Brian Easton says you are entitled to wonder how we can pursue 'trust' in government and 'cohesion' in society without considering inequality. He is looking to the Budget Policy Statement for some progress, particularly on child poverty

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The parliamentary year opens on Tuesday 8 February, with the Prime Minister presenting a statement to the House which reviews public affairs and outlines the government’s legislative and other policy intentions for the next year. It has a wider scope, and is less detailed, than the 2022 Budget Policy Statement, a 33-page document released at the end of December by the Minister of Finance with the Half Year Economic and Fiscal Update.

This Budget Policy Statement begins with the Treasury’s ‘four capitals’.

• Human Capital: Our People and Skills;
• Natural Capital: Our Environment;
• Social Capital: Our Connections;
• Financial and Physical Capital: Our Built and Financial Assets.

This is an attempt by the OECD to extend the narrow growth model of economics to a wider notion of wellbeing. Fair enough, but what strikes this economist is that distribution of wellbeing does not appear in the framework. Indeed the term ‘inequality’ is not used in the entire Budget Policy Statement document except in the titles of a couple of references. The government appears to be not engaging with a major concern of many of its friends.

I have been working in the area of distributional economics, of which inequality is a part, for six decades. It has been at the centre of my research program and it proves integral to understanding how an economy works. It has been a hard slog because most economists avoid the research area because they think it too difficult, or they think it irrelevant, or because they think it involves only value judgements. Yet as soon as they begin to discuss public policy issues or even many practical analytic problems, they begin to touch on distributional economics and they bring related value judgements to their discussion.

For example, the third OECD capital includes ‘trust in institutions’ and ‘social cohesion’. As a rule, societies with high economic inequality have low trust and poor social cohesion. You may not be surprised at such a finding, but you are entitled to wonder how a society can pursue trust and cohesion without considering inequality. In particular thirty years ago a National Government deliberately increased economic inequality; probably social cohesion and trust fell.

I said that New Zealand has higher inequality than it once had. Very often it is difficult to trace changes in inequality – many who pontificate on the subject do not have much grasp of the complicated analytic underpinnings of the measurement – but in this case I am confident that economic inequality increased markedly. (In my In Stormy Seas I argued that the increase dramatically changed the political economy of New Zealand; that is a more tentative conclusion, although nobody has yet challenged it.)

However the lens of distributional economics identifies some government concerns which are about inequality. For instance there is a handful of mentions of child wellbeing in the budget policy statement. This may not be surprising given the Prime Minister is Minister Responsible for Child Poverty Reduction. (While the Budget Policy Statement is in the name of the Minister of Finance, it is discussed intensively by cabinet ministers.) One gets no sense that a major reduction in poverty is a significant priority for the 2022 budget even though achieving the government's aim of halving the rate of child poverty would greatly reduce inequality.

There is a practical reason for this. Reducing child poverty is fiscally expensive. Recall those measures thirty years back which increased inequality thereby doubling child poverty. They involved big tax reductions on those at the top. The government wants to halve the rate of child poverty. Those measures will have to be broadly reversed to do so. That means higher taxes, especially on those at the middle to upper end of the income distribution. However, the Minister Responsible for Child Poverty Reduction has ruled out raising tax rates. How she expects to square the circle is unclear. It is a task for mañana.

Certainly there is no hint in the Budget Policy Statement that the 2022 Budget will raise tax rates; there are plenty of hints that if they were to be raised the government has a long list of worthy purposes on which to spend any extra revenue. Child poverty does not appear high on this list.

Let me finish by pointing out that the above analysis above does not say we should reduce child poverty nor that we should raise tax rates. I have my personal view on such matters, but the presentation here is analytic, of the sort of ‘if’ leads to ‘then’. It describes the logic involved in implementing the Child Poverty Reduction Act.

Once distributional economics is mastered, the conclusion is not difficult. I’d like to think that somewhere in the Treasury there is a paper which explores this. I imagine the Secretary of the Treasury who saw it went white, had it toned down and showed it to the Minister of Finance, who also went white and left it in his inbox while he got onto thinking about the 2022 Budget.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.