Take heart! Australia is still better and fairer than most

Don’t be disheartened by recent events. Things in the Land of Oz are far from perfect, and we have our share of problems. But don’t be tempted by the thought that if America’s going to the dogs, we won’t be far behind. No, we’re holding things together much better than the Yanks are.

With the US reverting to its traditional practice of taking shots at presidents and presidential candidates, this week of all weeks is the time to say, “Only in America”. Thanks to the courage and quick thinking of John Howard after the Port Arthur massacre in 1996, our access to guns is well controlled.

Of late, it’s been tempting to think that the goal of every generation being better off than their parents has been lost. It’s not true. Not yet, anyway. And there’s still time to ensure that Gen Z – youngsters in their teens and early 20s – get a fair shake.

It’s not easy to compare generations with statistical accuracy. But lately, statisticians have made progress in linking information from the census and official surveys with banks of data held by government departments. And last week, the Productivity Commission used this advance to publish a much more authoritative study on economic mobility.

It confirms that, on average, each generation earns more than its parents did at the same age. That’s because the economy has grown almost continuously over the decades, raising material standards of living. This would be true of all the developed economies.

Of course, it’s also true that it’s easier for children born into poorer families to do better than their parents than it is for children born into well-off families.

However, living standards haven’t grown much over the past decade or so. Were this to continue for a further decade or more, it could become true that Gen Z isn’t doing better than its parents.

A different question as to whether overall living standards are continuing to rise in real terms over the years is how easy it is for people to change where they stand in the distribution of incomes as their lives progress.

How easy is it for people starting out towards the bottom of the ladder to climb to a higher rung?

This is the meaning of income mobility. Can you better yourself if you try hard enough?

Now, this is where the Americans keep telling themselves they’re the land of opportunity. Log cabin to the White House and all that. Well, it may have been true in Abraham Lincoln’s day, but it hasn’t been true for decades. As a general rule, the more unequal incomes are, the harder it is for people’s positions on the ladder to change.

America’s incomes are highly unequal, and it’s one of the countries where changing your income status is hardest.

But this is where the Productivity Commission’s research brings good news. On income inequality, Australia is in the middle of the pack of rich countries. But when it comes to income mobility, we do what Australians love to think of themselves as doing: punching above our weight.

We pride ourselves on being the land of the fair go. Or, as dear departed Scott Morrison preferred to put it: if you have a go, you get a go. Well, guess what? We now have documentary evidence that it’s still true. According to the commission’s calculations, Australia is among the most income-mobile countries, scoring better than even the fabled Scandinavians.

Two qualifications. First, people in the middle 60 per cent of the distribution enjoy the most opportunity to move. If you start in the bottom 20 per cent of personal incomes, you have less ability to improve. And if you’re already in the top 20 per cent, it’s harder to go higher.

Second, although the commission doesn’t spell this out, mobility cuts both ways. Remember, we’re talking about relative incomes, not absolute incomes. So, if it’s easier for me to pass you on the ladder, it’s easier for you to fall below me.

How do people seek to improve their earning potential? The obvious way is to get a better education. On average, people with a uni degree or higher earn 23 per cent more over their lifetime than those who only complete year 12. And those who complete high school earn significantly more than those who don’t.

Mobility is adversely affected by significant life events, such as unemployment, serious health problems and relationship breakdowns.

So far, we’ve been focusing just on income. But wealth – the assets you own – also affects your mobility. Unsurprisingly, the less wealth you have, the harder it is to move up, and the more wealth you have, the easier it is to stay up.

The rich have always been with us, but I think the inordinate rise in the cost – and value – of homes, which is already handicapping young people without access to parental help, will also make inheritance a bigger influence on people’s income mobility.

As Australians, we have a lot to be pleased about and proud of. But we have no cause for complacency.

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Good policy, values and politics all agree: change the tax cuts

I have no inside info on whether Anthony Albanese will stick to his oft-repeated promise to deliver the stage 3 tax cuts intact on July 1, or change them in some way because the cost-of-living crisis means all bets are off.

 I don’t even know that the measures he’ll discuss at the meeting of Labor’s caucus on Wednesday will be the last word on what we’ll see in the May budget, or on our payslips after July 1.

 I’m paid to say what I think should happen, not to predict what will. So I can tell you this: if Albanese doesn’t initiate belated changes to make the tax cuts fairer and of greater benefit to those who’ve suffered most from the cost of living, it will show he’s lost touch with good policy, Labor’s professed values and even what’s needed to protect his political hide.

 Let’s start from first principles. The longstanding view that our system of taxes and benefits should require those who can best afford it to bear more of the cost of government than those who can least afford it rests on two key policies: a largely means-tested system of government pensions and benefits, and a “progressive” scale of income tax.

 Your income is taxed in slices. The first slice is untaxed, then the rate of tax on subsequent slices gets progressively higher. When you add the slices together, the average rate of tax you pay on the whole of your income is far higher for people on very high incomes than for those on modest incomes.

 As legislated, the stage 3 tax cut would make three changes to the tax scale. It would reduce the rate of tax on the slice of income running from $45,000 a year to $120,000 a year from 32.5c in the dollar to 30c.

 Then it would reduce the rate of tax on the slice running from $120,000 to $180,000 from 37c in the dollar to 30c.

 Finally, it would cut the rate of tax on the slice of income running from $180,000 to $200,000 from 45c in the dollar to 30c. Only the last slice of income, anything above $200,000 a year, would continue to be taxed at the top rate, unchanged at 45c in the dollar.

 Do you see how this would significantly reduce the progressivity of the tax scale? That’s just what Scott Morrison, as treasurer and then prime minister, wanted: to shift the burden of taxation away from high-income earners and on to everyone lower down.

 It’s the sort of policy you might expect from a Liberal government, but one Labor has always claimed to oppose. It initially opposed stage 3, but later changed to quietly supporting it, for fear of being branded as high-taxing by its opponents.

 If Albanese doesn’t seize this chance to make the tax cuts fairer, he’ll be remembered as the prime minister who struck the greatest blow in cutting taxes for the rich. The man who did what ScoMo couldn’t.

 Albanese has claimed that stage 3 will deliver tax cuts for everyone earning more than $45,000 a year. That’s true. Someone on $50,000 will have their average rate of tax reduced by 0.25c in the dollar, yielding a saving of $2.40 a week. Wow.

 To get a weekly saving of more than $20 a week – not a lot if you’re struggling with much higher rent or mortgage interest rates – you have to be earning more than $90,000.

 Only if your income is $120,000 will your average rate of tax be cut by 1.6c in the dollar, saving you $36 a week. At $180,000 your average rate falls by 3.4c in the dollar, saving you $117 a week. Not bad.

 But if you’re struggling on $200,000, your average tax rate falls by 4.5c in the dollar, and you save almost $175 a week. 

 According to calculations prepared by the Parliamentary Budget Office for the Greens, as they stand, the stage 3 cuts will cost the budget almost $21 billion a year. Of that, people earning less than $45,000 a year get nothing, and those earning between $45,000 and $60,000 would get less than 2 per cent of the benefit.

 The large number of people earning between $120,000 and $180,000 would get about 30 per cent of the benefit, while the relatively small number earning more than $180,000 get 44 per cent.

 It’s been said by some that rejigging the tax cuts so that more of the money went to the low- and middle-income earners who’ve been hit the hardest by the cost of living – and bracket creep – would be inflationary because they’d spend more of any tax cut than would the well-off.

 True, but not a good enough reason to distort the tax system and keep beating ordinary families into the ground.

 As it stands, stage 3 hugely benefits a minority of voters, most of whom are unlikely to vote Labor. If Albo can’t convince most voters he broke his promise because they needed a break, he ought to get out of politics.

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Consumerism and social status keep our noses to the grindstone

What better time to think about whether we’re working too hard than while we’re enjoying a Monday off, thanks to a public holiday? Wouldn’t it be nice if every weekend could be a long weekend?

Actually, almost 100 years ago, the greatest economist of the 20th century, John Maynard Keynes, pretty much predicted that’s the way we’d be living by now.

In his essay Economic Possibilities for our Grandchildren, written in 1930, he envisaged that by now, we’d be able to live comfortably while having to work only 15 hours a week. We could work just three hours each weekday, or clock up our 15 hours in just a few days – say, three five-hour days.

Really? What a duffer. How could anyone so smart be so disastrously wrong?

Well, not quite. What Keynes was saying was that, technological advance – the invention of ever-better labour-saving machines – would increase the productivity of our labour to such an extent that, by now, we wouldn’t need to work very hard to be able to live comfortably.

His point was that, as we’re able to produce more goods and services per hour of work, we become better off. We can take that benefit either as enjoying an unchanged material standard of living while working fewer hours a week, or as higher monetary income – thus allowing us to buy more stuff – while working the same number of hours.

As Jan Behringer and other economists from Germany’s University of Duisburg-Essen have written, in the years since Keynes made that prediction the productivity of labour in the developed economies has improved by more than he expected.

So, we could have been working a 15-hour week had we chosen to but, in fact, we chose to take the money and the extra stuff rather than the extra leisure. Working hours have fallen since the 1930s, but not by all that much.

Behringer and colleagues say the “obstacles to more leisure time are primarily sociopolitical in nature” – by which they mean it’s not purely economic reasons, the shortage of resources, that require us to work more.

I’ve no doubt it has suited the rich and powerful to have us working and spending rather than devoting four days a week to developing our hobbies. That way, the rich and powerful get more so.

But, by the same token, I think the rest of us have been easily seduced by the lure of the materialist, consumer culture. We love buying things that are new, shinier and do better tricks.

In Australia – and in Europe, but less so in America – pretty much all the reductions in working hours, the increases in annual leave and sick leave, and the introduction of that strange animal, long service leave, have happened because union-backed governments have imposed them on unwilling employers.

And every time they have, the employers and their political parties have predicted the death and destruction of the economy.

But, even so, how long since you’ve seen a union telling its bosses they should go easy on the pay rise, but cut working hours? No, I have no doubt that the workers have preferred more bangles and baubles.

Behringer and colleagues, however, have a different take. Their study of developments in the US and Europe over the decades leads them to two conclusions.

First, since the 1980s, average working hours have fallen more slowly as inequality – the gap between high and low incomes – has increased.

Second, in countries with high inequality, employees earning higher hourly wage rates tend to work longer hours than those on lower hourly wage rates.

Both these findings are striking because they contradict economists’ earlier finding that people with higher incomes chose to increase their leisure time.

So, what’s going on? The authors’ explanation is that rising inequality of incomes leads to more “upward status comparisons”. Like most social animals, we are conscious of our social status – where we fit in the pecking order.

And, particularly where there’s a big difference between the top and the bottom, we seek to improve our position.

“The upper middle class emulates the consumption norms of the rich, and sacrifices leisure time to do so. Because the rich also increase their spending on status goods such as housing, education, etc as their incomes rise, the middle class feels pressure to keep up,” they say.

“After all, what constitutes ‘a good place to live’ or ‘a good education’ is essentially defined in comparison to the standards that the upper income groups largely determine.”

Another of their findings is that working hours are more likely to be shorter when wage bargaining is centralised and government social benefits in kind (but not in cash) are more adequate.

One possible explanation, they say, is that centralised wage bargaining reduces status conflict because workers can decide collectively to avoid a “positional arms race” to allow shorter working hours and more leisure.

They find that social benefits in kind rather than cash are associated with lower hours of work. This may be because the direct provision of goods and services by governments reduces the need for status-oriented private spending on goods and services.

Education has many dimensions. It broadens the mind, it helps you get a better-paying job, and it’s a “positional good” – it helps people judge your social status.

"The extent to which the education sector is organised through private markets is found to be associated with longer working hours among workers who themselves have high levels of education,” the authors say.

Get it? If governments provided better healthcare and public schools, more people would be content to use the publicly provided services along with everyone else, and fewer people would feel the need to work longer to afford private hospitals and schools.

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Yes, money does buy happiness* *terms and conditions apply

 Years ago, when our kids were young, we used to stay at a guesthouse in the mountains in the same week of January every year, as did various other families. When we met up with people we knew quite well, but hadn’t seen for 12 months, the greeting was always the same: D’ya have a good year?

So, has 2022 been a good year for you? Something similar is asked by the Australian Unity Wellbeing Index. Each year since 2001, researchers from Deakin University ask 2000 people how they’re doing. Are they satisfied with their standard of living, their relationships, purpose in life, community connectedness, safety, health and future security?

The index combines the answers to those questions into a single rating of our “subjective wellbeing”, somewhere between zero and 100. It’s too soon to have results for this year, of course, but the researchers do have them for the first two years of the pandemic – “the worst economic crisis in a generation, and the worst health crisis in a century”.

Guess what? The index actually rose from a low of 74.4 in 2019 to a high of 76.4 in 2020, before falling back a bit to 75.7 in 2021.

But don’t take those tiny changes literally. Allow for sampling error and the best conclusion is: no change. Indeed, in the survey’s 20 years, there’s been only minor variance around an average of about 75.4.

So I can tell you now that our wellbeing in 2022 will have been much the same as it always is, just as almost everyone at the guesthouse gave the same answer every year: “Not bad, not bad”.

The index’s stability from year to year – which is true of similar indexes in other rich countries – confirms a point its founder, Professor Bob Cummins, has been trying to convince me of since I first took an interest in the study of happiness.

Measures of satisfaction with life reflect both biological factors and situational factors. At the biological level, it seems humans have evolved to maintain a relatively optimistic and happy mood. This is controlled by “homeostatic” mechanisms similar to the one that keeps our body temperature stable – unless some situation (such as getting COVID) causes it to go off range.

The researchers say the situational factors most likely to adversely affect a person’s wellbeing equilibrium are insufficient levels of three key resources: money, connection with others, and sense of purpose.

A nationwide average bundles together those people whose wellbeing is reduced by such deficits with a greater number of people who are doing well.

So nothing in this finding denies that many people did it tough during the pandemic, whether monetarily or in their physical or mental health. It’s just that more of us stayed happy enough.

Remember, too, that the media almost always tells us about people with problems, not those doing OK. Similarly, medicos rightly focus on the unwell, not the well. But if you’re not careful, you can get an exaggerated impression of the world’s problems.

And when you look further than the average, you do see the pandemic making its presence felt. The index always shows people living alone, those in share houses and single parents having the least satisfaction with their lot.

But get this: those living alone and single parents enjoyed a big increase in perceived wellbeing. Why? Keep reading.

When the survey divides people according to their work status – unemployed, home duties, study, employed or retired – it always finds the unemployed far less satisfied than everyone else.

In the first year of the pandemic, however, the satisfaction of the unemployed leapt by 9 percentage points. Why? Maybe because the composition of the unemployed had changed a lot. Or maybe because, with many more people becoming unemployed, the stigma of being without a job was reduced.

But a much more obvious explanation is that, early in the pandemic, the rate of the JobSeeker unemployment benefit was temporarily doubled. Suddenly, it went from being below the poverty line to well above it. And wellbeing went up.

Trouble is, when the payment was cut back heavily in the second year, the satisfaction of the unemployed fell below what it was in the first place.

This supports a finding of “behavioural” economics: people suffer from “loss aversion” – we feel losses more deeply than we enjoy gains of the same size.

And it’s borne out by the survey’s finding that the satisfaction of all those people whose household income had fallen was more than 3 percentage points lower than that of those whose income was unchanged.

But. The satisfaction of those people whose income had risen was no higher than that of those whose income didn’t change.

The survey shows that people on the lowest incomes were much less satisfied than those on the next rung up. But it also confirms economists’ belief in “diminishing marginal returns”. The higher incomes rise, the smaller the increase in people’s satisfaction with their lives.

So, unless you’re really poor, don’t kid yourself that more money will make you a lot happier.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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Maybe Left versus Right is turning into smart versus not-so

Here’s a funny thing to think about on a holiday Monday: what if all the well-educated people voted Labor and the lowly-educated voted Liberal or National? How would that change our politics? A preposterous notion? Not as much as you may think.

As I’ve mentioned once or twice before, the great political stereotype is that the Liberals are the party of the bosses, while Labor, with its link to the union movement, is the party of the workers. So the people who own and manage the country vote Liberal, whereas the people who do as they’re told vote Labor.

This is the basis for the Liberals' instinctive confidence that they’re the natural party of government. Such belief is reinforced by their having spent far more of the past 75 years in office than their opponent has.

The better-situated, better-off suburbs in any city tend to vote Liberal, while the inner and outer, less-desirable suburbs vote Labor. Most people living in country areas and voting for the Nationals tend to be on modest incomes, similar to the stereotypical Labor voter.

The owners and managers tend to be pretty happy with the world as it is, whereas those further down the pecking order, with less wealth and less income, can always think of things they’d like to see changed. The Liberals defend the status quo, while Labor is the party of “reform”.

This is the basis for the standard perception of politics as a conflict between the privileged Right and the discontented Left.

But what if this conventional setup was changing - being undermined – before our eyes? We all know that strange things happened in last month’s federal election. As usual, we’ve tried to understand these from the top down. How the parties’ share of the national vote changed, then looking by state and even at the 151 electorates.

But Luke Metcalfe, founder of the property and data analytics consultancy, Microburbs, (and, as it happens, a nephew of mine), has done a bottom-up, more “granular” analysis.

He’s taken the Australian Electoral Commission’s voting figures by polling booth and matched them with all the detailed demographic information for corresponding small statistical areas in the 2016 census. They’re not a perfect fit, but they’re a good guide.

Metcalfe finds that “we’re seeing a continuation of the trend in the [2019] federal election, where the Coalition’s support base is shifting towards poorer, less-skilled, less-educated people born in Australia”.

When Labor lost in 2019, many people noticed the swing against Labor in regional mining seats in the NSW Hunter Valley and Central Queensland. What few noticed was the swing to Labor in many safe Liberal seats.

This time, Metcalfe says, rich, educated professionals swung 11 to 12 per cent against the Coalition, while the country’s working poor - the fifth of polling booths paying the lowest rent, earning the lowest incomes and with the least skills - swung only 3 to 4 per cent against it.

As we know, much of this shift away from the Liberals came via the teal independents in Liberal heartland seats in Melbourne, Sydney and Perth. The teal seats’ most dominant characteristic was their high levels of “educational attainment”.

Unsurprisingly, income and education are highly correlated. But Metcalfe says it’s education, not income, that’s doing the driving.

Many people think they’ve detected in recent election results a growing divide between city and country in Australia, but also in Britain and America. But maybe it’s more about the better-educated concentrating in the big cities – where the best-paying jobs are – leaving the less well-educated in outer suburbs or back in country towns, feeling the world has changed in ways they don’t like and thinking of voting One Nation.

Some political scientists think voters in the rich economies are dividing between the globalists and the nationalists. In the same vein, David Goodhart famously explained Brexit as a battle between those who could live and work “anywhere” and those who had to live “somewhere”.

But it still gets down to education and the way ever-rising levels of educational attainment - particularly among women – are remodelling the party-political landscape.

Take climate change. The better educated you are, the more likely you are to accept the science, believe we should be acting, and not be worried about either losing your job in the mine or paying a bit more for power.

Wouldn’t it be funny if the party of the workers became the party of the well-educated, while the party of the bosses became the party of the battlers?

I can’t see that happening, it’s too incongruous. There’s no way the Coalition could get enough seats without the Liberals’ leafy heartland. But it will need radical policy change to get the well-educated back into the fold, or into bed with the Neanderthal Nationals.

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Stop kidding: the 2024 tax cut will be economically irresponsible

It’s a safe bet that, once we’ve seen the mid-year budget update on Thursday, we’ll hear lots of economists and others saying the government should be getting on with budget repair: spending cuts and tax increases.

That’s despite the update being likely to show that the outlook for the budget deficit in the present financial year and the following three years is much better than expected in the budget last May.

It’s also true even though the case for “repairing the budget by repairing the economy” is sound and sensible. The federal public debt may be huge and getting huger, but, measured as a proportion of gross domestic product, the present record low-interest rates on government bonds mean the interest burden on the debt is likely to be lower than we’ve carried in earlier decades.

It’s true, too, that recent extensive stress-testing by the independent Parliamentary Budget Office has confirmed that the present and prospective public debt is sustainable.

It remains the case, however, that both this year’s Intergenerational report and the budget office project no return to budget surplus in the coming decade, or even the next 40 years – “on present policies”.

So, it’s not hard to agree with former Treasury secretary Dr Ken Henry that doing nothing to improve the budget balance is more risky than it should be, too complacent. It leaves us too little room to move when the next recession threatens.

And, indeed, the Morrison government’s revised “medium-term fiscal strategy” requires it to engage in budget repair as soon as the economy’s fully recovered.

But there’s no way Scott Morrison wants to talk about spending cuts and tax increases this side of a close federal election. Nor any way Anthony Albanese wants to say he should be.

Of course, that won’t stop Morrison & Co waxing on about how “economically responsible” the government is – especially compared to that terrible spendthrift Labor rabble. Nor stop Labor pointing to all the taxpayers’ money Morrison has squandered on pork barrelling, and promising an Albanese government would be more “economically responsible”.

But here’s my point. There’s a simple and obvious way both sides could, with one stroke, significantly improve prospective budget balances, and because it would be front-end loaded, disproportionately reduce our prospective public debt over years and decades to come.

There’s no way such a heavily indebted government should go ahead with the already-legislated third stage of tax cuts from July 2024, with a cost to the budget of more than $16 billion a year.

Those tax cuts were announced in the budget of May 2018 and justified on the basis of a mere projection that, in six years’ time, tax collections would exceed the government’s self-imposed ceiling of 23.9 per cent of GDP. That is, the government would be rolling in it.

It was said at the time that it was reckless for the government to commit itself to such an expensive measure so far ahead of time. It was holding the budget a hostage to fortune.

But so certain were Morrison and Josh Frydenberg that the budget was Back in Black that, soon after winning the 2019 election, they doubled down on their bet and insisted the third-stage tax cuts be legislated. Desperately afraid of being “wedged”, Labor went weak-kneed and supported the legislation.

If, at the time, a sceptic had warned that anything could happen between now and 2024 – a once-in-a-century pandemic, even – they’d have been laughed at. But they’d have been right.

Just last week, Finance minister Simon Birmingham righteously attacked his opponents for making election promises that were “wasteful and unfunded” – by which he meant that they would add to the budget deficit.

But the tax cut both sides support is now also “unfunded”. We’ll be borrowing money to give ourselves a tax cut. That’s economically responsible?

It might be different if you could argue that the tax cut would do much to support the recovery, but it wasn’t designed to do that, and it won’t. Stage three is about redistribution, not stimulus and not (genuinely) improved incentives.

The budget office has found that about two-thirds of the money will go to the top 10 per cent of taxpayers, on $150,000 or more. Only a third will go to women. So, the lion’s share will go to those most likely to save it rather than spend it. Higher saving is the last thing we need.

Now, I know what you’re thinking. Get real. There’s no way either side would want to repeal a tax cut, especially just before an election.

Regrettably, that’s true. But, this being so, let’s tolerate no hypocrisy from politicians – or economist urgers on the sidelines – making speeches about “economic responsibility” without being willing to call out this irresponsible tax cut.

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OECD boffins find a new and better reason to increase the GST

Ask almost any bunch of economists what big reforms to the economy we need and their list will start with tax reform and probably not get much further. Ask a bunch of big-business people what we need and their list will linger lovingly on tax reform.

You can see this in the Organisation for Economic Co-operation and Development’s latest report card on our economy, the first since 2018. To be fair, the rich-nations club’s list of important reforms included much more than tax. But tax was front and centre of news reports in the financial press.

In particular, it seized on the outfit’s recommendation that we either increase the rate of the goods and services tax, or broaden the range of goods and services to which it applies, and use the proceeds to cut the rates of income tax. Good one! Yay! Let’s do it!

But hang on. Haven’t we heard this tune before? Yes, we’ve been hearing it for years. And haven’t both sides of politics made it clear it’s not on their list of promised reforms?

Yes, they have. But federal politics has degenerated to the point where both sides have not one controversial reform on their to-do list. That’s what inspiring, ambitious leaders our politicians have become. But all the more reason the rest of us should be writing our to-do lists for them. Let ’em know there’s work they should be doing.

Starting with the economists, their obsession with taxation comes from their favourite, “neo-classical” model of how our market economy works. In every market you have a contest between demand on one side and supply on the other.

What brings the two sides into balance is the “price mechanism”. The price of the item in question goes up or down until demand and supply are equal. This is why, if economists wore T-shirts, they’d say Prices Make the World Go Round.

To a neo-classical economist, prices are the great source of incentive, the great motivator. And, to them, a tax is just another price. So governments’ control of what’s taxed and at what rate gives them huge power to change the behaviour of producers and consumers in ways that make the economy work better – or worse.

Well, yes, there’s some truth in that. But maybe not as much of it as the economists’ grossly oversimplified model of the economy leads them to believe.

As for big-business people, their obsession with taxation, and income tax in particular, comes because they pay so much of it. Almost all their proposals, invariably marketed as great for “the economy,” involve them paying less and everyone else paying more.

It’s notable, however, that whereas business people see the greater revenue from an increased GST being used to cut income tax rates on higher incomes, the OECD boffins see it being used to cut the tax on low and middle incomes.

Why? Because income tax is the tax system’s main “progressive” tax – that is, as incomes rise from the bottom to the top, the rate of tax people are required to pay gets progressively higher, whereas “indirect” taxes such as the GST are “regressive” – they take a higher proportion of lower incomes than higher incomes.

So, the organisation’s boffins argue, the fairness of the tax system overall could be preserved by giving proportionately higher cuts to low and middle income-earners than to higher income-earners. Not what the Business Council had in mind.

The boffins advance their usual argument for changing the “mix” of federal taxes, raising a higher proportion from the GST and a lower proportion from personal income tax. Relative to the organisation’s other member-countries, they say, we are much less reliant on taxes on goods and services.

This is true. What’s not true – provided you compare apples with apples – is that we rely far more heavily on income tax collections than the others do.

No, the real standard argument for reducing income tax’s share is that the high “marginal” tax rates imposed on the last part of high income-earners’ incomes discourage them from working and innovating as much as they otherwise would.

The mainly older and more powerful men paying the top tax rate (as I do) have no trouble believing this to be true, as neo-classical theory says (sort of). Trouble is, there’s little empirical evidence that the theory accurately describes the real world.

Indeed, the empirical evidence says it’s mainly “secondary earners” – such as mothers deciding whether it’s worth moving from part-time to full-time work – who are discouraged from doing more paid work. The well-paid old men have never worried much about them.

So the conventional arguments for changing the tax mix aren’t very convincing. But the boffins have come up with a new and more convincing reason to increase our reliance on the GST: to ensure the total tax system remains able to raise all the revenue we’ll need to cover the ever-growing demand for government spending, particularly on health, ageing and education.

They point out that, left unchanged, our reliance on the GST will decline in coming decades (because it doesn’t tax the fastest growing classes of consumer spending), whereas reliance on income tax will increase (because of unreturned bracket creep).

But, as well as adding to government spending on the age pension, health care and aged care, the ageing of the population – read the retirement of the baby boomers – means more of the population (even people like me, who’ll be very comfortably off) will be paying little income tax. That’s mainly because income from superannuation is hardly taxed.

This will mean much pressure for those people still working to make up the shortfall by paying higher rates of income tax – far higher rates than retired people with the same income are paying.

Unless, of course, we extract more from the comfortably retired by at least requiring them to pay higher GST as they spend their largely untaxed public and private pensions.

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It's the rich wot get to complain and the poor wot get infected

If you’re anything like me, you’re getting mighty tired of lockdowns. I miss being able get out of the house whenever I choose, I miss going to restaurants and – my favourite vice – going to movies. That bad, huh? You’re right, I don’t have much to complain about. I don’t envy those having to school their kids while working at home – although I do miss seeing my grandkids in the flesh.

If you think I need reminding of how easy I’m doing it compared with a lot of others, you’re probably right. But I suspect that’s true of many of us, even those of us doing it just a tiny bit tougher than me.

Apart from those with kids to mind, the first hardship dividing line is between those of us easily able to work from home and those not. This probably means those still on their usual pay and those reliant on some kind of government support.

Even those unable to work from home but “fortunate” to work in an essential industry probably pay the price of running a much higher risk of getting the virus. And that without anyone doing enough to help them get jabbed.

Another divide would be between those in secure employment, with proper annual and sick leave entitlements, and the third of workers in “precarious” employment, most of whom are casuals rather than in the “gig economy”.

Having so many workers without entitlement to sick leave has been a burden for those involved and for the rest of us, namely an increased risk of being infected by someone who, needing the money, keeps working when they shouldn’t.

But though the dividing lines are different in a pandemic, the greatest divide of all is unchanged. As the old song says, it’s the same the whole world over, it’s the rich wot gets the pleasure, it’s the poor wot gets the blame.

Any amount of research confirms what the medicos call “the social gradient” – the well-off tend to be in much better health than those near the bottom. They’re less likely to be overweight (I must be an exception) and less likely to smoke.

The Mitchell Institute at Victoria University has just issued the second edition of its “health tracker by socio-economic status”. It finds that the 10 million Australians living in the 40 per cent of communities with lower and lowest socio-economic status have much higher rates of preventable cardio-vascular diseases, cancer, diabetes or chronic respiratory diseases than others in the population.

Why then should we be surprised to learn that, though Sydney’s outbreak of the Delta variant seems to have started in the better-off eastern suburbs, it soon migrated to the outer south west, where it finds a lot more business?

Last week the welfare peak body, the Australian Council of Social Service, issued a joint research report on Work, Income and Health Inequality, with academics at the University of NSW.

ACOSS boss Dr Cassandra Goldie says “the pandemic has exposed the stark inequalities that impact our health across the country. People on the lowest incomes, and with insecure work and housing, have been at greatest risk throughout the COVID crisis. Now, they are the same people who are at risk of missing out in the vaccine rollout”.

Then there’s the question of trust. Social trust works through social norms of behaviour, such as willingness to co-operate with strangers and willingness to follow government rules. As in other rich countries, our trust in governments has declined over the years. Last year it seemed to lift, as many of us believed we could trust our leaders – particularly the premiers – to save us from the pandemic.

Whether that confidence survives this year’s missteps we’ll have to see. But the economic historian Dr Tony Ward, of Melbourne University, reminds us of a significant finding in this year’s World Happiness Report: in general, the higher a country’s level of social trust, the lower its COVID-19 death rate.

Stay with me. An experiment by the American behavioural economist Alain Cohn and colleagues in Switzerland involved “losing” 17,000 wallets in 355 cities across 40 countries and seeing how many of them were returned to their supposed owners.

The rate of wallet return was about 80 per cent in the Scandinavian countries and New Zealand, just under 70 per cent in Australia, less than 60 per cent in the US and less than 30 per cent in Mexico.

Ward did his own study and found that two-thirds of the difference between countries could be explained by their degree of inequality of income. The greater the inequality, the less trust. When he added survey data on people’s perceptions of corruption, his apparent ability to explain the differences in trust rose from 68 per cent to 82 per cent.

Premier Gladys Berejiklian and her minions tell us the virus is raging in certain “LGAs of concern” because people aren’t doing as they’ve been asked. Maybe their lack of co-operation reflects a lack of trust in the benevolence of those higher up the income ladder. Inequality doesn’t come problem-free.

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Why did Labor lose? Not because of its tough tax plans

It’s been a week since the election so, naturally, by now a great many of the people who work in the House with the Flag on Top – politicians, staffers, journalists – know exactly why Labor lost and the Coalition won: those hugely controversial dividend franking credits.

There were other reasons, of course, but franking credits is the big one. How do I know they know? Because this is what happens after every election.

The denizens of the House take only a few days to decide on the single most important factor driving the result. Surprisingly, each side of politics – the winners and the losers – almost invariably comes to the same conclusion.

And once they have, the concrete around the notion sets quickly and what started as a theory becomes received wisdom, something any fool knows and part of the building’s corporate memory.

Months later, political scientists will come up with different, much more “evidence-based” explanations, but by then it will be too late. No one listens to them because the die has been cast.

Which is why it may already be too late for research by Dr Richard Denniss and others at the Australia Institute to debunk the quite misguided notion that it was all the people who’d be hurt by the franking credits policy voting against an evil-intentioned Labor Party.

When you see Denniss’ quite startling findings it should also disabuse you of the notion that, particularly in a country as big and varied as ours, a party’s loss of an election could ever be, as the academics say, “mono-causal” rather than “multi-factorial”.

Labor’s performance was disappointing (for its supporters, anyway), not disastrous. The composition of the House of Reps has changed surprisingly little. So it may surprise you, but shouldn’t, that as well as there being lots of electorates that swung to the Coalition (measured on a two-party-preferred basis), there were also lots of electorates than swung to Labor.

Get this: the seats that swung to the Coalition were mainly those whose voters had low incomes, whereas the seats that swung to Labor tended to be those whose voters had high incomes.

Among the seats with the 10 biggest swings to Labor were five from Victoria, three from NSW and one each from WA and the ACT. The swings varied from 3.7 per cent to 6.6 per cent.

In all but two of those seats, they had at least twice the proportion of high income-earners (people in the top 20 per cent) than the national average. Under the Coalition’s three-stage tax plan, voters in the same eight electorates are estimated to get tax cuts in 2024 varying from 49 per cent more to double the national average.

Across Australia, the average value of franking credits per taxpayer is $695 a year. In those eight electorates (five of which are held by the Coalition), the average value ranges from $1213 to $2578 a year.

Now let’s look at the 10 electorates with the biggest swings to the Coalition – six in Queensland and four in NSW. The swings varied from 6 per cent to 11.3 per cent. All of the seats had less than the national average of people with high incomes. And for all but one of them, the average tax cut in 2024 will be below the national average.

How much do they get in franking credits? All 10 seats get less than the $695-a-year national average. Between 83 per cent and 16 per cent of the average, to be precise.

Looking more generally, electorates with more people on low and middle incomes tended to swing to the Coalition, whereas electorates with more people on high incomes tended to swing to Labor.

Next, since it’s the (well-off) retired who would have been hit by the plan to end refunds of unused franking credits, the researchers looked at the voting trend for electorates with a high share of voters over 65.

They found only a very slight tendency for such electorates to move their votes to the Coalition.

So, what should we make of all this? Well, for a start, the figures allow us to rule out some possibilities, but leave others open.

They seem to refute the contention that many well-off retirees (or even prospective well-off retirees) moved their votes away from Labor because they were deeply opposed to the planned changes to franking credits.

They leave open the possibility than many less well-off voters moved their vote away from Labor because they disapproved of the way well-off retirees were to be treated. If so, they were being very magnanimous towards people better off than themselves.

Possible, but not likely. It’s easier to believe they (or, at least, some of them) were renters voting against Labor in response to the real estate agents’ scare campaign claiming Labor’s plan to limit negative gearing would force up rents.

Turning to the higher-income electorates, there’s little sign of many people moving their votes away from Labor because of their opposition to its franking credit plan – or to its move against negative gearing, for that matter.

According to Denniss, it looks like renters voted to help their landlords keep their tax lurks, whereas the landlords voted for Labor’s offer of free childcare and the restoration of penalty rates for their tenants.

Well, maybe. What can be said with more confidence is that it’s hard to see much sign of an outbreak of class warfare.

Moving on from Labor’s controversial tax changes, the success or near success of independents running in Liberal seats such as Warringah and Wentworth in prosperous parts of Sydney, and Indi in rural Victoria, makes it easier to believe the swing to Labor in so many high-income electorates was motivated by a concern that Australia needed a more convincing policy to combat climate change.

As for the swing against Labor in many low-to-middle electorates in Queensland and NSW, my guess is they felt Labor was neglecting their worries about jobs and the cost of living.

It’s never as simple as many workers in Parliament House convince themselves.

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A politician always wins, but this time the choice really matters

If you judged it by the way Labor's been so quick to match the Coalition’s backdated doubling to $1000-a-year of its tax cut for middle income-earners (good idea) and now the Coalition’s plan to help first-home buyers (con job), you’d be justified in thinking that, despite all their furious arguing with each other, there’s little to choose from between the two sides. For once, however, such a conclusion would be dead wrong.

Not for many moons have voters faced such a clear-cut choice between Labor and Liberal.

It’s true that, if you judge the pollies by the way they behave, they’re just as bad as each other. Both sides refuse to answer the question, never say yes or no when they could dissemble, keep saying tricky things calculated to mislead, claim to “feel your pain” when they don’t, keep badmouthing each other and answering a question about their policies by attacking their opponents’ policies, and make promises they’re not sure they can keep.

And – one we’ll need to watch out for if Labor wins – claim to be much more high-principled than the government while they’re in opposition, but then do just the same when they’re in government, justifying it by saying they’re no worse than the last lot.

All true. But where the two sides are very different is in the policies they’re offering. And, although the more unpopular of those policies may or may not make it through the Senate, this is one time I’m inclined to agree with Paul Keating when he repeats his saying that “when you change the government, you change the country”.

Since it’s true that governments lose elections far more often than oppositions win them, the standard practice is for oppositions to make themselves a “small target” – to promise little of substance – so all the focus is on the many things the government has stuffed up.

Not this time. This time it’s the government making itself a small target – running on its economic record, with few policy promises bar its $300-billion tax plan – while Labor has so many controversial policies to go with its popular ones the Libs have been spoilt for choice.

Only the naive believe the battle between the classes ever ended, but in this election it’s more in-your-face than any time since the days of Labor’s Arthur Calwell. The Libs say Labor wants to increase taxes rather than cut them, but it would be more accurate to say it wants to make the well-off (including the well-off retired) pay more tax, while using the proceeds to increase government spending on health, education, childcare and much else, with what’s left over used to repay some of the government’s debt.

Labor plans to abolish tax refunds of unused dividend franking credits for those not on the pension, wind back negative gearing and the capital gains tax discount, reduce superannuation tax concessions, tax family trusts and restore for four years the 2¢-in-the-dollar budget repair levy on income above $180,000 a year, not to mention cancel the second and third stages of the Libs’ tax cuts.

In other words, Bill Shorten and Chris Bowen plan to use both sides of the budget to affect the biggest redistribution of income from high income-earners to low and middle income-earners we’ve seen in ages.

By contrast, the Libs are fighting tooth and nail to protect the tax breaks favouring property investors, self-funded retirees, high-income superannuation savers and business people who’ve gone for years using family trusts to reduce the tax they pay – most of which concessions were introduced by the Howard government.

As well, the Libs’ seven-year, three-stage, super-mega tax plan would favour high income-earners – individuals earning more than $100,000 and, particularly, $200,000 a year – to a degree more generous/blatant than I can remember.

The first stage, which is limited largely to middle income-earners, would give them an immediate cut in their average tax rate of no more than about 1¢ in every dollar they earn. That’s pretty much it for low and middle income-earners.

High income-earners have to wait for stage two (July 2022) and stage three (July 2024) before they get much. But then the heavens would open. Cuts in average tax rates would range from 1.5¢ in every dollar for those on $110,000 to 4.5¢ in the dollar for me and my mates on $200,000 and above.

Next, more than ever before, this election sees Labor going for the young vote (negative gearing, better childcare, preschool and universities) while the Libs defend actual and prospective self-funded retirees.

Except for Scott Morrison’s last-minute, few-details first home loan deposit scheme (which Labor matched within an hour or two). It sounds better than is, mainly because access to it would be limited. Further falls in house prices would do far more to help – but no pollie wants to say that.

Then there’s the minor matter of the adequacy of our contribution to the Paris Agreement’s effort to limit global warming. Here, too, the choice is wide, ranging from the Coalition (just pretending) to Labor (real but inadequate) to the Greens (full blast).

All that remains is a threshold question: will your choice be aimed at benefiting yourself and your family, or the wider community and “those less fortunate than ourselves”?

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In poor countries income does trickle down

Try this test of your economic literacy: has world poverty decreased or increased since 1990? If you said decreased, congratulations. You’re smarter than the average bear.

If you were sure it had increased, you’re the victim of a news media gone overboard in indulging your preference for bad news over good.

A lot of bad things are happening in the world, but also some really good things, and we immiserate ourselves when we fail to give them the notice they deserve.

In October the Word Bank issued a report announcing that world poverty had fallen in the two years to 2015. But since this was the continuation of a longstanding trend, the media took little notice.

So let me give it the fanfare it deserves. World poverty has been falling continuously – and rapidly - for the past quarter century. In 1990, 36 per cent of the world’s population lived in extreme poverty, but by 2015 this had fallen to 10 per cent – the lowest in recorded history.

This means the number of people living in extreme poverty has fallen by a billion, from almost 2 billion to 736 million. And that really does make it “one of the greatest human achievements of our time”.

The World Bank defines extreme poverty as living on less than $US1.90 a day, which has been adjusted for the US dollar’s differing purchasing power in different countries in 2011.

But how did this great achievement come about? It’s the result of rapid economic growth in the developing countries over the past three decades, particularly in China (and its trading partners in east Asia) and India (and other south Asian countries, including Bangladesh).

These countries have made no herculean efforts to redistribute income from the rich to the poor, they’ve just grown a lot over a sustained period. Which makes the fall in poverty in these countries a fabulous advertisement for the benefits of market economies and freer trade between countries.

And it’s a reminder that, in poor countries at least, a fair bit of the income generated by economic growth does trickle down to those at the bottom. Low-income households also benefit as more of the country’s income is spent on increasing primary education and spreading access to electricity, decent water and sanitation.

Actually, lower-income households in Australia have benefited from our 27 years of continuous economic growth, with their incomes growing quite strongly in real terms. That’s because of employment growing faster than the working-age population, wages growing faster than prices (until five years ago) and pensions (but not the dole) being indexed to wages.

But real wage and pension growth occur because of government policy. And since, in truth, tax cuts for companies and high income-earners do little to boost the economy and employment, their benefits don’t trickle down to any great extent.

Back to the point. Though the rate of extreme poverty has fallen in all the world’s regions since 1990, it’s fallen only a bit in Sub-Saharan Africa, while its population has continued growing strongly.

This means the Sub-Sahara now accounts for more than half the 736 million people remaining in extreme poverty, with south Asia accounting for a further quarter. It’s been largely eliminated in east Asia and the other regions.

If India’s present strong economic growth continues, its share of world poverty will fall away. The World Bank projects that, by 2030, Sub-Saharan Africa will account for nearly nine out of 10 of the world’s extreme poor.

Globally, poor people live overwhelmingly in rural areas and have lots of children. Judge poverty not by people’s income but by their access to education, electricity, water and sanitation, and the proportion in rural areas is even higher.

Note that the World Bank’s austere “international poverty line” of $US1.90 a day is an absolute measure of poverty. You work out the value of goods needed to barely stay alive, then adjust it for inflation over time, ignoring what’s happening to the incomes of the better-off.

By contrast, in rich countries like ours we measure relative poverty: how are real incomes at the bottom (often defined as half the median income) travelling relative to those around the middle and at the top?

So absolute poverty falls whenever low incomes grow faster than inflation whereas, for a fall in relative poverty, the real incomes of the poor need to grow at a faster rate than everyone else’s.

This, by the way, explains why absolute poverty in China and India can fall even while income inequality – the gap between rich and poor – increases. As it usually has.

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Inequality not as great as claimed, worse than others admit

This week the Productivity Commission issued a “stocktake of the evidence” on inequality in Australia. Its findings will surprise you. But it wasn’t as even-handed as it should have been.

Its report forcefully dispels the myths of the Left – that inequality is great and rapidly worsening – but is much more sotto voce in telling the Right there’s still a problem and that the reason it’s not as bad as some think is that governments have taken corrective actions the Right usually disapproves of.

This has allowed the conservative commentators of the national press to greet the report with great glee. One in the eye for their ideological opponents. Inequality? Nothing to see here.

The report looks at three different measures of economic inequality – the distribution of income, consumption and wealth – over a long period: the 27 years from 1988-89 to 2015-16. It focuses on the experience of households rather than individuals, and eliminates the effect of inflation.

The report concludes that inequality has risen only slightly over the period. Measured by the Gini coefficient – where zero means perfect equality and 1 means one household has everything – the distributions of both income and consumption have risen slightly.

The distribution of household wealth (mainly owner-occupied housing and superannuation savings) is most unequal of the three. It, too, has become a bit more unequal over the period.

But, particularly for income, inequality increased during the resources boom of the mid-noughties, then decreased in the years following the global financial crisis of 2008.

Over the 27 years, the disposable income of all households rose at an average rate of about 2.2 per cent a year in real terms.

The annual incomes of households in every decile (10 per cent group), from the bottom to the top, increased. It won’t surprise you that average incomes in the top two deciles rose by more than the economy-wide average. The top decile’s average income rose by more than 2.5 per cent a year.

It will surprise you that average incomes in the bottom decile rose at the same rate as the economy-wide average. So it was households between the bottom 10 per cent and the top 30 per cent whose incomes rose by less than the national average.

Many people would be surprised by all this. Why? Because they hear what’s happened in America and assume it must be pretty similar here. Wrong.

The report notes that our progressive income tax and highly means-tested welfare payments do a lot to equalise household incomes (as I’ve written recently in this column).

Our income inequality in 2015 was about average for the rich countries. In 2017, our wealth inequality was eighth lowest among 28 rich countries.

Australians’ chances of moving between higher and lower income groups – a rough measure of equality of opportunity – “compare favourably with many other developed countries”, the report says.

It tells us that, at 9 per cent of Australians – 2.2 million people – our rate of poverty (measured as people with incomes below half the median income) is no higher than it was 27 years ago.

But if all these truths tell you we don’t have much to worry about, you’ve been misled. The report is much less up-front in reminding us of the qualifications to its findings.

It leaves the strong impression that, if inequality hasn’t increased much, and isn’t as great as in some other countries, there’s no great problem. This implies the inequality we started with was fine.

As Professor Peter Whiteford, of the Australian National University, has noted, the report does too little to remind us that all the averaging involved in Gini coefficients and decile groups rolls households who’ve gained together with households who’ve lost and tells us little has changed.

For instance, the report downplays the issue of the huge increase in the incomes of the top 1 per cent of households. Their extreme gains are averaged with the more modest gains of the next 9 per cent to give a rise in the incomes of the top decile that’s high compared with the rest of us, but not greatly so.

Since the increase in inequality occurred during the resources boom, the report notes quietly that, contrary to what conservative politicians keep telling us, “[economic] growth alone is no guarantee against widening disparity between rich and poor”.

True. Then we’re reminded that this increase in inequality went away in the long period of weak growth following the financial crisis.

So what does the Productivity Commission want us to conclude? Let nature take its course? Don’t worry about increasing inequality because the next recession will fix it?

The report’s fine print acknowledges the truth that a country’s degree of inequality is greatly influenced by its economic institutions (such as its tax system and the rules of its welfare system), by government policy changes, and by the public’s attitudes to inequality.

I happen to agree with the commission’s value judgement that the growing gap between the top 1 per cent of incomes and middle incomes isn’t of as great concern as the gap between the bottom and the middle.

But I don’t accept another implicit value judgement that not much more could be done to reduce income and wealth inequality (presumably, for fear the rich would stop wanting to get richer) and that, at the bottom end, the government should limit its intervention to assisting those poor people whose disadvantage has become “entrenched”.

In other words, don’t acknowledge that poverty is being kept high by successive governments’ refusal to lift the freeze on real unemployment benefits.

The report proudly informs us that the bottom decile’s income has kept pace with the economy-wide average, but does little to explain how this amazing truth came about.

The chief suspect is the Rudd government’s increase in the base-rate of the age pension, a boost so big it seems to have more than offset the adverse effects of the real dole freeze and the bipartisan policy of moving disabled and sole-parent pensioners onto the much lower dole.

Still think there’s nothing to see here?

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Morrison's tax cuts aim well above the middle

One thing to be said in favour of Scott Morrison’s complex three-step, seven-year tax plan is that his small tax cuts for the deserving middle income-earners are more likely to actually happen than the huge tax cuts for the undeserving high income-earners.

For the latter to eventuate, Malcolm Turnbull will have to be re-elected at least twice before July 2024. By contrast, the smaller cuts will start in six weeks’ time. For once it’s the rich who’re being promised pie in the sky (hopefully) before they die.

This means it’s wrong to simply compare the $530-a-year saving for people on middle incomes with the $7225-a-year saving for all of us struggling to get by on more than $200,000 a year.

Why? Because by the time the people on such big incomes are due to get their tax cut, the others will already have had their much smaller cuts every year for six years.

The thing about money is that the sooner you get your hands on it, the better. Economists call this “the time-value of money”.

But that about exhausts the good points of ScoMo’s tax plan. His claim that it would make income tax “lower, simpler and fairer” is debatable.

Even his claim that the first step in his cuts is aimed a “low and middle income-earners” is misleading. People accept such claims only because they have no idea where the middle is.

ScoMo wants to overstate the level at which the middle is situated because his tax cuts are designed to favour the better-off.

He quotes the average weekly earnings of full-time employees – about $85,000 a year – as his indicator of the middle. But way more than half of full-time workers earn less than this.

That’s because the super-high salaries of a relative handful of employees push up the arithmetic average (the mean), making it a misleading measure of “central tendency”.

No, the better measure is the median – the income that’s higher than half the other incomes and lower than half the others. That is, the one dead in the middle. A high proportion of all full-timers will be clustered in roughly equal proportions a bit above and below the median.

The median income of adult full-time employees is about $76,000 – almost 11 per cent lower than the mean. But this measure ignores almost a third of workers who are part-time. Don’t they pay tax?

The median income of all employees is about $57,000 – which is a much better indicator of “the middle of the middle”.

ScoMo’s full tax saving of $530 a year (about $10 a week) will go to the 4.4 million taxpayers earning between $48,000 and $90,000 a year. That range goes from 16 per cent below the all-employees median to 58 per cent above it. Touch of asymmetry there. But there’s more.

On the upside, the 1.5 million taxpayers earning between $90,000 and $125,000 get a saving that starts at $530 and slowly reduces until it reaches zero at the top of this bracket.

On the downside, the 1.8 million taxpayers earning between $37,000 and $48,000 a year get a saving of $530 at the top, which then falls to $200 at the bottom of the bracket, while the 2.4 million taxpayers earning between $18,000-odd and $37,000 get nothing at the bottom, rising to $200 at the top.

Now, what would be a good indicator of a low income? Well, the minimum full-time wage is about $36,000 - meaning these people get a saving of about $185 a year or $3.60 a week. Wow. That much?

And what about all the under-employed workers who can’t get as many hours as they need. Aren’t they low income-earners? Their saving could be as little as zilch.

Still think ScoMo’s first step is aimed at “low and middle income-earners”? The truth is it’s aimed at middle and upper-middle earners. Anyone well below the middle gets peanuts.

Morrison’s claim that his plan would make income tax simpler is based on his second and third steps, in July 2022 and July 2024, finally eliminating the 37¢-in-the-dollar bracket, reducing the rate scale from five brackets to four.

But his changes would make the system more complex by introducing a new “low and middle-income tax offset”, to go on top of the existing low-income tax offset.

The effect of both offsets could have been incorporated into the rate scale, but hasn’t been. Why not? Because leaving them separate stops people seeing the extra tax rate (1½¢ in the dollar) they pay as their eligibility for the tax offset is clawed back to zero.

The Australian Taxpayers Alliance has demonstrated that, far from reducing the tax scale from five brackets to four, in truth the plan increases them from eight to 10. That’s simpler?

Our income tax is “progressive” because successive slices of your income are taxed at progressively higher rates. It would stay progressive under ScoMo’s plan, because it would still go from a first bracket where the tax rate is zero, to a top bracket where the rate is 45¢ in the dollar.

But it would, in a sense, be less progressive in that, after step three, almost three-quarters of taxpayers would end up in a huge bracket running from $41,000 to $200,000, all with a “marginal” tax rate of 32.5¢ on the last part of their income.

A better way to put it, however, is that ScoMo wants to put a big kink in the progressive scale. As your income rose above $200,000, your marginal tax rate would suddenly leap from 32.5¢ to 45¢.

Why is every country’s income tax scale progressive? Because making people contribute a higher proportion of their income according to their “ability to pay” is considered fairer.

When Morrison claims his changes would make the system fairer, he’s turning the meaning of the word on its head. He thinks the system would be fairer if high income-earners had to pay a smaller proportion of their incomes in tax.

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Indigenous middle class arises despite slow closing of the gap

It's easy for prime ministers to make big promises at some emotion-charge moment of national attention, but a lot harder to keep those promises when the media spotlight (and that prime minister) are long gone.

I could be alluding to the promise Kevin Rudd made that the federal government would never forget the needs of the victims of Victoria's Black Saturday bushfires in 2009, but I'm referring to the promise he made a year earlier, at the time of his apology to the stolen generations, to Close the Gap between Indigenous and non-Indigenous Australians.

The gap needing to be closed – and the commitments Rudd made – referred particularly to health, education and employment.

But all of those gaps contribute to another one: the gap between Indigenous and non-Indigenous incomes. What's been happening there?

I'm glad you asked because Dr Nicholas Biddle and Francis Markham, of the Centre for Aboriginal Economic Policy Research at the Australian National University, have just written a paper on the subject.

And, on the face of it anyway, the news is reasonably good.

First, however, some background. You won't be surprised that there is a gap between the two group's incomes. But it's worth remembering that gap has existed since the early days of European settlement of the Wide Brown Land.

To be euphemistic, it's a product of our colonial history. To be franker, Indigenous people were systematically and violently deprived of access to economic resources, especially land, a process that continued until well into the second half of the 20th century.

And though Aboriginal and Torres Strait Islander people engaged with the settler-colonial economy in many ways, underpayment or theft of wages was systematic in many parts of the country until the 1950s and '60s.

This colonial legacy endures into the present, Markham and Biddle say.

They quote another academic saying that "Aboriginal people, families, households and communities do not just happen to be poor. Just like socioeconomic advantage, socioeconomic deprivation accrues and accumulates across and into the life and related health chances of individuals, families and communities" (my emphasis).

The authors use the censuses of 2006, 2011 and 2016 to study what's been happening to the level and distribution of incomes within the Indigenous population, and between it and the non-Indigenous population.

The good news is that the median (the one dead in the middle) disposable equivalised​ household income for the Indigenous population rose from 62 per cent of non-Indigenous income in 2011 to 66 per cent in 2016. ("Equivalised" just means adjusted to take account of differences in the size and composition of households.)

That's the highest the percentage has been since reliable data started in 1981. And, in fact, it's been trending up since then.

There's progress, too, on the Indigenous "cash poverty rate", which measures the proportion of Indigenous incomes falling below 50 per cent of the median disposable equivalised household income of the nation's entire population.

So, as is usual in rich countries, it's a measure of relative poverty (how some incomes compare with others) rather than absolute poverty (whether people's incomes are high enough to stop them being destitute).

It's called "cash poverty" in recognition of the truth that there's more to poverty than how much money you have. As well, it acknowledges that no account is taken of "non-cash income", such as the value of food gained by hunting and gathering in remote areas.

Remember, however, that there are also costs involved in hunting. And the prices of basic necessities are much higher in remote areas.

Measured this way, the Indigenous poverty rate has declined slowly over past decades. More recently, it's gone from 33.9 per cent in 2006 to 32.7 per cent in 2011 and 31.4 per cent in 2016.

Sorry, that's where the good news runs out.

For a start, the rate of improvement is far too slow. Markham and Biddle calculate that if the gap kept narrowing at the rate it did over the five years to 2016, the medians for Indigenous and non-Indigenous incomes would be equal by 2060. That fast, eh?

Now get this: while the gap between the two groups has been narrowing, the gap within the Indigenous group has been widening.

If you take the weekly disposable personal incomes of all Indigenous people aged 15 or older, adjust them for inflation, rank them from lowest to highest, then divide them all into 10 groups of 10 per cent each, you discover some disturbing things.

Between 2011 and 2016, the average income of those in the top decile rose by $75 a week, compared with $32 a week for those in the middle decile. Individuals in the bottom decile had no income (possibly because they were students or home minding kids), while those in the second and third lowest deciles saw their incomes fall.

But what explains this growing gap between the top and the bottom within the Indigenous population?

Turns out it's explained by where an Indigenous person lives. Household disposable incomes are highest – and have grown fastest - in the major cities, with a median of $647 a week, but then it's downhill all the way through inner regional areas, outer regional, and remote, until you get to "very remote", where the median income is $389 a week.

Over the five years to 2016, the real median income in remote areas hardly changed, and in very remote areas it actually fell by $12 a week.

Got your head around all that? Now try this: despite the weakness in median incomes in remote (but not very remote) areas, the incomes of the top 20 per cent are higher and have been growing relatively strongly.

Get it? However poorly we're doing on Closing the Gap, we are getting an Indigenous middle class.

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Disadvantaged should rate higher than rich and powerful

I shouldn't say it, but the thing that annoys me most about the readers of this august organ are those who want to consign me to a party-political pigeonhole. "He's only saying that because he's Liberal/Labor/Green/Callithumpian."

Sorry. I have a lot of strong views, and I hope it isn't hard to detect an internal consistency in them, but they're not driven by loyalty to any party.

Like many old journos, the older I get the more disdainful I become of both sides of politics. They're not identical, but they have far too many bad habits in common.

But if my views come from a consistent set of values, where do those values spring from?

It's no secret. If you must pigeonhole me, I don't mind you saying this: "He's only saying that because he grew up in the Salvos – and hasn't managed to shake it all off."

I certainly inherited from my father a penchant for preaching sermons. So, since it's Easter, here's the latest.

Earlier in my career as a commentator my mission was to convert readers to the one true faith of economic efficiency.

As I've got older and wiser, however, I've realised that, though economic inefficiency has nothing to recommend it, efficiency isn't the only worthwhile goal of public policy, and there are often times when other objectives should take priority.

Such as ensuring the fruits of our economic success are distributed fairly between all the participants in the economy, not hogged by the rich and powerful.

Such as ensuring the poor – these days we're supposed to say the "disadvantaged" – are given a helping hand, even if they're the political path of least resistance when trying to fix the budget deficit.

The more unimpressed I've become with party politics and economic orthodoxy, the more I've fallen back on the values I imbibed as a youth, reading about the Salvos' daring, disreputable and sometimes law-breaking exploits in their early days.

I've been reminded of all this by a four-DVD box set, Boundless Salvation, produced by my coreligionist and mate, John Cleary, late of the ABC religion department, to celebrate the Salvos' 150th anniversary.

The Salvation Army was founded in the East End of London in 1865, when the Rev William Booth broke away from the Methodists. As a protestant church, its doctrines are identical to Methodism.

As Cleary explains, what distinguished the Salvos was Booth's preoccupation not just with saving souls, but saving "the worst", and the way he matched spirituality with practicality.

As soon as you were saved you were set to work, not just spreading the word, but helping the downtrodden escape the economic bonds that enslaved them.

Consider this recorded sermon from late in Booth's life: "Amidst all your joys don't forget the sons and daughters of misery. Do you ever visit them? Come away and let us make a call or two.

"Here is a home, six in family. Bathe and drink and sleep and sicken and die in the same chamber.

"Here is a drunken hovel, devoid of furniture, wife a skeleton, children in rags. Father maltreating the victims of his neglect.

"Here are the unemployed, wandering about, seeking work and finding none. Yonder are the wretched criminals cradled in crime, passing in and out of the prisons. All the time.

"There are the daughters of shame, deceived and wronged and ruined. Travelling down the dark incline to an early grave.

"There are the children, fighting in the gutters, going hungry to school. Growing up to fill their parents' places.

"Brought it all on themselves, you say? Perhaps so. But that does not excuse our assisting them.

"You don't demand a certificate of virtue before you drag the drowning creature out of the water.

"Nor the assurance that a man has paid his rent before you deliver him from the burning building.

"But what shall we do? Content ourselves by singing a hymn? Offering a prayer? Or giving a little good advice?

"No! Ten thousand times no! We will pity them, feed them, reclaim them, employ them.

"Perhaps we shall fail with many. Quite likely. But our business is to help them all the same. And that in the most practical, economical and Christlike manner."

Never heard that sort of talk from the pulpit? Here's a verse from Psalm 82 a reader sent me:

"Give justice to the weak and the orphan; maintain the right of the lowly and the destitute.

"Rescue the weak and the needy; deliver them from the hand of the wicked."

It all helps me know whose side I'm on in the great self-centred battle for government largesse.

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Time for new thinking on reforms to encourage growth

Disheartening times are times for fresh thinking. The voters' effective rejection of conventional economic solutions at the election require our economists and policy makers to go back to the drawing board.

It's always tempting to blame the salesman for his failure to make a sale but, of late, that argument is wearing thin. It's more useful to ask whether sales would be more forthcoming if we improved the product.

Everyone accepts the importance of innovation and agile thinking but, as with most professions, it doesn't come easy to economic practitioners.

They need to go back over their thinking, looking for factors they may have missed or conclusions that aren't as solid as they've long assumed.

One simplifying assumption economists have long relied on is that "equity" and "efficiency" are in conflict. The things you could do make the economy fairer come at the cost of reducing incentives and causing the economy to grow more slowly.

Conversely, the things you could do to improve incentives and growth will, regrettably, make the economy less fair.

On this, however, the tide of international opinion is turning. Several studies by economists at the International Monetary Fund and the Organisation of Economic Co-operation and Development find that increased inequality of income leads to slower economic growth.

If this advance in understanding of ways to encourage growth has filtered through to "the government's chief economic advisers" in Treasury, we've yet to see any sign of it.

But the message hasn't been lost on the Labor Party's think tank, the Chifley Research Centre. In a paper prepared for the centre, Equity Economics, a consultancy, explains the two mechanisms by which inequality can dampen economic growth.

First, the more of the growth in income that's captured by high income earners, the less income that flows back into consumption.

This is because high-income households tend to save a much higher proportion of their income than do middle and particularly low-income households.

It's clear this is a big problem in the United States, where a quite amazing proportion of income growth is being captured by the top few percent of households.

It would be a significant factor in helping to explain America's low rate of growth in recent decades.

It's not such a big factor in Australia yet, but it will be if we let our top few percent continue increasing their share at the rate they have been.

The second mechanism by which inequality dampens economic growth is longer term. Lower growth in the incomes of families towards the bottom of the distribution limits their ability improve their knowledge and skills by investing in their own education.

The same applies when governments shifting more of the cost of healthcare on to out-of-pocket payments discourage workers from doing all they should to protect their health.

The Gini coefficient measures income inequality on a worsening scale from 0 to 1. Modelling by the OECD has found that a reduction of 1 percentage point in the coefficient will cause the level real gross domestic product in 25 years' time to be up to 5.7 per cent higher than otherwise.

To err on the conservative side, Equity Economics caps the increase at 3 per cent, before comparing it with modelling exercises showing that the national competition policy reforms of the 1990s raised the level of GDP by 2.5 per cent, and that the combined preferential trade agreements with Japan, South Korea and China will raise the level of GDP by just 0.1 per cent over the long term.

Now, I never take such modelling results too seriously. They rest on too many unstated and debatable assumptions. But the comparison does suggest there's a lot to be gained by taking steps to halt the continuing widening of the gap between high and low income-earners.

So what sort of reforms could be made to improve growth in this way?

Of the paper's five suggestions, the top two are, first, improve access to quality education to increase economic and social mobility, starting with early childhood education, right through to needs-based student funding and affordable higher education.

Second, improving labour outcomes for women, through flexibility in childcare options, paid parental leave and reducing the gender pay gap so that returning to work is financially viable.

Clearly, such reforms are very different from those that economists have been pursuing – with so little acceptance by voters.

Although their cost could be covered by equity-enhancing tax reforms – affecting negative gearing, the capital gains tax discount, superannuation and the taxation of multinational companies – they require policy makers to be more agile in their thinking than they've been to date.

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