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Budgetary policy and greater equity in the personal distribution of income

Budgetary policy plays a primary role in government's efforts to achieve greater equity. Specifically, it aims to ensure that:  

  1. all Australians have sufficient income to purchase those goods and services that enables them to have a 'dignified' standard of living.  Where a dignified standard of living involves households being able to afford the goods and services that allows them to live in our affluent and modern society with some dignity and self respect.  

  1. there are no persons or households in Australia experiencing absolute poverty, defined as the situation where one can't afford to purchase the goods and services necessary for survival.

  1. huge or obscene inequalities in incomes (and to a lesser extent wealth) are avoided.

If we focus on budget outcomes, an expansionary budget is one that is best suited to creating both employment and incomes, reducing unemployment, and reducing a reliance on welfare.  Accordingly, any budgetary policy measures that are designed to stimulate Economic Growth and Full Employment should indirectly assist with the equity goal.  However, budgetary policy can directly impact on income levels, poverty and inequality more generally.  

A useful way to analyse the power of budgetary policy in this area is to refer to the various types of income we explored when covering the Equity goal).  The Box below highlights ways that budgetary policy can be used to assist in the achievement of this important goal. The transition from Private Income to Final Income has occurred purely as a result of government budgetary policy measures that are targeted at 'equity'.

You should remember that Private Income is the unadjusted income accruing to workers for their contribution to the production process.  It has the highest gini coefficient (or degree of inequality) of all the income types.  Policy measures that operate to create jobs, such as tax cuts and investment in skills and training), should, if successful, increase the number of people earning private income and assist in the achievement of the government's equity goal.  This is sometimes referred to as government attempts to improve the 'initial distribution of income'.  

Transfer payments are the largest single component of government expenditure, working to improve the ability of citizens to afford the basic goods and services giving them a dignified standard of living.  This causes the gini coefficient for Gross Income to be lower than Private Income, therefore helping to improve equity in the distribution of income.  

Direct taxes are the biggest single revenue item for the federal government and they are specifically designed to be progressive in nature such that higher income earners accept a relatively larger tax burden compared to lower income earners.  Once again, this causes the gini coefficient to be lower for Disposable Income when compared to Gross Income. The tripling of the tax free threshold in the 2012-13 budget is an example of increasing the progressivity of the tax system and improving the distribution of Disposable Income.

Indirect government benefits, such as expenditure that falls within the areas of education, health and general government services, are once again targeted at lower (to middle) income earners, once again reducing inequality, causing the gini coefficient for Social Wage Income to fall once more.  

With respect to indirect taxes, they are mostly regressive in nature, with some exceptions, such as taxes on luxury cars.  The presence of indirect taxes on goods like tobacco, alcohol, and carbon, in addition to the GST, make it likely that Final Income is less equitable than Social Wage Income’.

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