Inequality and the future of democracy
October 8, 2025
Rising inequality and declining living standards have posed a threat to democracy in several democracies, but so far not in Australia. However, the increasing inequality of wealth, driven by housing becoming unaffordable without rich parents, is a threat.
The requirements for democracy
Democracies perform best when the electorate is not polarised. This occurs when electors are largely in agreement, and any differences of view are not fundamental. Then when a party loses an election, its supporters can readily accept the result because they don’t expect that their critical interests will be challenged.
For most electors, at least until recently, this was the only world we have known. The last major challenge to democracy occurred almost 100 years ago during the Great Depression which led to the emergence of far-right-wing fascist governments in several European countries.
But following the democracies’ victory in World War II, the common experience of hardship during the Depression and the War led to the development of the welfare state based on an acceptance of our common responsibilities for each other.
There was general acknowledgement that we must all look after the well-being of our fellow citizens when they are challenged by misfortune through no fault of their own. Further, our economy and our society gain when everyone is provided with the opportunities to realise their potential.
The counterpart was stable systems of government with not a lot of political disagreement, or at least not on major matters.
In recent years, however, in many developed OECD economies that common agreement based on a shared experience is no longer the case. Politics has become more divided, with new parties emerging to challenge the traditional two-party political divide between labour and capital.
Most of these new parties reflect what is sometimes called “identity politics”, such as the Greens and Teals in Australia. However, these parties can typically negotiate agreed policy positions with a major party to allow the formation of a stable government.
In contrast, most recently, the emergence of a populist right-wing movement in many developed countries does represent a much more significant challenge to our traditional democracies and their previously agreed policy responsibilities.
So far the US, under Donald Trump, is the only country where populism has triumphed. Trump is ruling by decree, bypassing the normal democratic checks and balances, to introduce his MAGA agenda based on tariffs, stopping migration and reversing any action to reduce the threat of climate change. Policies all designed to appeal to Trump’s white, male, working-class support base, but contrary to previous mainstream thinking.
Populist political movements are, however, also frontrunners in opinion polls in other major developed countries like the UK and France and are significant in Germany. In addition, populists have been in government in Italy, Hungary and the Netherlands, although these governments have been somewhat constrained by EU rules.
On the other hand, Australia stands out as an exception to the success of populist movements elsewhere. As the last Australian election showed, most Australians are not anti-migrant, no party favours increasing tariffs and the majority favour action to reduce carbon emissions and climate change.
Democracy and income inequality and living standards
But why are we different and will it last?
One common answer is our electoral system, where in contrast to say, America, our system is based on compulsory, preferential voting and an independent system for determining electoral boundaries which prevents gerrymandering in favour of one party.
While I agree that these are important pluses for Australia, I wonder if they fully explain the difference in recent electoral outcomes for Australia and the US.
In all countries, the growing strength of populist movements is very much based on support from men who are only moderately skilled and who have frequently lost their jobs – typically in manufacturing. The obvious response by these men is to blame foreigners, and hence Trump’s opposition to migrants and his embrace of tariffs.
But if we compare Australia and the US, migration has been even more important here in Australia. In the US, immigrants and their descendants accounted for 28% of the total US population in 2024, whereas half the Australian population were either immigrants themselves or have at least one parent born overseas. The latest data show that for the year ending in March 2025, migration accounted for three quarters of total population growth in Australia.
Equally important, manufacturing employment has fallen in both countries since the 1970s. but the fall from that peak has been about the same at around 40%.
What is different between our two countries is how each responded to this decline in manufacturing employment.
The evidence shows that, technological change (especially automation) hollowed out relatively routine middle-level jobs in many OECD countries, including both the US and Australia. This was the main cause of the rise in inequality experienced during the 1980s, 1990s, and 2000s throughout the OECD. But the extent and impact of that rise in inequality depended heavily on how governments responded to these changes in the labour market.
In the US, the cost of getting a university degree meant that over this period the number of graduates stayed the same, but the wage premium for a graduate doubled while the relative wages of less skilled labour also fell. In contrast, in Australia, governments supported the expansion of higher education and training, so the number of graduates doubled while the graduate wage premium hardly changed.
The consequence was that inequality rose by much less in Australia than in the US. Further, the real wage of a manufacturing worker in the US today is less than it was 40 years ago. In contrast, while real wage growth has been low in Australia in recent years, real wages have been maintained over time.
It seems likely that this difference in their experience with living standards helps to explain much of why populism has not caught on in Australia to anything like the extent that it has in the US.
But that said, it seems likely that Australia is facing a new threat. The distribution of wealth is much more unequal than the distribution of income, and this wealth distribution is likely to become even more unequal in the future.
Democracy and the distribution of wealth
Owners’ net equity in their homes is the most important form of household wealth in Australia, accounting for 37% of total household net worth in 2019-20. However, this percentage refers to all households, and the value of their dwellings accounts for around two-thirds or more of the wealth of those households which have total or substantial equity in their homes.
Further, traditionally, this home ownership has been widespread in Australia. But that is changing.
The most recent Census data show that in 2021 Australia’s overall home ownership rate was 67%, down from 70% in 2006 and a peak of 71% in 1966. Further, this decline in home ownership is very much concentrated among young people, while older generations have maintained high rates of home ownership.
Thus, Australians born between 1947-1951 saw an increase from 54% home ownership at age 25-29 (in 1976) to 82% at age 70-74 (in 2021). By contrast, those born between 1992-1996 had a home ownership rate of only 36% when they were aged 25-29 (in 2021).
This falling rate of home ownership among young people is mainly due to the rise in house prices relative to incomes. Median home prices in Australia have increased from about four times median incomes in the early 2000s, to more than eight times today (and around 10 times in Sydney).
The consequence is that for many young people home ownership is no longer affordable without a loan from the “bank of Mum and Dad”. Research published in The Conversation found that 44% of parents whose children bought a house more than a decade ago had provided help, but that proportion has since risen to 58% among those who assisted their children within the past five years.
In short, the distribution of wealth is already very unequal, and is becoming even more unequal at a rapid rate when increasingly you need rich parents to access the principal source of wealth – home ownership.
Of course, the Albanese Government would like to believe that its new policy, to provide a government guarantee to first home buyers so that only a 5% deposit is needed, will restore the possibility of home ownership more widely without relying on parental support. But that ignores the increase in loan and interest repayments that will follow from a lower deposit rate.
The median house price across Australia’s capital cities is presently $1,068,696, but in Sydney it is approximately $1,550,563. Thus, it is unlikely that reducing the size of the required deposit will help young couples access a home in Sydney.
But even elsewhere, the annual repayment of principal and interest on a $1 million loan is presently $66,564. This represents more than half the average annual total earnings for a full-time adult male of $115,024, and for most young home seekers it will be unaffordable.
No wonder, Treasury has found that this reduced deposit scheme will make little difference to house prices when it also makes little difference to the ability to afford to buy a home.
Conclusion
Unless we can resolve the housing crisis, wealth will become much more unequally distributed in Australia. Australia could easily become a country of “haves” and “have-nots” when it comes to the most important item determining our living standards.
That would then risk our social coherence and thus the foundations of our democracy.
It is essential therefore, and in everybody’s interests, that governments succeed in increasing the supply of housing where people want and need to live. Realistically, however, that can only be achieved by increasing housing density.
At present the existing wealthy home owners are resisting this increase in density. But they need to recognise that a more divided society is not in their interests.
Further, the necessary changes are not that radical. As the Grattan Institute has pointed out, if Sydney, which has the densest population in Australia, offered the same number of homes as Toronto in its inner 15km, it would mean an extra 250,000 well-located homes in inner Sydney.
The views expressed in this article may or may not reflect those of Pearls and Irritations.