ACTU Submission. Inquiry into the extent of income inequality in Australia. 29 August 2014

Transcription

1 ACTU Submission Inquiry into the extent of income inequality in Australia 29 August 2014

2 Contents Introduction... 2 The extent of income inequality in Australia... 4 Measuring income inequality... 4 The level of household income inequality in Australia... 5 The level of household income inequality in OECD countries... 6 Changes in income inequality in Australia over time... 7 A note of caution... 8 Changes in income inequality over time in the OECD... 9 Trends in top income shares Trends in earnings inequality The role of minimum wages The role of unions Income inequality and disadvantaged groups The rise of the gender pay gap Causes of the gender pay gap Recommended solutions to gender pay inequity Indigenous inequality Indigenous employment Educational attainment Health and access to services The need to address indigenous inequality The impact of government policies on inequality Income inequality and redistribution The Budget s impact on households: NATSEM s analysis The Budget s impact on households: ANU analysis The Budget s impact on households: Treasury s analysis The Budget s impact on households: some specific measures The longer run impact Principles for social security payments in Australia Adequacy of payments The promotion of workforce participation Policies to address inequality ACTU Submission to the Senate inquiry into income inequality Page 1

3 Introduction The Australian Council of Trade Unions (ACTU) is the peak union body representing 46 affiliated unions and the interests of almost 2 million members across Australia. The ACTU welcomes the opportunity to provide a submission to this inquiry. We thank the Committee for agreeing to grant the ACTU a one week extension to the deadline for this submission. Unions work towards a fairer, more equal Australia. All Australians deserve to live in dignity and be socially included. People should have the opportunity to achieve their potential. High and rising income inequality undermines these objectives. Income inequality is an important and complex subject. Rising inequality is caused by many factors, including technological change and globalisation, as well as policy-related factors such as a reduction in the progressivity of the tax system, a fall in the relative value of the minimum wage, and a fall in union density. Inequality can have a range of negative consequences, ranging from increasing social atomisation and isolation, to possible effects on health and crime, to negative effects on economic growth. This submission does not consider all these important potential causes and consequences of income inequality. This submission present evidence that shows: Income is distributed more unequally in Australia than in most OECD advanced economies; Income inequality has risen in Australia by about 5% since the mid-1990s; The share of income going to the top 1% has more or less doubled since the early 1980s; Earnings inequality among workers has grown significantly; The minimum wage has fallen relative to average and median wages, which we believe has contributed to rising earnings inequality; The rise of income inequality in Australia has coincided with a large fall in union density, and we believe these phenomena to be related; The gender pay gap has grown in recent years to a multi-decade high; Aboriginal and Torres Strait Islander people experience high levels of disadvantage, including low incomes relative to the rest of the community; One of the causes of rising inequality in Australia has been a reduction in income redistribution through taxes and transfers; The measures proposed in the Budget would further reduce redistribution and thus increase inequality; The adequacy of social security payments is central to the prevention of poverty and reduction of income inequality, but key payments in Australia are inadequate; and Elements of the tax system, notably including the structure of superannuation tax concessions, work to increase inequality in Australia. ACTU Submission to the Senate inquiry into income inequality Page 2

4 Unions do not wish for Australia to become more like America, with large numbers of working poor, a disenfranchised underclass, and low intergenerational social mobility. We believe that Australians share our wish to avoid this outcome. In 2011, the ACTU commissioned original research regarding Australians perceptions of inequality. 1 The research found that Australians underestimate the level of wealth inequality in Australia. When asked to outline their ideal wealth distribution, Australians of a wide range of backgrounds choose an egalitarian society. Australians do not want wide economic disparities. Inequality has fallen slightly since the GFC, but this is not cause for complacency. Policymakers have a significant influence over the level of inequality. We ask the Committee to recommend policies that would reduce inequality in Australia. These include: A fairer tax system; Adequate minimum wages; Promotion of collective bargaining and quality jobs; Adequate income support payments; The abandonment of regressive budget changes; and Ensuring all Australians have access to education, regardless of their background. 1 D. Neal, C. Govan, M. Norton and D. Ariely 2011, Australian Attitudes Towards Wealth Inequality and Progressive Taxation: A national survey of knowledge, attitudes and perceptions of wealth inequality and progressive taxation, Empirica Research, Prepared for the ACTU. Available from: ACTU Submission to the Senate inquiry into income inequality Page 3

5 The extent of income inequality in Australia This section provides evidence that demonstrates that income inequality in Australia is higher than in most OECD advanced economies and has risen in the past two decades. We also show that the income share of the top 1% has doubled (more or less) in the past three decades and that minimum wages have fallen relative to average wages, contributing to a rise in earnings inequality. Measuring income inequality Different measures of income can be used for inequality measures. Some use income before taxes and transfers this is private income that consists of wages and salaries, business income, interest, etc. When cash transfers are added to private income, you obtain gross income. Subtracting personal income tax (and the Medicare levy) from gross income gives disposable income. 2 Disposable income is most commonly used to compare levels of income inequality over time and across countries. It s important to note that disposable income includes income tax, but not indirect taxes like the GST; it also includes cash transfers, like the Age Pension or Newstart Allowance, but not in-kind transfers, like the value of publicly-provided health care and education. 3 Income inequality is typically calculated using household income, to reflect the fact that people who live together are able to share resources. Someone who has an income of $ per year, but lives in a household with someone who earns $ per year, is likely to have a higher material standard of living than someone with an income of $ who lives alone. However, a direct comparison of households incomes can be misleading. This is because households differ by size. A household with an income of $ that has two adults and two children can support a lower level of consumption, per person, than a single person living alone who has an income of $ For this reason, household incomes are typically adjusted for differences in household size. Incomes are adjusted by the ABS for differences in household size using the modified OECD equivalence scale. This assigns a value of 1 to the first adult in a household, 0.5 to the second adult, and 0.3 to each child. 4 This means that a household with two adults and two children with an income of $ would have an equivalised income of $ (=$ / 2.1). When incomes are equivalised in this way, a single person living alone with a disposable income of $ is able to support an equivalent standard of living to a family of four with a disposable income of $ Income inequality is usually measured using the Gini coefficient, a summary statistic that is equal to 0 in a case of perfect equality and equal to 1 when one person in society receives all the income. 2 See ABS, Explanatory notes, Household Income and Income Distribution, Australia, 2011, Catalogue number , Released 16 August Subtracting estimated indirect taxes and adding estimated in-kind transfers gives final income. 4 For more information see: OECD, What are equivalence scales?, OECD Project on Income Distribution and Poverty, ACTU Submission to the Senate inquiry into income inequality Page 4

6 The level of household income inequality in Australia The ABS calculates the Gini coefficient based on households equivalised disposable income was 0.32 in The median equivalised disposable household income was $790 per week in A single person, living alone, with this level of income would have a standard of living higher than that of half the Australian population, and below half the population. The ABS figures also show: The top 20% of households received 39.5% of all household income; The bottom 20% of households received just 7.5% of all income; The average income of the top 20% of households was $1814 per week; The average income of the bottom 20% of households was $346 per week; NSW is the most unequal State or Territory, with a Gini of 0.331, followed by Western Australia at 0.325; and The Northern Territory has the most equal income distribution, with a Gini of 0.283, followed by Tasmania (0.293) and the ACT (0.294). 5 Table 1 shows the number and proportion of Australians who live in households with equivalised disposable incomes in particular ranges. It shows, for example, that 4.4% of Australians have incomes of $2000 per week or more, while 22.6% have incomes below $500 per week. 5 All figures from ABS, Household Income and Income Distribution, Australia, 2011, Catalogue number , Released 16 August ACTU Submission to the Senate inquiry into income inequality Page 5

7 Table 1: Half of Australians live in households with equivalised disposable income below $790/week Equivalised disposable household income by income range, Thousands Share (%) Cumulative share (%) No income % 0.4% $1 $ % 0.8% $50 $ % 1.2% $100 $ % 1.6% $150 $ % 2.2% $200 $ % 3.2% $250 $ % 4.9% $300 $ % 7.1% $350 $ % 12.6% $400 $ % 17.5% $450 $ % 22.6% $500 $ % 31.7% $600 $ % 40.9% $700 $ % 50.8% $800 $ % 59.8% $900 $ % 66.4% $1,000 $1, % 73.2% $1,100 $1, % 85.9% $1,400 $1, % 92.6% $1,700 $1, % 95.8% $2,000 or more % 100.0% All persons Source: ABS 6523 and ACTU calculations The level of household income inequality in OECD countries Income inequality is higher in Australia than in most OECD advanced economies. Australia s Gini coefficient is , higher than the average for OECD countries of Figure 1 shows the level of income inequality in 32 OECD countries. 6 This is slightly higher than the reported by the ABS due to minor technical differences. 7 This is the unweighted average of the 32 OECD countries listed in Figure 1 in the latest year available. ACTU Submission to the Senate inquiry into income inequality Page 6

8 Figure 1: Income inequality in Australia is higher than in most OECD countries Gini coefficient for equivalised household income after direct taxes and cash transfers Chile Turkey United States Israel United Kingdom Spain Portugal Japan Greece Australia New Zealand Estonia Italy Canada France Korea Poland Ireland Germany Switzerland Austria Netherlands Luxembourg Sweden Belgium Slovak Republic Finland Czech Republic Denmark Iceland Norway Slovenia Gini coefficient Source: OECD Income Distribution Database. Available from: Inequality of disposable incomes is higher in Australia than in most OECD countries, as shown above. However, it is important to note that inequality of pre-tax, pre-transfer incomes is slightly lower than average. One of the key reasons why Australia s disposable income inequality is relatively high is that we do less income redistribution through taxes and cash transfers than most OECD countries. This issue is examined in more detail in a later section of this submission (see Figure 17 and Figure 18). Changes in income inequality in Australia over time According to the ABS, Australia s Gini coefficient rose from in to in , an increase in inequality of around 11%. Between , income inequality fell a little, with the Gini coefficient coming down to While this is lower than the level recorded in , it remains higher than the Gini at any time from to (inclusive). The decrease in inequality since the GFC has been ascribed to causes including: The economic stimulus packages of , a large portion of which consisted of means tested cash transfers to households; The increase in pensions in 2009; and The post-gfc fall in income from assets such as stocks, the ownership of which is concentrated among high-income earners. ACTU Submission to the Senate inquiry into income inequality Page 7

9 Figure 2: Income inequality has fallen since the GFC, but remains higher than the early 2000s or 1990s Gini coefficient based on equivalised disposable household income Gini coefficient Current ABS series Johnson and Wilkins series based on old ABS data 0.22 Source: Current ABS series from ABS Earlier series from Johnson and Wilkins To the extent that the recent fall in inequality can be ascribed to a fall in income from owning assets, the fall is likely to prove short-lived. A note of caution Caution needs to be exercised in comparing the Gini coefficients over time. This is because of changes to the ABS definition of income and survey method changes that affect the comparability of estimates. Figures from prior to should be viewed with particular caution and are presented in Figure 2 for illustrative purposes only. The ABS presents all its Gini coefficient estimates from onwards together in one series, suggesting that it is comfortable with the degree of comparability of those estimates. However, Roger Wilkins of the Melbourne Institute has shown that some (unknown) portion of the measured rise of income inequality in the 2000s could be due to technical changes in the survey methodology rather than an increase in income inequality itself. Wilkins concludes as follows: We are therefore left with the somewhat unsatisfactory conclusion that it is not possible to produce definitive estimates of income inequality trends between 2001 and There are, however, some seemingly unambiguous facts about income distribution changes over the decade. No data source shows inequality decreasing and indeed there is agreement between [various data sources] that inequality increased from approximately to and 8 D. Johnson and R. Wilkins, The causes of changes in the distribution of family income in Australia, 1982 to , Social Policy Research Paper Number 27, Department of Families, Community Services and Indigenous Affairs, Australian Government, Canberra, 2006,Table 4.5. Available from: ACTU Submission to the Senate inquiry into income inequality Page 8

10 then decreased in the next two years. In addition, all three series show that changes to income taxes and to government benefits acted to increase income inequality over the decade. 9 The ABS has improved its survey methodology over time and harmonised its definition of income with the international standard. This means that the recent estimates of the Gini coefficient are more likely to be accurate than earlier estimates. Thus, to the extent that the available figures overstate the rise in inequality, it is likely to be due to an underestimate of inequality in earlier years rather than an overestimate of inequality in later years. The ABS (and OECD) figures are used in this submission, as those organisations are confident enough of the comparability of the post-1994/95 estimates to present them as a time series, but the Committee should be aware of the technical issues here. Changes in income inequality over time in the OECD According to the OECD figures, Australia s Gini coefficient has increased from in 1995 to in 2012, a rise of 0.15 points or around 5%. This is lower than the increase in Canada (9.2%) and the USA (7.8%) over the same period, but higher than the UK (2.2%) or New Zealand (-3.6%). Advanced economies in recent decades have shown a general trend towards increasing income inequality, but this trend is by no means universal and the increase has not been of equal magnitude everywhere. Rising inequality is not inevitable or homogenous; public policy has played an important role in determining the degree to which inequality has risen in OECD countries, as will be examined in more detail later in this submission. Figure 3: Inequality has risen over the past three decades in Australia and elsewhere Gini coefficient for equivalised disposable household income in Australia and comparator countries Gini coefficient 0.40 United States 0.35 United Kingdom Australia 0.30 Canada 0.25 Australia (less comparable pre- 94 data) Source: OECD Income Distribution Database. Available from: Australian Gini coefficients from 1982 to 1990 (inclusive) from Johnson and Wilkins The rise in income inequality in Australia since the mid-1990s is around the middle of the pack for OECD countries, as shown in Table 2. The continental European countries have experienced a large rise 9 R. Wilkins, Evaluating the Evidence on Income Inequality in Australia in the 2000s, Economic Record, vol. 90, no. 288, March Melbourne Institute Working Paper version available from: ACTU Submission to the Senate inquiry into income inequality Page 9

11 in inequality off a low base; the United States has experienced a large rise of a high base. Australia has experienced a medium-level increase in inequality off a medium-to-high base level. Table 2: The rise in income inequality in Australia has middle of the pack for OECD countries Gini coefficient in 1995 (or nearest year) and latest year Trends in top income shares 1995 or closest Gini Latest Gini Increase (%) Increase (Gini points) Turkey % Netherlands % Greece % New Zealand % Italy % Czech Republic % United Kingdom % Norway % Japan % Australia % Luxembourg % United States % Canada % Germany % France % Israel % Finland % Denmark % Sweden % Source: OECD Stat and ACTU calculations The Gini coefficient is calculated based on sample surveys of households. This is a reliable way to estimate a measure like the Gini, which takes into account the whole income distribution. However, it is generally thought that sample surveys understate the income share of the very highest income earners. For this reason, a new literature has sprung up in the past decade or so, following the work of Thomas Piketty, Emmanuel Saez, and Anthony Atkinson, that estimates the income share of top earners using tax records. These estimates are compiled in the World Top Incomes Database (WTID). The data in the WTID shows that the share of income going to the top 1% in Australia fell more or less steadily throughout the 20 th century, with occasional interruptions such as the wool boom associated with the Korean War around The top 1% share reached a low of 4.61% in 1981 and rose significantly in the following decades, reaching a high of 10.06% in 2006; it was 9.17% in This is shown in Figure 4. In real terms, the WTID shows that the average income of the top 1% in Australia rose from $ in 1981 to $ in 2010, an increase of 184%. Over the same period, the average real income per adult rose from $ to $49 304, a 43% increase. ACTU Submission to the Senate inquiry into income inequality Page 10

12 Figure 4: The income share of the top 1% has nearly doubled since the early 1980s (Top 1% income share with and without capital gains) Per cent Top 1% income share (incl. capital gains) Top 1% income share (excl. capital gains) 2 Source: Series including capital gains is from the World Top Incomes Database: 10 Series excluding capital gains is from Roger Wilkins: There has been some debate about the extent to which the measured rise in the Australian top income share is due to changes in the tax system, particularly related to capital gains. 13 But even when capital gains are excluded, it is clear that there has been a significant rise in top income shares since the early 1980s. Excluding capital gains, the top 1% income share was 4.44% in 1981, peaked at 7.83% in 2006, and was 7.68% in Whichever series is used, the top 1% share is close to double its early 1980s level. The income share of the top 1% in Australia is lower than the share of the top 1% in Canada, the UK, or the US. This has been the case for virtually the entire post-war period, barring the Korean War wool boom blip of However, the (approximate) doubling of the top 1% share in Australia over the past thirty years or so is not dissimilar to the rise in the income share in these comparator countries, as shown in Figure Series including capital gains is from A.B. Atkinson and A. Leigh, The Distribution of Top Incomes in Australia in Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, A.B Atkinson and T. Piketty, T. (eds), Oxford University Press, 2007, chapter 7; updated data from the World Top Incomes Database: 11 Data from Roger Wilkins: 12 Series excluding capital gains is from R.V. Burkhauser, M.H. Han, R. Wilkins, Measuring Top Incomes using Tax Record Data: A Cautionary Tale from Australia, NBER Working Paper 19121, National Bureau of Economic Research, Cambridge, Massachusetts, 2013; updated data from Roger Wilkins: 13 See Burkhauser, et al ACTU Submission to the Senate inquiry into income inequality Page 11

13 Figure 5: Australia s top 1% share is smaller than the US, UK or Canada, but has risen a lot Income share of the top 1% in four countries Change in the income share of the top 1% Per cent 20 Index (1980=100) USA UK UK USA 10 Canada Australia Canada 5 Australia Source: The left panel is from the World Top Incomes Database: The right panel shows ACTU calculations based on WTID data. The UK s index is set to 100 in 1981, not 1980, due to data limitations. Top income shares have risen in most, though not all, advanced economies. However, the extent of the increase is far from homogenous across the OECD. Many of the continental European countries have experienced only small rises in the top 1% share, or even falls in top income shares. This suggests that national policy can play an important role in affecting income trends they are not merely an inevitable and unavoidable consequence of technological change and globalisation. Countries with lower top marginal tax rates (MTRs) tend to have higher (pre-tax) top income shares. This is shown in Figure 6. One possible explanation advanced for this is that lower top MTRs increase the incentive and return to rent-seeking behaviour. 14 Figure 6 shows that Australia is more or less middle of the pack both on our top MTR and our top 1% income share, when compared with other advanced economies. 14 See T Piketty, E Saez and S Statcheva, Optimal Taxation of Top Labour Incomes: A Tale of Three Elasticities, American Economic Journal: Economic Policy, vol. 6, no. 1, 2014, pp NBER working paper version available: ACTU Submission to the Senate inquiry into income inequality Page 12

14 Figure 6: Countries with lower top tax rates tend to have higher top income shares Top MTR and top 1% income share in in 18 OECD countries Top 1% income share (%) US UK 12 8 Ireland Norway Canada Germany Portugal Italy Australia NZ Spain Japan France Switzerland Finland Netherlands Sweden Denmark Top marginal tax rate (%) Source: Piketty, Saez and Statcheva 2014, Figure 2b. 15 Not only do countries with lower top MTRs tend to have higher top income shares, but countries that have cut their top MTRs more over time have tended to experience larger rises in top income shares. This is shown in Figure 7, which compares the change in the top MTR and the change in the top 1% income share between and Again, this suggests that differences in national public policy influence changes in income inequality. Figure 7: Top income shares have risen more in countries where the top tax rate has been cut more Change in the top 1% income share and top MTR between and Change in top 1% income share (percentage points) 10 US UK Portugal Ireland Norway Canada Italy Japan Australia Change in top marginal tax rate (percentage points) Source: Piketty, Saez and Statcheva 2014, Figure 3 NZ France Netherlands Denmark Sweden Finland Spain Germany Switzerland 15 T Piketty, E Saez and S Statcheva, Optimal Taxation of Top Labour Incomes: A Tale of Three Elasticities, American Economic Journal: Economic Policy, vol. 6, no. 1, 2014, pp NBER working paper version available: ACTU Submission to the Senate inquiry into income inequality Page 13

15 Trends in earnings inequality The measures of income inequality examined above pertained to all households or individuals and all sources of income. Another important dimension for the Committee to consider is earnings inequality the inequality of wages earned by employees. One source of rising earnings inequality is the increase in CEO pay related to the rise in top income shares examined above. The Productivity Commission found that: The available data suggest that the average remuneration of executives in ASX100 companies grew in real terms at an average annual rate of around 6 7 per cent between 1993 and This equates to an increase of per cent over the period, or an increase from 17 times average earnings in 1993 to 42 times in Earnings inequality has also risen sharply among non-managerial workers. The good news for Australia is that real wages are higher than they were a decade or two decades ago, unlike in some OECD countries. The bad news is that this growth has been shared unequally, with wages growing much quicker at the top end than for low-paid workers. Full-time workers at the tenth percentile of the (non-managerial) earnings distribution earned $769 per week in That is $122.75, or 19%, more than a full-time worker at the same point of the distribution earned in 1975 (in inflation-adjusted terms). Over the same period ( ), median full-time earnings rose by $ per week (39.4%). Earnings at the 90 th percentile increased by $ per week (65.5%). 17 Figure 8: Real wages have risen at all points of the distribution, but risen much more at the top Real weekly earnings of full-time non-managerial adult employees Real 2012 $ per week $2,500 $2,000 90th percentile $1,500 $1,000 Median $500 10th percentile $ Source: ABS Deflated by the CPI (ABS 6401). 16 Productivity Commission, Executive Remuneration in Australia, Report No. 49, Final Inquiry Report, Melbourne, Note that these figures pertain to full-time adult non-managerial employees. The rise in earnings at higher percentiles thus cannot be ascribed to increasing salaries for CEOs and other managers. ACTU Submission to the Senate inquiry into income inequality Page 14

16 The earnings of high-paid workers (those at the 90 th percentile) grew by an average of 2.5% in inflationadjusted terms between 2002 and 2012; the median rose by 1.7% a year, while the NMW grew by 0.8% a year. Figure 9: Real wages have risen faster for high income earners Real weekly earnings of non-managerial adults Average annual growth: 2002 to 2012 Real 2012 dollars per week $2,500 $2,000 $1, th percentile 75th percentile 50th percentile 1.7% 2.0% 2.5% $1,000 25th percentile 1.4% $500 10th percentile 1.2% $0 NMW 0.8% Source: ABS 6306 and ACTU calculations. Deflated by the CPI (ABS 6401). 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Average annual real wage increase Earnings inequality has grown significantly, even among non-managerial workers. The role of minimum wages There are many reasons for rising earnings inequality, but the sharp fall in the minimum wage, relative to median and average wages, has surely played a role. Figure 10 shows that the minimum wage has grown much less rapidly than average or median wages. As a result, the minimum full-time wage has fallen from 53.7% of the average full-time wage in 1994, to 49.7% in 2004, to 42.8% in mid Note that these figures pertain to the ratio prior to this year s minimum wage increase taking effect. This is because the latest ABS average weekly earnings data pertain to the May 2014 quarter. The latest minimum wage increase took effect from 1 July. ACTU Submission to the Senate inquiry into income inequality Page 15

17 Figure 10: The minimum wage has fallen as a proportion of median and average wages Average, median, and minimum full-time wages Ratio of minimum to median & ave full-time wages Real 2014 dollars per week $1,600 $1,200 $800 $400 Average full-time earnings Median full-time earnings National Minimum Wage Ratio 65% 60% 55% 50% 45% 40% NMW as % of median FT earnings NMW as % of average FT earnings $0 Jun 94 Jun 99 Jun 04 Jun 09 Jun 14 35% Jun 94 Jun 99 Jun 04 Jun 09 Jun 14 Source: Average weekly full-time earnings of full-time adults from ABS 6302; median full-time earnings from ABS 6310, ABS 6401, FWC. The ratio of the minimum to the average wage is known as the minimum wage bite. Australia had the highest minimum wage bite in the OECD by some margin in the 1990s and earlier decades. It remained the highest in the OECD in the early 2000s, although by a similar margin. But as Australia s bite has fallen, those of many other OECD countries have risen. As a result, Australia s minimum wage bite is falling back to the pack, as shown in Figure 11. Figure 11: Australia s minimum wage is moving back to the middle of the pack Distribution of minimum wage bites in OECD countries Source: OECD Stat and ACTU calculations. Chart shows the number of countries in 2.5 percentage point ranges. Bite=minimum FT wage as % of average. The ACTU is concerned about the implications of this trend continuing. If the minimum wage bite is allowed to continue to fall, then Australia will soon have a minimum wage bite of the same level as Canada and the UK, where earnings inequality is much higher. By the 2030s, unless the trend is ACTU Submission to the Senate inquiry into income inequality Page 16

18 arrested, Australia s minimum wage bite will be close to that of the United States, a country with a large working poor and unacceptably high inequality. Figure 12: If trends continue, Australia s minimum wage bite will be similar to the UK s in a few years Minimum wage as a percentage of average wage in OECD countries, including Australian projection Minimum wage as % of average wage 60% Australia 50% Projection 40% Canada 30% United Kingdom 20% 10% Other OECD countries (excl.mexico) United States The US would be here with President Obama's proposed $US10.10 minimum wage 0% Source: OECD Stat and ACTU calculations. The projection assumes a 0.67 percentage point decline per year, the average since Countries with lower minimum wage bites tend to have greater earnings inequality. They also tend to have a larger proportion of their workforce in low paid jobs those that pay less than two-thirds of the median full-time wage (Figure 13). Figure 13: Countries with lower minimum wage bites tend to have more earnings inequality and a higher share of workers in low-paid jobs 50:10 earnings ratio and the minimum wage bite Low pay incidence and the minimum wage bite 50:10 ratio 2.2 US Korea Estonia Canada Czech Rep Israel Slovak Rep Ireland Hungary UK Poland Spain Turkey Australia Japan Netherlands Greece Slovenia NZ Luxembourg France Portugal Belgium Low pay incidence (Per cent) 30 Israel Hungary Czech Rep UK Slovak Rep Canada Ireland Poland Spain Australia Japan New Zealand Greece Belgium % 30% 35% 40% 45% 50% 55% 25% 35% 45% 55% Minimum wage as a percentage of average Minimum wage as a percentage of average Source: OECD Stat. Figures pertain to The 50:10 ratio measures median full-time earnings as a multiple of the earnings of full-time workers at the 10 th percentile. Low pay incidence is the share of full-time workers with earnings equal to less than two-thirds of gross median earnings of all full-time workers US Korea Portugal ACTU Submission to the Senate inquiry into income inequality Page 17

19 Sure enough, earnings inequality and the incidence of low pay have risen in Australia as our minimum wage bite has fallen (Figure 14). We ve gone from having a notably egalitarian earnings distribution to one that is middle-of-the-pack and increasingly unequal. If Australia s minimum wage bite continues to fall, it is likely that broader earnings inequality and the prevalence of low pay will rise. Figure 14: As Australia's minimum wage bite has grown, so have earnings inequality and the share of workers in low-paid jobs Source: OECD Stat. The 50:10 ratio measures median full-time earnings as a multiple of the earnings of full-time workers at the 10 th percentile. Low pay incidence is the share of full-time workers with earnings equal to less than two-thirds of gross median earnings of all full-time workers. If Australia s minimum wage keeps falling, relative to average wages, the consequences won t be dire immediately. It will take a while to fully erode Australia s status as a relatively high minimum wage country with a relatively equal wages distribution. But over time, if the current trends continue, Australia will start to resemble other advanced economies with a relatively low minimum wage and high earnings inequality. We are already a fair way down this track. There s a precedent for this kind of erosion the United States. In 1968, the US minimum wage was worth US$10.40 in 2013 prices. This is higher than the Australian minimum wage today - the Australian minimum wage (AU$16.37) is worth US$10.20 in purchasing power terms. The role of unions The rise in income inequality in Australia has coincided with a fall in union density. This is shown in Figure 15, which relates the fall in union density 19 to the rise of the top 1% income share and the Gini coefficient of male gross incomes. 19 Union density refers to the proportion of employed persons that are union members. ACTU Submission to the Senate inquiry into income inequality Page 18

20 Figure 15: Income inequality has risen as union density has fallen Union density and the top 1% income share Union density and inequality of male gross income Union density 70% Top 1% income share 14% Union density 70% Male gross Gini % Union density (LHS) 12% 60% Union density (LHS) % 10% 50% % 8% 40% % 6% 30% % Top 1% income share (RHS) 4% 20% Male gross Gini (RHS) % 2% 10% 0.1 0% 0% Source: A. Leigh, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc. Books, Data available from: The fall in union membership is likely to have increased inequality, relative to where it otherwise would have been. The OECD has found that: The income of union members is generally higher and less dispersed than that of other workers of similar age, education and gender The effect of union membership on labour income inequality among the employed varies by country. In Australia, Canada, Switzerland and the United States union membership appears to raise the income of low-income workers the most, meaning that unions are beneficial for equality among the employed. 20 0% Policies that work to undermine unions and collective bargaining will increase income inequality in Australia. 20 OECD, Inequality in labour income What are its drivers and how can it be reduced?, OECD Economics Department Policy Notes, No. 8, January ACTU Submission to the Senate inquiry into income inequality Page 19

21 Income inequality and disadvantaged groups The negative consequences of inequality are borne disproportionately by particular groups of Australians. On average, women earn significantly less than men. This and other gender-related inequities must be addressed. Aboriginal and Torres Strait Islander people face multiple sources of disadvantage, including lower incomes. Closing the income gap is important, as is closing the gaps in health, education, employment, and other (interrelated) areas of disadvantage. People with disability face social exclusion, including as a result of lower average incomes than the rest of the community. These are all important issues that must be properly examined and addressed by policymakers. Unfortunately, time has not permitted an in-depth examination of these issues in this submission. Instead, we present a brief overview of some issues related to gender inequity and disadvantage faced by Aboriginal and Torres Strait Islander people. The rise of the gender pay gap In 2014, income inequality between Australian men and women working full time (the gender pay gap or GPG ) rose to 18.2%; nearly 1 percentage point worse than 2013, and the worst in more than 20 years. The rise of the gender pay gap is shown in Figure 16. Figure 16: The gender pay gap is at its highest level in at least twenty years Gap between full-time weekly earnings of male and female full-time employees 19% 18% 17% 16% 15% 14% 13% 12% May 94 May 98 May 02 May 06 May 10 May 14 Source: ABS 6302 and ACTU calculations Some other key facts regarding gender pay inequity are: In 2014, male full-time employees on average earn $14,500 more than female full-time employees, adding up to women earning as much as a million dollars less a life time; The gender pay gap in lifetime earnings is pervasive across all age groups, but is most pronounced between men and women with children; AMP NATSEM, Income Wealth Report She Works Hard for her Money Australian Women and the Gender Divide, University of Canberra, April 2009, p.33 ACTU Submission to the Senate inquiry into income inequality Page 20

22 Men who hold a university qualification and have children can expect to earn around $3.3m over their working life, nearly double the amount for women in the same category at $1.8m. 22 Causes of the gender pay gap The gender pay gap cannot be explained by different levels of educational attainment or workforce experience. This has been confirmed by multiple studies of pay inequity in Australia, including by NATSEM, which found: simply being a woman is the major contributing factor to the gap in Australia, accounting for 60 per cent of the difference in women s and men s earnings, a finding which reflects other Australian research in this area if the effects of being a woman were removed, the average wage of an Australian woman would increase by $1.87 per hour, equating to an additional $65 per week or $3394 annually, based on a 35 hour week. 23 The following social, economic and labour market factors partly explain the gender pay gap: 1. Women doing the same work as men but earning a lower salary, including less penalty rates, overtime, performance payments, bonuses and superannuation contributions. 2. The difference in pay between industry sectors or occupations with a lower value placed on traditionally female dominated work. 3. The effect of breaks in service and part-time work on mother s and carer s earnings and careers. 4. Unconscious bias, discrimination and barriers women face in career development and access to leadership positions. 5. There are now more women finishing secondary education, enrolled at University and in professional jobs than men in Australia. 24 Despite this female graduate salaries are 90.9% of male graduate salaries 25 and female post-graduate salaries are 85% of male postgraduate salaries. 26 Women s, particularly mothers, workforce participation rate in Australia is 19% lower than men s- the fifth highest gap in the OECD. 27 In Australia, one third of working women with a child under age of two leave the workforce permanently while pregnant or after having a child. 28 Some of this is based on 22 AMP NATSEM, Income Wealth Report She Works Hard for her Money Australian Women and the Gender Divide, University of Canberra, April 2009, p.1 23 R. Cassells, Y. Vidyattama, R. Miranti and J. McNamara, The impact of a sustained gender wage gap on the Australian Economy, Report to the Office for Women, Department of Families, Community Services, Housing and Indigenous Affairs, NATSEM, University of Canberra, November AMP NATSEM, Income Wealth Report She Works Hard for her Money Australian Women and the Gender Divide, University of Canberra, April 2009, p.1 25 WGEA Gender Workplace Statistics At A Glance, July 2013, p.1 26 WGEA Gender Workplace Statistics At A Glance, July 2013, p.1 27 AMP NATSEM, Income Wealth Report She Works Hard for her Money Australian Women and the Gender Divide, University of Canberra, April 2009, p.1 28 ABS, Pregnancy and Employment Transitions, 2011 ACTU Submission to the Senate inquiry into income inequality Page 21

23 parents choices, but a recent AHRC study shows many women are in fact forced out of the workforce whilst pregnant or upon trying to return to work from parental leave. 29 The AHRC study found that one in five women report having faced discrimination in the workplace whilst pregnant: 1 in 10 received inappropriate or negative comments; 1 in 15 missed out on training, development and promotion; 1 in 35 had their roles or responsibilities changed without consultation; 1 in 60 were retrenched, dismissed or felt obliged to resign as a result of their pregnancy, parental leave or upon return to work; and 1 in 80 were demoted as a result of their pregnancy, parental leave or upon return to work. 30 Seventy % of part time work is undertaken by women 31 with women still performing most unpaid domestic work. 32 Part time work is associated with lower pay and fewer career development opportunities. 33 Recommended solutions to gender pay inequity A range of policy solutions must be embraced to reduce and ultimately eliminate gender pay inequity, including the following: 1. Improve employment legislation to enshrine a positive duty on employers to reasonably accommodate employees caring responsibilities and provide enforceable rights to family friendly work for employees; 2. Improve workplace health legislation to better protect pregnant and breastfeeding employees; 3. Improve anti-discrimination legislation to better protect employees who are pregnant or caring for dependents; 4. Ensure employers are accountable for providing equal employment opportunities by maintaining the existing reporting regime as enshrined in the Workplace Gender Equality Act; 5. Encourage and support women to enter and progress careers in non-traditional occupations and industries; 6. Implement quotas and targets to improve representation of women in government, political parties and business; 7. Introduce more robust accounting standards and enforceable ASX requirements on gender diversity; 29 Australian Human Rights Commission, Supporting Working Parents: Pregnancy and Return to Work National Review Report, AHRC, Sydney, ABS, Pregnancy and Employment Transitions, WGEA Gender Workplace Statistics At A Glance, July 2013, p.1 32 AMP NATSEM, Income Wealth Report She Works Hard for her Money Australian Women and the Gender Divide, University of Canberra, April 2009, p.2 33 Preston, Yu & Wright, Australia At Work: The Part-time / Full-time Wage Gap, Workplace Research Centre, University of Sydney, Fact Sheet No.17. The study found that an earnings penalty of 6.9% was attached to part time work. ACTU Submission to the Senate inquiry into income inequality Page 22

24 8. Maintain adequate social infrastructure (such as childcare) and financial support (such as paid parental leave) to assist women combine paid work with their caring and family responsibilities; and 9. Government policies which encourage and recognise greater sharing of caring roles and paid work within households. Indigenous inequality Inequality between Aboriginal and Torres Strait Islander people and non-indigenous people is stark. The inequality has a range of dimensions including employment outcomes as well as regional and locations considerations. 34 Aboriginal and Torres Strait Islander disadvantage is both a consequence and a cause of income inequality between Aboriginal and Torres Strait Islander Australians and non-indigenous Australians. In recent years, the focus of governments and other groups has been on closing the gap in educational attainment, health outcomes, life expectancy, employment participation and also in income and living standards. While income inequality does need to addressed, in cannot be viewed or understood in isolation. Rather it must be seen as part of a wider circumstance of entrenched disadvantage and inequality. In the 2011 Census, only 13% of Aboriginal and Torres Strait Islander people aged 15 years and over reported a gross personal income of $1000 or more per week. In comparison 27.6% of non-indigenous people reported a weekly income in excess of $ Only 1% of Aboriginal and Torres Strait Islander people reported a weekly household income of over $2000, compared to 6% of non-indigenous Australians. 36 As individuals and as households Aboriginal and Torres Strait Islander people are more likely to have incomes well below non-indigenous people and households. The income inequality between these groups is clear. The reasons for this inequality and the impacts that it has are varied, the main areas that intersect are employment, education, location and health. Indigenous employment This stark difference between the income of Aboriginal and Torres Strait Islander people and non- Indigenous people intersects with other types of disadvantage and inequality. In particular, there is a strong relationship between income inequality and employment participation amongst in Aboriginal and Torres Strait Islander people. Just over 15% of the Aboriginal and Torres Strait Islander population is engaged in full time employment, compared to close to a third of the non-indigenous population. 34 Deloitte Access Economics, Economic benefits of closing the gap in Indigenous employment outcomes, Reconciliation Australia, pg 1 ( 35 ABS, Census of Population and Housing: Characteristics of Aboriginal and Torres Strait Islander Australians, 2011, Catalogue number ; and Table Builder analysis of 2011 Census. 36 ABS, Census of Population and Housing: Characteristics of Aboriginal and Torres Strait Islander Australians, 2011, Catalogue number ACTU Submission to the Senate inquiry into income inequality Page 23

25 Demographically there is a significant difference in the age profile of Aboriginal Torres Islander population and the non-indigenous population, with 35.9% of Aboriginal and Torres Strait Islander population aged 15 years or under compared to 18.8% of the non-indigenous population. This data demonstrates the importance on focusing support services and education opportunities on those aged under 15 years. The labour force participation rate for Aboriginal and Torres Strait Islander people at the time of the 2011 Census was 50.7%, compared to 64.4% for the non-indigenous population 37. The unemployment rate at the time of the 2011 Census amongst the Aboriginal and Torres Strait Islander population was 17.1%, significantly higher than the 5.4% for the total workforce at the same time. A disproportionately high number of Aboriginal and Torres Strait Islander workers were labourers or community service workers, both occupations that are (on average) associated with lower rates of pay. It is likely that this contributes to Aboriginal and Torres Strait Islander Income inequality. Increasing employment participation is a key way to address income inequality. However consideration must also be given to the type of work available and any job creation focus should also consider industries and occupations that are not low paid and insecure as this type of work only services to entrench inequality. In addition to job creation, specific attention to creating work in regional areas and a focus on improving access to education and social services are all ways to facilitate employment participation and also address disadvantage and inequality. Educational attainment Aboriginal and Torres Strait Islander people have significantly lower rates of educational attainment in comparison to non-indigenous Australians. The 2011 Census found that one quarter (25%) of Aboriginal and Torres Strait Islander people over the age of 15 had completed year 12 or an equivalent, compared to half (52%) of non-indigenous people. A similar proportion (26%) of Aboriginal and Torres Strait Islander people over 15 years had a non-school qualification, compared with half (49%) of non- Indigenous people 38. Aboriginal and Torres Strait Islander people aged 15 to 17 years were also less likely to be attending secondary school than non-indigenous people (61% compared with 81%). Health and access to services Aboriginal and Torres Strait Islander people are disproportionately likely to have a health or disability issue. According the 2011 Census, Aboriginal and Torres Strait Islander people were twice as likely to require assistance with core activities, 8% compared to 4% for non-indigenous people. This is 37 Australian Bureau of Statistics, 2011 Census of Population and Housing, Table Builder Data Analysis Census of Population and Housing: Characteristics of Aboriginal and Torres Strait Islander Australians, 2011 ACTU Submission to the Senate inquiry into income inequality Page 24

26 symptomatic of a wider problem of lower life expectancy and increased risk of health problems that face Aboriginal and Torres Straits Islander people. 39 This care is often given by family members and if not it must be provided by external services. However care and treatment can be expensive and also difficult to access for those living in more regional or remote areas and this has consequences for the already low incomes of many Aboriginal and Torres Strait Islander people. Further to this poor health and the inability to address health issue or access service, has consequences for the ability of Aboriginal and Torres Strait Islander people to find and maintain employment, which in turn serves to restrict the ability of people to earn an income and entrenches income inequality. 40 The need to address indigenous inequality The factors that contribute to and are caused by income inequality between the Aboriginal and Torres Strait Islander population and the non-indigenous population are numerous. The intersection between these factors makes it difficult to single out a specific strategy to address this inequality and disadvantage. However it is clear that one of the main contributors to the broader disadvantage facing Aboriginal and Torres Strait Islander people is income inequality. Aboriginal and Torres Islander people and families have incomes well below those of non-indigenous people and families. This inequality impacts on the ability of people to access employment, education or healthcare and in turn the inability to access these services and opportunities further entrenches the inequality that exists between the two populations Census of Population and Housing: Characteristics of Aboriginal and Torres Strait Islander Australians, Deloitte Access Economics, Economic benefits of closing the gap in Indigenous employment outcomes, Reconciliation Australia, pg. 27 ACTU Submission to the Senate inquiry into income inequality Page 25

27 The impact of government policies on inequality Government policy has a significant impact on the level of income inequality. It has a direct impact through the level and distribution of taxes and cash transfers. Government has an indirect impact through a multitude of policies regarding healthcare, education, disability support, transport, and so on. The Budget, if implemented as proposed, would hit low-income Australians the hardest. The inequity will grow over time. Income inequality and redistribution There are a lot of factors that affect the level of inequality in a country. Perhaps the biggest factor is the amount that the country chooses to redistribute through taxes and cash transfers (like age and disability pensions, family payments, and unemployment allowances). Countries with similar levels of inequality in market incomes make different choices about the amount of redistribution to undertake, and the result is very different levels of inequality in disposable incomes. Look, for example, at the United States, Germany, France and Chile. These four countries have a roughly similar level of pre-tax, pre-transfer inequality (with Ginis ranging from 0.5 to 0.53), but they have dramatically different levels of inequality after taxes and transfers are taken into account. France and Germany do a lot of redistribution, and reduce inequality by about.20 points from.50 to.30. The US doesn t do nearly as much redistribution, so its Gini coefficient after taxes and transfers is about 0.39 America only reduces inequality by about half as much as France or Germany. Chile does virtually no redistribution at all, so it has a post-tax, post-transfer Gini of The level of pre- and post-tax/transfer inequality is shown in Figure 17. ACTU Submission to the Senate inquiry into income inequality Page 26

28 Figure 17: Countries with similar levels of pre-tax inequality can have very different post-tax inequality Gini coefficient before and after direct taxes and cash transfers in OECD countries Ireland Greece Portugal Chile United Kingdom Spain France United States Germany Italy Austria Japan Finland Belgium Estonia Israel Luxembourg Turkey Poland Australia Czech Republic Slovenia New Zealand Canada Sweden Denmark Netherlands Norway Slovak Republic Iceland Switzerland Korea Post-tax, posttransfer Pre-tax, pre-transfer Gini coefficient Source: OECD Income Distribution Database. The data are the latest available for each country; for most countries this is Australia s level of pre-tax, pre-transfer inequality is lower than in many other OECD countries (Gini 0.46), but our post-tax, post-transfer inequality is somewhat higher than the typical developed country (Gini 0.32). The difference between those two figures 0.14 Gini points is a measure of the extent of redistribution that Australia does through direct taxes and cash transfers. Figure 18 shows that Australia redistributes income to a lesser extent than most OECD countries, and only a little bit more than the US. ACTU Submission to the Senate inquiry into income inequality Page 27

29 Figure 18: Australia reduces inequality through redistribution less than most OECD countries Difference between Gini coefficients before and after taxes and transfers Ireland Finland Greece Belgium Austria Slovenia Germany Luxembourg Czech Republic France Portugal United Kingdom Italy Denmark Spain Norway Poland Sweden Estonia Slovak Republic Iceland Japan Netherlands Australia New Zealand Canada United States Israel Switzerland Turkey Korea Chile Gini points Source: ACTU calculations based on OECD Income Distribution Database. Data are the latest available for each country; for most this is At first, this might seem counter-intuitive. Australia has a relatively progressive personal income tax system and we have by far the most targeted welfare system in the OECD. But the simple fact is that we don t raise much in taxes or spend much on transfers. What we do raise in taxes comes disproportionately from those who can afford it most, and what we spend goes overwhelmingly to those who need it most, but we re a low-tax, low-spending country. As a result, we re a low redistribution, somewhat high inequality country The amount of redistribution that Australia does through income taxes and cash transfers has also fallen over time. In the mid-to-late 1990s, we reduced inequality by about 0.16 Gini points through direct taxes and transfers. Now that figure is A recent paper by Herault and Azpitarte (2014) finds that the decline in income redistribution is mostly due to a change in the distribution of market incomes, but that policy change (such as a reduction in income tax progressivity) also played a role. ACTU Submission to the Senate inquiry into income inequality Page 28

30 Figure 19: The extent to which Australia reduces income inequality through redistribution has fallen Difference between Gini coefficients before and after taxes and transfers Gini points 0.20 UK 0.15 Canada Australia 0.10 US Source: ACTU calculations based on OECD Income Distribution Database. The Budget, if legislated, will further reduce the amount of redistribution Australia does through income taxes and transfers. As a result, income inequality will rise. The Budget s impact on households: NATSEM s analysis NATSEM is a widely respected, independent research centre that specialises in economic and social policy modelling, particularly microsimulation. Its Static Incomes Model (STINMOD) is widely used, including by Commonwealth agencies, to analyse the distributional implications and possible cost of proposed changes to tax and transfer policies. Ben Phillips, the Principal Research Fellow at NATSEM, has used STINMOD to estimate the effect of the Budget on households of different types and with different income levels. 42 Phillips summarises his findings as follows: The burden on families for falls most heavily on low and middle income families with children. The impact on high income families with children is smaller in dollar terms and percent change terms... In percentage terms, the impact is clearly felt by the low income families more than high income families. The burden on families of the Budget is quite clear by once all grandfathering arrangements are removed and the Budget levy is removed. Low income couples with children (bottom 20 per cent) are worse off by around 6.6 per cent while single parents are worse off by around 10.8 per cent on average. High income families are marginally better off thanks to the carbon price removal Phillips, B. 2014, NATSEM Budget Analysis, National Centre for Social and Economic Modelling, University of Canberra, May 26, Available from: [Accessed 18 August 2014]. 43 Phillips 2014, p.4. ACTU Submission to the Senate inquiry into income inequality Page 29

31 The effect of the proposed Budget measures on different household types can be seen clearly in Figure 20. For all household types, low-income households experience the largest reduction in income as a result of the Budget. The reduction is largest for families with children. A single parent with children aged 8 and 12 would have his or her disposable income cut by 5.8% in this financial year by the Budget measures. Very high income earners will experience a much smaller income reduction a single person earning $ per year would experience an income reduction of 0.3% as a result of the temporary budget repair levy. Figure 20: Measures proposed in this Budget would disproportionately hurt low income people (Modelled change in disposable income in by private income for various households types) Change in disposable income (%) 0% Single person, no kids -1% -2% -3% -4% -5% -6% Single income couple, 2 kids Single parent, 2 kids Dual income couple, 2 kids -7% $0 $25,000 $50,000 $75,000 $100,000 $125,000 $150,000 $175,000 $200,000 Private income per annum Source: Phillips 2014, NATSEM Budget Analysis, May 26. Available online: The temporary levy is set to apply for three years, up to and including This means that by , the Budget measures will no longer have a negative effect on high income earners. In fact, the NATSEM modelling suggests that high income earners will be slightly better off in than they would have been in the absence of the recent Budget, due to the slight increase in real incomes as a result of the carbon price repeal. By contrast, the measures in the Budget that affect lowincome earners are permanent and their effects generally grow over time. The pain from policy decisions such as freezing or reducing indexation or payment rates or eligibility thresholds is mostly not felt immediately rather, its effect on the real incomes of households grows over time. Figure 21 shows the effect of the Budget measures on various household types in Low income earners are expected to be significantly worse off in as a result of the recent Budget than they would otherwise have been. ACTU Submission to the Senate inquiry into income inequality Page 30

32 Figure 21: The effect on low-income earners grows; the effect on high-income earners disappears (Modelled change in disposable income in by private income for various households types) Change in disposable income (%) 0% -5% Single person, no kids Dual income couple, 2 kids -10% -15% Single parent, 2 kids Single income couple, 2 kids -20% 0 25,000 50,000 75, , , , , ,000 Source: Phillips 2014, NATSEM Budget Analysis, May 26. Available online: It is important to note that the NATSEM analysis does not include the proposal to deny income support for 6 months to jobseekers aged less than 30. Including this measure would make the apparent impact on households even more starkly negative. The inequitable effect of the recent budget can be seen most clearly in Figure 22, which shows the average change in disposable income for each income quintile for this financial year and for This year, the average income of low income earners is expected to be cut by 1.3% by the budget; the average income of high income earners will fall by 0.3% relative to where it would otherwise have been. By , the average income of low income earners will be 2.2% lower than it would otherwise have been, while high income earners will be slightly better off (+0.2%) than they would ve been if the 2014 budget measures hadn t been implemented. ACTU Submission to the Senate inquiry into income inequality Page 31

33 Figure 22: The budget hurts low income earners the most Mean change in disposable income by quintile as a result of the 2014 Budget in and Change in disposable income (%) 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% % Lowest Second Middle Fourth Top Income quintile Source: Phillips 2014, NATSEM Budget Analysis, May 26. Available online: The budget will increase inequality in Australia. The gap between the richest and poorest in Australia will grow, as the amount of redistribution we achieve will be reduced further. The Budget s impact on households: ANU analysis The NATSEM modelling shows that low-income earners bear the brunt of the Budget cuts. Other analyses concur with this assessment. Peter Whiteford and Daniel Nethery of ANU calculated the difference between the disposable incomes of various household types in under the policies announced in the Budget and those in place before the Budget. 44 As with the NATSEM analysis, Whiteford and Nethery find that low income households will experience the largest falls in income as a result of the Budget. Their results are shown in Table 3. Note that AWOTE refers to the average weekly ordinary time earnings of full-time adult employees Whiteford, P. and Nethery, D. 2014, Sharing the Budget Pain, Crawford School of Public Policy, Australian National University, Canberra. Available from: [Accessed 19 August 2014] ACTU Submission to the Senate inquiry into income inequality Page 32

34 Table 3: Low income households suffer the largest cut in incomes as a result of the Budget (Projected change in disposable income in for various households types) Household type Disposable income in Under current Under policy Budget policy Difference $ pw % Single person on Newstart, 23 years Lone parent, one child aged 3, Parenting Payment Single Lone parent, 1 child aged 3 (67% AWOTE) Lone parent, 1 child aged 6, Parenting Payment Single Lone parent, one child aged 6 (67% AWOTE) Lone parent, 1 child aged 8, Newstart Lone parent, 1 child aged 8 (67% AWOTE) Single income couple with two children, 3 and 6 years (100% AWOTE) Single income couple with two children, 6 and 9 years (100% AWOTE) Dual income couple with two children, 3 and 6 years (100% and 33% AWOTE) Dual income couple with three children, 3, 6 and 9 years (100% and 33% AWOTE) Single person (300% AWOTE) Couple, no children (150% and 100% AWOTE) Source: Whiteford and Nethery Expressed in 2014 prices. The Budget s impact on households: Treasury s analysis Treasury analysis released under Freedom of Information to Fairfax Media also shows that the Budget will reduce the incomes of low income households by a greater amount than high income households. 45 The Treasury analysis, which was produced for the Budget itself, shows that working age households incomes in will be lower than they would otherwise have been, by the following amounts: Lower income households: $844 per year; Middle income households: $492 per year; Higher income households: $517 per year. 46 Lower income households will be hit harder than high income households even in absolute dollar terms; if these figures were expressed as a percentage of income, the inequity would be even starker. The impact of the Budget cuts on households is clear. Most households will suffer a reduction in disposable income as a result of the Budget. Lower income households will generally suffer the largest cuts in income. The inequity of the impact on households will grow over time. 45 Treasury 2014, Final Distributional Analysis for Budget, Available from: Information/DisclosureLog/2014/1510 [Accessed 19 August 2014]. 46 ACTU calculations based on Treasury ACTU Submission to the Senate inquiry into income inequality Page 33

35 The Budget s impact on households: some specific measures The negative impact of the Budget on households, particularly low-income households, is due to a range of measures. However, a few of the policies announced in the Budget are of particular note. In the Budget, the Government announced a three year pause on the indexation of income free areas for working-age payments and Family Tax Benefit. Income free areas are the amount that income support recipients can earn before their payment begins to be reduced. As a result of pausing the indexation of these free areas, income support recipients can earn less, in real terms, before their payment is reduced. The measure would reduce the real disposable incomes of many recipients. It will increase effective tax rates and, perversely, reduce the financial return to work. This short-sighted measure should not be adopted. The Budget also includes a plan to cut the indexation rate applied to Parenting Payment Single from 2014 and pensions from Rather than being tied to Male Total Average Weekly Earnings (MTAWE), as at present, it will be indexed only to the CPI. This move will ensure that single parents incomes, and then those of other pensioners, will fall further and further behind typical community living standards over time. Poverty and social exclusion will rise. The measure should be rejected. Further examination is given to this issue in a later section of this submission pertaining to the effect of the Budget on retirement incomes. Family Tax Benefit payment rates will be frozen as a result of the Budget. Many low- and middle-income working families rely on Family Tax Benefit to ensure they have a decent material standard of living. The expansion of family payments was a proud achievement of the Accord under the Hawke and Keating Governments. The provision of adequate family payments significantly reduced child poverty in Australia. Reducing these payments in real terms, as this Budget measure proposes to do, will cut the incomes of millions of working Australians. Child poverty is highly likely to rise. The measure should be rejected. The Budget measures include the extension of Youth Allowance to people aged 24, and the restriction of Newstart to those aged 25 and over. The Budget will also require young people with full capacity to learn, earn, or Work for the Dole. Job seekers aged 29 or younger will be denied income support for up to six months after applying for a payment and for up to six months out of their second and subsequent year of unemployment. This is arguably the most punitive and objectionable measure in the Budget. There is no case for such a policy at any time. However, it is especially troubling that the measure has been introduced at a time when unemployment, and youth unemployment, are at their highest levels in over a decade. The latest ABS labour force data for July 2014 has unemployment now at 6.4%. Youth unemployment is more than double that at 14.1%. There are now unemployed Australians. At the same time, there are now only job vacancies. The Government s own research shows the number of skill shortages is at an historical low. There are generally large and growing fields of ACTU Submission to the Senate inquiry into income inequality Page 34

36 applicants vying for skilled jobs and almost all employers attracted applicants. 47 The Government s own budget papers forecast that unemployment will still be 6.25% in June 2015, as shown in Figure 23. Figure 23: Unemployment rate and forecasts Unemployment rate Per cent Budget Actual (trend) Actual (seas. adj.) OECD forecast (May 2014) IMF forecast (April 2014) Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Source: ABS 6202, IMF WEO database April 2014, OECD Economic Outlook Annex Table 13, Budget Note that IMF forecasts are year averages; OECD forecasts are for the Dec quarter; Budget forecasts are for June quarter. In the face of this evidence that jobs will continue to be hard to come by for many, the Government s approach panders to prejudices about the unemployed, suggesting that those not fortunate enough to be in work are to blame for their predicament. The debate is cast by the Government in terms of lifters versus leaners. An unemployment benefit that currently sits at a meagre $255 a week for a single person is somehow seen to be part of the problem, acting as a disincentive to find paid work, rather than being viewed as essential support for the unemployed to meet their day to day living expenses, to live with dignity, and to support their job search activities, which can include costs such as transport, phone calls and clothing. Newstart Allowance is inadequate. Youth Allowance is even lower. Pushing more young people onto this allowance will do nothing for the effectiveness of their job search and will merely increase their poverty. The proposal to deny income support to adults aged 29 and under for six months would exacerbate this and is a draconian, unconscionable proposal. 47 Department of Employment 2013, Skill Shortages Statistical Summary , Australian Government. ACTU Submission to the Senate inquiry into income inequality Page 35

37 The longer run impact Over the longer term, reductions in public funding for health and education are likely to increase income inequality relative to where it would otherwise have been. Changes to funding arrangements and regulations regarding tertiary and vocational education are also likely to increase income inequality. The Government announced in the Budget that it will cut $1.8 billion in funding under the National Health Reform Agreement 2011 over the next four years. 48 Beyond the forward estimates, the cuts are much larger. The Government announce that it will reduce the indexation rate for hospital funding to a combination of the Consumer Price Index and population growth, in other words providing no real increase in funding per person. 49 The Budget also included an announcement of reduced funding to schools. School funding beyond the 2017 school year will be indexed by the Consumer Price Index, with an allowance for changes in enrolments 50 in other words, there will be no increase in real funding per student. The reduction in indexation schools and hospitals funding represents a large cut in planned spending, relative to where it otherwise would have been. The trajectory of funding for schools and hospitals under the old and new funding arrangements are contrasted in Figure 24. $ billion Figure 24: Funding for schools and hospitals cut by $85 billion over the next decade (Funding for schools) (Funding for hospitals) Old funding arrangement New funding arrangement $ billion Old funding arrangement New funding arrangement Source: Budget , Budget Overview, p refers to the fiscal year. Over the next decade, funding for schools and hospitals will be $85 billion lower than it would otherwise have been as a result of the recent Budget. 51 The reduction in funding, relative to previous policy, will 48 Budget Paper No. 2, p Ibid. 50 Budget Paper No. 2, p Treasury 2014, Answer to questions on notice, Senate Economics Legislation Committee, Question BET 41, 4 June. Available from: [Accessed 21 August 2014] ACTU Submission to the Senate inquiry into income inequality Page 36

38 increase over time as the effect of the indexation reduction compounds. By , funding will be cut by $6 billion in the case of schools and $15 billion in the case of hospitals. 52 Figure 25: Funding cut through reduced indexation compounds over time Reduction in funding for schools and hospitals relative to previous policy $ billion Hospitals Schools Source: Treasury 2014, Answer to questions on notice, Senate Economics Legislation Committee, Question BET 41, 4 June. These significant reductions in funding to the states to provide vital public services leave them with two options: either reduce service provision, or raise revenue elsewhere. This has fuelled speculation that the planned cuts to health and education funding to the states is part of an orchestrated push to increase the rate and/or broaden the base of the Goods and Services Tax. A tax-mix shift towards the GST would reduce the redistributive impact of the tax system and thus increase inequality. The higher education policy changes announced as part of the Budget represent the most radical changes to the regulation and funding for Australian universities and their students in over 20 years. If passed by the Parliament, the proposals will have significant negative impacts on students and many of our public universities. Based on the fees currently being paid by international students and even some domestic students attending private universities, the cost of some university degrees will excess $ The proposal to charge real interest rates on student debts will also substantially increase the cost and length of time it takes students to repay their debts. Modelling has shown this will impact most heavily graduates with low incomes and those, predominantly women, who take extended career breaks. Entry into a public Australia university should be based on a student s ability and not their capacity to pay. Proposed changes to the vocational education and training (VET) system may also increase inequality. It is more important than ever in the current labour market and economic environment to support the VET system and skills development in this country, including our apprenticeship system. Unfortunately, the recent federal Budget has failed to do this, despite the Government advocating a policy based on the need for young people to be learning or earning. The Government has ripped funding out of the skills budget, taking away important programs that support apprentices, and that help existing workers to 52 Ibid. ACTU Submission to the Senate inquiry into income inequality Page 37

39 transition to new jobs and young workers to get that first job. At the same time, it has failed to introduce any new measures to help those who rely most on the VET system to develop the skills they need. The Budget scrapped the important Tools for your Trade programme and abolished the following programs: National Workforce Development Fund Workplace English Language and Literacy Program Australian Apprenticeship Access Program Accelerated Australian Apprenticeship Program Australian Apprenticeships Mentoring Program National Partnership Agreement on Training Places for Single Parents Alternative Pathways to the Trades Program Apprenticeship to Business Owner Program Productive Ageing through Community Education Step into Skills Program These programs included vital support for basic literacy and numeracy skills in the workplace, upskilling for existing workers, and mentoring, advice and assistance for apprentices. If these policy changes result in fewer young people obtaining training, particularly young people from disadvantaged backgrounds, then the result is likely to be higher income inequality in the future. ACTU Submission to the Senate inquiry into income inequality Page 38

40 Principles for social security payments in Australia Social security payments are crucial to the prevention of poverty and social exclusion, as well as the reduction of income inequality. In this section, the ACTU argues that the adequacy of payments is the central purpose of the income support system and must be the foundational principle. Adequacy should be defined with reference to the typical living standards of the Australian community. Another important principle in the design of the social security system is the promotion of workforce participation for people who are able to work. A key to assisting and encouraging people to participate in the workforce is ensuring that effective tax rates are not prohibitively high. Further tightening of means tests, as recommended by the National Commission of Audit, would undermine this objective. Adequacy of payments The most fundamental purpose of the income support system is to protect people from poverty and social exclusion. Payment rates must be adequate to achieve this purpose. Some current payments clearly fail this test, most notably allowances for single people such as Newstart Allowance. Our comments in relation to adequacy focus on this payment, as an example of where current arrangements are clearly inadequate. A social security system that does not protect people from poverty and social exclusion is a system that is failing to fulfil its basic purpose. The adequacy of an income support payment should be assessed in relative terms; adequacy can only be measured in the context of living standards generally prevailing in the community, as well as the norms and values of the time. An adequate real income in Australia in 1900 would not be an adequate income today, and nor would the typical income of citizens in a developing country be seen as adequate in contemporary Australia. Defining adequacy in relative terms is a long-established and accepted approach. The Harmer Pension Review concluded that adequacy must be defined in the context of contemporary society, and the living standards of others ; Saunders and Wong suggest that the key features of this definition of adequacy are consistent with the approach taken in other reviews of the Australian social security system undertaken over the last three decades. 53 The Australia s Future Tax System Review ( AFTS, also known as the Henry Review) noted that there are four common measurements of the adequacy of income support payments. These are: Replacement rates, which compare the income of a payment recipient with that of a worker (such as a minimum wage worker or the median worker); Poverty lines, to which the disposable incomes of payment recipients are compared; 53 P Saunders & M Wong, Pension adequacy and the Pension Review, The Economic and Labour Relations Review, vol. 22, no.3, 2011, pp ACTU Submission to the Senate inquiry into income inequality Page 39

41 Budget standards, which estimate the amount of income necessary to sustain a particular standard of living; and Financial stress indicators, which enable a comparison of the financial wellbeing experienced by payment recipients with that of the community as a whole. 54 All four approaches suggest that current payment rates, particularly allowances for singles, are inadequate. The replacement rate of Australia s unemployment benefit is the lowest of any advanced economy. An Australian worker on average wages who loses his or her job and claims Newstart Allowance will suffer a larger negative income shock than his or her counterparts in any other OECD country. Figure 26: Net replacement rates of OECD countries including housing assistance where applicable Israel Luxembourg Portugal Netherlands Switzerland Slovenia Czech Republic France Belgium Iceland Slovak Republic Norway Germany Denmark Spain Canada Italy Ireland Hungary Japan Austria Estonia Finland Poland United States Sweden Turkey Greece Korea United Kingdom New Zealand Australia Unemployment benefit as a % of average fulltime wage (net) Figure 27: Net replacement rates of OECD countries excluding housing assistance Israel Luxembourg Portugal Netherlands Switzerland Slovenia France Belgium Czech Republic Slovak Republic Norway Iceland Germany Spain Canada Denmark Italy Hungary Japan Austria Estonia Finland United States Sweden Turkey Korea Ireland Poland Greece New Zealand Australia United Kingdom Unemployment benefit as a % of average fulltime wage (net) Source: OECD Tax-Benefit Models 2012: Charts show the net replacement rates for the first year of unemployment. The Australian replacement rate is also at its lowest level in several decades. The indexation of allowances to CPI, while wages rise in real terms, ensures that these replacement rates will continue to fall. 54 Australia s Future Tax System Review, Section 7.3: Important impacts of the personal tax-transfer system, Architecture of Australia s Tax and Transfer System, Commonwealth of Australia, Canberra, ACTU Submission to the Senate inquiry into income inequality Page 40

42 Figure 28: The replacement rate for Newstart is at its lowest level in decades: Newstart Allowance for singles as a percentage of average and minimum full-time wages Replacement rate 50% Replacement rate 50% 40% 30% Ratio of Newstart payment to full-time minimum wage 40% 30% 20% 10% Ratio of Newstart payment to average full-time earnings 20% 10% 0% 0% Sep 1983 Sep 1988 Sep 1993 Sep 1998 Sep 2003 Sep 2008 Sep 2013 Source: DSS Guide to Social Security Law, ABS 6302, FWC, ACTU calculations. Evaluating payment rates relative to poverty lines is another key measure of adequacy, as noted by Whiteford and Angenent: Given that alleviation of poverty is one of the primary objectives of the Australian income support system, it should be regarded as a key measure of the success or otherwise of social security spending. 55 Researchers in Australia, as in other advanced economies, tend to use relative poverty lines Two particular lines are used most often: the Henderson Poverty Line (HPL) and the 50% of median income poverty line. The income of a single, adult Newstart recipient is now more than $100 per week below each of these lines, as shown in Figure 29. In the mid-1990s, Newstart was equal to the 50% of median income poverty line; now, a single adult reliant on Newstart has an income that is barely two-thirds the level of the poverty line. The decline relative to the Henderson line has been of a similar magnitude. Figure 30 shows the Newstart payment rate as a proportion of these two poverty lines. 55 P Whiteford & G Angenent, The Australian System of Social Protection An Overview, Occasional Paper No. 6, Department of Family and Community Services, Canberra, 2001, p Department of Family and Community Services, Inquiry into poverty and financial hardship, Occasional Paper No. 9, Submission to the Senate Community Affairs References Committee, DFAC, Canberra, 2003, p For a summary of poverty lines across the world see Figure 2 in M Ravallion, Poverty lines across the world, Policy Research Working Paper, The World Bank, Washington, D.C., ACTU Submission to the Senate inquiry into income inequality Page 41

43 Figure 29: Newstart, the Henderson Poverty Line, and the 50% of median income poverty line Real 2012 dollars $25,000 $20,000 Figure 30: Newstart as a proportion of two poverty lines Ratio 100% 90% Newstart as a % of 50% median PL $15,000 $10,000 80% Newstart as a % of Henderson PL $5,000 50% of median poverty line $0 60% Source: Newstart payment rates are from FaHCSIA historical data, deflated using CPI (ABS 6401). Henderson PL is from the Melbourne Institute, Poverty Lines. 50% of median PL is an ACTU calculation based on ABS The gap between Newstart and the poverty line (be it the Henderson line or the 50% of median income line) is large and growing. This is a strong indication that the payment rate is inadequate. A basic function of the safety net is to protect households from poverty. Although the choice of any particular poverty measure involves some degree of subjectivity and value judgement, a payment rate that is less than two-thirds of the level of either of the main relative poverty lines for a single adult is clearly inadequate. Newstart recipient Henderson poverty line Relative poverty lines are sometimes criticised on the grounds that they record an increase in poverty if median incomes rise while low incomes remain constant. 58 While all measures of poverty and deprivation have limitations and involve the exercise of judgement on the part of researchers, alternative approaches to measuring standards of living have been developed to guide decisions about income support payment adequacy. The budget standards approach involves quantifying the level of income that is required to obtain a particular material standard of living. Budget standards are still necessarily measures of relative living standards, as their construction takes into account the prevailing community standards of the time, but they are not necessarily fixed to a particular point in the income distribution in the same way as a relative poverty line. Saunders, et al., undertook the laborious task of rigorously constructing budget standards for Australia in the mid-1990s, after receiving a commission to do so from the-then Department of Social Security. 59 The authors describe their task as: [A]n attempt to apply the budget standards methodology to produce a set of indicative 70% standards that can inform decisions regarding standards of adequacy absolute and relative. 58 For example, see M Ravallion, op. cit. 59 P Saunders, J Chalmers, M McHugh, C Murray, M Bittman & B Bradbury, Development of Indicative Budget Standards for Australia, Research paper No. 74, Social Policy Research Centre, University of New South Wales, March ACTU Submission to the Senate inquiry into income inequality Page 42

44 The budget standards approach involves specifying what households need in a particular time and place, to attain a particular standard of living. It involves working out the cost of living by pricing a typical 'basket' of goods and services that corresponds to the underlying living standard. The level at which the standard itself is set can be varied so that, in principle, budget standards can be derived at different levels. 60 The report quantified two budget standards, summarised in Table 4. The ACTU has referred to the modest but adequate standard in submissions to reviews of minimum wages, whereas the low cost standard is seen to be more appropriate for setting income support payment rates. The primary motivation for developing a low cost budget was to guide the setting of income support payments. 61 Modest but Adequate Budget Standard One which affords full opportunity to participate in contemporary Australian society and the basic options it offers... lying between the standards of survival and decency and those of luxury as these are commonly understood... (falling) somewhere around the median standard of living experienced within the Australian community as a whole. Table 4: Budget standards Source: Saunders, et al., Development of Indicative Budget Standards for Australia, p.438. Low Cost Budget Standard A level of living which may mean frugal and careful management of resources but would still allow social and economic participation consistent with community standards and enable the individual to fulfil community expectations in the workplace, at home and in the community... corresponding to a standard of living which is achievable at about one-half of the median standard. The low cost standard was $ in February 1997 for single adults in the private rental market. 62 If this figure is inflated by the growth in the CPI over the period to the June quarter 2012, this suggests that the current low cost budget standard for a single private renter is around $481 per week. 63 A single adult would currently be eligible to receive around $318 per week in Newstart Allowance and Rent Assistance (at the maximum rate of each); this therefore leaves a single Newstart recipient with an income equal to only around two-thirds of the low cost budget standard. The ratio of Newstart to the low cost budget standard is around the same level as the ratio of Newstart to the 50% of median poverty line. This adds weight to the conclusion that the Newstart Allowance payment rate is inadequate to sustain an acceptable standard of living. However, it is not possible to draw firm conclusions from the updated budget standards. The original SPRC report provided three means of updating the standards over time: conducting the entire exercise again; repricing the elements of the baskets of goods on a regular basis; or inflating the standards using a measure such as the CPI. The third approach has been used in this submission (it was also used in the Pension Review and in a 2004 report for the ACTU by one of the original study s authors) However, updating the standards using the CPI is not preferable, particularly some fifteen years after the original analysis was conducted. The ACTU understands that the 60 Ibid., p P Saunders, Updated Budget Standard Estimates for Australian Working Families in September 2003, SPRC Report 1/04, Social Policy Research Centre, University of New South Wales, February Based on the updated figures used in P Saunders, Updated Budget Standard Estimates for Australian Working Families in September 2003, op. cit. An average of the male and female household types has been used. 63 ACTU calculations based on ABS J Harmer, op. cit., p P Saunders, op cit. ACTU Submission to the Senate inquiry into income inequality Page 43

45 Social Policy Research Centre has obtained funding from the Australian Research Council to fully update the standards, although this will take several years. Despite this caution about the use of the updated standards, it should be noted that alternative methods of updating them would likely result in higher, rather than lower, estimates of the income required to sustain a low cost living standard. For example, Professor Saunders has proposed an alternative approach that relies on anchoring the standards to a particular point in the income distribution. 66 Given that incomes have risen in real terms since 1997, this approach would be likely to yield a higher estimate of the low cost standard. Despite the caveats around their use, the updated budget standards confirm that the incomes of Newstart recipients are not sufficient to obtain an acceptable low cost standard of living. Another means of assessing the adequacy of income support payment is to compare the incidence of financial stress and deprivation among recipients to that of other groups. This approach adds further weight to the conclusion that the Newstart Allowance is inadequate. As with all measures of adequacy, deprivation indices are not without their theoretical or practical difficulties, but they avoid many of the major criticisms that have been levelled at poverty line studies there is no need to set a policy line or rely on the judgements of experts. 67 The findings of studies of deprivation and financial stress confirm the conclusion suggested by replacement rates, poverty lines and budget standards: the current Newstart payment rate is inadequate. A recent study of deprivation among different population groups was conducted by Saunders and Wong. 68 They surveyed a representative sample of Australians and asked which items they deemed essential, not just for themselves, but for people in general. Further work was then done to assess the extent to which various groups (like low-wage workers, disability pensioners, and Newstart recipients) were deprived of these essential goods. On both measures of deprivation used by the researchers, Newstart recipients had higher levels of deprivation than pensioners and low-wage workers; a result that is to be expected given the relative incomes of these groups. 66 G Watson & S Richardson, Measuring the Needs of the Low Paid: Report to the Minimum Wage Panel, Fair Work Australia, December 2011, paragraph Saunders & Wong, op. cit., p Ibid. ACTU Submission to the Senate inquiry into income inequality Page 44

46 Figure 31: Rates of deprivation among different groups (2006) Source: Saunders & Wong 2011, Figure 1. Asterisks indicate that the difference between the group measures and those for the age pensioner group was statistically significant: * denotes significance at the 10% level; ** denotes significance at 5%; *** denotes significance at 1%. Analysis of the latest ABS Household Expenditure Survey also suggest that people receiving Newstart are more likely to experience financial stress than people who receive other forms of payments. Table 5 shows the proportion of people in households that experienced various forms of financial stress in the 12 months prior to the survey. On all indicators, people who receive unemployment and study payments are more likely to have experienced financial stress than recipients of other forms of assistance, who in turn are more likely to experience stress than people in households that do not receive pensions or allowances. ACTU Submission to the Senate inquiry into income inequality Page 45

47 Table 5: Proportion of persons in household that experienced financial stress in last 12 months ( ) Receives unemployment and study payments (%) Main source of income is government pensions and allowances (%) Does not receive pensions and allowances (%) All persons (%) Unable to raise $2000 in a week for something important Spent more money than received Could not pay electricity, gas or telephone bills on time Could not pay car registration or insurance on time Pawned or sold something * Went without meals * Unable to heat home * * Sought assistance from welfare/community organisations * Sought financial help from friends or family Could not afford holiday for at least one week a year Could not afford a night out once a fortnight Could not afford friends/family over for a meal once a month Could not afford a special meal once a week Could only afford second hand clothes most of the time Could not afford leisure or hobby activities Source: ABS Nearly 80% of households for which the main source of income is unemployment and study payments experienced three or more indicators of financial stress in the 12 months before the survey. This was the highest level of multiple indicators of financial stress of any type of household. Figure 32: Proportion of households that experienced three or more indicators of financial stress in a 12 month period, by payment type ( ) Unemployment and study payments Family support payments Disability and carer payments Other payments Age pensions Does not receive govt. pensions & allowances Source: ABS Per cent ACTU Submission to the Senate inquiry into income inequality Page 46

48 The very high levels of financial stress and deprivation experienced by recipients of Newstart strongly suggest that the payment is inadequate. This confirms the analysis of the inadequacy of Newstart based on replacement rates, poverty lines, and budget standards. It is clear, based on the analysis above, that Newstart Allowance is inadequate, particularly for singles. The promotion of workforce participation As outlined above, adequacy of payment rates is (or should be) the core principle that underpins the provision of social security payments in Australia. An important secondary principle is that the design of the payments system should encourage and assist people to participate in employment where they are able to do so. One way that the payments system can reflect this principle is to ensure that work pays. Income support recipients should receive a decent increase in their take-home pay if they move into work, or increase their hours of work. To ensure this is the case, effective tax rates should not be prohibitively high. The rate at which payments are withdrawn as earnings rise (the taper rate) should not be excessive. The National Commission of Audit (NCOA) recommended that the taper rate for various payments, including Newstart and other allowances, be increased to 75%. 69 This would discourage workforce participation. A taper rate of 75% means that an income support recipient who chooses to earn an extra $20 from work will lose $15 of income support and may also pay income tax out of the remaining $5. This is an extremely high effective marginal tax rate, higher than any faced by high income earners. Prohibitively high taper rates such as those recommended by the NCOA would be at odds with the principle of promoting workforce participation. Another principle that is often emphasised in Australian social security policy discussion is that payments should be targeted in other words, they should be tightly means tested. The ACTU supports this principle, but believes it is of lesser importance than adequacy and the promotion of workforce participation. There is a between tighter means testing and employment participation. More targeted assistance implies higher taper rates on payments, such that assistance cuts out more rapidly as private income rises. However, as discussed, higher taper rates reduce the financial return from work. The higher the taper rate, the less a recipient retains out of each extra dollar they earn from work. The reform priority should be to ensure that people are encouraged and assisted to work. High taper rates work against this objective. Australia already has an extremely tightly targeted social security system, by far the most tightly means tested of any OECD advanced economy. Income support payments should not be tightened further at the expense of workforce participation. 69 National Commission of Audit, Recommendations, The Report of the National Commission of Audit Phase One, 2014, Recommendation 27. Available from: ACTU Submission to the Senate inquiry into income inequality Page 47

49 It is sometimes suggested that lower payment rates relative to wages (ie. lower replacement rates) would promote workforce participation. 70 The smaller the replacement rate, the greater the amount by which an individual can increase his or her income by becoming employed, thus the greater the immediate financial incentive to seek employment. The replacement rate therefore embodies the tradeoff that is said to exist between adequacy and incentives. At some point, it is likely to be true that increased payment rates would reduce the incentive to participate in the workforce. However, the relationship between the adequacy of the replacement rate and the effectiveness of recipients job search activities is not monotonic. Increasing the replacement rate to 100 would eliminate the immediate financial incentive to seek work, but reducing the replacement rate to 0 (ie. abolishing unemployment assistance) would leave unemployed people socially excluded, unable to subsist, and unable to meet the costs of searching for work. Unemployed people need a sufficient income to allow them to maintain a stable home, meet all necessary costs of living, purchase appropriate clothing for interviews and employment, and pay for transport to and from job interviews and potential places of employment. Very low incomes can also lead to a decline in physical and mental health that can reduce a person s likelihood of finding employment. The replacement rate that best balances the competing policy objectives is therefore somewhere between 0 and 100; there is no prima facie reason to suppose that the current replacement rate adequately reconciles the competing policy ends. The idea that the effectiveness of job search can be eroded by low payment rates has been widely noted. For example, the OECD made the following observations in its 2010 survey of Australia: The low level of the unemployment allowance (Newstart Allowance) has raised concerns about its adequacy. The relatively low net replacement rate in the first year of the unemployment spell raises issues about its effectiveness in providing sufficient support for those experiencing a job loss, or enabling someone to look for a suitable job. 71 The OECD identifies two related, but distinct, concerns that arise from a replacement rate as low as Australia s: the first is the adequacy of the payment (in terms of the standard of living it affords to recipients); the second is the effectiveness in supporting people to find employment. This suggests that the usual trade-off between adequacy and effective work incentives can break down at low replacement rates. Increasing the payment would both improve its adequacy and better support unemployed people to find work. Newstart Allowance is now so low that the ACTU believes it inhibits, rather than promotes, workforce participation. 70 For example, see DEEWR, FAHCSIA, DHS and DIISRTE, Joint interagency submission to the Senate Inquiry on the adequacy of the allowance payment system for job seekers and others, Organisation for Economic Co-operation and Development, OECD Economic Surveys: Australia 2010, OECD Publishing, Paris, 2010, pp ACTU Submission to the Senate inquiry into income inequality Page 48

50 Policies to address inequality Government policy plays an important role in determining the level of inequality. Many of the policies that can affect inequality, in the short- and long-run, are discussed elsewhere in this submission. Among other things, policymakers should: Improve the fairness of the tax system, particularly by reducing or removing exemptions and concessions that disproportionately benefit high income earners. Superannuation tax concessions and negative gearing should be reformed. Inheritance duties are worthy of consideration. Ensure that income support payments are adequate and that the social security system encourages and assists people to participate in the workforce where they are able to do so. Provide adequate minimum wages and resisting calls for radical cuts, such as from the NCOA. Promote collective bargaining and quality jobs through a robust and fair framework of labour law. Abandon the regressive changes to various policies proposed in the Budget. Ensure all Australians have access to education, regardless of income or background. ACTU Submission to the Senate inquiry into income inequality Page 49

51 ADDRESS ACTU 365 Queen Street Melbourne VIC 3000 PHONE WEB actu.org.au D No: 113/2014