Photo by Andrew Teoh on Unsplash

“Equity” is the principle of fairness and justice in the distribution of resources, opportunities and privileges among individuals or groups, taking into account their different backgrounds, needs and abilities.

It is often used as a means of addressing systemic and structural inequalities, such as discrimination based on race, gender, socioeconomic status or other factors.

The Mandarin asked me to bring the concept of ‘equity’ to bear on the 2023 Budget. This is to provide some contrast to the familiar but misguided commentary on new money the Budget allocates to various groups and its use as a metric of how much the government cares about those groups or how much better off those groups will be under this government.

‘Misguided’ because history is riddled with well-intentioned budget allocations leading to worse outcomes.

Throwing money does not necessarily improve things

In the US, welfare payments were made more generous for single mothers to offset the extra economic disadvantage they faced. This generosity probably increased the number of children growing up fatherless — one of the strongest predictors of long-term disadvantage for young people.

In Australia, large budget outlays on Indigenous Australians and education have not led to commensurate improvements.

When we think about equity and how a budget might have a long-run, positive impact on equity in society, we need to remember these lessons. Identifying a problem and throwing money at it may not improve things: it might make them worse. Keep this simple equation in mind:

Identify problem + spend money ≠ solution

The potential of evaluation

The appointment of an evaluator general and associated funding for a renewed focus on the evaluation of government programs is a relatively small new budget line of auspicious potential for equity in Australian society.

An evaluator general, if deployed properly, will bring to the government the evidence it needs to justify allocating money away from ineffective and harmful programs and towards those that can be shown to improve people’s lives and social equity more generally.

Of course, the government then needs to be open to accepting that existing policy often hasn’t worked as intended, something which history suggests governments are particularly bad at.

Do not assume that a better evaluation of policy will automatically clarify an optimal and equitable policy solution. This, too, is misguided. However, better evaluation will clarify the trade-offs inherent in policy.

Take, as an example, the Budget measure to extend the cut-off at which single mothers stop receiving Parenting Payment Single (PPS) for their youngest child from eight to 14 years. This almost reinstates the policy of earlier governments that made parents eligible for PPS until their youngest child was 16.

This sounds like good news for single mums. But is it? Mostly, but not always…

We evaluated the reduction in cut-off age (from 16 years to eight) using both survey and administrative data. We found about one-third of single mums did better under the reduced age cut-off. They moved into full-time work and away from welfare and enjoyed the benefits of generous childcare subsidies and the wellbeing that work bestowed on them and their children.

Unfortunately, the other two-thirds of single mothers didn’t increase how much they worked. Moving from PPS to Newstart when their child turned eight meant their incomes declined. Their wellbeing and the wellbeing of their children probably did, too.

On average, this Budget’s change to PPS will benefit single mothers. But it will hurt a significant fraction of them as well. The new policy will lead some who might have worked to not working. That means lower human capital accumulation for those women, lower superannuation balances and lower future earnings potential.

Better data and evidence have clarified the trade-off this policy entails. Reasonable people can disagree about what should be done, but can do so with knowledge of the costs and benefits rather than with opinions seized out of thin air or based on pre-existing prejudices.

Tackling inflation inequity

The Budget leaves much to be desired in the equity space.

It is not an inflation-fighting budget. It adds expenditure in areas that will grow into the future. Handouts that provide “cost of living relief” will inevitably push up prices.

Large and growing expenditures like the NDIS and aged care have produced a structural deficit. Some combination of program reform that involves means testing and reduced generosity seems inevitable in the medium term.

So, too, do tax increases to arrest the growing gap between expenditure and revenue. Yet this remains to be dealt with in a future when its magnitude, and that of related equity issues, will only be more intimidating.

Inflation is an equity issue. Bringing it under control is particularly important for low-wage workers with few assets.

Asset price inflation, even if wages keep up, makes it harder to come up with a down payment on a house. Inflation hurts those typically poorer Australians whose wealth is held in bank accounts. Yet it helps those with geared properties (many of which can be found in the Register of Members’ Interests) as the real value of their loans decrease and their assets inflate in price.

Bringing inflation under control with interest rate rises often leads to recession and job losses. Again, those at the lower end of the wage and income distribution lose out.

Instituting increased government outlays but turning a blind eye to well-learned lessons of their impact on the economic cycle is delusional.

It is a balancing act. Time will tell if this Budget gets the balance right. But we can’t keep putting off dealing with the underlying structural issues.

Tax system remains unfair

The Budget makes limited use of taxation to improve equity.

Changes to the Petroleum Resource Rent Tax (PRRT) are good as far as they go. Australians have benefited insufficiently from the wealth extracted from mineral and petroleum resources. The PRRT changes will grow revenue from petroleum and gas by a small but significant amount.

On the downside, the PRRT is inefficient and the new threshold adds complexity. Alternatives (withdrawing the grandfathering of overly generous uplift rates, changing the netback pricing mechanism or raising the rate) would raise more revenue more efficiently.

The Stage 3 tax cuts, viewed in their entirety, are not unfair and they maintain equity, as they mostly return bracket creep while maintaining the progressivity of the overall system. Leaving them alone is good policy and good politics.

Additional taxation of superannuation balances above $3 million is good policy. While superannuation tax concessions are about right, they are misused by those with very high balances to fund bequests rather than retirement income. Giving tax breaks to build inter-generational family fortunes is not good policy.

But these three changes are mere tinkering. The big equity issues in our tax system remain.

Priorities for reform are clear:

  • reduce the system’s reliance on personal and corporate income tax;
  • increase consumption taxes; and
  • tax wealth more effectively through the introduction of either a broad-based land tax or an inheritance tax.

Our over-reliance on taxing income rather than wealth means that young, working people pay too much tax while property owners pay no or little tax and get even richer as government policy undermines increased housing supply and prevents in-fill.

This is grossly unfair.

My question to all sides of politics: What are you going to do? For all of us and especially those with no easy or available alternatives.


A version of this article first appeared on the Mandarin.


Other Budget Forum 2023 articles

The Costly and Unfair Stage 3 Tax Cuts Will Undermine the Progressive Income Tax and Worsen Inequality, by Kathryn James, Guyonne Kalb, Peter Mares, Miranda Stewart and Roger Wilkins.

Inflation Forecast, Fiscal Policy and Personal Income Tax Rates, by Chris Murphy.

Financial Support for Those on Low Incomes, by John Freebairn.

Will the Budget Reduce Inflation? By Michael Coelli.

Stage 3 Tax Cuts and JobSeeker – A Slightly Different View, by Andrew Podger.

A Small Investment in the Budget With a Big Policy Return? By Nicholas Biddle.

Labor Could and Should Have Gone Stronger on the Petroleum Resource Rent Tax, by Rod Sims.

How Removing Parenting Payments When Children Turned 8 Harmed Rather Than Helped Single Mothers, by Kristen Sobeck.

Straightening Out the Super Tax Breaks Debate, by Brendan Coates and Joey Moloney.

The Priorities of Australians Ahead of Budget 2023-24, by Nicholas Biddle.


This article has 1 comment

  1. Many politicians do think throwing money at a problem solves it. COVID was clearly cured by Mr Morrison running the biggest Budget deficit since Japan entered WWII and sending me a Jobkeeper cheque I did not really need or want – but accepted only because I knew the idiots would be raising taxes down the track to claw it back. Years ago in the 60s they coped with a slump by just cutting sales or income taxes rather than taking and throwing money back at the people they took it from.

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