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Australian Financial Review  December 15, 2000

Minister Newman’s initial response to the report on Participation Support for a More Equitable Society rightly emphasises the aim of reducing social security beneficiaries and having them more actively participate in society. The 22 per cent of the working age population (including students) now on income support payments compare with “only” 15 per cent at end 1980s. Though a minority have some employment, the addition to the tax burden and the general deterrent to employment constitute a serious economic and social problem.  But the problem’s origin is primarily political.

After a long period of strong growth in incomes, resort to social security should not have been allowed by governments to be much higher than at the close of the last economic expansion at end 1980s. That outcome largely reflects vote buying rather than increased need. In our more dynamic economy a substantial proportion of beneficiaries at any one time has the capacity to move up the income scale – and often do. Such dynamism is neglected by the report and the Minister.

Serious analysts will thus be disappointed the Government is not now tackling in any substantive way the steadily increasing generosity of eligibility for benefits over many years. With benefits and their administration now costing the Commonwealth taxpayer over $66 billion a year (9.8 per cent of GDP) and 43 per cent of the budget, it is scarcely “reform” to promise a “substantial up-front investment of budget funds”, reportedly adding yet another billion of expenditure over four years.

Compared with end 1980s, social security spending is about 2.5 percentage points of GDP higher. Most surprising is the distribution implied by the ABS Household Expenditure Survey for 1998-99. That shows households from the top 40 per cent of incomes receiving nearly 15 per cent of government benefits and allowances. Unfortunately, no major political party or welfare group has the courage to advocate changing the system to concentrate on helping households genuinely unable to participate.   

Since end 1980s, the biggest spending increase (in GDP terms) for those of working age has been in assistance to families, which is politically popular but also creates not a few of our many jobless families. Substantial increases have also been allowed in assistance to sole parents, whose numbers rose from 240,000 to 380,000.  While parents whose youngest child is over 12 but under 16 will now have the onerous (sic) task of developing a “plan to support part-time activity”, this group will continue to access one of the most liberal schemes in the OECD.

Disability pensioners (up from 300,000 to an unbelievable 600,000) now cost almost as much as the unemployed. With the significantly higher rate of benefit, many who would otherwise be unemployed have been allowed to join pensioner ranks. Thus, although the published unemployment rate is similar to end 1980s levels, it is really considerably higher – possibly over 9 per cent. The increase in medical testing will be of limited help in making it harder to receive the disability pension.

Moreover, even with a similar unemployment rate, recipients of unemployment benefits have increased disproportionately from around 350,000 to 650,000. Although these include over 170,000 not even required to look for work or undertake training, it appears that situation will not alter. The very modest extension of mutual obligation will, however, expose unemployed aged 35-39 to work for the dole.

Increased assistance has extended beyond the working age population of 15 –64 years. Thus the proportion of aged receiving means/assets tested pensions has risen from 60 to an astonishing 66 per cent, adding some 400,000 pensioners to the welfare bill. No “reform” is proposed here.

However, without providing detail, Minister Newman does foreshadow the development of financial incentives for income support recipients to take up part-time and casual work.   Such incentives have potential to encourage into employment some who would otherwise not participate because the reduction or elimination of reliance on benefits is deterred by the high effective marginal tax rates that can leave little net additional income initially. On its own, though, a moderation of such rates through work incentives can only play a small role.

Of course, the Minister claims the various measures will effect a significant reduction in welfare dependence in the “long term.”  But no estimates are provided of either possible reductions in benefit recipients from “reforms” or net employment gains. While, for example, some additional workers who receive financial incentives will doubtless find employment, that may largely be at the expense of fellow workers.  Even the OECD’s Employment Outlook, whose authors’ predilections generally incline them to support such subsidies, acknowledged recently that such Making Work Pay policies might have only moderate employment effects.  

In reality, unless the current relatively generous eligibility is moderated, Australia faces difficulties in permanently reducing welfare rolls and moving people into sustained employment. Moreover, a major barrier to increasing Australia’s low employment rate remains our highly interventionist and biased regulatory labour market arrangements, which significantly inhibit risk-taking by employers.

Minister Reith has courageously been pursuing the path of workplace reform and Treasurer Costello recently pointed to the need too. The US’ success in reducing welfare rolls importantly reflects its less regulated labour market’s capacity to readily absorb the  (relatively) more low skilled there. Accordingly, while the political difficulties of substantive welfare reform are considerable, the US example suggests the need to combine a tightening in eligibility with substantial reductions in our employment-deterring labour market regulation.


Des   Moore is Director of the Institute for Private Enterprise



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