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Inequality is a natural consequence of the free market functioning effectively though the government both directly and indirectly influences the extent of inequality through its policies it puts together such as through macroeconomic policies, low income earner benefit policies and microeconomic reforms.
Fiscal and income policies generally have the most direct impact on inequality through changing the levels of welfare benefits, tax, government charges and wages and salaries. The recent push to achieve fiscal balance has meant the reduction of these expenditures on welfare and government benefits and services such as labour market programs, which adversely affects lower income earners.
Despite the government using monetary policy to slow the rate of economic growth, it can distort the distribution of income and wealth. This is done by the rising of interest rates resulting in a transfer of wealth from low to high-income earners due to the fact that most low-income earners are borrowers and faced massive interest rates.
This has also resulted in high levels of unemployment , which is a significant factor in creating a widening gap between high and low income earners. Unemployed people must rely on government benefits, which are significantly below the average incomes earned by people in employment. This also leaves the problem of long term unemployment which has created a core of people who may permanently rely on government benefits for their income and who become entrenched in poverty further increasing inequality.
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The government has created policies in an attempt to equal distribution of income through Welfare policies as well as a progressive taxation system, which increases the proportion of income paid in tax as the level of income rises. Also the Goods and Services Tax, is regressive, and basic necessities such as some health, education and childcare services and basic food are exempt, in order to assist low income earners. Rebates are also given to lower income earners with the government reducing the cost of government and private sector services reduced for low income earners such as through Medicare, pharmaceutical benefits, reduced transport fares and subsidised housing
The government’s direct and indirect policies influence strongly the inequality within Australia, as well as their encouragement to globalise the economy and integrate the global business cycle with the domestic. This though makes Australia susceptible to downturns in other economies, which would have serious implications for economic growth, employment and distribution. Despite long-run benefits of globalisation the short-term consequences involve structural change, which have the most negative impacts on low-income earners.
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