Wealth to the already wealthy

Here we go again, yet a couple more subtle quiet shifts of wealth to the already wealthy away from middle- and low-income people.

The process can be seen with several announcements in the past week or so: the Reserve Bank’s decision to lift interest rates yet again; the interest cost of government debt to be $122 billion over the next five years; and the finding that in its last year the Coalition Government spent $21 billion on consultancies.

The transfer of wealth is being caused by the Reserve Bank’s misreading of the economy and the failure of government policy. The inflation the bank is fighting is not being caused by excess cash slopping about households which has to be taken out of the economy lest it creates demand that will push up prices.

Rather, much of it is supply-side generated and also because companies are simply putting up prices to increase profit share. The masses just have to suck it up. On the supply side Covid, Ukraine and other disruptions caused scarcity. People with money who want their goods and services now tell suppliers that they are happy to pay more and suppliers respond accordingly. Up go prices and inflation.

So, hitting cash-strapped households will do little or nothing to curb inflation.

But, surely, we have had higher interest rates and higher inflation in the past without growing inequality and wealth shifts. True, but it was different then.

When inflation struck in the 1970s and interest rates went up, they did not go up on the housing loans taken out by owner-occupiers. That part of the market was heavily regulated and rates were capped at 13.5 percent even as rates generally went as high has 17 per cent. The 13.5 per cent cap on occupier mortgages did not come off until 1986. 

Banks were required to hold large reserves in government bonds to meet the needs of owner-occupiers.

Also, at that time, unions had collective bargaining power to successfully demand higher wages.

The upshot was that ordinary wage and salary earners were getting pay increases as high or higher than inflation while their mortgage repayments were fixed at a lower rate. Inflation literally ate their mortgages for them. Inflation made home-owning baby boomers rich automatically.  Also, mortgages then were easier to pay off at about three times annual income; now they are five or six times.

Moreover, for a time, mortgage interest for occupiers was tax deductible.

Further, many people in the 1970s were able to buy the government house they lived in at very favourable rates.

Wealth was moving to a great swathe of housing-market entrants on ordinary wages and salaries.

That doesn’t happen now. These days, only those with the Bank of Mum and Dad or an inheritance can enter the Kingdom of Home Ownership.

Now inflation is running higher than both wages and interest rates. Further, occupiers have to compete on an unequal playing field with investors. Mortgage and purchase costs for investors are tax deductible, but not for occupiers.

Added to this is the strain caused by massive immigration. The extra demand for housing pushes rents and prices (hence mortgages) up. But the shareholders and upper management of big businesses profit from the cheap labour and lower labour bargaining power. Again, a wealth transfer to the already wealthy.

In many ways, in the past 40 years, government action or inaction has been a catalyst for the wealth transfer to the already wealthy.

As interest rates have risen, the banks have been passing the costs on to borrowers fully and immediately, but have only been passing on the benefits to deposit holders partially and tardily. The result is higher profits for banks which have been announced or predicted in the past week or so – Westpac’s profit was up 22 per cent.

These profits are not being passed on to customers. Oh no. Rather they are being passed as dividends to shareholders – the already wealthy. Many of these, of course, will be getting a cash rebate from the government because bank shares are usually fully franked.

This and the higher interest government is paying on debt reduces the amount the government has to spend on social welfare, health and education.

The same applies to the cost of consultants. The Coalition’s squandering of $20 billion on consultants was a huge transfer of wealth to the already wealth on several counts. First, most of the work could have been done by salary-earning public servants at less cost than pouring money into wealthy corporations. 

Second, and most importantly, the world view and mindset of people working for the big accounting and other consulting firms is one of favouring business and seeing social spending as “waste”.

Third, these consulting firms have massive conflicts of interest. They can obtain inside knowledge and use it for their own and their wealthy clients’ interests. They can also make recommendations to government that are more in their own and their wealthy clients’ interest than in the public interest.

At last, Labor is doing something about it.

These wealth transfers to the already wealthy are just this week’s highlights. They come in addition to decades of wealth transfer away from the struggling to the already wealthy.

The HECS/HELP scheme which started as a requirement for students to pay for part of their education has morphed into a scheme where they pay nearly all of it. And with higher inflation, indexation causes the debt to grow and total repayment becomes a distant dream. The debt also reduces the graduate’s borrowing capacity, making the break into the housing market even more difficult.

With any luck the Budget will cancel the indexation.

The list goes on: medical gap payments; education funding; tax inequalities.

The irony is that most of these inequality-generating measures were initiated or ramped up by Coalition governments and it resulted in their 2022 electoral drubbing.

The electorate is entirely sick of growing intergenerational unfairness. The Coalition will remain in electoral difficulty if its policies continue to promote it or try to block attempts by Labor to reverse it. 

Labor can begin reining in some of the inequality measures, especially the Stage 3 tax cuts which again transfer wealth to the already wealthy.  

There would be both justice and poetic justice if Labor, having been wedged into agreeing with Stage 3 when they were announced by the Coalition in 2018, could reverse-wedge the Coalition by dropping them.

Crispin Hull

This article first appeared in The Canberra Times and other Australian media on 9 May 2023.