Inclusive growth

As the next federal budget is scheduled to be announced mid-June

The next federal budget scheduled to be announced mid-June needs to focus on reducing inequality that has over the years made the rich, richer and the poor, poorer. We need to lower income inequality in the country, helped by a mix of policies that support education and innovation while fiscal and monetary measures need to be framed so as to reduce poverty.

It’s well known that without reallocation of resources where they are needed the most for establishing an equitable society, it would not be possible to arrest the rot of expanding inequality. And for sustained reallocation of resources, intervention of the state has been found to be necessary, even essential. But before that happens, we need to unlearn all that we have been taught by the infamous Washington Consensus.

According to an article by Andrew Newell, Professor of Economics, University of Sussex (Thatcher, Reagan and Robin Hood: a history of wealth inequality – co-published with Conversation on April 19, 2017 in World Economic Forum’s ‘The Agenda’), history provides some clues to how we might go about tackling the inequality problem.

In some advanced Western countries, the period after World War II was one of inclusive economic growth. Indeed, income inequality fell and stayed low in most Western countries roughly between 1910 and 1980. What made it fall?

In the earlier years of the 20th century, there was a clear trend of state intervention in the economy. It was generated by a mix of factors: social solidarity engendered by the wars, wartime experience of governing the economy, unemployment in the 1930s and the rise of socialist ideas. It accelerated for a decade or so after World War II.

Key features were nationalisation, increased provision of welfare, public health and education, and the development of public amenities. Scholars have discerned regional variants: the Nordic Model, Rhine capitalism and so on. Arguably the most important aspects that directly affected income inequality were state’s involvement in wage setting and redistributive taxes and transfers.

In many countries, there were moves to centralise collective bargaining over wages and conditions of work. In the UK, Wages Councils which controlled wages in low-pay sectors were introduced in 1909, and national wage setting was introduced during both world wars.

In other countries, the process was different. In Sweden, national-level bargaining between employers’ federations and unions was agreed initially in 1938 to avoid government intervention. In West Germany after World War II, employers’ confederations and unions were restructured along industry lines and wage bargaining took place nationally, by industry. Even in the US, the Treaty of Detroit of 1945 created a tripartite system aimed at maintaining industrial peace. Moderation and duty were virtues to be applauded.

Taxation was changing as well. In most Western countries, income tax became a major revenue source in the early 20th century. As the political tide changed, both Reagan and Thatcher heavily reduced the progressivity of income tax – the extent to which the rate of taxation increases with income.

There is also international evidence that increases in tax and transfer progressivity do reduce income inequality directly. Calculations have shown that changes in progressivity and changes in income inequality across the OECD countries 2007-2014 are strongly negatively correlated.

Norway, the small Scandinavian country of five million people, has the lowest income inequality in the world, helped by a mix of policies that support education and innovation. Norway does not have a statutory minimum wage, but 70% of its workers are covered by collective agreements which specify wage floors. Furthermore, 54% of paid workers are members of unions, compared to 11% in the United States and 25% in the United Kingdom. Overall, Norway tops the employment part of index, both in terms of how accessible and stable employment is, and how well workers are paid.