This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
It is too easy to stick to conventional thinking when we are in a totally new economic environment. Thinking about distributional issues allows us to think deeper.
Distributional analysis is not a high priority either in economic analysis or public discussion (except in the me-me-me demands).
Oh, I know that five years back, everyone suddenly discovered that household disposable income inequality was markedly greater than thirty years earlier, although the discovery was treated with ‘shock-horror’ rather than discussing why the jump had occurred. (The answer is the massive tax and benefit changes that occurred under Rogernomics and Ruthanasia.) More intriguingly, the jump was known a few years after it happened; why did it take decades for the conventional wisdom to become aware of it?
Here is another example. There is a fashion arguing that we should cut GST. The issue is far more complicated than the advocates allow. Even if there was a case for a spending boost, would we want to encourage spending on imports? How easy is it to implement? In any case, is a further spending boost a priority at the moment?
Instead, to illustrate the column’s central point, look at the distributional side of a GST cut. Consider professors of economics; they do not generally front for private lobby groups. Suppose they are taking home pay of $120,000 a year and that GST was cut 2.5 percentage points (back to 12.5 percent). A professor would receive a spending boost of about $3000 a year, or $60 a week. Not that they were thinking of this when advocating the GST cut. The point is that the distributional issue had not occurred to them.
The GST cut would cost the exchequer about $5b a year. With the much same amount we could eliminate the bottom income tax rate (it is currently 10.5 percent on the first $14,000). The effect would be to give a spending boost to just about all adults of almost $1500 a year – say $28 a week. It would be the same amount for a beneficiary as for the professor of economics. Anyone with an after-tax income under $60,000 a year would be better off. (And it would be easier to implement than the GST cut.)
So why do we not advocate zeroing the bottom income tax rate rather than cutting GST (or target more on children)? Public rhetoric ignores such distributional issues.
I am not expecting tax cuts this budget – go on, Grant, surprise me – but there is another major distributional issue which will also be ignored. The budget figures will show a massive increase in the public deficit – partly because the economy was slowing down anyway, but the deficit has also been severely compromised by the Covid Crisis. I’ll leave the budget papers to give the details but note that we are not alone; the IMF is expecting the average increase in public debt across all economies to be in the order of 11 percentage points of GDP.
There will be much discussion on the size of our debt increase, but an obvious question – a distributional one – is who in the private sector will hold the public debt?
It may be you; if you have not been hit too heavily by the Covid Crisis in economic terms, because your spending – on holidays, entertainment and purchase of things like books, cars, clothing and house repairs – has been cut back. So you may be holding more banknotes. Or perhaps your deposits in the bank have risen; one way or another, they get lent back to the government.
It is obviously an important economic question because public debt affects the private wealth distribution and also because we need to know what people will do with their increased reserves. Once the severe lockdown is over, much may be spent on those items which were held over. That is exactly what the government wants in order to help the economy recover. (It will also generate tax revenue.) Some will be spent offshore; what will those foreigners who receive New Zealand money do with it? Some may be used to pay off debt or go into retirement savings. Some may go into housing or sharemarket speculation. Some may be put into new investment. And so on.
It will be surprising if this issue is discussed much in the post-budget comments. Instead there will be the usual focus on the budget deficit. Insofar as the private sector is involved, it will be explaining why they deserved more from the government. (Thankyous will rarely be reported.)
Unfortunately, that we do not have the data bases to discuss such distributional questions. About the time of the Global Financial Crisis, when comprehensive balance sheets were also vital to understand what was going on, we were beginning to develop them. But the squeeze on government expenditure undermined that development too.
Distributional economics is ignored not because it is unimportant but because it is too hard. The quality of public policy suffers.
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.