ALP’s real budget balancing act is picking the winners and losers

Looming cuts to expenditure and probable tax increases mean there will inevitably be winners and losers. But just how should these be chosen? Image sourced from www.shutterstock.com

The government is facing two options to tackle its budget deficit: significant cuts in government expenditures or increasing taxes to close the gap with spending.

Prime Minister Julia Gillard has already indicated the Gonski education reforms will be protected, while the bipartisan agreement of an 0.5% increase in the Medicare levy to cover the National Disability Insurance Scheme provides some funding certainty, at least in the short-term.

All the post-budget proposals being publicly floated recognise the need to implement saving measures that can balance the budget.

At least in the short term, this cannot be a win-win policy intervention: there are always going to be losers.

The key question is: how should a government pick who is going to be worse-off? Identifying such budget cuts are among the most difficult decisions politicians make.

Taking away electoral calculations, the dilemma can be partly simplified by first answering the question: is there is any group in society which under no circumstance should be in the group of losers from budget cuts? Is there such a group in the case of Australia?

In the last two decades, we have witnessed a period of strong economic growth that led to an increase in the real incomes of individuals and households. However, as recent research shows, the benefits of growth in the last two decades was quite uneven as income gains were highly concentrated at the top of the income parade.

In fact, the data tells us that between 1994 and 2003 the cumulative income growth rate of the person at the 10th percentile of income distribution was more than five points lower than that of 90th percentile, and this difference widened to more than 10 points in the period 2003-2008.

Evidence also from the longitudinal information for the last decade included in the Household, Income, and Labour Dynamics in Australia (HILDA) Survey shows that there were highly disadvantaged groups for which the benefit from growth was well below that of the average individual in Australia.

Research by the Brotherhood of St Laurence has found those excluded were people with long-term health conditions or disabilities, public housing tenants, poor English proficiency, the long-term unemployed and other people of out of the labour force with less than Year 12 qualifications (and not studying). These individuals failed to keep up with the rest of the population because they benefited much less from economic growth.

The inadequacy of welfare payments to the most vulnerable groups may well contribute to explain this result. As the Henry Tax Review concluded, there has been a deterioration in the adequacy of Newstart Allowance payment rate relative to a variety of welfare standards. The ratio between the Newstart allowance and the minimum wage has fallen about 10% since 1996 and the comparable ratio to the average wage has fallen 23%.

While economic growth was to some extent fuelled by the expansion of public spending, it is notable these vulnerable groups did not benefit as much as more well-off groups. Ultimately, fiscal discipline must be implemented through policies that are fair and equitable. To achieve this, the cost of such policies cannot be borne by the very people in the community who benefited the least from the recent prosperity.

Imposing further burdens on disadvantaged groups that were not able to fully benefit during the economic expansion period may compromise even further the limited the capacity of these groups to participate in society.

Proposals to improve the quality of the services delivered by Centrelink or Medicare would increase the participation possibilities of the most disadvantaged in society. However, improving engagement mechanisms that ease the interaction with clients would require more spending from governments and not less.

It is logical that the cost of austerity should be borne by those on high incomes. They benefited the most from growth in the past and are therefore in a better position to overcome income losses implied by these kind of policies.