2. HSC ECONOMICS 2006 TOPIC: ECONOMIC ISSUES DISTRIBUTION OF INCOME & WEALTH

3. Introduction Despite sustained economic growth, lower unemployment and higher productivity and structural change Australia has become a more divided society i.e. the degree of inequality in income and wealth is growing. This is compared to OECD countries. Despite sustained economic growth, lower unemployment and higher productivity and structural change Australia has become a more divided society i.e. the degree of inequality in income and wealth is growing. This is compared to OECD countries.

4. Introduction The creation of a more efficient and international competitive economy have been major factors contributing to increased inequality. The creation of a more efficient and international competitive economy have been major factors contributing to increased inequality. The tax system becoming more regressive, welfare payments, deregulated labour markets and reductions in Government services all contribute to the increase in the degree of inequality. The tax system becoming more regressive, welfare payments, deregulated labour markets and reductions in Government services all contribute to the increase in the degree of inequality.

5. This topic will cover: Measuring Wealth & Income Distribution Measuring Wealth & Income Distribution Sources of Income as a % of household income Sources of Income as a % of household income Sources of Wealth Sources of Wealth Dimensions & Trends, according to trends, age, occupation, ethnic background and family structure. Dimensions & Trends, according to trends, age, occupation, ethnic background and family structure. Economic and Social Costs & Benefits of Income Distribution Economic and Social Costs & Benefits of Income Distribution Government policies and their impact on income and wealth distribution Government policies and their impact on income and wealth distribution

6. Measuring Income & Wealth Measuring wealth and income is complex. Firstly income is a Measuring wealth and income is complex. Firstly income is a Flow concept measured in money terms, indicating a return to individuals or households for sale of factors of production over time. Flow concept measured in money terms, indicating a return to individuals or households for sale of factors of production over time. Research focuses on disposable income rather than final income because of the difficulty in calculating the social wage expenditures, such as schools and hospitals. Households are a single income unit. Research focuses on disposable income rather than final income because of the difficulty in calculating the social wage expenditures, such as schools and hospitals. Households are a single income unit.

7. Types of Income Market (Private) income i.e. from employment & investments Plus cash transfers, e.g. dole & pensions Gross Income Minus income tax Disposable Income Plus social wage Less indirect taxes Final Income

8. Income Inequality Income Inequality refers to the degree to which income is unevenly distributed among income earners. Income Inequality refers to the degree to which income is unevenly distributed among income earners. It is measured by the LORENZ CURVE (graphical) and GINI CO- EFFICIENT (mathematical). It is measured by the LORENZ CURVE (graphical) and GINI CO- EFFICIENT (mathematical).

9. The Lorenz Curve The Lorenz curve measures the degree of income inequality compared to the line of absolute inequality. The more concave the curve the more income distribution becomes unequal. The Lorenz curve measures the degree of income inequality compared to the line of absolute inequality. The more concave the curve the more income distribution becomes unequal. When reading the curve the axis shows cumulative percentages for income recipients (horizontal axis), expressed in deciles or quintiles and for real income (vertical axis). When reading the curve the axis shows cumulative percentages for income recipients (horizontal axis), expressed in deciles or quintiles and for real income (vertical axis).

10. Lorenz Curves for Income and Wealth Income Units Income Wealth Income Units Income Wealth Cumulative Cumulative Cumulative Cumulative Cumulative Cumulative PercentagePercentagePercentagePercentagePercentagePercentage a Lowest 20204400 bSecond 204091333 cThird 206015281013 dFourth 208024522235 e Highest 201004810065100

11. Income and Wealth in Australia 1999-2000 Line of equality

12. Interpreting the Lorenz Curve If income were distributed evenly across the whole population, the Lorenz curve would be the diagonal line through the origin of the graph. If income were distributed evenly across the whole population, the Lorenz curve would be the diagonal line through the origin of the graph. The Gini coefficient is defined as the ratio of the area between the actual Lorenz curve and the diagonal (or line of equality) and the total area under the diagonal. The Gini coefficient is defined as the ratio of the area between the actual Lorenz curve and the diagonal (or line of equality) and the total area under the diagonal. The Gini coefficient ranges between zero when all incomes are equal and one when one unit receives all the income, that is, the smaller the Gini income. The Gini coefficient ranges between zero when all incomes are equal and one when one unit receives all the income, that is, the smaller the Gini income.

13. Income and Wealth in Australia 1999-2000 Income Line of equality

14. Income and Wealth in Australia 1999-2000 Income Wealth Line of equality

16. Interpreting the graph Normally the degree of inequality is greater for the whole population than for a subgroup within the population because subpopulations are usually more homogeneous than full populations. homogeneous than full populations. Normally the degree of inequality is greater for the whole population than for a subgroup within the population because subpopulations are usually more homogeneous than full populations. homogeneous than full populations. This is illustrated in the graph below, which shows two Lorenz curves from the 2003–04 Survey of Income and Housing. This is illustrated in the graph below, which shows two Lorenz curves from the 2003–04 Survey of Income and Housing.

17. Interpreting the Lorenz Curve The Lorenz curve for the whole population of the survey is further from the diagonal than the curve for persons living in one parent, one family households, with at least one dependent child. The Lorenz curve for the whole population of the survey is further from the diagonal than the curve for persons living in one parent, one family households, with at least one dependent child. Correspondingly, the calculated Gini coefficient for all persons was 0.294 while the coefficient for the persons in the one parent households included here was 0.247.coefficient the more even the distribution of income Correspondingly, the calculated Gini coefficient for all persons was 0.294 while the coefficient for the persons in the one parent households included here was 0.247.coefficient the more even the distribution of income

18. Interpreting the Data Refer to diagrams and tables 0n page 198 & 199 (Dixon) and answer the questions below: Refer to diagrams and tables 0n page 198 & 199 (Dixon) and answer the questions below: Comment on the individual and overall trends in income distribution from 1995-2004 based on the information provided in Figure 11.1 Comment on the individual and overall trends in income distribution from 1995-2004 based on the information provided in Figure 11.1 __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________ __________________________________________________

19. Interpreting the data (cont.) Based on the information provided in Figure 11.2 approximately comment on the following: Based on the information provided in Figure 11.2 approximately comment on the following: a. Australia has equality of income distribution. Justify you response. ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

20. Interpreting the data (continued) What implications exist for income inequality if the Lorenz curve moved closer to the line of equality? What implications exist for income inequality if the Lorenz curve moved closer to the line of equality? __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________

21. The GINI-COEFFICIENT The Gini co-efficient is a way of calculating income inequality for the Lorenz curve. It’s the ratio between the line of absolute inequality and the Lorenz Curve as indicated by A and the total area below the line of absolute equality as indicated by A+B. The larger the co-efficient the greater the income inequality, the co-efficient range is between zero (0) for absolute equality and one (1) for absolute inequality. The Gini co-efficient is a way of calculating income inequality for the Lorenz curve. It’s the ratio between the line of absolute inequality and the Lorenz Curve as indicated by A and the total area below the line of absolute equality as indicated by A+B. The larger the co-efficient the greater the income inequality, the co-efficient range is between zero (0) for absolute equality and one (1) for absolute inequality. Therefore the smaller the co-efficient, the less income equality i.e. more even distribution of income. Therefore the smaller the co-efficient, the less income equality i.e. more even distribution of income.

22. GINI CO-EFFICIENT The Gini co-efficient hovers around 0.3 for Australia from 2000 it has was 0.311 and in 2004 it was 0.294. The Gini co-efficient hovers around 0.3 for Australia from 2000 it has was 0.311 and in 2004 it was 0.294. GINI CO-EFFICIENT (G) = _A___ GINI CO-EFFICIENT (G) = _A___ A + B A + B

23. The Gini Co-efficient A B % of I N C O M E % of HOUSEHOLDS 0 100

24. GINI COEFFICIENT The Gini coefficient is a single statistic which summarises the distribution of income across the population. The Gini coefficient can best be described by reference to the Lorenz curve. The Gini coefficient is a single statistic which summarises the distribution of income across the population. The Gini coefficient can best be described by reference to the Lorenz curve. The Lorenz curve is a graph with horizontal axis showing the cumulative proportion of the persons in the population ranked according to household income and with the vertical axis showing the corresponding cumulative proportion of equivalised disposable household income. The Lorenz curve is a graph with horizontal axis showing the cumulative proportion of the persons in the population ranked according to household income and with the vertical axis showing the corresponding cumulative proportion of equivalised disposable household income. cumulative proportion of equivalised disposable household income. The graph then shows the income share of any selected cumulative proportion of the population, as can be seen below. cumulative proportion of equivalised disposable household income. The graph then shows the income share of any selected cumulative proportion of the population, as can be seen below.

25. MEASURING THE DISTRIBUTION OF WEALTH IN AUSTRALIA Measuring wealth is more complex and relies on surveys. NATSEM attempts to do this. Measuring wealth is more complex and relies on surveys. NATSEM attempts to do this.

26. Interpreting data Refer to p.200 and answer the following questions. Refer to p.200 and answer the following questions. Comment on the degree of wealth inequality in Australia; use an example to illustrate your response. Comment on the degree of wealth inequality in Australia; use an example to illustrate your response. __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________

27. Interpreting the data Comment on whether wealth distribution has improved or deteriorated over the past 80 years. Comment on whether wealth distribution has improved or deteriorated over the past 80 years. ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________

28. DISTINGUISHING BETWEEN INCOME AND WEALTH

29. Personal Income is the flow of funds received by individuals or households mainly from the sale of factors of production Personal Income is the flow of funds received by individuals or households mainly from the sale of factors of production Personal Wealth refers to the value of assets of a person or household, stock of assets e.g. shares, bonds, bank deposits and property. Personal Wealth refers to the value of assets of a person or household, stock of assets e.g. shares, bonds, bank deposits and property.

30. FOCUS QUESTIONS Distinguish between wealth and income. Distinguish between wealth and income. ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________

31. FOCUS QUESTIONS Explain how the following can be used to measure the degree of inequality in the distribution of income: Explain how the following can be used to measure the degree of inequality in the distribution of income: The Lorenz Curve (explain using diagram) The Lorenz Curve (explain using diagram) _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________

32. FOCUS QUESTIONS The Gini coefficient ( explain using numerical examples) The Gini coefficient ( explain using numerical examples) ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________

33. FOCUS QUESTIONS Explain the relationship between income inequality and wealth inequality. Explain the relationship between income inequality and wealth inequality. ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________

34. SOURCES OF INCOME- p.200-201 Dixon Wages from the sale of labour Wages from the sale of labour Rent from land Rent from land Interest (from sale of capital) Capital Interest (from sale of capital) Capital Profits from sale of entrepreneurial skills Profits from sale of entrepreneurial skills social welfare social welfare

35. The ABS divides income flow into two categories based on GDP: compensation to employees in the form of wages, salaries and other benefits compensation to employees in the form of wages, salaries and other benefits Gross operating surplus- value of profits, rents and interest earned by organisations and individuals or PROPERTY INCOME Gross operating surplus- value of profits, rents and interest earned by organisations and individuals or PROPERTY INCOME

36. Additional Income Transfer payments are received by about 1/3 of households but are not included in GDP as it is not earned but simply a transfer of income from one group to another. Transfer payments are received by about 1/3 of households but are not included in GDP as it is not earned but simply a transfer of income from one group to another. For most households wages & salaries form the main income with transfer payments coming in as second. For most households wages & salaries form the main income with transfer payments coming in as second. Even though we have one of the highest share ownership rates in the world income from these sources is less than 10%. Even though we have one of the highest share ownership rates in the world income from these sources is less than 10%.

37. Copy pie chart on page 201 Fig. 11.4 into you notes

38. SOURCES OF WEALTH IN AUSTRALIA

39. SOURCES OF WEALTH IN AUSTRALIA pp.201- 202(Dixon) Value of assets owned less value of liabilities owed. Value of assets owned less value of liabilities owed. The composition of wealth includes: The composition of wealth includes: –dwelling capital –business capital –consumer durables –government securities –money base –Australian investments abroad

40. Focus Questions Examine Figure 11.5 p.202 and answer the following questions Examine Figure 11.5 p.202 and answer the following questions Which two components make up the largest percentage of wealth in Australia? Justify your response. Which two components make up the largest percentage of wealth in Australia? Justify your response. ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________

41. Distribution of wealth In 2005 according to Federal Treasury the value of private sector wealth has increased by 9.9%, this is despite a slowing economy. In 2005 according to Federal Treasury the value of private sector wealth has increased by 9.9%, this is despite a slowing economy. This is still greater than a 7% average over the last two decades. Net private sector wealth is $6,217 billion – equivalent to $305,000 per Australian. This is still greater than a 7% average over the last two decades. Net private sector wealth is $6,217 billion – equivalent to $305,000 per Australian. The strong performance of the sharemarket has been the greatest contributing factor. Despite this the largest source of wealth (58%) is represented in the family home. The strong performance of the sharemarket has been the greatest contributing factor. Despite this the largest source of wealth (58%) is represented in the family home.

42. How does a nation Accumulate Wealth? Increases in the quantity and quality of the factors of production Increases in the quantity and quality of the factors of production Increases in the production of capital Increases in the production of capital Higher levels of economic growth are associated with higher levels of investment Higher levels of economic growth are associated with higher levels of investment Willingness to tap into export markets – that is to gain a % of wealth in foreign nations Willingness to tap into export markets – that is to gain a % of wealth in foreign nations Foreign entrepreneurs by providing scarce savings and technology Foreign entrepreneurs by providing scarce savings and technology Monetary measures e.g. inflation Monetary measures e.g. inflation

43. How do individuals accumulate wealth? surplus income i.e. savings surplus income i.e. savings existing wealth existing wealth inheritance inheritance personal qualities- inventiveness, innovation, entrepreneurial skills personal qualities- inventiveness, innovation, entrepreneurial skills luck luck in inflationary periods the choice of assets e.g. real estate in inflationary periods the choice of assets e.g. real estate

44. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH pp.202-208 The extent of inequality has fallen in recent years it is still high when compared to other industrialised nations The extent of inequality has fallen in recent years it is still high when compared to other industrialised nations Refer to Fig. 11.6 p.203 Refer to Fig. 11.6 p.203 almost 60% of people earn less than the mean income almost 60% of people earn less than the mean income a relatively small % of households have high income while a large number have relatively low incomes a relatively small % of households have high income while a large number have relatively low incomes

45. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH pp.202-208 Dixon Some groups are more affected than others by inequality of income. This depends on Some groups are more affected than others by inequality of income. This depends on age age gender gender occupation occupation cultural background cultural background family type family type geography geography

46. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH Prepare summaries using the above categories: Prepare summaries using the above categories: age____________________________ ______________________________ ______________________________ ______________________________ _____________________________ age____________________________ ______________________________ ______________________________ ______________________________ _____________________________ gender_________________________ ______________________________ ______________________________ ______________________________ ______________________________ gender_________________________ ______________________________ ______________________________ ______________________________ ______________________________

47. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH occupation occupation __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ _______________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ _______________

48. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH cultural background cultural background __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ __________________________________

49. TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH family type family type _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ _________________________________________ geography geography ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________

50. FOCUS QUESTIONS Outline how age and gender can influence the distribution of income. Outline how age and gender can influence the distribution of income. __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________

51. FOCUS QUESTIONS Discuss the general trends in the distribution of income and wealth in Australia in recent year. Discuss the general trends in the distribution of income and wealth in Australia in recent year. ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________

52. THE COSTS AND BENEFITS OF INEQUALITYpp.208-211 The cost and benefits of inequality are divided into economic and social BENEFITS Economic Social

53. COSTS OF IINEQUALITY Economic Economic Social Social

54. FOCUS QUESTIONS Outline the economic costs and benefits associated with income inequality. Outline the economic costs and benefits associated with income inequality. _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________

55. FOCUS QUESTIONS Outline the social costs and benefits associated with income inequality. Outline the social costs and benefits associated with income inequality. ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 54 ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 54

56. What Effect have Government Policies Had on Income and Wealth Distribution in Australia?

57. GOVERNMENT POLICIES & INEQUALITY The overall objective of government is to achieve a fairer distribution of income. Governments accept that the operation of the free markets will produce unfair outcomes for some individuals. The overall objective of government is to achieve a fairer distribution of income. Governments accept that the operation of the free markets will produce unfair outcomes for some individuals.

58. GOVERNMENT POLICIES & INEQUALITY Government does not see its aim to remove all inequalities but generally accepts its responsibility to make provisions for the needs of people who cannot provide for themselves- such as the aged, people with disabilities or illness and those unable to find work. This is represented in the fact that most of the Federal Governments budget each year is spent on Social Security. Government does not see its aim to remove all inequalities but generally accepts its responsibility to make provisions for the needs of people who cannot provide for themselves- such as the aged, people with disabilities or illness and those unable to find work. This is represented in the fact that most of the Federal Governments budget each year is spent on Social Security.

59. GOVERNMENT POLICIES & INEQUALITY In general, government policies aim to reduce some of the gap between higher and lower income earners through redistribution policies such as higher tax rates for higher income earners and social security payments for lower income earners, especially those with families. In general, government policies aim to reduce some of the gap between higher and lower income earners through redistribution policies such as higher tax rates for higher income earners and social security payments for lower income earners, especially those with families. In recent years there has been less of an emphasis on reducing inequalities, instead the government has focused on low inflation, economic growth, increased savings, lower unemployment and lower CAD. In recent years there has been less of an emphasis on reducing inequalities, instead the government has focused on low inflation, economic growth, increased savings, lower unemployment and lower CAD. They argue that strong growth will benefit all income earners at all levels rather than policies to redistribute income to lower income earners. They argue that strong growth will benefit all income earners at all levels rather than policies to redistribute income to lower income earners.

60. GOVERNMENT POLICIES & INEQUALITY Government policies can influence inequality both direct and indirectly. Government policies can influence inequality both direct and indirectly. Fiscal and labour market policies generally have the most direct impact through changing the level of benefits, taxation and wages. However the side- effects of microeconomic reforms undertaken in the Australian economy can also affect inequality. Fiscal and labour market policies generally have the most direct impact through changing the level of benefits, taxation and wages. However the side- effects of microeconomic reforms undertaken in the Australian economy can also affect inequality. Despite the extensive micro reforms undertaken in Australia income inequality remains little unchanged from a decade ago due to the fall in the unemployment rate and the general success of policies to redistribute income to lower income households. In other words it has not got better but it has not got worse either. Despite the extensive micro reforms undertaken in Australia income inequality remains little unchanged from a decade ago due to the fall in the unemployment rate and the general success of policies to redistribute income to lower income households. In other words it has not got better but it has not got worse either.

61. MACROECONOMIC WEAPONS Fiscal Policy: Fiscal Policy: Patterns in government spending and revenue collection have the most impact on inequality in Australia. Patterns in government spending and revenue collection have the most impact on inequality in Australia. Overall government intervention tends to reduce income inequality by taxing higher income groups more and redistributing to lower economic groups (i.e. through the progressive tax system). Overall government intervention tends to reduce income inequality by taxing higher income groups more and redistributing to lower economic groups (i.e. through the progressive tax system). However it is government payments to the unemployed, low income earners and the elderly, and the provision of government services such as health, education and housing are the primary mechanisms for reducing disadvantage in Australia. However it is government payments to the unemployed, low income earners and the elderly, and the provision of government services such as health, education and housing are the primary mechanisms for reducing disadvantage in Australia.

62. Examine Fig. 11.15 p.213 and comment on the impact on inequality of government intervention through the tax system. __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________

63. MACROECONOMIC WEAPONS GST: the introduction of a regressive tax has the impact of increasing GST: the introduction of a regressive tax has the impact of increasing income inequality for lower and fixed income earners. income inequality for lower and fixed income earners. WEALTH TAX: Changes to capital gains tax and no tax on inheritance ensures that the more income to more wealth cycle continues. WEALTH TAX: Changes to capital gains tax and no tax on inheritance ensures that the more income to more wealth cycle continues. The absence of tax on wealth is justified by the emphasis on incentivisation by the Howard government i.e. the fewer barriers to wealth accumulation the greater economic efficiency will result in a stronger incentive to accumulate wealth overall. The absence of tax on wealth is justified by the emphasis on incentivisation by the Howard government i.e. the fewer barriers to wealth accumulation the greater economic efficiency will result in a stronger incentive to accumulate wealth overall.

64. The 2005-06 Budget The 2005-06 Budget will have a mixed impact on the distribution of income, but overall the effect is likely to increase income inequality. The 2005-06 Budget will have a mixed impact on the distribution of income, but overall the effect is likely to increase income inequality. The changes in the Budget were: The changes in the Budget were: Taxation: Taxation: a. reduction the lowest marginal income rate from 17% to 15% will give lower income earners a larger proportional taxcut. a. reduction the lowest marginal income rate from 17% to 15% will give lower income earners a larger proportional taxcut. b. changes to the two top income tax brackets will much larger b. changes to the two top income tax brackets will much larger cuts for high income earners cuts for high income earners c. the combined effect will make the taxation system less progressive. c. the combined effect will make the taxation system less progressive.

65. Net Personal Income Tax Brackets and Rates (excludes Medicare levy) Tax Brackets 2003/04 Current tax Brackets 2004/05 Brackets from 1/7/05Brackets from 1/7/06 $0 – $6,000 0% $6,001 – $21,600 17% $21,601 - $52,000 30% $52,001 – $62,500 42% Over $62,500 47% 0-$6,000 0% 6,001-21,600 17% 21,6001-58,000 30% 58,001-70,000 42% 70,000+ 47% 0-6,000 0% 6,001-21,600 15% 21,601-63,000 30% 63,001-95,000 42% 95,000+ 47% 0-6,000 0% 6,001-21,600 15% 21,6001-70,000 30% 70,001-125,000 42% 125,000+ 47%

66. Tax Brackets 2003/04Current tax Brackets 2004/05 $0 – $6,000 0% $6,001 – $21,600 17% $21,601 - $52,000 30% $52,001 – $62,500 42% Over $62,500 47% 0-$6,000 0% 6,001-21,600 17% 21,6001-58,000 30% 58,001-70,000 42% 70,000+ 47%

67. Brackets from 1/7/05Brackets from 1/7/06 0-6,000 0% 6,001-21,600 15% 21,601-63,000 30% 63,001-95,000 42% 95,000+ 47% 0-6,000 0% 6,001-21,600 15% 21,6001-70,000 30% 70,001-125,000 42% 125,000+ 47%

68. Budget 2006-07 – There has been much discussion about further changes to the taxation system. – There has been much discussion about further changes to the taxation system. WATCH THIS SPACE WATCH THIS SPACE

69. MACROECONOMIC WEAPONS Welfare to Work: The principle of mutual obligation (i.e. income support is dependent on willingness to seek work or re-enter education). Welfare to Work: The principle of mutual obligation (i.e. income support is dependent on willingness to seek work or re-enter education). New applicants for Parenting Payments and Disability Support Pension who do not actively seek work receive the lower Newstart welfare payment, is also likely to cause an increase in inequality if these individuals do not receive adequate support to find employment New applicants for Parenting Payments and Disability Support Pension who do not actively seek work receive the lower Newstart welfare payment, is also likely to cause an increase in inequality if these individuals do not receive adequate support to find employment

70. MACROECONOMIC WEAPONS ‘Social wage’ type government spending on health, housing and education since 1996 have seen: ‘Social wage’ type government spending on health, housing and education since 1996 have seen: sharp spending in a wide range of the social wage matters sharp spending in a wide range of the social wage matters dismantling of dental services dismantling of dental services sharp reductions in education spending growth concentrated on the tertiary sector sharp reductions in education spending growth concentrated on the tertiary sector restraints on spending growth in health- hospitals, Medicare benefits. This had an electoral backlash, so government did some reversal in outer metropolitan areas. restraints on spending growth in health- hospitals, Medicare benefits. This had an electoral backlash, so government did some reversal in outer metropolitan areas. increase in the ‘user pay’ principle to areas such as nursing homes costs and tertiary education increase in the ‘user pay’ principle to areas such as nursing homes costs and tertiary education Subsidies to dairy farmers and buyers of private health insurance, redistributes income to those sectors but not necessarily improving income redistribution. Subsidies to dairy farmers and buyers of private health insurance, redistributes income to those sectors but not necessarily improving income redistribution.

71. MONETARY POLICY

72. The monetary stance to keep interest rates low ensures greater income equality as less income is spent on interest repayments. Lower income earners also tend to be borrowers rather than lenders. The monetary stance to keep interest rates low ensures greater income equality as less income is spent on interest repayments. Lower income earners also tend to be borrowers rather than lenders. Higher interest rates will tend to favour savers and result in further wealth creation thereby increasing the level of inequality both for incomes and wealth. Higher interest rates will tend to favour savers and result in further wealth creation thereby increasing the level of inequality both for incomes and wealth.

73. MICROECONOMIC REFORMS Privatisation: Policies to aggressively pursue economic growth can result in negative social effects such as privatised companies sharply raising prices or downsizing that can lead to structural unemployment. Privatisation: Policies to aggressively pursue economic growth can result in negative social effects such as privatised companies sharply raising prices or downsizing that can lead to structural unemployment. These actions can worsen inequality in the short term but in the long term the belief is that improved efficiency will benefit all Australians by creating sustainable employment and therefore improved equality. These actions can worsen inequality in the short term but in the long term the belief is that improved efficiency will benefit all Australians by creating sustainable employment and therefore improved equality. However the long term unemployed can contribute to increased inequality but in recent years the government has had some success in reducing this type of unemployment. However the long term unemployed can contribute to increased inequality but in recent years the government has had some success in reducing this type of unemployment.

74. Labour Market Reforms:

75. Changes in the pattern of employment i.e. increased casualisation have created the problem of underemployment. Changes in the pattern of employment i.e. increased casualisation have created the problem of underemployment. People in casual or part-time jobs have greater fluctuating incomes. This can make it difficult for them to borrow to purchase assets thereby reducing their capacity to acquire wealth, this further impacts on wealth inequality. People in casual or part-time jobs have greater fluctuating incomes. This can make it difficult for them to borrow to purchase assets thereby reducing their capacity to acquire wealth, this further impacts on wealth inequality.

76. Labour Market Reforms: Deregulation of labour markets has widened inequality between wage earners. Under enterprise agreements workers with greater skills and stronger bargaining power have achieved higher average incomes than those with fewer skills who rely on industrial awards for wage rises (award simplification). Deregulation of labour markets has widened inequality between wage earners. Under enterprise agreements workers with greater skills and stronger bargaining power have achieved higher average incomes than those with fewer skills who rely on industrial awards for wage rises (award simplification). However in recent years the AIRC has granted significant increases to minimum wages in recent years which has helped minimise the gap between higher and low income earners. However in recent years the AIRC has granted significant increases to minimum wages in recent years which has helped minimise the gap between higher and low income earners. The present Howard government has criticised the actions of the AIRC and has now transferred its power to set minimum wages to the Equal Pay Commission. The present Howard government has criticised the actions of the AIRC and has now transferred its power to set minimum wages to the Equal Pay Commission.

77. Compulsory Superannuation Compulsory Superannuation is the most important recent policy to improve distribution of wealth in Australia. A minimum of 9% of employee wage is to be contributed by the employer to a superannuation fund in provision for retirement. Compulsory Superannuation is the most important recent policy to improve distribution of wealth in Australia. A minimum of 9% of employee wage is to be contributed by the employer to a superannuation fund in provision for retirement. The superannuation pool makes up 70% of the wealth for the poorest 40% for of people. The superannuation pool makes up 70% of the wealth for the poorest 40% for of people.

78. International Business Cycle Australia’s integration into the world economy has effectively resulted in the government having less effective control over the business cycle. Australia’s integration into the world economy has effectively resulted in the government having less effective control over the business cycle. This in turn can have an impact on the distribution of income as 1/5 workers are to work in export related industries. This in turn can have an impact on the distribution of income as 1/5 workers are to work in export related industries. Therefore if there is a downturn in the global economy, Australian workers can be displaced resulting in an increase in income inequality. Therefore if there is a downturn in the global economy, Australian workers can be displaced resulting in an increase in income inequality.