burden on workers 67 pressure to reduce 174 think tanks defined 171 independent 105–6 ideologically affiliated 113, 184 trade unions 40, 41, 115, 157, 176 training see education Treasury 60–1, 87, 101–3, 187 unemployment see employment

United Kingdom 49, 55, 78, 80, 87, 135 United States 55, 65, 66, 78, 87, 91, 104, 135 Universities see academics; economists; education wages trends 7–10 and unemployment 90–2 see also workers wealth distribution see income; wealth distribution welfare and welfare dependence see social spending; egalitarianism welfare groups 13, 14, 15, 115–16, 123, 173 Whitlam Government 20, 26, 48 women see gender equity workers low paid target of reform 149 voice in workplace 39–41, 176 wages 6–10 working conditions/hours 10–12, 173 see also regulation; trade unions work for the dole 15–16, 153

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Where to from Here?: Australian Egalitarianism Under Threat

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Nonlinear Dynamics and Chaos: Where Do We Go From Here

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Here Where the Sunbeams are Green

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Anthropology and Egalitarianism: Ethnographic Encounters from Monticello to Guinea-Bissau

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Where to from Here?: Australian Egalitarianism Under Threat

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From Here to Maternity

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From Eternity to Here

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From Eternity to Here

From Here to enternity

From Eternity to Here

From Here to Maternity

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Nonlinear Dynamics and Chaos: Where Do We Go From Here

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From Here to There and Back Again

Here Where the Sunbeams are Green

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