Australia’s shadow treasurer, Joe Hockey, has declared to the world his crusade against entitlements. He argues the “age of entitlement” in the West must be brought to an end by governments winding back the role of the state. Absent this measure, the West will not stay economically competitive in the Asian century.
By entitlements, Hockey means welfare spending — the system of income transfers designed to distribute income to achieve such things as social security.
His crusade ignores all forms of entitlement that directly benefit business. If a genuine free market is what’s called for, why not end: government subsidies protecting manufacturing industries, such as Australia’s car manufacturers; tariffs on imported goods like clothing and food, which helped the Australian import-competing industry to the tune of more than $9 billion in 2009-2010; budgetary assistance for research and development; or tax concessions for the finance industry?
Putting aside the unexplained hypocrisy in targeting entitlements for mostly lower income families but not those for corporations, the simplicity of Hockey’s argument that the “best way to create wealth is to give people control over their own money by reducing tax” is attractive. But we need to unpack the assumptions in, and consequences of, this argument to determine whether we can live with it.
Hockey points favourably to Hong Kong’s model of low corporate tax (16%) and absent social safety net. What he has not mentioned is the extraordinarily high level of inequality in Hong Kong as compared with most of the world.
Only 13 measured countries in the world have a worse degree of inequality in the distribution of family income than Hong Kong. Australia and the European Union are at the opposite end of the inequality scale, enjoying a place among the 20% of countries that have the least inequality.
Wages are another point of contest between the West and Asia. Australia’s minimum wage is $15.50 per hour, compared with Hong Kong’s $3.50 (HK$28) introduced last year and with other workers in Asian factories who earn about 80c an hour.
The logic of Hockey’s argument about the need to compete with Asia, and his political party’s recent rhetoric about increasing productivity, suggests willingness to sacrifice wages.
Hockey cannot advocate reduction in income redistribution without acknowledging the adverse consequences for inequality. However he tries to do so by arguing equality of opportunity, not equality of outcome, is important: “I know that being successful in Australia is not the product of belonging to rich and prosperous families, but rather the result of hard work and diligence.”
Unfortunately, as the OECD has shown, Hockey is wrong. In all countries, parental and socio-economic background influences educational, earnings and wage outcomes.
Inequalities are transmitted generationally. Welfare redistribution policies can improve mobility, with Australia, Canada and Scandinavia enjoying higher social mobility relative to France, the United States and the United Kingdom.
The social consequences of Hockey’s crusade must be carefully contemplated. Reducing social welfare may help to allow business to compete in the international marketplace, but it will create and perpetuate inequality. To me and many others, the total well-being of our communities is an important consideration.