Distribution of Income

Policy Options

The distribution of income is directly affected by the policies that are adopted by the Australian government. However, it is important to realise that it is only through fiscal policy that the federal government actually targets the achievement of this goal.

Monetary policy will have an indirect impact on the distribution of income and wealth. When interest rates increase, our discretionary income will fall. As the rates paid on mortgages is the same for all members of the community, this can have a bigger impact on low income earners than on high income earners. However, it is important to remember that monetary policy is used primarily to target the inflation rate. Maintaining a low rate of inflation will have a long term impact on the distribution of income – the purchasing power of individuals will be maintained over a longer period if the inflation rate can remain low.

Similarly, any impact on the distribution of income through the microeconomic reform process will be secondary to the major goals of the policy. In fact, the short term impact could be the loss of many jobs, which will have an adverse effect on the distribution of income. Having said that, it is also true that an increase in the supply potential of the Australian economy will lead to stable prices in the long term. Once again, this will help to maintain the purchasing power of Australian consumers.

Through the use of fiscal policy the federal government is able to directly affect the distribution of income. This is done primarily through two parts of the budget – the progressive income tax scale and the use of transfer payments. These are referred to as “automatic stabilisers” in the budget.

For example, when the economy moves into recession, these parts of the federal budget change automatically. The level of transfer payments will increase (to compensate the increased number of unemployed people), while the level of income tax receipts will fall (as there are fewer people from which to collect tax revenue). This will ensure that the distribution of income does not become more inequitable during this time.

Australian maintains a progressive income tax scale. This means that as our income increases we will pay a higher rate of tax on each additional dollar that we earn. The result is that the income tax burden is lower on low income earners than it is on high income earners. This also contributes to the pursuit on equity in income distribution, as it means that the higher income earners will pay more in tax, and this will be passed on to low income earners through the budget as “transfer income”.

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