Inequality Rules (Great For Some; Horrid For Most)!

There is a three-way split across the country as inequality rises with mortgage holders and renters bearing the brunt of poor policy decisions for years, while older property-owning cohorts are doing just fine.

I have been highlighting the growing gulf between households and now the Australian Productivity Commission has released their research paper “A Snapshot of Inequality in Australia” which explores how the distribution of wealth and incomes changed over the COVID-19 period, to assess the state of economic inequality in Australia.

They show that Australian wealth is overwhelmingly tied up in residential property, followed by superannuation. Property (owner-occupier and other) comprises the majority of wealth for middle- and higher-income Australians, i.e., the top 60% of households. They also show that households in the two oldest age groups—55-64 and 65-plus—hold the most wealth and wealth has grown strongest for older Australians aged 65-plus.

Other signals of inequality can see seen in spending patterns. Data from CommBank iQ shows that the cost-of-living crisis and high interest rates are having a disproportionate impact on Australians’ spending habits based on their generation.

Many of these older cohorts are not impacted by rising mortgage rates or rents, because they own their homes outright. And many of these households are also benefitting from increased investment returns. The accounts for about one in three households.

There is a second cohort the rents who are experiencing massive rent rises, one reason why we seen rental stress going through the roof in our surveys, with three quarters of renters in cash flow stress.

The remaining third of households are those burdened with mortgages, where stress is also registering as strongly as I have ever seen it.

Beyond perceptions of inequality, which matter, the overall wellbeing of society can suffer when inequality is high. This is because inequality can lead to uneven access to social opportunities and services such as health and education, waste human capital potential, and increase vulnerabilities to economic shocks and the resources needed to recover from these.

It also can reduce social justice and adversely perpetuate narrowly focused institutional arrangements and decision-making processes.

There are direct economic consequences for the economy, as reports show that higher income inequality is correlated with lower economic growth, at least at current levels of inequality (OECD 2014). The gap between low-income households and the rest of the population appears to be particularly detrimental to growth. Recent analysis also suggests that lower inequality is correlated with faster and more durable growth.

A possible consequence of increasing inequality is that it could harm social cohesion. This could happen when different economic interests lead to social and political conflict. Although this aspect is subjective and hard to quantify, some research suggests that countries with more inequality also have more corruption and political instability.

Economic inequality also determines the opportunities of the next generation – that is, the more unequal a society is, the more likely that children will have the same economic situation as their parents. Intergenerational inequality and mobility are linked.

These are important and uncomfortable concepts, which boil down to a question, what type of society do we want? I for one do not think the current setting are right, and social cohesion is coming unglued. Bad policy leads to bad society, as we are seeing.

http://www.martinnorth.com/

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Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Inequality Rules (Great For Some; Horrid For Most)!
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Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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