Parties Lose Distinguishing Features

The Age

14th June 2006

The term 'middle class welfare' is a misonomer, writes Des Moore, when much of that welfare is going to high-income households.

Paul Keating is wont to prefer policies pursued under his reign to Labor's current ones. He complained recently that Labor post-Keating has failed to espouse perceived "winners" - the rising middle classes - from his own reforms. Perhaps he overlooked the Bracks Government budget hand out of $300 to parents with schoolchildren regardless of their income.

In fact it is now common ground for the major Australian political parties to compete for voters by providing government hand outs across the income spectrum. The $300 is simply another example of what has become known as middle class welfare but which in practice extends well into higher income brackets too.

This year's document on federal budget measures is the largest ever, comprising 357 pages of expenditure and revenue decisions since the last budget, costing some $47 billion net over the next three years. The Coalition found that various better than expected economic outcomes (so-called parameter changes) produced sufficient savings in net revenue to allow these further hand outs and still budget for a substantial surplus.

Some may see the adoption by both major parties of extended welfare as a welcome narrowing of differences between them. Certainly it is encouraging from one perspective that Labor no longer simply plays to its customary base and guarantees no increase in federal taxes as a percentage of GDP. For its part, the Coalition says it believes in smaller government but shows no prospect of achieving it. So, regardless of the party in power, citizens continue to suckle a similar-sized government voting teat.

But, I hear you say, at least the Coalition is providing $37 billion worth of income tax cuts.

However, welcome as they are, that $37 billion is spread over four years and by 2009-10 bracket creep will have restored as big a proportion of GDP in income tax as the government receives this year. Retention of the progressive tax scale means that revenue soon recovers the loss from income tax reductions and Mother Government can resume milk distribution. Perhaps this repetitive process helps explain her children's seemingly less than enthusiastic response to the cuts in this year's budget. Had those tax cuts been real they would, of course, have permanently lowered the income tax take relative to GDP.

This apparent lack of enthusiasm may also reflect the fact that the Coalition has become the biggest taxing federal government in Australia's history. Data from the Australian Bureau of Statistics web site, compiled on an historically consistent accounting basis (which rightly includes the GST as a Commonwealth tax), puts the federal tax take in 2004-5 at nearly 26 per cent of GDP, or over 3 percentage points higher than when the Coalition obtained office in 1995-96. Even if that year's Beazley "black hole" of a $10 billion deficit had all been filled from higher taxes, Coalition taxes would still be 1.5 percentage points higher. Data from the budget papers also indicates that, even after the $37 billion income tax cut, the tax take will stay around this record high level over the next four years.

Moreover, although the states have used GST payments from the federal government to eliminate some of their taxes, the ABS data shows the total tax take by all governments was almost 2.5 percentage points of GDP higher in 2004-05 than in 1995-96. Even under the highly irresponsible budget policies pursued under the Whitlam government the total tax then was 8 percentage points of GDP lower, equivalent to a tax cut today of more than $70 billion.

Our political leaders say the community's needs have grown since Whitlam's time. In explaining the $28 billion benefits now provided annually for families with children, Prime Minister John Howard claimed they were not middle class welfare but "tax relief that recognised the universal reality that it costs money to raise children. Of course. But do such realities justify the extraordinary increase in social welfare, health and education

benefits from 6.6 per cent of GDP in 1973-74 to 14.5 per cent today [and the further projected increase in line with GDP for the next four years to reach a massive $168 billion in 2009-10]?

Surely the nearly 80 per cent increase in real incomes per head over the past 30 years that has been spread relatively evenly across the income spectrum would have allowed individuals to take progressively more of the responsibility for their own welfare, health and education, including the cost of raising children. The vote-buying federal expenditure in these areas is highlighted by the large proportion going to upper income groups.

[Using 1998-99 ABS data,] about 30 per cent, or $45-50 billion, of next year's benefits will probably go to households with incomes in the top two quintiles. Is it not time to wean some of the babies fed by mother government?