During those two weeks the Financial Review began a series on “the new middle class.” It opened with a long article analysing survey results that revealed how households on $140,000 a year — a lot of money in those days — didn’t consider themselves particularly well-off. Great, I thought — this’ll make for a solid ten or fifteen minutes. I hurried over to the presenter of the program and showed him the article. “Good God,” he exclaimed after reading the opening paragraphs. “How do people manage on that kind of money?”

Sociologists Marcos González Hernando and Gerry Mitchell open their new book, Uncomfortably Off, with an incident that makes a similar point in a slightly different way. In an episode of the BBC’s Question Time during the 2019 British election campaign, IT consultant Rob Barber accused a Labour MP of lying when he said the party’s plan to lift taxes on high earners would only affect people on the highest incomes. Labour wouldn’t be lifting taxes for the remaining 95 per cent, the MP promised.

“But you are!” Barber replied angrily. “Because I’ve read your policy!” The tax would apply to incomes above £80,000, and that meant he’d be among those who’d pay it. “I’m nowhere near the top 5 per cent, let me tell you. I’m not even in the top 50 per cent.”

Barber was wrong: a salary of £80,000-plus put him comfortably in the top 5 per cent of earners. (At around the same time, an Australian earning $180,000 would have snuck into the same bracket here.) His likely mistake, according to Hernando and Mitchell, was to habitually compare himself with people who earn as much as he does or, more importantly, those who earn much more.

As its title suggests, Uncomfortably Off attempts to explain why people on relatively high incomes don’t feel particularly affluent. (Hernando and Mitchell’s interviewees, all British, were drawn from the top 10 per cent of earners, though not the top 1 per cent.) Partly it’s because, like Barber, they compare themselves with people who earn more than they do. Partly it’s because their spending has increased as their incomes have risen and they have to find the money to cover increases in school fees, rising private healthcare costs and mounting lifestyle expectations.

These pressures contribute to what the authors call a fear of falling — the fear that they or their children will end up further down the income ladder. And those pressures have only worsened in recent years. The Conservative government’s austerity program of 2010–19 encouraged wealthier households to abandon overstretched public schools, healthcare and other publicly provided services, adding to the pressure on household finances, and the growing crisis in British schools, hospitals and community care has only added to the incentive to bail out.

But why would well-heeled earners look up rather than down when they’re assessing their own position? Increasingly segregated schooling and housing, more marriage within rather than between income groups, much less shared experience of healthcare and other social services, a greater focus on paid work and its monetary rewards — these are a large part of the explanation, say Hernando and Mitchell.

“All these tendencies,” they write, “mean that it’s increasingly rare for high earners to get to know people outside their usual interaction with friends, family, work and education, especially when other networks (such as those based on religion or hobbies) either dwindle or move online.” Asked to place themselves in the income hierarchy and feeling under pressure, they compare themselves with the relatively small segment of the population that seems typical to them.

This wouldn’t be quite such a problem if it weren’t for the fact that wealthy people have disproportionate political power. Once they withdraw from the spheres that most people inhabit — government-provided schools, healthcare or childcare, for instance — it’s no longer in their interest for those services to be adequately funded. This sets up a malign cycle: underfunded public services push people who can afford it into the hands of private providers. Their services cost more — often much more — and that puts pressure on their own finances, increasing their resistance to taxes and making them more likely to support government cutbacks.

Some of these trends are hard to reverse. We can’t do much about people marrying within their own milieu, for example. But we can begin the slow process of changing that milieu. The obvious place to start is in the school system, where private schools (generally the preserve of the wealthiest families) are reinforcing social segregation to an alarming degree.

Hernando and Mitchell conclude that cracks are opening up in the fearful barriers wealthy Britons have erected against an increasingly underresourced public sphere. “This book’s aim is to invite the top 10 per cent to consider a future in which, for the price of giving up the barriers through which they seek to distinguish themselves from the rest” — a price that would include higher taxes — “they could become less anxious, more secure and less isolated.”

Can Australia learn from Britain’s uncomfortable wealthy? While 7 per cent of British children are educated in private schools, the Australian figure is 35 per cent. Add in selective government schools, particularly in New South Wales, and our school system rates among the most segregated in the Western world. But the groundswell of support for the Gonski report (before it was fatally compromised by federal and state governments of both varieties) shows the soil is fertile. •

Uncomfortably Off: Why the Top 10% of Earners Should Care about Inequality
By Marcos González Hernando and Gerry Mitchell | Policy Press | £19.99 | 256 pages

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Many politicians and public servants have described to me his rare magic in combining academic rigour with clear communication and a talent for finding a cut‑through line. His retirement this year is a good excuse, if one were needed, to talk about tax reform, the subject of his major academic and policy contributions. Indeed, his research and writing read like a tax reform to‑do list.

Pick up the Financial Review on any given day and you’ll find opinion pieces grounded in John’s decades-long efforts to unpick the efficiency and equity impacts of different tax reform options. He has also made the case for these reforms directly to government as a consultant to the Henry tax review, on the review panel of the NSW Federal Financial Relations Review and in other forums.

And while he has done the hard work of tilling the ground, and has no doubt been pleased with some of the progress made on tax reform, much of the broad agenda he has articulated remains on the shelf.

The question is: why? Why, after so many decades of discussion and so many points of broad economic consensus, does tax reform remain so challenging? Is progress possible or is tax reform simply an impossible dream?

To answer this question, we need to first understand why someone with John’s rare talents decided to use them to make the case for tax reform. The bottom line is that tax matters. It matters to all of us: how much we collect and how it’s collected have implications for economic activity, governments’ capacity to deliver services, and levels of inequality.

One challenge we face when we talk about tax reform is that different people start with very different objectives. So let’s unpack some of those.

The first is economic efficiency. Economists rightly focus on the fact that how we collect tax — that is, what we tax and how much — affects the “economic drag” created by the tax system. Almost all taxes come with some loss of welfare, but some drag on growth more than others.

In a static sense, this can be measured by the “marginal excess burden” — how much economic activity is lost for every dollar collected. As Treasury and others have reminded us, this varies significantly between taxes.

But while there can be big differences in the estimates different modellers come up with, they broadly agree that a tax-mix switch from higher-burden to lower-burden taxes would deliver an economic dividend.

The most clear-cut example is a move from stamp duties to taxes on land. Stamp duties are among the most inefficient of taxes. Treasury estimates suggest that every dollar collected can reduce economic activity by up to 72 cents. Stamp duties discourage people from moving to housing that better suits their needs, and sometimes discourage people from moving to better jobs. Overall, they distort choices and gum up the economy.

Another reason we might advocate for tax reform is to make government budgets sustainable and future‑proof our tax system. At a time when the treasurer has just delivered the first budget surplus in fifteen years and we are seeing apparently endless revenue “upgrades,” it may seem strange to be having this conversation right now.

But government spending overall is projected to average 26.4 per cent of GDP over this period — compared with less than 25 per cent over the three decades before Covid — and revenues have not kept up. The federal government’s latest Intergenerational Report reminds us that the ageing population and the fallout from climate change will only see this fiscal challenge grow over the next forty years. The same is true of state budgets.

The implications of not taking policy action are clear: we are asking future generations to bear the costs of today’s inaction.

Governments have three levers they can pull to tackle long-term budget challenges: they can make economic reforms to “grow the pie,” they can increase taxes and they can reduce spending.

Pursuing policies to boost growth is critical. Much of Grattan Institute’s work has focused on this first lever. And I look forward to pursuing this in a big way when I join the Productivity Commission in a couple of weeks’ time. But, as Grattan highlighted in our Back in Black? report earlier this year, we can’t rely on higher growth alone to close the budget gap.

Given the scale of the challenge, governments will also need to find ways to reduce spending and/or boost revenue. After a decade of looking at this challenge I have come to the view that we will need to do both. The scale of the challenge, and the greater buy‑in that can come when the costs are spread across the population are arguments for looking to both sides of the budget for answers.

If we do accept that some additional revenue is needed to respond to the structural challenge outlined, then we want to make sure that additional revenues are collected with the lowest possible economic costs. In fact, this can also help us grow the pie: more efficient, less distorting taxes are one of the Productivity Commission’s “enduring policy priorit[ies]” for productivity growth.

On the other hand, if we do nothing, we may end up on the path of least resistance: collecting ever-more revenue through ever‑creeping taxes on wage and salary earners. Bracket creep may be the most politically painless way to raise revenues, but it is far from the best.

Tax reform for budget sustainability should aim to broaden the base of income taxes — looking at loopholes and overly generous concessions as well as orientating our collections towards more efficient bases such as consumption, wealth, externalities or resource rents. In other words, we need to revisit the John Freebairn back catalogue.

The atrophying of tax reform in recent decades might make us pine for a golden era. In truth, though, tax reform has never been easy. So let’s take a short history lesson — five decades of tax reform in five minutes — and see what we can learn.

Let’s start in 1975. Many elements of our tax system today can be traced back to the 1975 Asprey tax review. This comprehensive, independent review was commissioned by the McMahon government in response to concerns about bracket creep and tax evasion. (Sound familiar?)

The review outlined the basic principles of efficiency, fairness and simplicity that remain our lodestars and made the case for many aspects of the system we have today, including fringe benefits tax, capital gains tax and a broad-based consumption tax.

But the report initially had little impact. Landing in the final, tumultuous year of the Whitlam government, it was written off in the media as a “tax flop,” and its main recommendations not adopted.

It took another decade for momentum to build. In 1985, fresh off the Prices and Incomes Accord and the floating of the dollar, prime minister Bob Hawke and treasurer Paul Keating turned their attention to tax reform. They released a draft white paper on reform options and hosted a tax summit with unions, business and community groups.

These processes resulted in the adoption of some of Asprey’s recommendations, including a capital gains tax, negative gearing reform, fringe benefits tax, dividend imputation and taxation of foreign source income.

But it was a case of “two steps forward, one step back.” A broad-based consumption tax was central to Keating’s original vision but failed to win support and was dropped. And the pioneering negative gearing reforms were repealed two years later.

So the Asprey blueprint was partly implemented. Another long reform slumber followed. The next big push was John Hewson’s Fightback! platform for the 1993 election, which proposed, among other things, a broad-based consumption tax. Fightback! proved to be a false start — Hewson lost the “unlosable” election — but consumption taxes were back on the agenda.

Another six years had to pass for the reform dream to become reality. Prime minister John Howard took a proposal called A New Tax System, which included the GST, income tax cuts and the abolition of a host of inefficient state taxes, to the 1998 election. He narrowly won and the legislation ultimately passed in 1999, twenty-four years after the release of the Asprey report.

We’ve seen precious little in the way of significant, lasting tax reform since then. The landmark Henry review is close to celebrating its fourteenth birthday with most of its meaty recommendations untouched. State and territory tax reform has also, mostly, been a non-starter, despite a succession of reviews converging on similar recommendations.

So what should we take from this history? What can we learn from those rare moments when we managed to overcome the many barriers I outlined before? I see four key steps for would-be reformers.

Step 1: Put reform on the agenda

History shows that an external push is often needed to put tax reform on the agenda. In 1985, fears about Australia’s economic decline and resentment about tax avoidance pushed the discussion forward. In 1997, the High Court’s decision to strike down a key state tax left a significant hole in the states’ budgets and opened the reform window for the GST.

The optimist in me can’t help but draw parallels with last month’s High Court decision to strike down Victoria’s electric vehicle levy. Perhaps we might have another golden opportunity for a grand intergovernmental tax reform bargain on our hands?

Tax reform was hardly on the radar for the Howard government until civil society groups — representing both social services and business — started championing the cause. The Australian Council of Social Service and the Australian Chamber of Commerce and Industry, in particular, pushed in a coordinated way, culminating in the National Tax Reform Summit in 1996. The strong and united messaging put the GST and tax reform firmly back on the political agenda.

Today many groups feel similarly. Federal independent MP Allegra Spender has been spearheading a push to unite academic, business and civil society leaders to build some consensus on the need for tax reform and the way forward.

Step 2: Build a coherent package

While rewriting thousands of pages of the tax code at once would be a recipe for chaos, relying on incremental changes is probably not going to get the job done either.

History shows that reform packages can work well. In 1985, reforms that broadened the income tax base were bundled with income tax rate cuts and tax avoidance measures — a coherent story to sell to the public. In 1999, removing narrow and inefficient, but lucrative, state taxes and widely variable wholesale sales taxes made sense in the context of the broader GST deal shoring up state budgets.

Packages provide the opportunity to dull the sting of reform by sharing the costs more broadly and perhaps offering some compensation to the losers.

The major tax reforms of the past two decades have come at an upfront cost. The GST package overcompensated households by about $12 billion a year, through personal income tax changes and increases to pensions and family payments. This was a key part of its sales pitch. Former Treasury secretary Ken Henry recalled that:

the distributional tables outlining the impact of the GST were the most “thumbed” part of the documentation, certainly by those Treasury officers answering phone queries. Of course, it helped that every individual and family represented across all income levels appeared better off.

Compensation packages are particularly important where there are equity implications for lower-income households. Australians tend to reject reforms that seem unfair. But, crucially, potentially regressive reforms, such as broadening the base of the GST, can form part of larger, fairer reform packages. For example, the carbon tax package involved substantial assistance for households, particularly lower-income households, to address concerns that poorer households would be particularly affected by higher energy and food prices.

Given the long‑term budget challenges, high‑cost packages of the type needed to ensure there are “no losers” from tax changes are difficult to justify. But it is certainly possible to design packages with much lower upfront costs that still compensate vulnerable households. For example, Grattan’s previous work on the GST proposed a revenue-positive package, with a 15 per cent GST, cuts to income taxes, and an increase in welfare payments, that would leave the lowest 40 per cent of income earners better off on average.

Packages might also help address some of the other political economy challenges of reform. Ironically, opening up more fronts in the tax debate may quiet some of the more over-the-top reactions. As Ken Henry has argued, “if you give a lot of well-armed people only one target to shoot, it will take a pounding. Incrementalism sets up a single target on a battlefield occupied by well-resourced attack forces.”

And while my goal here is not to opine on the “what” of tax reform, let me give a sense of some of the types of packages that a government could put forward.

• On income tax reform, we could return to the logic of 1985: broadening the income tax base by winding back loopholes and overly generous concessions, to support a cut in rates. This could include targeting discretionary trusts and super tax concessions, or reforming capital gains tax — either by reducing the capital gains tax discount or returning to the indexation of gains.

• Another package could tackle the inconsistent tax treatment of different savings options, to reduce the distortion in savers’ choices and simplify the system. This would mean lower taxes on interest from bank accounts and bonds, and somewhat higher taxes on other savings vehicles such as superannuation (which is very lightly taxed even after accounting for the long holding periods). An even “bigger bang ” version would be a dual income tax where income from savings is taxed at a consistent low rate, regardless of source.

• On the corporate tax front, we could better tax resource rents to fund a company tax cut. We could also consider more wholesale reforms such as an allowance for corporate equity or a cash flow tax.

• For states, inefficient stamp duties could be swapped for land taxes over time, along the lines of the ACT government’s gradual phase-in or Victoria’s switch for commercial and industrial property.

• In transport, distance-based congestion charges that vary by location and time of day would be a more efficient replacement for the declining fuel tax base.

• Finally, to aid the climate transition, the government could substantially expand and strengthen the safeguard mechanism, while eliminating many higher-cost interventions to reduce emissions, such as the fringe benefits tax exemption for electric vehicles. The package would deliver both faster and lower-cost emissions reduction.

But while packages make a lot of sense, would‑be tax reformers can’t be too purist. Incremental changes in the right direction are still an improvement on the status quo, and in some cases these more incremental steps can ultimately take us towards more comprehensive packages.

Step 3: Embrace the “vomit principle”

The next step is making a compelling case for change. Complicated reforms that can’t be explained are unlikely to win support, and are more vulnerable to scare campaigns. We saw this in 2019 with the confusion about franking credits — irredeemably branded a “retirement tax” — and in 1993, when John Hewson’s tortured explanation of the effect of a GST on the price of a birthday cake helped turn the tide of popular opinion against the new tax.

Convincing the public of both the necessity of change and the proposed solution takes time and political capital. Howard and Costello spent two years and a lot of political energy highlighting the structural problems with Australia’s tax base prior to releasing their reform package in 1998.

While no one likes to pay extra tax for the fun of it, many are more inclined to agree when higher taxes are linked to better services. The proportion of Australians favouring “less tax ” has declined since the late 1980s, according to the Australian Election Study, and the proportion preferring “more spending on social services” has risen. At the time of the 2022 election, 39 per cent indicated they would prefer less tax, 31 per cent more social spending and the remainder said “it depends” — presumably on the nature of both the tax and the spending increases.

My reading is that when our political leaders do the work of tilling the ground and explaining changes and why they are needed, then hearts and minds can shift.

A more recent example, albeit one contrary to received wisdom, was the then‑Labor opposition’s 2016 policy to wind back negative gearing and reduce the capital gains tax discount. We have already discussed some of the public challenges that reform faced, but it is also worth remembering that negative gearing had formerly been viewed as a “political untouchable.”

Indeed, since the Hawke government lost its nerve and reversed its decision to wind back negative gearing in 1987, it has been considered the “sacred cow” of Australian politics. When Labor announced it would introduce these changes to improve housing affordability and contribute to the budget bottom line in 2016, just over a third of Australians supported removing or limiting negative gearing.

But, over time, as shadow treasurer Chris Bowen and others made the case, support gradually increased. Support for limits on negative gearing climbed almost 10 percentage points, from 34 per cent in March 2016 to 43 per cent in December 2018. By the time of the 2019 election, the Australian Election Study estimated that 57 per cent of Australians supported limiting negative gearing.

To me this is a textbook example of what some political strategists call the “vomit principle ” — repeat something until you feel like you are going to vomit. Only then are you cutting through.

Labor has since dropped the policy, of course, and many reading the media commentary would have gained the impression that the tax reform agenda was deeply unpopular and “to blame” for Labor’s surprise election loss in 2019. The reality was far more complex.

In any case, it’s not just down to politicians to argue for reform. Successful tax reforms need a diverse cheer squad. Historically, academics, premiers, public policy institutions, and community groups have all been important advocates for tax reform. Providing incentives for academics and non-profit organisations to participate in public debate would be a useful step to building these coalitions today.

Step 4: Make it stick

Somewhat dispiritingly, even after these hurdles have been overcome and tax reform has been passed, the job isn’t done. Tax issues tend to linger on the agenda, often for entire parliamentary terms, and reforms sometimes don’t stick. As we’ve just seen, negative gearing reforms were undone after just two years in 1987. The carbon tax and mining tax were repealed. The Perrottet government’s hesitant steps towards stamp duty reform were wound back by the new NSW Labor government.

But in other cases the controversy does die down after reform is enacted. Sometimes social norms change quickly — for example, in Stockholm, congestion charging was much more popular after it had been implemented than before, and many people did not even remember that they once opposed the idea.

In Australia, plenty of tax changes that were controversial at the time — the GST, fringe benefits tax, capital gains tax — are now so entrenched that there is no constituency or any visible public appetite for their removal.

Reforms are more likely to stick if they create positive feedback loops — for example, if they result in institutional shifts, if reform winners can be used as advocates, or if businesses make big investments under the new regime. Taking the GST as an example, the Australian Taxation Office and businesses made significant investments in the infrastructure for administering the new scheme; and the changes to federal financial relations created a key constituency — state governments — who had a strong interest in its continuation.

What are the prospects for tax reform? I, for one, remain optimistic.

First and foremost, I don’t think we have much choice. The slow‑burning platform is still on fire, and over the coming decade the gap between our spending needs and our tax system’s capacity to meet them without ever higher taxes on employment income will be stretched to breaking point.

More and more questions are being raised about the sustainability and intergenerational fairness of our current tax mix. Without action, expect them to get louder and louder over the coming decade. Tax must also come into the conversation if we are going to deliver our policy objectives in other areas, including the green transition.

Second, I am confident that our leaders can make a positive case. While I have focused on the challenges, I am also heartened by the leadership we are seeing on difficult reforms in other areas.

Over the past three months the Commonwealth and state governments have made strong commitments to boost the supply of housing through politically challenging reforms to planning laws. If they can pull it off, this would be a huge economic and social reform, and one that has been in the too-hard basket for many decades.

As a reform proposition, making the case for greater housing density is probably of the same order of difficulty as making the case for major tax changes, and yet we are seeing both levels of government go after it in a big way.

Third, I think there is appetite across a broad swathe of interested parties to shift the dial. Allegra Spender’s tax reform round tables suggest at least a consensus among business, academia and civil society that something needs to change, even if there is not yet broad agreement on the reform priorities. A process to harness this agreement, ideally led and shaped by government, could help move the conversation forward.

Finally, I have confidence in the Australian people to see through the noise. Scare campaigns and a shouty media are one thing, but if state and federal governments can hold their nerve in the rule in/rule out game long enough to make a positive case for change, and keep making it, history shows that people can be brought along.

Tax reform is hard, but it’s not impossible. It’s time we woke up from our slumber and became a little less afraid and a little more Freebairn. •

This is an edited version of this year’s Freebairn Lecture, delivered at the University of Melbourne last week. The full lecture, with charts and footnotes, is here.

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Lee is a novelist, painter and human rights lawyer. Her debut novel The Healing Party was shortlisted for several prizes, including the Victorian Premier’s Literary Award.

Born with spinal muscular atrophy and using a wheelchair, she is also the author of the latest Quarterly Essay, Lifeboat: Disability, Humanity and the NDIS. Of all the millions of words written about the National Disability Insurance Scheme, few have been as incisive as these, bringing to us the dimensions of her lived experience.

The NDIS has transformed the lives of tens of thousands of people — something that Lee acknowledges. “For those who can access the scheme and turn funds into the support they need,” she writes, “the NDIS is, as many have said, life-changing.” Without the NDIS, “I wouldn’t be able to pay for the support workers I need to live independently in my home.”

But she also argues that it has not lived up to expectations. The activists who fought for reform for many years focused on three principles: that a new scheme had to be based on rights; that those with disability should be able to decide themselves the supports they need; and that these supports should enable them to participate on an equal basis in economic, social and cultural life.

The NDIS’s design means it delivers these goals in theory but compromises them in practice.

Many have been unable to exercise choice or real management of their supports, Lee writes. She describes the process of drawing up an NDIS plan as “notoriously disempowering,” with processes hard to navigate and the planners who assist likely to change every year.

On one occasion she was told that her funding would be reduced as she became better or more independent, in line with the goals of the NDIS. Lee explained that her condition was progressive and she was likely to need more supports in the future rather than fewer. “You’re talking to a real person,” she told her planner, “not someone who has to fit into one of your boxes.” Her plan was reduced anyway.

The market-based approach that underlies the NDIS and the light-touch regulation that accompanies it means the government and the National Disability Insurance Agency, or NDIA, which administers the scheme, often have little knowledge of the scheme’s impact on individuals. Lee cites cases of private providers refusing to take on people who display challenging behaviours — people who have no government service to fall back on.

Her critique echoes that of Mark Considine, whose book The Careless State cites numerous examples of the failure of Australia’s privatised and deregulated social policy system, including the NDIS. Rather than competition among private providers making services cheaper and better, she writes, the opposite is the case. “Once they know you are on the NDIS, many providers will charge the maximum rate allowable under the scheme.”

The scheme also has had perverse effects, such as the assumption by society that it means those with a disability always have their own help. Flying to Byron Bay for the writers’ festival, where she would meet a support worker, Lee decided not to arrange for a separate support worker on the flight, which she estimated would have involved about fourteen hours of paid time, including the flight back.

But she could find only one airline that would allow her to travel alone. At security, where in the past staff had always helped her, she was asked where her carer was and had to rely on a friendly woman in the queue to lift her bag on to the belt. She was asked the same question at the boarding gate and by the flight attendant. “The NDIS has helped to minimise the individual effects of my condition but it has not helped make society more accessible,” writes Lee.

Nor has it led to a more inclusive society in other respects, a point also highlighted by last week’s report of the disability royal commission. Lee explained to her long-time friend Frida, who had a mental health condition, how the NDIS might be able to help her get back to work. “Yeah sure, but what can they do if no one wants to give me a job?” Frida replied. A new client rejected Lee, who works as a lawyer, as soon as he saw her. “He told the manager that he needed a lawyer who would look the part in court.”

According to the NDIA, 20 per cent of NDIS participants had a job in 2020, with another 31 per cent saying they were unemployed but wanted work. “We are disabled by society as well as by our bodies,” writes Lee.

She charts her journey from when she was young and “disability was something I had to deny and overcome” to acceptance: “You can accept your disability. What is not acceptable is when the world treats you as second class and excludes you because of it.”

As a young woman, her fear of becoming increasingly disabled and dependent drove her to travel widely in Europe and Africa alone and without support. “I was spurred on to experience everything, not miss out, never miss out, no matter how hard it was. Paradoxically, by experiencing my own helplessness, I was able to discover my inherent worth and power.”

Many of the shortcomings mentioned by Lee have been acknowledged by Bill Shorten, the minister responsible for the NDIS. The review he has commissioned is due to report by the end of October. Lee is hopeful. “The tide is turning,” she writes. •

Lifeboat: Disability, Humanity and the NDIS
By Micheline Lee | Quarterly Essay | Black Inc. | $27.99 | 144 pages

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There is, however, one prediction that can be made, with almost perfect safety. For the foreseeable future, Australia’s political class will continue to worry about declining birth rates and “population ageing.”

Worries of this kind have been around since the late nineteenth century, when families first began exercising some control over the number of children they had. The panic over declining fertility was briefly interrupted by an unexpected baby boom after 1945, which coincided with an economic boom. But concerns about ageing resumed with increasing force from the 1980s, when the fact that baby boomers would one day retire started to enter budget calculations just as the prospects of continued strong growth were fading. Worse, unlike previous generations, the boomers showed a propensity to live well beyond the official pension age.

This resurgence in concern has coincided almost exactly with my own working life, and I have spent a fair bit of that time trying to debunk it. My attempts began before the first Intergenerational Report in 2002, and have continued, with very limited success, right up to last month’s release of the latest.

Criticising alarmism about fertility and ageing is something of a family tradition. In 1988, my mother Pat, a demographer, produced No Rising Generation: Women & Fertility in Late Nineteenth Century Australia, a study of the first panic about declining fertility. The title, a quotation from a typically gloomy pro-natal advocate, would work perfectly well as a summary of views being stated today.

Alarm is expressed most commonly in terms of the “old-age dependency ratio”: the ratio of people aged sixty-five and over, assumed to be dependent, and those between fifteen and sixty-four, who must therefore work to support them.

The ages built into the ratio reflected the economic realities of 1909 (at least for men), when the age pension was first introduced. Most men left school and entered the workforce at fifteen, possibly after a brief apprenticeship. Young and strong, they reached their peak earning power in their twenties. If they made it to the pension age of sixty-five they were worn out and, in many cases, incapable of working any longer. At that point, they could expect to live another ten years or so.

Women, meanwhile, were expected to leave paid employment when they married, as nearly all of them did. They then undertook the work of caring for children — an activity ignored by the dependency ratio and left out of calculations of national income. Reflecting their limited employment opportunities, women could (if single or widowed) receive the age pension at sixty.

Apart from some fluctuations, these patterns didn’t change much for the next fifty years or so. The birth rate fell sharply during the Great Depression but rebounded in the baby boom. Women entered the workforce in large numbers during the second world war but were pushed out again to make room for returned servicemen. And although reductions in premature deaths (especially infant mortality) produced a big increase in average life expectancy, prospective longevity barely changed for sixty-five-year-olds between 1900 and 1960.

After 1960, though, things changed radically at both ends of the age distribution. Leaving school at fifteen ceased to be a sensible (or even a feasible) option. By the late twentieth century nearly all young people finished high school and most went on to post-school education and training. Dependence on parents, and on publicly provided or subsidised education, continued to around twenty years of age.

At the other end of the age distribution, the number of healthy years someone could expect to live after sixty-five increased steadily. The abolition of official retirement ages meant people could choose to work until they were seventy or even older. Yet the trend of the late twentieth century — exacerbated when the 1990s recession consigned many older workers to apparent unemployability — was towards earlier retirement.

It was in this context that Coalition treasurer Peter Costello launched the first Intergenerational Report. Its predictions (or projections) were less important than the rhetorical purpose: to spread the message that reductions in public spending, and particularly in welfare payments, were urgently needed if unacceptable increases in taxation were to be avoided.

These claims were repeated in successive reports, reaching the height of absurdity under treasurer Joe Hockey, who warned that the 2015 report would make us “fall off our chairs” and raised the prospect of newborn Australians living to 150. (He forgot to mention that these future Methuselahs would not even reach pension age until the last decades of the twenty-first century.)

The alarmist tone of the Intergenerational Reports was based on the idea that old people will represent an unsustainable burden on both the health system and the retirement income system. But most of the policy changes necessary to fix retirement incomes were well under way by the time the first report came out.

First, income and assets tests for the age pension, largely abolished in the 1970s, had been reintroduced in the 1980s. Then, beginning in the early 1990s, defined benefit superannuation schemes were replaced by accumulation schemes that put the burden on workers to plan the retirement investments on which they would live.

The final step, beginning in the late 1990s, was a gradual increase in the age of eligibility for retirement incomes of all kinds. The pension age for women was increased to sixty-five. Further changes in 2009 began the process of increasing the pension age to sixty-seven, which has just been completed.

Ironically, the most important backward steps in this process were taken by Costello himself. His tax concessions for superannuation, of particular benefit to self-managed superannuation funds, have proved both unsustainable and politically hard to undo. It has taken fifteen years of effort by governments of both parties to wind them back. The absurdly generous franking credits system, against which Labor campaigned in 2019, now looks untouchable.

The resolution of the retirement income problem was finally acknowledged, with some justifiable partisan spin, in the 2023 report. As treasurer Jim Chalmers observed, “Our population is ageing but our spending on the age pension will fall — that’s the intergenerational genius of super. Super is delivering on its promise — providing a better retirement for more Australians and a better outcome for the budget over the next forty years.”

Despite this, the 2023 report sticks with the outdated dependency ratio, noting that the term “refers to the number of people aged sixty-five and over for every 100 people of traditional working age (fifteen to sixty-four).” The only concession to twenty-first-century reality is the word “traditional,” hinting that a document supposedly designed to prepare for the future is still using the mental categories of the past.

But if we use a more realistic age distribution, and take account of the fact that both young and old people are dependent, the apparent crisis vanishes. There are currently about two people aged under twenty or over seventy for every three people in between. This ratio will barely change between now and 2063.

And what about the old bugbear of health spending? Ever since the first Intergenerational Report, critics of the conventional wisdom have pointed out that the growth in health expenditure has been driven mainly by the new and better treatments that lead to longer and healthier lives. This is the reverse of the alarmist claim that an increase in longevity (the cause of which is left unstated) means longer periods of late-life illness and greater demand for medical services.

New medical technologies are part of the process of structural change inherent in modernity. In the first half of the twentieth century, manufacturing displaced agriculture as the central focus of economic activity, only to be displaced in its turn by services. Now change is occurring within the service sector, with information technology and artificial intelligence replacing some services and enhancing the importance of others.

Much of the growth in the service sector comes from human services like health and education, which governments are best placed to provide or at least fund. This will indeed require an increase in the share of national income going to government, and therefore an increase in tax rates. Rather than calling for alarm, the Intergenerational Report ought to be raising awareness of the need for these structural changes.

Like its predecessors, the latest Intergenerational Report will almost certainly fail to create the hoped-for sense of alarm among voters. But in two crucial respects it ought to be generating some alarm in the political class that produced it.

First, the report spells out the need for more tax revenue. Yet the major parties have a bipartisan commitment to cutting taxes for those with the greatest ability to pay. The stage three tax cuts, designed by Scott Morrison first as treasurer and then as prime minister, will put a hole in tax revenue that will take decades to fill. And Labor’s 2019 election defeat led it to abandon most proposals to close tax loopholes.

Our government ought to be even more alarmed about global heating. For the first time, this year’s Intergenerational Report at least attempts to estimate some of the monetary costs of the disaster towards which we are accelerating. But the government that commissioned it is doing little to improve the situation, and a great deal to make it worse.

Every day, it seems, we read of a new coalmine being approved or a new gas project receiving massive subsidies. And every day the results are evident around the world in catastrophic fires, devastating floods and the accelerating destruction of natural habitats.

We are, indeed, driving younger generations of Australians towards a poorer future. But this poverty won’t be caused by higher tax rates or the costs of aged care. Rather, our poisoned bequest will be the unliveable planet that is already in plain view. •

The post The ageing alarmists won’t let go appeared first on Inside Story.

The problem turned out to be technical. The computer system used by the agents, designed on the assumption that unaccompanied minors were travelling solo, had no way of recording a link between them and their parents. Some agents stuck sticky notes on infants’ onesies. Others kept makeshift records that were lost when the children were moved.

In Recoding America, technology writer Jennifer Pahlka tells the stories of how technological successes and failures have affected the way the US government operates. As founder of the non-profit Code for America and deputy chief technology officer under president Barack Obama, Pahlka is ideally placed to show why government computer systems sometimes underperform (and occasionally outperform) our expectations.

In one case, a pair of young coders set about redesigning the website for people to apply for food stamps in California. The existing website contained 212 questions and could take up to an hour to complete. Because it didn’t work on mobile devices, some homeless people would try applying at a public library computer only to find it kicked them off after half an hour. The coding duo redesigned the system to remove irrelevant questions, made it mobile-friendly, and ensured that the application process could be completed in about seven minutes.

Part of the reason government websites are so complicated, Pahlka argues, is that their creators rarely stop to think about the consequences of complexity. She quotes a colleague of hers admonishing website designers: “Every time you add a question to a form, I want you to imagine the user filling it out with one hand while using the other to break up a brawl between toddlers.”

The philosophy of good government services, Pahlka argues, rests on dignity. Services that respect our time, use straightforward terms and don’t make us feel stupid will not only work better; they will also help build a greater sense of trust in government.

Pahlka discusses the debacle of President Obama’s healthcare.gov site, whose glitches prevented hundreds of thousands of Americans from obtaining health insurance in the first few weeks after its launch. By contrast, she notes that the covidtests.gov site worked beautifully, allowing Americans to order four free Covid tests in less than a minute.

Part of the difference was that mailing out tests is easier than selling insurance, but the designers of covidtests.gov also made a deliberate decision to keep their site straightforward. In distributing free Covid tests, the designers might reasonably have asked users their vaccine status and household size. They might have required everyone to check a box promising not to resell the tests. But they recognised that the longer it took to use, the fewer people would order tests. They opted for the KISS principle: keep it simple, stupid.

Fixing one problem often leads to another. Pahlka tells the story of the US veterans affairs department, whose website worked only with the software versions used by those inside the agency and often crashed when used with the browsers and document readers on veterans’ home computers. When the department fixed the online form, the number of incoming applications jumped tenfold. Suddenly the problem wasn’t a faulty website, it was a backlog of applications. Some departmental officials wanted the agency to revert to its technically flawed application form. To the department’s credit, its leadership chose to clear the backlog instead.

Government is the focus of Recoding America, but the problems are familiar in many large organisations. Pahlka wryly notes Kodak’s decision to outsource most of its information technology staff to IBM in 1989. In the 1970s, the company had produced the first digital camera prototype; in 2012, sideswiped by the rise of electronic photography, the company filed for bankruptcy. We’ll never know whether the pre-eminent photography company of the twentieth century could have transitioned into the digital age if it had kept its technological expertise in-house. But the decision didn’t help.

In 2001, Robert D. Atkinson and I wrote a report titled Breaking Down Bureaucratic Barriers: The Next Phase of Digital Government for the Progressive Policy Institute, a Washington think tank. Reading back through that report two decades on, some of it seems quaint. At the time, the US government had only been online for eight years. One of our recommendations was that government websites should allow personalisation through the use of cookies — a radical notion at the time.

But some of our suggestions still ring true. Government websites should be arranged with a focus on consumers, not producers. Just as Amazon’s homepage doesn’t feature a photo of Jeff Bezos, service-oriented government websites should be designed around customers’ needs. Atkinson and I argued that governments should avoid the silo mentality revealed by websites that show only the programs provided by a single agency, and instead structure the information around users.

Layers of government within Australia can also be time-consuming and confusing obstacles for citizens. But with sensible use of technology, government can make it easy for people to understand and access all the services available to them.

The Australian government has commenced organising services by life event. A trial allows new parents to perform one simple transaction in myGov to enrol the newborn in Medicare, initiate family assistance claims, and register the birth with the state or territory government. In principle, government can do the same with retirement. If a citizen commences on the age pension, why not offer to add state or territory government concession cards to the myGov wallet and connect the new pensioner with financial support services?

According to Pahlka, American adults spend an average of forty-two hours per year on paperwork for the federal government — a figure that doesn’t include the forms they fill out for state and local governments. Making government easier to use could pay massive dividends for the community. One way to think about it is that if the typical working day is eight hours long, then reducing the paperwork burden by one-fifth would be like giving each American adult another public holiday.

Pahlka quotes Cecilia Muñoz, head of the Domestic Policy Council under President Obama: “We need to think bigger than bringing tech solutions to policy problems.” It’s not the tech, she argues, it’s the tech people. The successful covidtests.gov site wasn’t built by a private provider, it was designed in-house by a team from the US Digital Service and the US Postal Service. The whole project took six weeks.

Technology will change, but the principles of good technology design will remain constant. Design systems based on consumer needs, not government imperatives. Keep private information secure. Beware of locking in legacy architecture. Encourage innovation by breaking projects into small, achievable components. Don’t make websites any more complicated than necessary.

If I were to take a single message from Recoding America, it would be about the relationship between tech firms and government. Governments should learn from how the best technology companies design their websites and apps, tweaking their interfaces to maximise the user experience. Yet just because there’s a lot to learn from the private sector, it doesn’t follow that outsourcing is always desirable. Having coding expertise within government helps align policy and delivery, allows troubleshooting and improvements, and places a priority on that most straightforward of goals: delivering public services effectively. •

Recoding America: Why Government Is Failing in the Digital Age and How We Can Do Better
By Jennifer Pahlka | Metropolitan Books | $49.99 | 346 pages

The post Recoding government appeared first on Inside Story.

In retrospect, what were we thinking? Did we really believe private companies would put serving the public above profit? That companies wouldn’t take advantage of light-touch regulation? That their insistence on commercial confidentiality wasn’t designed to protect their operations from scrutiny?

Which leads to another question: is our whole approach to social services systemically flawed?

Mark Considine, a professor of political science at Melbourne University with decades of experience in examining social programs, thinks so. His recent book The Careless State brings together what we tend to see as separate problems — problems that add up to an indictment of the privatisation and deregulation of Australian social policy — and provides some pointers to how we could do better.

Social services reform became an extension of the enthusiasm for financial deregulation, free markets and privatisation that swept the world during the 1980s and was taken up by the Hawke and Keating governments in Australia. Why not try market-based reforms in new areas, even though they were outside the traditional market economy? Lumbering, inefficient bureaucracies and the community service model went out of fashion; competition, choice and entrepreneurial flair were all the rage.

Efficient markets are driven by price competition, but in the new social service markets prices were set by a single purchaser of the services, which was the government. But governments lost touch with how services were provided and often found themselves reduced to mopping up and repairing when things went awry.

Not-for-profit providers shrank, unable to compete with the often ruthless cost-cutting and understaffing of their profit-making rivals. Clients, particularly the vulnerable, often fell prey to lack of information or misleading information. The absence of real alternatives made choice illusory.

Another result was that the quality of services deteriorated. “If money can be made by providing a terrible service, that is what a market will allow,” writes Considine. Serious fraud and rorting of the rules, costing billions of dollars, were evident in all the market-driven services he examined.

So what now? The timing may just be right for a serious reassessment. A change of government in Canberra and the searing experience of robodebt might provide the impetus for change.

One of those who commented on a draft of Considine’s book was Glyn Davis, who was vice-chancellor of Melbourne University. Davis has since been appointed by Anthony Albanese to head the Department of the Prime Minister and Cabinet, and wants to pursue the issues Considine identified.

Not surprisingly, The Careless State has struck a chord with non-government providers and charities, though not so much with for-profit enterprises. It also has attracted international attention: Considine has been invited as the keynote speaker at the annual Social Outcomes conference in Oxford next month.

Considine says that Britain saw a similar shift to market-based services, starting with the Blair government. But it was never as gung-ho in its approach and is already well on the way to a reconsideration. He recalls a British bureaucrat remarking that his counterparts in Canberra “were always more Catholic than the Pope.” Denmark, Israel and the Netherlands have already moved away from a free-wheeling market approach towards a more mixed model of public coordination and governance.

Australian politicians are starting to take notice as well. As chair of the select parliamentary committee on employment services, Victorian federal Labor MP Julian Hill kept the attention of his audience of employment providers with a provocative speech last October. “Over two decades of evidence raises legitimate questions about the impact of marketisation,” he said, “and there are a growing number of informed sceptics deeply concerned that competition and choice has failed and will continue to fail the most vulnerable consumers.”

The Albanese government made some changes to employment services last year. Among them was that those jobseekers considered the easiest to return to work are no longer assigned to employment agencies, for whom they were easy earners, but are instead referred to a digital service. The existing system remains for two-thirds of unemployed people, however, including an estimated 500,000 who have been on benefits for more than a year — a figure that has barely changed despite a substantial fall in overall unemployment.

The government’s changes prompted Hill to ask his audience: “Will you respond to the greater flexibility in the system and upfront investment by investing in people? Or will we see more ‘creaming and parking,’ as has plagued the privatised system for twenty years, underinvesting in those who need the most help?” Hill was referring to the fact that more money could be made by “creaming” — moving the easiest clients quickly into jobs — while “parking” those with greater needs but fewer prospects of employment.

Those hoping Hill’s views may be tempered by Liberals on the committee could be disappointed. Russell Broadbent, a Victorian Liberal MP with a long record of hewing an independent path, is the committee’s deputy chair. He praises Hill’s bipartisan approach, is impressed with the critique developed by Considine (who has given evidence to the inquiry), and is concerned the present system plays into the hands of those who argue that “everyone who hasn’t got a job is a slacker. That is just not true — most have multiple barriers to entry into the workforce.”

Broadbent also makes broader criticisms of the market-based social services. “How come private aged-care providers drive exceptionally beautiful cars? It’s not because they’re living on the breadline: it’s because they have taken their million dollars out and say to the managers ‘there’s the money that’s left — make it work.’” He hastens to add that not everyone deserves to be tarred with the same brush.

When Paul Keating’s government shook up employment services in 1995 it went further than most developed nations. The Commonwealth Employment Service was retained but forced to compete with private job agencies. The unemployed would be able to shop around for the best service, and quality would be assured by competition between providers.

As the rhetoric of the time put it, the government would be steering, not rowing. It would set the policies but not run the services. The shift fitted nicely with another fashion — the drive for smaller government.

Capturing the mood of the moment, Keating favourably compared the new market with the previous public “monolith.” But Considine quotes another reason Keating gave for the reform: “One of the things you have always got to do when you think about social reform in Australia is to make it Tory-proof… you have got to hermetically seal them so they can’t get their nasty little right-wing fingernails under them and tear them away.” In short, Labor adopted a policy it thought the Liberals could only agree with.

That’s not quite how it worked out. The Howard government did retain the changes but reshaped them in its own, harsher image. It increased the proportion of employment services transferred from the CES to private providers from 30 per cent to 50 per cent and whittled it away further in subsequent years. Then it closed the government body down completely, leaving the whole field to non-government providers.

It also removed the “mutual” in the mutual obligation policy introduced by the Keating reforms, cutting spending on the training programs that the government had provided for long-term unemployed and introducing Work for the Dole as a condition for retaining benefits. This pandered to the populist notion mentioned by Broadbent — the unemployed as “slackers” or “bludgers” (see also robodebt). Although it has been shown to do almost nothing to help people find real jobs, Work for the Dole has been retained by the Albanese government.

Against a background of rapidly increasing demand for social services, the same arguments for choice and competition influenced new policies in aged care, childcare, vocational training and later the NDIS. In the first two decades of this century, aged care spending rose from 2.8 per cent to 3.5 per cent of the total federal budget. For childcare the increase was from 0.77 per cent to 1.53 per cent; for employment services, including income support and job assistance, from 3.3 per cent to 4.5 per cent.

In the name of “contestability,” for-profit firms were allowed to offer their services alongside not-for-profit companies and community organisations. “A church agency with a history of 100 years of philanthropic work to the unemployed would be considered no better and no worse than an entrepreneur seeking to make a profit from the same social services market,” writes Considine.

Even the most respected charities were sucked into the vortex of ruthless competition. In 2005, the Salvation Army in Victoria was forced to repay more than $9 million for fraudulently upgrading unemployed clients to a “highly disadvantaged” classification so that they attracted much higher fees. Staggeringly, a 2012 audit found that only 42 per cent of job-finding fees charged by providers were genuine.

Private providers also sprang up like mushrooms when vocational education and training was progressively deregulated and privatised, starting under the Hawke government in the 1980s and eventually enfeebling the states’ TAFE systems. The reforms culminated in what Considine describes as “the most spectacular frauds yet seen in any social program… With extraordinary profits to be made, the system was deluged with providers targeting the most disadvantaged customers with courses that had little value and sign-up incentives that made it appear they were getting their program for free.”

Students had choices but insufficient information to make them meaningful, particularly if they were international students. In theory, they could switch to other providers if they were unhappy about the quality of the training they were receiving. In practice, enrolment and course fees created effective barriers. The education and training provided by some firms were so poor that childcare firms refused to employ their graduates.

Childcare itself has also performed poorly. Government subsidies for the rapidly expanding sector often feed almost directly into higher fees and bigger profits. A 2021 study found that an Australian couple on average wages spent 16 per cent of their income on childcare, compared with 3 per cent in South Korea, 4 per cent in Sweden and 5 per cent in Iceland.

“In effect childcare providers lift fees according to what the consumers will bear, with politicians then pressured to reduce some of the cost this generates for families,” Considine writes. He adds that childcare has also become a real estate business, with a bias towards the suburbs with the best prospects for capital gains.

The shortcomings in another market-driven sector, aged care, were tragically thrust into the spotlight during Covid, particularly in Victoria. The aged care royal commission’s scathing report labelled the neglect of clients, including physical and sexual abuse by staff, a “disgrace” that “should be a source of national shame.” Cutting costs on meals, typically described in promotional material as “home cooked”, meant many in care were malnourished.

The pandemic also highlighted how the best-quality care was being provided in government-run homes, where there were far fewer deaths. Eighteen reviews of aged care over twenty-four years led Considine to the conclusion that governance of the sector was “catastrophically weak.”

Substantial increases in funding disguise the fact that the system has not kept up with the increased demands of an ageing population. Considine estimates a 40 per cent reduction in spending per client over twenty-five years, coinciding with the steady shift from a community service to a market model.

Regulation has increased but is often ineffective. Large-scale gaming of the system is evident, with the proportion of nursing home residents classified as needing complex health care — which attracts higher funding — increasing from 12.7 per cent to 53 per cent over the decade to 2019.

Inspections of facilities do occur, but always with plenty of notice. “You knew at least a week ahead,” says one executive quoted in the book. Remarkably, the industry has prevailed in its strong objections to unannounced inspections. The Australian Aged Care Quality and Safety Agency is compromised by operating inside the health department, which makes the policy decisions in aged care.

For providers, the incentives are perverse: rather than rewarding them for higher standards, the system encourages them to cut costs to generate higher demand and bigger profits. Staff are underpaid and undertrained, which also means they lack the authority to advocate on behalf of clients.

Considine believes the aged care royal commission has not gone anywhere near far enough in its recommendations. “There’s a lot of regulation raining down from above but not much internal self-management and learning,” he says. “We haven’t actually laid out the basis of a transparent care strategy. I think there is still a very high likelihood, even with more trained personnel, that the management of some of these residential places could be behaving in a really unsatisfactory fashion.”

The National Disability Insurance Scheme, the largest reform in social policy since Medicare, is admirable in its charter to give everyone with a serious disability the right and the means to obtain the assistance they choose and need. What sets it apart from the other social programs Considine examined is the role of two intermediaries — local area and support coordinators — who help clients draw up a plan and implement it, making for more effective choice.

But the NDIS still incorporates some of the same problems Considine identified in the other programs. It relies on a market for services, with the aim of using competition between providers to achieve greater efficiency. But the services offered have not always been adequate in terms of quality and availability.

The NDIS example raises another weakness in market-based social programs — what Considine calls the “black box.” Instead of the government prescribing how services are delivered, it allows providers to offer services according to their own “secret recipe,” in the interests of innovation, competition and efficiency.

Considine gives the example of a provider who suggests weekly appointments when monthly appointments are adequate; clients then ask for higher funding to cover this. The government’s National Disability Insurance Agency, or NDIA, may see costs going up but be unable to act effectively against over-servicing because it doesn’t know enough about the services provided or has limited ability to act.

The Quality and Safeguards Commission is supposed to be the NDIS cop but it is seldom on the beat. In 2020, when it reported on the death of a person whose carer was charged with manslaughter, it had received more than 8000 complaints over two years but banned only one provider.

Considine identifies other inequities in the NDIS, with better-off or more articulate people or their families able to argue for better care plans. And the government’s arm’s-length approach creates the ever-present danger of fraud, as it has done in other choice-based social systems.

Last year, the NDIA reported that eighteen people had been charged since 2020 over alleged fraud against the NDIS totalling up to $14 million. At the same time, the head of the Australian Criminal Intelligence Commission, Michael Phelan, estimated that as much as a fifth of the $30 billion annual spending on the NDIS had been misappropriated. His agency had uncovered fake NDIS clients, systematically inflated invoices, payments for services never provided, and a network of professionals helping criminals exploit the scheme.

The picture Considine paints is not unremittingly bleak. Workplace health and safety has moved in the opposite direction, from a private insurance market approach to something closer to a public–private partnership, with greater government — in this case state government — involvement and control. The cost of the schemes Considine examined in New South Wales and Victoria rose and fell at different times but were ultimately brought under control alongside improvements in health and safety.

Employers are still able to choose their insurers, but uniform standards were set and operators are required to be more transparent, encouraging a “learn from the best” culture, as opposed to the black box approach. And workplace inspections occur without prior notice.

One other area Considine identifies as an outlier is maternal and child health, which is still a public service delivered by state governments and local councils at centres staffed by specialist nurses. The service is available to everyone; to the degree choice is provided, it involves public rather than private providers. The service has a high reputation, says Considine, and offers few opportunities for fraud or “creaming.”

While the Albanese government seems prepared to listen to critics of the present system, and while at least some people believe it is open to persuasion, its risk-averse approach to change raises questions about its willingness to embrace wholesale reform.

Some signs are less than encouraging. The government’s draft national care and support economy strategy talks, among other things, about “functioning markets, sustainable funding and… productivity gains.” In its response, the Australian Council of Social Service urges the government to look at better options, including alternatives to markets, given the “litany of systemic failures and inadequacies with markets in social services.” Anglicare argues that the government should take back the control and operation of employment services.

Considine believes the markets-and-choices model has been exhausted. The pendulum needs to swing back towards empowering the clients and staff of the services — “from choice to voice,” as he puts it.

A culture of improvement and innovation must come from within. Vulnerable people in particular should have access to specialists who advocate for their needs. The black boxes within which providers guard their business models have to be replaced with more transparency. Governments need to take responsibility for services as well as setting the standards.

Is that enough? “I don’t have the view that nationalising these services is necessary,” says Considine. “In most of these social services, where the government has been working with community organisations, it works well. There are some private organisations in childcare and aged care and parts of the NDIS who are credible.

“I don’t have a problem with a mixed economy. I have a problem with running a social service as if is a market. You need to run it as a public service because that is what it is.” •

The post “You need to run it as a public service because that is what it is” appeared first on Inside Story.

In key fields — childcare, aged care, employment services and the NDIS — what we have is not a quality system of care but a disordered ecology of self-directed providers and distant regulators. Governments write complex contracts and rain down new rules when things go wrong, but they haven’t improved the systems themselves. We pay a high price for poor quality and often fraud-ridden services.

Royal commissions, parliamentary reviews, Productivity Commission reports and dozens of independent studies show the same pattern. Successive federal governments have dealt with rising demand for social services by encouraging private companies to form a quasi-market and then encouraging citizens to search for services that suit them.

The new vocabulary of social service reform became the offer of greater choice, with the power that might create for each individual to get what they want and for services to thus become highly responsive. The engine driving this imagined process was the failed idea that unhappy customers will simply exit a bad service and thus “signal” to producers that they must lift their game.

The problem with this “choice” model is twofold.

First, new service markets don’t suddenly spring into life across the social spectrum, waiting for customers to stroll in and make their selections. They are completely different from products: they can’t be produced in advance or shipped in the post or compared on a supermarket shelf. They are created at the same moment they are consumed. They require personal delivery and careful connection to the communities they seek to serve.

Second, these services are extremely difficult to regulate from a distance. We only know how good a service is when we experience it or when we observe, up close, someone else experiencing it.

What current services offer is a “buyer beware” warning and a distant form of regulation that catches the occasional rogue but misses the day-to-day defects across the system. That’s the reason the aged care royal commission found that the majority of people in our old folks’ homes were malnourished. That’s the reason thousands of people were duped by vocational education providers signing them up to ghost courses.

The “choice” idea turns out to be a stalking horse for something else altogether. It enables governments to withdraw from social services. Top public servants now like to say they are “steering, not rowing,” which has come to mean that they lack knowledge of how services are actually produced and experienced. The choice revolution has become a means of risk shifting.

Of course, choice itself is no bad thing. Everyone likes to have a choice when it comes to the important things they have to do. But that raises critical questions. What kinds of options can clients choose? And do they want to be left to figure all that out themselves? When US researchers asked a sample of the general American population if they want to choose their own cancer treatments, a strong majority answered yes. But when they asked people who actually had cancer, only a small number said yes. What they wanted was access to quality medical advice and a chance to be fully involved in decisions. That’s not choice, that’s voice.

The services in Australia’s service “markets” are a wide mix of the great and the ghastly — which is exactly what we would predict. Not all private providers are rogues, but it is also true that they all put shareholder value first; that’s the whole point of the market model. And once fraud becomes a regular event, heavier regulation and reputational damage become common.

This system produces a low-average model with some core characteristics. The owners of the services seek to increase their margins by de-professionalising the service and stocking it instead with poorly paid and untrained staff. Because they all do it and because they are all paid the same rate by the government, they face no market risk if they run a service that conforms to a poor minimum standard. Only the truly dreadful get noticed by the regulators.

Where a star-rating system is used to show consumers how the different providers are doing, the low-average system means that the best service only has to be slightly better than its terrible comparators in order to score points.

With weak oversight of the service itself, providers are tempted to put their best effort into marketing their service to would-be clients. If you browse the websites of aged care homes you will see that most offer “home-cooked meals” and a “place like home.” But no one knows exactly what that means until they move into a centre, which may be too late. Childcare centres promise educational activity, but there is no way to know if that ever happens or for how long in the average day.

Service providers also work very hard to get the maximum subsidy they can from the government. Many seek to reclassify their clients as more needy than they really are, or delay helping them solve smaller problems so the bigger issues will generate greater subsidies. Charges meanwhile rise faster than the average in the broader community because users receive government money to cushion the blow. These dynamics help explain one of the great paradoxes of these service markets: they can become more expensive at the same time as they deliver worse services.

These tragic conditions are well known inside each of the sectors. Sadly, the better operators get tarred with the same brush as the worst. “It is a matter of luck whether our most vulnerable and forgotten citizens end up in one of these shitholes or living a good life” is how one market player described rogue operators in the disability sector.

In that contrast is the clue to the way out of this terrible mess. Instead of a chaotic world of high-risk choices, we need to redesign these services with high, transparent standards of care built in. And we need those receiving the services and those supporting them to have a strong voice in their development and delivery. Throwing more money at the problem won’t make a jot of difference until a more systemic approach kicks in.

The good news is that many of the changes needed aren’t expensive, and some will actually save money. Services need to be better grounded in communities, which will require a more imaginative social investment strategy than has been evident to date. And shared expertise will need to play a bigger role within these services so we can promote the best solutions and share the best methods.

Each of these services has its own dynamics and will require specific reform. But common problems also need to be tackled. The first and most dramatic challenge is to make services more transparent by defining the core activities and standards of all service providers and building in the peer reviewing and evidence sharing that make real-time improvements possible. An agreed model of delivery must combine the best interests of clients with an efficient and responsive approach to current users and future demand.

With transparent models of service will come a greater capacity to share useful adaptations and innovations and use resources creatively. Regulation will also be cheaper and less time-wasting. A common service model would also give employees access to training to increase their skills and to participate in sector-wide benchmarking and self-improvement.

A second area for structural change involves the necessary shift from choice to voice. By all means, let’s keep systems that involve multiple agencies. Nothing is improved by going back to a single bureaucratic supply model — if ever such a thing existed. But let’s move past the myth that these systems will improve because consumers can simply move to the better option and thus drive out poor performers. Multiple suppliers are useful when they offer specialisation and community-specific capability, not when they seek to out-compete some carbon-copy agency down the street.

What really drives improvement is a stronger voice for clients and their families. More mechanisms are needed to help these “experts of experience” make a positive contribution to agencies’ performances. For example, public funds should come with the requirement that the agency has a client board that is consulted about all the key issues.

The third area where change would generate significant benefit is in infrastructure. By over-relying on private markets for core social services we have drifted away from public assets and weakened our planning capacity. Public payments for individual users include contributions to service infrastructure, but these assets reside in private hands and can’t therefore be used for maximum benefit. New models for private–public partnership are needed to build services for the future.

Local governments often provide the planning approval for such facilities but cannot manage them over their lifespan. As a result, aged care, childcare and training facilities are often built to optimise real estate value rather than to develop joined-up services such as joint childcare and aged care facilities.

Finally, we need to re-establish the role of public service providers within the broader mix of agencies. The public service can’t improve a service it doesn’t understand using staff who have no frontline capability. Public service delivery should always drive for high standards, test new methods and activate the “flanking services” — including counselling, rehabilitation and housing assistance — needed to make complex services work. And a “provider of last resort” should always be ready to move to places where market players won’t accept risks associated with long-term investments in clients.

There’s an alternative, of course: we can keep doing what we have been doing for twenty years and watch the most vulnerable in our community get ripped off and done down. It’s not a great choice. •

The post Choice versus voice appeared first on Inside Story.

The report’s “highest” and “immediate” priority” was for a large enough increase in JobSeeker to significantly reduce poverty among the unemployed. The right amount, it suggested, would be 90 per cent of the age pension, or an increase of $256 a fortnight.

The government has responded by increasing the rate by just $40 a fortnight, or $2.86 a day. Yes, it did some other things — a slightly increased rate for unemployed people aged between fifty-five and sixty, an increase in rent assistance by $31 a fortnight, more money for single parents with children between eight and fourteen, incentives for more bulk-billing under Medicare, and help with energy bills. That will make a difference, but not — with the exception of the single parents’ payment and perhaps some people’s energy bills — a substantial one.

The increase in JobSeeker and the youth allowance will cost an estimated $1.3 billion next financial year out of an expected $668 billion in total revenue. Despite the professed concern about the impact on inflation of pushing more money into the economy, the inflation rate is coming down, the economy is slowing and the budget has been taking more money out of the economy than it is putting in.

No doubt the government believes it got the politics right. I mean, what were the members of the advisory committee thinking by suggesting such a huge increase in JobSeeker? Even $40 a fortnight was far too high in the eyes of people like Robert Gottliebsen, who wrote in the Australian that “it is particularly galling to see able-bodied younger people gaining extra money to pursue a non-working lifestyle at a time of labour shortages.”

How can a committee of experts possibly compete with such deep-seated prejudices, and with a government that feels it must indulge them?

It was ACT independent senator David Pocock who secured the government’s commitment to set up the Economic Inclusion Advisory Committee during the negotiations over industrial relations legislation last November. He called it a “game changer” for people living below the poverty line, especially as the government agreed that the committee’s expert advice about how the most vulnerable are faring “and what needs to change to ensure we don’t leave them behind” would be released publicly before each budget.

The government honoured the promise, appointing a stellar cast of committee members. At their head is Jenny Macklin, a former Labor minister with a legacy of major reforms (including the National Disability Insurance Scheme) and a record as a researcher and expert adviser on health and welfare issues extending back to the Hawke era.

She was joined by leading academic experts in relevant fields, including Professor Peter Whiteford on welfare payments, Professor Jeff Borland on the labour market and Associate Professor Ben Phillips on inequality. Then there were representatives of the major interest groups, including the Australian Council of Social Service’s Cassandra Goldie, the ACTU’s Sally McManus and someone even Mr Gottliebsen couldn’t place among the usual suspects — Jennifer Westacott, head of the Business Council.

The government shouldn’t have been surprised by the committee’s findings. Yet it did its best to bury the report, sneaking it out late in the day, distracting attention to other issues and writing Pocock out of the script.

This response wasn’t just part of the annual political ritual of lowering expectations before the budget. Treasurer Jim Chalmers had clearly decided that tackling what the report called the “serious inadequacy” of payments to the unemployed was not sufficiently important.

As its track record shows, Labor has higher priorities than that, such as politics. It didn’t get around to increasing unemployment benefits when it was last in government. Then, in opposition, it remained sufficiently unmoved by evidence that the unemployed couldn’t survive on the prevailing rate of $40 a day as to promise no more than a review in government.

Even that commitment was dropped before the last election. It was left to the Morrison government to provide a permanent $50 fortnightly increase ($10 more than in this budget) following the withdrawal of the Covid emergency payment.

Labor’s attitude stems from deep-rooted myths about unemployment. In the words of the Grattan Institute’s Danielle Wood, the myths’ most pervasive image is “a work-shy twenty-something playing video games in their parents’ basement.” The same attitude convinced the Morrison government it was on a winner with its ill-starred robodebt scheme and accompanying rhetoric about welfare bludgers.

Department of Social Services figures show that just 16.8 per cent of people on JobSeeker and Youth Allowance are under twenty-five. Anti-Poverty Week executive director Toni Wren points out that half of those on JobSeeker are over forty-five and 28 per cent over fifty-five — many of them facing overt or covert age discrimination.

Forty-three per cent of JobSeeker recipients have been assessed as having only a partial capacity to work, mainly because higher eligibility hurdles have barred them from the more generous disability support pension. Many of them are forced to apply for eight jobs each month to continue receiving their payment.

About 10 per cent of the unemployed are single parents with children between eight and fifteen who would have qualified for the higher parenting payment before the Howard and Gillard government reduced the cut-off age for children from sixteen to eight. This move has now been largely reversed, which will improve the lives of some of the one in six Australian children living in poverty — a figure that Toni Wren points out has not changed in twenty years.

In short, the figures reveal a very different profile of the unemployed from the stereotype.

JobSeeker has become the fallback payment for many of those who have been locked out of higher income support options by increasingly restrictive eligibility requirements. This has very little to do with the populist rhetoric that anyone should be able to get a job when the unemployment rate is down to 3.5 per cent.

Danielle Wood points out that the Macklin committee’s proposed increase of $128 a week would still take the payment to only just over half the minimum wage, leaving a very significant financial incentive to work. Better employment services for those who face large barriers to employment would help; ACOSS says Australia’s spending on those services is less than half the OECD average.

The government is reviewing employment programs, and it’s to be hoped they’ll improve, but this is no substitute for a decent level of JobSeeker. As the Macklin committee stressed, the payment’s current inadequacy is also itself a barrier to finding work.

Was David Pocock too optimistic about the Macklin committee being a game changer? Perhaps not, if we look to the future. Its first report shifted the public debate to an extent that must have unsettled the government, though not enough to take proper action. Otherwise, perhaps there wouldn’t have been even the $40 increase, which was decided only near the very end of the budget process when the government learned it had more money coming in.

The Macklin report’s message cut through the pre-budget communications clutter, despite the government’s best efforts and its equivocal response. It generated an outpouring of support from an unusually broad political spectrum. Among the 350-plus signatories to ACOSS’s follow-up letter to Anthony Albanese were four federal Labor backbenchers — and others came out in public separately — Liberal MP Bridget Archer, the teals, other independents and the Greens, former Labor and Liberal ministers and backbenchers, prominent economists, and church and community leaders. The letter made several pointed references to not leaving people behind — a sentiment Anthony Albanese expressed in his election victory speech last year and has repeated since.

The Macklin report’s impact came not only from its official, if reluctant, government sanction. Step by step it builds the argument for the sheer inadequacy of JobSeeker. In the twenty years to 2020, the rate for a single adult rose by less than 3 per cent in real terms. The post-Covid increase in 2021 lifted this to 13.7 per cent, still far short of the 47 per cent increase in disposable income received by median households. In the same period, the gap between JobSeeker and the age pension grew in real terms from $35 a week to $160.

As a proportion of the national minimum wage, JobSeeker fell from 47 per cent in 2002 to 41 per cent in 2021, making it the third-lowest rate, after Britain and New Zealand, among the thirty-four developed countries of the OECD. Including housing costs, for which assistance is more generous in both those countries, puts Australia at the very bottom of the OECD rankings. “When an average earner becomes unemployed their income drops by more than [in] any other high-income country,” says the report.

And then there is the moral argument. JobSeeker recipients told the committee about looking around the house for things to sell, choosing between medicines and paying electricity bills, and doing without meat and fresh fruit and vegetables. This is the face of poverty in Australia — one of the richest countries in the world, but one where inequalities in income and wealth have been growing.

Under the agreement with Pocock, the Macklin committee will report annually before the budget. The pressure to turn into reality the prime minister’s words about leaving no one behind and holding no one back will continue.

Has the government made a rod for its own back by agreeing to the committee, as the Australian Financial Review’s Phillip Coorey has argued, given how many worthy, competing and unavoidable demands are made on the budget?

To the contrary, if it helps dispel ignorance and misunderstanding about Australia’s unemployed and pushes the government to do more to help them, it may be to Labor’s political advantage. Voters may be less inclined to defect to the Greens and independents if the government implements more real Labor policies for which the arguments are so compelling. •

The post Jenny Macklin’s mythbusters appeared first on Inside Story.

Howard’s promise was a dog whistle to Australians that he would end the continual economic change of the Hawke–Keating years and the turmoil caused by the 1990–91 recession and other policy errors. Under pressure from big business, he broke his promise and introduced the GST, but in the generation since then, the only substantial reform we’ve seen has been the short-lived carbon tax.

Almost a year into its term, the Albanese government has fine-tuned many small things but embarked on no really big changes, and none are foreshadowed. It’s unleashed no surprises other than committing future governments to spend up to $14,000 for every Australian on nuclear-powered submarines. Nothing the PM and his team have learned in office seems to have changed their priorities or their sense of what Australia needs.

At each policy announcement, Albanese reminds us that Labor put this policy to voters at the election. Fulfilling campaign promises has become his mantra, his commitment: it proves that his word can be trusted. He is governing as he campaigned: as a small target, promising changes only if they are popular. And politically, as the opinion polls show, it’s working.

After almost a year of Labor in power, perhaps the main surprise is that so little has changed. It feels a bit like Orwell’s Animal Farm. Refugees remain locked up in Nauru, but now it’s a Labor government that is paying a US security firm hundreds of millions of dollars to provide “garrison and welfare” services. Whistleblowers David McBride (Afghanistan) and Richard Boyle (tax office intimidation) are still being prosecuted for exposing unwelcome truths, but now by a Labor attorney-general, Mark Dreyfus.

The real wages of Australian workers are falling even faster than before, yet the Labor government plans to deliver tax cuts to the rich. Australians on lower incomes remain priced out of home ownership, endless economic debates bring no action, and sky-high energy prices haven’t lifted the budget out of a structural deficit the International Monetary Fund now estimates at 3.25 per cent of our GDP — more than $80 billion a year.

This is one of the few Western countries with no economy-wide carbon price and no vehicle-emission standards, and no plans for the former and endless reviews for the latter. Sure, the Voice to Parliament could prove an important step forward, maybe, if it works well and governments listen to it. But the pace of reform generally under Albo’s rule has been a gentle trot.

Welcome to Australia 2023, where life is relaxed and comfortable.

Have Anthony Albanese and his ministers found no urgent issues in their first year that can’t be solved by Labor’s 2022 campaign promises? Given the problems we face, is it enough for them to stick to their pre-election script and aim to keep out of trouble?

Or is the reality, rather, that Labor’s campaign policies, designed to be popular, do too little to fix some of the biggest problems confronting us? It will be challenging for just 215 selected companies to deliver Labor’s target of reducing emissions to 43 per cent below 2005 levels by 2030 — assuming integrity reforms ensure those reductions are genuine. Australia’s per capita emissions will probably remain the highest in the Western world.

Labor’s policies are clearly inadequate to fix the problems of the economy, or of the budget: more on that in a moment. Across the board, its problem is that as the traditional party of social justice it has raised expectations it has no plans to meet. By camping in the middle ground, it leaves its traditional radical base looking for an alternative. Increasingly, they are finding one.

As psephologist Ben Raue of The Tally Room has pointed out, Labor won the election with 52.1 per cent of the two-party-preferred vote — but only 32.6 per cent of voters gave the party their first preference. Three in every eight voters in the broader Labor camp preferred Labor to the Liberals but chose to vote first for other parties (mostly, the Greens) or independents.

It’s been a long-term trend, and it’s getting stronger here and around the world. Ten years ago, the Socialists ruled France: today they are a minor party. Germany’s Social Democrats are gradually being overtaken by the Greens.

When Labor came to power in 2007, the House of Reps had just two crossbenchers, Bob Katter and Tony Windsor. Today it has sixteen, with another eighteen in the Senate. Overwhelmingly, they are to the left of Labor. Sure, they won’t support the Coalition. But if Labor keeps losing voters and seats to the left, will this be its last majority government?

Contrast the responses treasurer Jim Chalmers gave to two key reports he released last week. The first, by the government’s expert Economic Inclusion Advisory Committee, reported that Jobseeker and related benefits for people of working age are “seriously inadequate,” leaving many recipients in such financial stress that some “[have] to choose between paying for their medicine or electricity bills.”

Chalmers released the report at 5.10pm on Tuesday evening, too late for it to get appropriate media coverage, and issued a statement making it clear that Labor would not implement its proposals. “We can’t fund every good idea,” he said, emphasising that support for those most in need had to be “responsible and affordable… and weighed up against other priorities and fiscal challenges.”

Two days later, Chalmers released another report, this time on the Reserve Bank, by three monetary policy experts, essentially into how interest rates should be set. He announced that all fifty-one recommendations would be accepted, including its core proposal that interest rates be set by a committee of experts, as in the United States, to embrace a wider spread of informed opinion.

The contrast was striking. Labor today feels at home with highbrow issues of economic policy, and is willing to act swiftly and decisively on them. But it doesn’t want to know about the problems of those most in need, and does not intend to do anything about them.

Yes, the budget is in a desperate situation, and this is no time for unfunded new spending (such as $380 billion to buy a dozen or so submarines). That’s why many of us have been arguing that Australia needs to get the budget back in the black by closing the tax loopholes that mean we raise far less revenue than most other Western countries.

A recent report by Grattan Institute economists Danielle Wood, Kate Griffiths and Iris Chan conceded that there are no easy options but proposed getting there mostly by closing loopholes — and making normal budget rules apply to politically driven spending on infrastructure and defence. We don’t need to raise taxes: we can get there by scrapping tax concessions.

For example:

• Reduce tax breaks for superannuation, especially for retirees and high-income earners.

• Redesign the stage 3 tax cuts to eliminate the overcompensation of high-income earners.

• Scrap the Coalition’s decision to tax small business profits at a lower rate than those of bigger firms.

True, Grattan also recommends some tax rises on mainstream Australia, notably lifting the GST to 15 per cent, widening its base, and compensating only the bottom 40 per cent of income earners for their losses. But closing loopholes is easier politically than raising the GST or tightening the assets test for pensions.

A Resolve Strategic poll last weekend in Nine’s Sunday papers found that only 17 per cent of Australians say they want to close the deficit by raising taxes, whereas 40 per cent say they want to close it by cutting spending (and another 26 per cent want to just keep running up debt). But the poll failed to ask what spending the cutters wanted to cut, whereas it asked everyone what they thought of specific tax increases. And, hey, most of them attracted more support than opposition.

For example:

• Increase taxes on the profits of resources companies: 58 per cent support, 12 per cent oppose, 30 per cent undecided.

• Reduce tax concessions for negative gearing: 44 per cent support, 21 per cent oppose, 35 per cent undecided.

• Cancel or reduce stage 3 income tax cuts: 34 per cent support, 23 per cent oppose, 43 per cent undecided.

• Reduce tax concessions for superannuation: 37 per cent support, 28 per cent oppose, 35 per cent undecided.

• And, on raising the $50 a day rate paid to unemployed people reliant on Jobseeker benefits: 43 per cent support, 31 per cent oppose, 26 per cent undecided.

That contrasts sharply with voters’ usual knee-jerk opposition to any tax rises. The more Australians have been talking about it, the more people have come to see them as necessary. On negative gearing, for example, the number opposed to reform is now about the same as the number of people who own rental properties. Unfortunately, one of those is Anthony Albanese.

Chalmers has been given a looser rein to let us know that the budget is in bad shape, and has led the way in encouraging debate on tax increases. But Albo himself has seemed to stand above all that. He is not warning Australians of hard times ahead. He is not asking us to make any sacrifices. And above all, he is not drumming home a message that things must change. His message is: business as usual.

But times are tough. The IMF recently downgraded its forecasts of Australia’s economic growth to 1.6 per cent this year and 1.7 per cent in 2024. With our population swelling at a record 400,000 a year, that implies two years of zero or negative growth in per capita GDP. It hasn’t led to rising unemployment yet, but if the IMF forecast is correct, it will.

What wasn’t reported here was that the IMF’s medium-term projections see Australia’s growth per capita sliding towards the bottom of the pack: over the next five years, only Canada will rank lower among the dozen largest advanced economies. On the IMF’s projections, Australia would also lose its proud position as one of the world’s twenty largest economies. (That’s on the IMF’s preferred measure, which adjusts for differing cost levels to measure the real volume of production.)

With real wages set to fall by 8 to 10 per cent over this period, it seems a very strange time to be delivering tax cuts costing more than $25 billion a year and directed overwhelmingly to high-income earners — those who by definition are doing well and least need help.

We can all understand Labor’s desire to be seen as keeping its word. But this was a bad reform that ordinary households’ loss of buying power has made worse. I suggest a compromise that keeps some key elements of the package but redistributes the gains more fairly. Rather than abolishing the 37 per cent marginal tax rate, reduce it to 35 per cent with the same thresholds as now — but add a new 40 per cent rate for income from $180,000 to $200,000, and a timetable to raise that threshold to $250,000. Over time, that would save the budget a lot of money, without taking everything from those who would gain from the plan Labor promised them.

As the Grattan Institute report points out, the budget is in even more trouble than it seems to be, because it assumes continued underspending in areas where that is clearly unsustainable. In areas like aged care and regional hospitals, jobs can’t be filled because governments have failed to ensure enough funding to pay the going rates. Country and even suburban GPs are closing down because the long Medicare freeze on rebates has made general practice unviable as a career.

These are just some of the many areas where Labor has raised expectations of change that it can’t deliver with existing revenues. Australia already has full employment; mineral prices are already close to record highs. This budget can’t be fixed, and the underspending lifted to adequate levels, without revenue increases on a wide range of fronts. Labor is flagging a few nibbles at tax reform in the 9 May budget. That won’t do it.

In the end, these are moral issues: we should raise the rate of Jobseeker because it is wrong to make people relying on it (40 per cent of whom have mental health issues) live in such abject poverty. One told last week of taking the lightbulb with her from room to room because she couldn’t afford a second one. But the moral issues don’t seem to resonate with the cynical hardheads running Labor.

They ignore them on political grounds. The Coalition won’t do anything about them, so there’s no need for Labor to do anything either. Most voters, they say, don’t care how low the dole goes — at $50 a day, it’s now about a third of the median wage — and those who do are soft-hearted lefties who end up having to vote Labor anyway.

But wait. Yes, back in 2007, when Rudd was elected, voters on the left had no other choice. Labor had 43.8 per cent of the votes, while the combined vote of the Greens and independents of all shades was 10 per cent. The Greens won 20 per cent of the three-party vote in just one seat, when a young lawyer named Adam Bandt pipped the Liberals for second place in Melbourne. They couldn’t win seats: their role was to help Labor win seats.

Fifteen years later, that reality has gone. At the 2022 election Labor won just 32.6 per cent of votes for the House of Reps, while the Greens and independents won 17.5 per cent. Their vote has been swollen by former Labor supporters who have moved left because of issues like these. They don’t want unemployed people to be condemned to live in dire poverty. They don’t want refugees to be locked up on Pacific islands. They don’t want whistleblowers to be prosecuted, or Australia to keep dragging its feet on action to slow global warming. Labor is no longer their party.

Peter Dutton is risking giving Liberal voters more reason to abandon his party and vote independent. Albanese risks giving Labor voters more reason to abandon his party to vote for the Greens. Last year they took Griffith from Labor, overtook it to claim the marginal Liberal seats of Brisbane and Ryan, and came just 300 votes short of taking Macnamara (formerly Melbourne Ports), a seat Labor has held since 1906.

Honeymoons rarely last until the next election. If Labor alienates more of its base by inaction or half-hearted measures on issues that matter to them, it risks losing more seats. Macnamara would fall to the Greens in a swing of 0.3 per cent, while its neighbour Higgins (2.4) and Richmond (1.3) in laid-back northern New South Wales are very marginal. Another seven Labor seats had a margin of less than 10 per cent over the Greens — and while that’s big, the Greens won most of their seats with higher swings than that.

Remember 2010. The media focus was on Tony Abbott and Julia Gillard, but the vast bulk of the voters who deserted Labor went to the Greens. Their vote jumped from 7.8 to 11.8 per cent, and they picked up Melbourne — and four extra seats, and the balance of power, in the Senate. Labor has never regained the seats it lost.

Another swing like that would take a lot more seats with it. It could mean this is Labor’s last majority government. •

The post Albo’s choice appeared first on Inside Story.

The passing of Biden’s legislation is the result of both his presidential election victory and the run-off elections in Georgia, which gave the Democrats fifty votes in the US Senate (with vice-president Kamala Harris holding the casting vote). The central issue in the Georgia elections was the choice between the relatively modest stimulus package passed by Congress in December 2020 and the much more ambitious proposals from the Democrats. In hip-pocket terms, the distinction was between the payments of US$600 per taxpayer from the Republicans and a total of US$2000 offered by the Democrats.

That wasn’t the only difference. The Republican legislation allocated nearly a third of funds to the Paycheck Protection Program, a version of Australia’s JobKeeper, but gave nothing to state and local governments. Because their tax revenues have been reduced by the pandemic, and because they have little or no capacity to run deficits, state and local governments in the United States have been forced to cut spending and employment. Biden’s package includes large-scale support for these levels of government.

The measures in the Rescue Plan are temporary and most are expected to cease as the economy recovers. But the package includes funding for policies the Democrats would like to make permanent, the most important of which are increases in the Earned Income Tax Credit and the Child Tax Credit, the two main measures that assist families with children. If sustained, these increases would reduce child poverty by an estimated 40 to 50 per cent.

Republicans’ opposition to the package may safely be dismissed as political posturing, given their eagerness to pass the Trump cuts. But some more credible commentators, most notably Larry Summers (who held senior economic positions in the Clinton and Obama administrations), have expressed concern about the scale of the stimulus.

These concerns have mostly focused on inflation and the growth of budget deficits and public debt. A more useful way to consider the problem (an approach sometimes referred to as functional finance) is to ask whether the resources available to the economy are sufficient to meet both the extra public expenditure in the stimulus package and the rise in consumption and private investment expenditure that follows.

For the moment, finding those resources isn’t a problem. The conditions created by the pandemic have reduced private consumption and investment expenditure. Households whose incomes have been unaffected by the pandemic have used the money saved by working from home and limiting holidays to pay down debt. Businesses have held off big investment decisions.

But once life returns to normal, and spare capacity in the economy is exhausted, households will want to start spending the liquid assets they have built up. Their increased demand will collide with permanently higher levels of public expenditure and renewed investment to produce a level of aggregate demand beyond the capacity of the economy to supply.

The outcome will create shortages, rationing and bottlenecks — which means none of these demands will be satisfied. Eventually, the shortages will produce higher prices and wages, and a renewed burst of inflation. But inflation is just a symptom of excess demand; it’s the shortages, and the problems they create, that are the real source of economic damage.

Once the economy recovers, the only way to meet the need for increased public expenditure, given the productive capacity of the economy, will be to reduce the spending power of private households through taxation. Given the highly unequal distribution of income in the United States, most of the reduction must be borne by those in the top 10 per cent of the income distribution and particularly those in the top 1 per cent. Since these groups were the biggest beneficiaries of the Trump tax cuts, the immediate response must be to repeal part or all of those tax cuts.

What about the public debt built up during the pandemic, and the further increases in debt implied in sustained budget deficits? In the short run, much of the debt has been monetised: the US Federal Reserve has bought around US$4 trillion in Treasury bonds since the pandemic began, and will be able to buy more to offset the increase in public debt associated with the latest stimulus. But the Reserve’s capacity to do this is limited by the public’s willingness to hold cash and zero-interest deposits rather than spend their wealth or invest it in higher-yielding assets. Once this willingness is exhausted, further monetary expansion will translate into higher expenditure and therefore run the economy into resource constraints.

To resolve the situation, the ratio of debt to GDP will need to be reduced during the expansion created by the stimulus package. Fortunately, low interest rates mean that will happen automatically, as long as tax revenue is sufficient to cover government “primary” expenditure (exclusive of debt).

But a faster reduction is probably desirable. The small policy adjustments (such as twenty-five basis points in central bank interest rates) that seemed to work in the couple of decades before the global financial crisis aren’t adequate for managing the unstable economy we can expect for the foreseeable future. The larger the stimulus we want government to provide in bad times, the bigger the surpluses it should run when private demand would otherwise be excessive.

All that is for the future. If Biden’s stimulus plan achieves its goals, it will be the clearest demonstration in many years of the central role of government — in the United States and countries like Australia — in stabilising the economy and delivering outcomes more sustainable and equitable than those of unregulated capitalism. Let’s hope it works. •

The post On economics, America has moved left appeared first on Inside Story.

Last month the Refugee Council of Australia warned premier Daniel Andrews that 164 people in his state were set to be moved from community detention, with no provision for ongoing housing or support. Sixty had already been removed in New South Wales, seventy-six in Queensland, thirty in South Australia and twenty-two in Western Australia.

Home Affairs officials confirmed on Monday that the numbers have since increased in all states but Western Australia. In response to a question from senator Nick McKim at a Senate committee hearing, they confirmed that it is the department’s “intention” to include Victorian cases among another 300 community detainees targeted for removal.

As the department describes it, the removal process gives people three weeks of “transitional support,” during which time they can stay in their current government-provided housing and receive their last income payment. Once the transitional period is over, they have the right to work (though no guarantee of a job) and to Medicare, but have lost their accommodation and government benefit.

Senator McKim expressed surprise that the move was proceeding during a pandemic and recession. Were people in Victoria on hold, he asked, or had “a decision been taken that, once a certain thing happens, then the people in Victoria can start receiving these [bridging visa] grants?”

“No decision has been taken on what that milestone would be,” replied the department’s Justine Jones.

The government provides a six-month final departure bridging visa to people being moved on from community detention, by the end of which they are expected to have left Australia, either for their home country or to return to Nauru or Papua New Guinea. Having vacated their homes and lost their government-funded income payments, they are expected to find housing and provide for themselves.

The current community-detention cohort of more than 570 people are not allowed to work or study, and so must rely on the government for their housing and a monthly allowance. They can move about during the day but must be at their assigned accommodation each night. Children can go to school, but school camps, for example, are off-limits without written permission from authorities.

As refugee advocate Pamela Curr points out, these people have had no chance to prepare themselves for work. “Their chances of finding jobs to fully support themselves and, in some cases, their children would be tough at the best of times. To require that of them when unemployment is higher than it has been for decades is a test of Olympian proportions.”

Curr’s assessment is backed by Sister Brigid Arthur, joint coordinator of the Brigidine Asylum Seeker Project, which has been providing emergency funds, food and other material aid to refugees and people seeking asylum since 2001. The project is a Melbourne-based initiative of the Brigidine Sisters.

“We are preparing for a crisis to hit,” says Arthur. “We estimate that we need to find another one hundred accommodation units to house families and individuals likely to find themselves homeless within the coming month.” Adding to the difficulty, she says, is the fact that agencies like hers must deal with a “climate of secrecy and lack of any rationale which would allow us to understand exactly what is about to happen and why it is happening.”

The Australian Border Force is responsible for immigration detention, including community detention of those previously held on Nauru or PNG who were brought to Australia for medical treatment, mostly in the years before the since-repealed medevac legislation came into effect. Management of the people in community detention and their needs is contracted out to organisations including AMES and Life Without Barriers in Victoria. Other church and community welfare agencies are among the contracted providers in other states.

The Border Force, led by commissioner Michael Outram, is an operationally independent statutory authority within Peter Dutton’s home affairs portfolio. The published organisational structures of the department and the Border Force don’t make clear to whom Mr Outram reports, so it is assumed to be Minister Dutton. This makes it difficult to say whether the decisions and actions of Border Force fit into any coherent implementation of refugee policy or ministerial priorities.

“Having had seven years to find a solution to the dilemma of what to do with refugees covered by a ‘never, ever’ ban on settling in Australia, we say that this is a proven policy failure,” Curr says. “But we don’t want to criticise without offering a better way.”

Curr and Arthur have offered an alternative process that would see the Morrison government move people from community detention to a new community protection visa with full work and study rights, and access to Medicare, JobSeeker and continuing housing and income, until they are securely supporting themselves.

Arthur believes there is time to avoid the crisis about to hit in Victoria if the federal government willingly works with those who are concerned, informed by experience and well connected in the refugee support sector.

Advocates like Arthur and Curr may well be among the “informed citizenry” Mike Pezzullo had in mind when he addressed the National Security College at the ANU last week. Summarising his vision of national security as a “positive and unifying force,” he said that it should not entail the administration of fearful and anxious subjects.

“Security should be contested by an informed citizenry who share a common horizon of threat awareness and agency in relation to risk and opportunity,” he continued. “On this reading, security is a dialectic between the state’s mandate and capacity to act, and the population’s collective specification of the trade-offs and the costs that it is willing to bear in the name of protection and survival.”

This suggests a shift in the national security narrative. Since prime minister John Howard declared in 2001 that “we will decide who comes to this country and the circumstances in which they come,” refugee policy has been framed as a border security issue. It was further entrenched in security debates by the actions of prime ministers Kevin Rudd and Tony Abbott.

After two decades, the trade-off in Australia’s current refugee policy is indeed contested. Refugee advocates see many costs — denial of human rights, trauma compounding harm, punitive treatment of people seeking protection — but no greater sense of security.

Figures in this month’s federal budget indicate that the government is continuing its push to reduce the cost of support for asylum seekers, which commenced in last year’s budget. But with costs reported in a fragmented manner across departmental programs, it is difficult for interested citizens to assess the full picture. With the department’s broadbrush response to my detailed questions shedding no new light, it can’t be said definitively whether the move to evict people from community detention is a cost-saving measure or a response to other, possibly political imperatives. Decisions on removing people from community detention are put directly to the minister on a case-by-case basis.

There is, however, clear provision in the budget for a further $55.6 million to “reactivate” the Immigration Detention Centre on Christmas Island, which was placed on a contingency setting last year. The Kaldor Centre’s analysis of the budget finds that “onshore compliance and detention” expenditure in 2020–21, set at $1 billion, includes voluntary return packages and the management of onshore detention facilities.

These facilities include traditional fenced-and-locked facilities as well as the hotels and motels where around 160 men medevaced from PNG and Nauru in 2019 are being held. So far, these men — in the Kangaroo Point Central Hotel in Brisbane and the Mantra Bell City motel in suburban Melbourne — have not been included among the proposed evictions from community detention. Neither have those who still have a chance of resettlement in the United States. According to the home affairs department, “The US government continues to progress cases under the resettlement arrangement. Those actively engaged in the US resettlement process are able to continue with this process.”

Many of those in Victoria who are expected to be moved out of community detention in coming weeks are aware of what has happened in other states. “Everybody is talking about it,” one resident told me. “But our immigration case worker has said nothing. We don’t know. We are just waiting. We are always waiting.” •

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A subcommittee of COAG, chaired by Indigenous Australians minister Ken Wyatt and Coalition of Peaks chief executive Pat Turner, oversaw negotiation between Indigenous interests and all levels of Australian governments. The result, the National Agreement on Closing the Gap, released in late July, provides an opportunity to assess the ramifications and effectiveness of the Indigenous groups’ involvement in the process.

The agreement included not only sixteen new targets — mostly in policy areas that are primarily state and territory responsibilities — but also a series of priority reforms for joint national action. The latter, included at the insistence of Indigenous interests, were designed to tackle the systemic and structural underpinnings of Indigenous disadvantage; they focused on formalising Indigenous involvement in policymaking related to programs and services; strengthening Indigenous community-controlled organisations; transforming the operations of government organisations to improve accountability and responsiveness; and improving access to data.

The reaction to the new agreement has been mixed, focusing overwhelmingly on the scope, rationale and shortcomings of the sixteen new targets and the absence of other targets. Although a significant segment of public opinion (both mainstream and Indigenous) appears to be supportive of the aspirations and content of the new agreement, widespread scepticism has also emerged. Critics point to the targets’ lack of ambition, particularly in relation to incarceration rates and family violence, and the absence of the investment needed to ensure they are met.

Nationally, Labor and the Greens support the new national agreement, but both parties have called for extra funding. The most surprising criticism came from prominent architects of the Uluru Statement from the Heart, who pointedly questioned the representativeness of the peak organisations that negotiated with governments — a development that raises complex issues about how Indigenous interests are represented and advocated more widely.

Despite this debate, some of the key implications of the new partnership agreement have been overlooked.

The best way to unravel the deeper policy implications of the new Closing the Gap targets is to consider what each of the parties to the agreement — the Commonwealth, the states and territories, and Indigenous interests — were seeking.

While the governments’ objectives were opaque, their shape can be discerned by analysing past policy approaches and by reverse engineering the final agreement. It would be naive to take the public rhetoric of governments regarding their objectives at face value; for example, the Commonwealth refused access to an evaluation of the National Indigenous Reform Agreement, the COAG document that established the Closing the Gap targets in 2008, on the basis that to do so would reveal “deliberative processes” regarding the negotiations.

In my view, the Commonwealth is likely to have had four objectives in refreshing Closing the Gap:

• to shift the goalposts so as to diminish the significance of the annual ritual admission of failure to meet its targets (the “humiliation driver”)

• to avoid structural or systemic policy reforms that are necessary for greater Indigenous inclusion yet would impose unacceptable political costs (the “policy stasis driver”)

• to avoid significant new and ongoing financial investment in addressing Indigenous disadvantage (the “deficit driver”)

• to shift political and financial responsibility for Indigenous services to the states and territories to the maximum extent possible (the “fiscal federalism driver”)

All of these drivers are mutually reinforcing, and their attainment would combine to compound and reinforce Indigenous exclusion.

Because the original Closing the Gap targets, fixed by COAG, were expiring, the Commonwealth was able to corner the states and territories. The premiers and chief ministers were already at the table, and couldn’t easily avoid engaging. In many respects, they also share those four objectives, except that their fiscal federalism driver points in the opposite direction. Above all, they would want to ensure that the Commonwealth doesn’t offload responsibilities for servicing Indigenous citizens and communities without providing funding too, and to ensure that the agreed targets can be implemented and assessed flexibly. In theory, they could have pushed back, but the Commonwealth had cleverly brought Indigenous interests into the design of its strategy, making it politically harder for the states and territories to resist a new negotiation.

The Indigenous parties to the process were the most transparent. The Coalition of Peaks had laid out its overarching agenda in a number of public forums. It had no choice but to do this openly, because it had to build, and importantly sustain, an alliance of disparate organisations with no established organisational infrastructure. The Peaks’ initial core objectives (as set out on its website) were fourfold: shared decision-making, community control, structural transformation of government agencies, and better access to data.

Spelling out these objectives of the parties helps clarify the dynamics of the refresh. First, the Commonwealth’s fiscal dominance and legislative heft outweigh the states and territories individually and collectively, and its policy objectives — though never made explicit — are more straightforward and encompassing.

Second, the parties’ objectives are not “mirror images”: they don’t involve zero-sum calculations and therefore allow for win/win outcomes (admittedly constrained by the respective ambition and comparative strength of the parties).

Third, the Indigenous objectives were, of necessity, dependent on ongoing commitment and implementation by governments, whereas the governments’ objectives were not dependent on Indigenous responses and were essentially one-off decisions, albeit with longer-term institutional implications.

Fourth, while Indigenous interests traditionally prefer more rather than less Commonwealth engagement, it seems likely that they faced a trade-off between their own objectives and supporting the states in resisting Commonwealth disengagement. Their focus on building Indigenous capacity lessened their ability to insist on mechanisms to pressure on the states and territories to wholeheartedly implement the necessary policies.

Finally, a further “interest” is at stake in these negotiations — namely, the wider public interest — though it is inchoate and intangible and has no seat at the table. This interest transcends the partisan and institutional interests of governments and oppositions, and extends beyond the preoccupations of the current generation of Australians. It posits a simple question without easy answers: how might the negotiations contribute to the sort of nation we hope to bequeath to our children and their children?

While it will take some years for the agreement’s tangible outcomes to emerge, an informed assessment of likely outcomes is possible now that we know the detail of the proposal. After all, the strategists and insiders within each party who determined what was and wasn’t on the table made just such an assessment.

My own assessment, against the notional objectives of the parties, is as follows.

The Commonwealth, by achieving all of its likely objectives with minimal political cost, is the big winner. It has retreated from its overarching national policy role to essentially become a mere aggregator of statistics. By strenuously advocating the notion of shared accountability, and by choosing targets that overwhelmingly relate to state and territory responsibilities, it has shifted the responsibility for explaining failure largely to the states and territories, and to a lesser extent to Indigenous interests.

Importantly, the proliferation of implementation plans and performance data across eight jurisdictions and against sixteen (plus) targets, most of which are required to be disaggregated into four or more categories, will create an extraordinarily complex maze of outcomes to be monitored, assessed and (in theory) adjusted as necessary by policymakers. Commonwealth ministers will sleep soundly at night in the knowledge that when everyone is accountable, no one is accountable.

The Commonwealth’s success in avoiding policy responsibility is not just about Closing the Gap. It is the culmination of a decade-long push to shift Indigenous policy responsibilities away from the Commonwealth and towards the states and territories, and away from Indigenous-specific programs and towards mainstream programs. On issues as diverse as heritage protection, essential services, Indigenous housing and legal aid, the Commonwealth has been reducing its footprint. Where it retains responsibility — in relation to income support, for example — it has increasingly turned to mainstream programs rather than Indigenous-specific ones. The new Closing the Gap agreement is a major capstone on a pre-existing trend that will shape Indigenous policy for generations.

Measured against their assumed objectives, the states and territories have emerged from these negotiations as losers. They will each be obliged to develop detailed implementation plans against the various targets and introduce the necessary policies to deliver them. They receive no extra funding, which means they must either raise extra revenue or borrowings, cut services elsewhere, or — perhaps most attractively from their perspectives — find ways to replace tangible actions with rhetoric (which would shift the loss to Indigenous interests).

Assessing the outcomes for Indigenous interests is not straightforward. The first-order issue is that they leveraged their partnership status into an ongoing role in overseeing Indigenous service delivery both in Canberra and in the states and territories. If implemented, this is of huge strategic importance: it would be the first time Indigenous interests are present when decisions with life-changing implications are being made.

Second, the new national agreement gives Indigenous interests a commitment by the governments of eight jurisdictions, plus local government, to a new policymaking approach based on partnership and greater community control of service delivery. This commitment is built around a formal cross-jurisdictional agreement to four overarching priorities:

• Shared decision-making, including a joined-up approach to five policy priority areas and the creation of six place-based partnerships between all levels of government and relevant communities.

• Sector-strengthening plans in priority areas, starting in early childhood care and development, housing, health and disability.

• Transformed government organisations focusing on issues such as cultural safety, improved engagement with Indigenous organisations and, importantly, improved accountability through more transparent funding processes.

• Shared access to data and information at a regional level.

Implemented effectively and with imagination, these reforms will be far-reaching and will fundamentally increase the influence of First Nations people in policymaking across the nation. To have them embedded in a formal agreement signed up to by all levels of government in Australia is a monumental achievement.

Offsetting these nominal gains are two serious downsides for Indigenous interests; risks that I assess as both high-impact and highly probable. First, they will struggle to build — and, importantly, sustain — the organisational capabilities to engage persuasively and influentially both nationally and, most importantly, across eight jurisdictions. A “seat at the table” does not guarantee positive outcomes. This challenge will be more difficult if governments pursue strategies encouraging internal dissension.

The second risk is the one I foreshadowed earlier: that governments will avoid implementing, resourcing and sustaining the strategies necessary to achieve these reforms. Implementation failure is ubiquitous across Australian governments, even in contexts where policymakers have the best intentions and a relatively free hand. Nicholas Gruen recently framed this as a disjunction between what policymakers say and what they do; a problem he described as being endemic in policy circles. Memorably, he referenced Lord Acton’s observation on rowing as the perfect preparation for public life: moving in one direction while facing the other. The new agreement will require policymakers in a variety of jurisdictions to operate at levels of coordination and cooperation that are rarely achieved in mainstream services, and will require them to take account of Indigenous views in fluid policy and political contexts.

But are governments prepared to make such commitments? Two examples, incarceration levels and employment levels, suggest they may not be, and point to the likely impact of that failure on the lives of Indigenous citizens.

After a leaked version of the final agreement revealed a proposed (and not apparently ambitious) goal of parity in incarceration rates by 2093, Minister Wyatt announced that the target would be changed. The parties subsequently reframed the target as a reduction in Indigenous adult incarceration of 15 per cent by 2031. If achieved, according to the most recent data, this would bring the rate of Indigenous incarceration down from 2589 per 100,000 to 2201 per 100,000, against a mainstream incarceration rate of 223 per 100,000. After ten years’ effort, in other words, Indigenous incarceration rates would still be around ten times the rate of the wider community.

In relation to employment, Closing the Gap now aims by 2031 to increase to 62 per cent the proportion of working-age Aboriginal and Torres Strait Islander people who are employed. According to researchers at the ANU, around 47 per cent of working-age people — those aged fifteen to sixty-four — were employed at the time of the 2016 census, compared with 72 per cent of the non-Indigenous working-age population. The new target focuses on the narrower age range of twenty-five to sixty-four, sidestepping extremely low youth employment, both mainstream and Indigenous, and shifting the latter challenge to the target that focuses on youth employment, education and training.

Even if the new employment target is achieved, some 40 per cent of Indigenous citizens aged twenty-five to sixty-four — four out of ten — won’t be employed by 2031, with all the associated health and economic repercussions for individuals, families and the wider community.

If reducing Indigenous incarceration or increasing Indigenous employment were actually a real priority for Australian governments, these targets would be much more ambitious. In fact, their failure to commit to ambitious targets — and to the policy reforms and increased funding necessary to achieve them — clearly represents a lost opportunity for Indigenous interests. But it can’t credibly be argued that Indigenous negotiators — the party with the least negotiation leverage — bear responsibility for this outcome; instead it is a failure of governments to move decisively beyond the status quo.

Finally, what of the public interest? Australia’s continued failure to tackle deep-seated Indigenous disadvantage diminishes us all. The federal government’s ongoing retreat from policy responsibility is driven by short-term politics and doesn’t align with the expectations of the Australian population when they voted overwhelmingly in 1967 to give the Commonwealth the power to legislate in relation to Aboriginal people. More insidiously, the pretence and self-deception involved in reassuring ourselves that we are doing all that is possible, and that somehow the issues are “intractable” and thus insoluble, undercut the very integrity of our democratic culture. This is not a win for the public interest.

All of us, Indigenous and non-Indigenous alike, have a propensity to see politics and policymaking in terms of a destination rather than a journey. Yet, as we reach each milestone, others appear on the horizon.

The Closing the Gap negotiations saw Indigenous groups successfully demanding a role in developing future policies and programs, and forced governments to formally commit to structural reforms, shifting the nature of the journey ahead. Instead of the previously impenetrable terrain surrounding arid targets and arcane statistics, we now face a climb, admittedly steep, through more open terrain on which the milestones are more visible and are linked to a framework for developing further reforms. Despite my pessimism, the opportunities for the nation have expanded. •

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Noel Pearson’s second article was co-authored by Bill Mitchell, an economist known for helping to found modern monetary theory, or MMT, a heterodox school of macroeconomics, and helping to devise the job guarantee that is the school’s policy centrepiece.

At first glance, the Pearson–Mitchell alliance might seem curious. Pearson’s assault on “welfare dependency” — he refers to welfare as “poison” — is popular with the political right, whereas Mitchell identifies as a socialist. But the job guarantee occupies a complex place in political philosophy, bringing together strange bedfellows.

Today, the concept is probably most popular on the American left. But MMT’s co-founder and key benefactor, Warren Mosler, a politically unorthodox former Wall Street hedge fund manager, points to the hard-right Breitbart columnist John Carney as a supporter of a job guarantee, which Carney suggests could be used to provide the labour to build Donald Trump’s wall.

Mitchell’s emphasis on “reciprocal obligations” and “duty to work” gives a clue to the job guarantee’s popularity on the right. His scheme is explicitly designed to replace unemployment benefits.

Conventional economics sees a trade-off between employment and price stability. As unemployment nears zero and firms compete for a dwindling pool of unemployed workers, inflation increases. To maintain price stability, a fraction of the working population — what Marx called a reserve army — must be kept unemployed. In most developed countries these people are paid unemployment benefits. Mitchell’s job guarantee would abolish these benefits and instead require the unemployed to perform community tasks in exchange for income support. Supporters of the job guarantee consider this arrangement to constitute a paid job, but it is sufficiently analogous to unemployment to serve as a reserve army of labour.

As MMT academic and Mitchell co-author Randall Wray puts it, a “buffer stock of workers is a restraining influence on wages, whether they are unemployed or JG-employed.” There should not be “any difference in the influence.” To control inflation, the rate of payment to the unemployed — whether on a JobSeeker payment or in a job guarantee work scheme — must be fixed, in the sense that it can’t be bargained up in the manner of conventional employment.

In this sense, the grand rhetoric of the job guarantee movement boils down to semantics. Imposing work requirements on income support can meet a definition of “employment” that lets the government declare involuntary unemployment to be zero per cent.

Not all job guarantee advocates follow Mitchell in eliminating the JobSeeker allowance, but they generally support a much lower rate of payment for people who don’t participate in the scheme. In substance, the job guarantee is equivalent to an unemployment benefit accompanied by onerous work requirements; non-compliance is subject to a payment penalty (cancellation, in the Mitchell model).

Australia arguably already has a kind of job guarantee — work for the dole. Job guarantee proponents object to this characterisation, primarily because they propose paying the minimum wage, but this muddles the issues. The payment in either scheme is a policy choice. JobSeeker could be set at the current minimum wage; the job guarantee could be set below the minimum wage.

In either case, the same constraint applies: the rate must be fixed so the “buffer stock” can keep inflation under control. Collective bargaining over pay rates is impermissible. The job guarantee participant is literally a “recipient” of terms handed to them. They cannot have the rights of conventional employees.

Advocates say that job guarantee participants would do work of significant value. But this claim conflicts with their own design principles. To accommodate a worker of any skill level — anytime, anywhere — the work can require only basic skills and must be strictly optional from a societal perspective. (The job guarantee is a “buffer stock,” so tasks must wind down when the economy picks up.) Proponents also claim that job guarantee work can’t compete with currently employed workers.

It isn’t possible for work under a job guarantee to meet all those criteria. Many suggested tasks (such as care) relate to ongoing social needs. Others (care, infrastructure) are too highly skilled to be appropriate; the more highly skilled the participants, the more they compete with existing workers. But if a job guarantee provides classic “make-work” jobs of basic skill, then the social benefit would be next to nil. These contradictory design criteria create an “impossible quadrilateral”: any attempt to achieve one criterion requires abandoning another.

In short, the job guarantee is no way to satisfy aged care or childcare needs. It will not install solar panels. It will not build bridges, or roads, or even a big wall. More likely is make-work — raking leaves, picking up trash or weeding — but this means ditching the grand claims about social benefits.

Proponents also argue that a job guarantee is psychologically better for recipients than are unemployment benefits. Research shows an association between unemployment and low subjective wellbeing that isn’t entirely explained by income. But does this really come from work, as such? The voluntarily retired are not in formal work but generally do fine. Perhaps the real story is not so much about the presence or absence of tasks, but about norms and social approval. Although work tasks are easy to guarantee, social validation is another story.

Let’s say the government simply increased work for the dole hours to full-time and then declared it “employment.” Any increase in payment would be welcome, whatever the name, but would it suddenly lead to non-financial benefits? Would it alter the participants’ social standing? There’s no magical power in the mere designation “job.”

By design, job guarantee participants can’t be treated as regular employees. Beyond the absence of basic labour rights like the right to bargain for their wage, they can’t even be promoted for good performance.

On the other hand, non-performance is of little consequence. As the work is guaranteed — including for people with vastly different capabilities and needs — it would be hard to fire anyone. MMT economist Pavlina Tcherneva of Bard College compares it to a child’s legislated right to school. Implicitly, administrators must go to extremes to retain unproductive and troublesome participants.

Even when fired, participants can resume their work virtually straight away. Tcherneva compares this to removing a patron from a library: “There may be some circumstances when a person is asked to leave the premises, but unless they threaten the public’s safety, they are not denied access… the next time they show up.” The principle is “assurance that no one will be denied access to a job.”

What exactly is the point of this bizarre arrangement? It requires little more than turning up at a so-called worksite and pretending to do something. It is not a real job; it is theatre.

Of course, some unemployed people may gain satisfaction from workplace chores. Volunteering is already available, and the government could help facilitate it.

But others may find job guarantee make-work to be tedious and degrading, as is historically the intent of workfare programs. Bad work can be worse for health and happiness than no work.

Those who choose not to participate in arbitrary labour should not be punished. Make-work programs tend to “lock in” participants, crowding out job search activities. People get stuck in dead-end pseudo-jobs, no good for them or the economy.

Why the interest in this grandiose make-work scheme? Perhaps it seems like a “one weird trick” solution for two great socioeconomic ailments — structural unemployment and poverty.

But there exist well-established, albeit less sexy, policy solutions — including conventional full employment policy — that remain unimplemented. We should hire more public sector employees, with full industrial rights, to do work of meaningful value. We should implement an active labour market policy — including intensive training, counselling and transitional subsidies — to place people in genuine jobs. We should abolish work for the dole and raise JobSeeker payments — even to the minimum wage — without the cost of a massive job guarantee bureaucracy.

Research on people unemployed in Denmark suggests that this kind of policy package can eliminate the physical and mental health effects associated with job loss.

If policymakers wish to emphasise reciprocity in unemployment payments, John Quiggin’s proposed participation income is preferable to the job guarantee as it incorporates broader activities including job search, volunteer work and family care — without requiring make-work.

There is no need for a cumbersome, untested plan for fake jobs designed to displace welfare and flout industrial rights. •

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The divergence between the facts established by the intelligence services — sometimes by the decision makers themselves (as notably in the case of McNamara) and often available to the informed public — and the premises, theories, and hypotheses according to which decisions were finally made is total. And the extent of our failures and disasters throughout these years can be grasped only if one has the totality of this divergence firmly in mind.

— Hannah Arendt

I have a theory that the truth is never told during the nine-to-five hours.
— Hunter S. Thompson

1. Introduction

From 1788 till the 1960s, Europeans established themselves on Indigenous land in a brutal regime, first of dispossession and then of disregard. Yet some among them had strikingly good intentions. A year before Wilberforce took on the cause, nearly eighty years before the Emancipation Proclamation, Arthur Phillip accepted his commission insisting that slavery had no part in the new colony. Phillip sought to treat the Indigenous people fairly, at least according to his own lights. But mutual incomprehension reigned and those with murkier intentions soon prevailed.

Today, good intentions abound, though racism often lives on in unacknowledged assumptions. Governments outlay vast sums, whether adequate or not, on specific Indigenous programs and in general expenditure on Indigenous health, education and social security. Widely supported grand gestures are announced every few years. You might think “Closing the Gap” was Kevin Rudd’s idea but it rebooted (or is that rebranded?) a Hawke government initiative of twelve years earlier. But the results are meagre.

Now comes a new cycle of activity, this one focused on whether formal evaluation processes might allow us to identify and scale up those Indigenous programs that actually “work.” Most recently, the Productivity Commission has been hard at work on a national Indigenous Evaluation Strategy, which was the immediate trigger for this essay and to which I’ll return. Will this cycle of activity produce better results than earlier efforts? I’ll explain below why I have my doubts.

To first clarify where I’m coming from, it is not from deep knowledge of Indigenous policy. My focus here is rather on a prior question: how our formal institutions of government — and most particularly our bureaucracies — might need to change to succeed where previously they have so consistently failed. To make that question concrete I draw on my experience in other intractable areas of social policy that bear family resemblances to Indigenous policy.

Programs to protect children from abuse and neglect, particularly in disadvantaged families and communities, follow the same endlessly repeated cycle of failure followed by grand plans for reform that then run into the sand before the cycle begins again. This essay focuses on how little the system really appreciates the distance it would need to travel to really be effective, in terms of either its own values and objectives, or those of the disadvantaged communities — including Indigenous communities — it claims to be serving.

2. The “what” and the “how,” the saying and the doing

So here’s my very simple description of the problem: despite endless pronouncements of what we must do, there’s minimal comprehension of how to do it.

This is an endemic problem. Dependable know-how itself — whether it’s improving outcomes in an Indigenous community or representing government in the High Court — is not directly legible to government systems. Anyone can claim to have that know-how but a bureaucracy needs something more dependable than that. As a consequence, it will interact with know-how as a certified, decontextualised “what.” That “what” could be a credential, the meeting of a key performance indicator, or a particular bureaucrat’s informal reputation for being a “good operator” or a “safe pair of hands.” In improving Indigenous lives, however, know-how won’t align with any such things, not least because so much of it resides among Indigenous people and communities themselves. We need to access their knowledge and their agency to improve their own lives in ways that matter to them.

The cliché used to convey this idea is “putting people at the centre” or “putting people first.” However well-intentioned such slogans are, more often than not they operate as a kind of doublethink — as if adopting the slogan were to put its intent into practice.

The philosopher Martha Nussbaum offers a story that illustrates this difference between saying and doing. She describes how a development program encounters a woman in a traditional rural community who is uninterested in education for herself or her children. Nussbaum is showing how our (reductive) framing of the other’s perspective can cut us off from the wisdom of the other’s lifeworld. “Clearly,” she writes, “a one-shot logical argument” wouldn’t be enough to engage the woman:

[S]uch a procedure would only reinforce her conviction that education has nothing to do with her. Nor would the exchange get very far if the development workers sat down with her… asking… calm and intellectual questions about what she thinks and says. But suppose, instead, they spent a long time with her, sharing her way of life and entering into it. Suppose, during this time, they vividly set before her stories of ways in which the lives of women in other parts of the world have been transformed by education of various types — all the while eliciting, from careful listening over a long period of time, in an atmosphere of trust that they would need to work hard to develop, a rich sense of what she has experienced, whom she takes herself to be, what at a deeper level she believes about her own capacities and their actualization. If they did all this, and did it with the requisite sensitivity, imagination, responsiveness, and open-mindedness, they might over time discover that she does indeed experience some frustration and anger in connection with her limited role; and she might be able to recognise and to articulate wishes and aspirations for herself that she could not have articulated to Aristotle in the classroom. In short, through narrative, memory, and friendly conversation, a more complicated view of the good might begin to emerge.

Nussbaum’s scenario is based on actual fieldwork in Bangladesh, and couldn’t be cost-effective if it involved professionals engaging rural women en masse. But, as I discovered when I was chairing the Australian Centre for Social Innovation, the spirit of this translational endeavour is already captured in existing and cost-effective programs in Australia.

The centre’s Family by Family program takes families who feel they’re close to crisis. A trained coach then takes each family through a structured program of mentoring by another local family that has come through similar stresses. The family seeking help chooses the family that mentors them and sets the objectives they want to work on.

The program was co-designed with families over many months, but the simplicity and obviousness of the end result gave those involved in it and many lookers-on numerous “aha” moments. Family by Family embodies the rare art of professionals vacating centrestage in a therapeutic intervention to create space for those who must do the real work. Professional knowledge, which grows with the program, is always there — but as midwife, not obstetrician.

Talking to some of these families, I was struck by their visceral engagement with the program and their mentors. To take just one example — of which there were many — one mother in the program had received twenty-seven statutory “notifications” documenting outsiders’ suspicions that she was neglecting her kids. The relevant department was heading to court to take her four kids into guardianship. When her mentor family took her family camping, she learnt many things from them — not least to hug her kids. The department stopped proceedings against her.

The thirty-week program cost around $13,000. If that sounds expensive, it’s a fraction of what social workers would have cost, and much more effective. Moving all four kids into care would have cost around $224,000 per year. So, if Family by Family steered just this family from the shoals of state intervention it probably paid for its development and first couple of years of operation.

Before I saw Family by Family in action, I’d have described my outlook as that of a tragic liberal — committed to fairly generous spending on social disadvantage, but with very modest expectations of how much it could turn things around. After seeing Family by Family, the penny dropped. Ingrained patterns and social reinforcement are immensely powerful, almost immovable forces. But people’s desire to work towards better lives for themselves, their families and their communities is similarly elemental if they can somehow unlock their own agency and that of those around them.

3. Lord Acton’s fault line

After acknowledging the vast gulf between identifying the “what” and mastering the “how,” between the saying and the doing, we should then do something I’m doing for the first time in this essay. For decades I’ve referred to it in asides, but it needs to be brought centre-stage so we can look it in the eye. It’s significant that it’s a joke, just as it’s significant that so many of the best insights into bureaucracy are provided by comedies like Yes Minister, The Office and Utopia.

More than a century ago Lord Acton quipped that rowing was the perfect preparation for public life. Why? Because you face in one direction while moving in the other. One crucial reason that we’ve made so little progress is that in a thousand ways, large and small, the actors in the system face in one direction — with their mission statements, corporate values, strategic plans, evaluation strategies and all the rest of it — while moving in the other.

Of course, they’d prefer to do a good job — most people would. But when push comes to shove, their animating imperative isn’t to keep progress going in the field. It’s to keep up appearances. Seen this way, all those grand announcements we keep making are part of the problem. They’re really directed at our own anxieties. They alleviate and distract us from facing our disappointment — our discomfort — that the world remains so resiliently impervious to our good intentions.

Lord Acton’s fault line appears between the two feet on which we stand — between what we say and what we do. That’s why the words we use matter so much, and why we should take George Orwell’s advice to choose the simplest and clearest words we can. As he put it:

If you simplify your English, you are freed from the worst follies of orthodoxy. You cannot speak any of the necessary dialects, and when you make a stupid remark its stupidity will be obvious, even to yourself. Political language — and with variations, this is true of all political parties [and here we can include officialese]… is designed to make lies sound truthful… and to give an appearance of solidity to pure wind.

Since those in the system are the ones with the power, all we have to appeal to is their own self-respect — their own desire to feel better about themselves. When they say they want to change, the real question is how much. The system has said that it wants greater Indigenous agency in its programs for ages. But as I’ll illustrate, our programs are so dominated by that same system’s routines and perspectives that Indigenous agency barely gets a look-in. Instead it gets reduced to things that are legible to the system — such as Indigenous ethics codes and certified cultural sensitivity. These things may have some benefits. They may also have costs, which I’ll discuss. But they are mostly the system saying rather than doing.

This takes us to the nub of the problem. It is only humility, or some institutionalisation of it, that can create that space within which Indigenous agency might be nurtured and grow. But “humility” itself is now turning up as a cliché in all those “how to” guides (it appears just before “nuance” and after “authenticity” — yes, authenticity really was a corporate value of PwC for a while there). So I’ve tried to revivify it with Iris Murdoch’s magnificent words above. For the non-Indigenous among us who fancy we care, we must find ways to untangle ourselves and our institutions from the “the anxious avaricious tentacles of the self.”

4. Enter evaluation

Like a patient resisting therapy, the system constantly initiates new beginnings. But Lord Acton is never far away. At the political level leaders talk of evidence-based policy, but then shunt it aside when convenient. In fact, substantial performance evaluation was built into the structure of the Aboriginal and Torres Strait Islander Commission but sidelined after ATSIC was dismantled by John Howard’s government. The failure of the Northern Territory Intervention to take an evidence-based approach is legendary, worked up as it was over a few days in Canberra in the run-up to an election and yet largely maintained by the incoming government.

More recently, while stressing his own commitment to following the evidence, newly elected prime minister Malcolm Turnbull expanded income-management schemes without mentioning that the independent evaluations were highly equivocal. However well the idea played in non-Indigenous Australia, the evaluations suggested that compulsory income management has clear, positive impacts in very few cases and gives rise to “considerable feelings of disempowerment and unfairness.” As one might expect, voluntary income management is more successful.

Now, it is one thing for senior officials not to speak publicly of their political masters’ hypocrisy. But their complicity goes deeper. In 2009, a finance department review of Indigenous expenditure stressed the need for “a more rigorous approach to program evaluation at a whole of government level.” In 2016, the nation’s most senior public servant, the secretary of the Department of the Prime Minister and Cabinet, Martin Parkinson, echoed those sentiments. In response to such concerns, $40 million over four years was allocated for evaluation. Parkinson’s department was responsible for Indigenous affairs, but the Audit Office reported three years later that its performance was desultory.

As ANU researcher Michael Dillon has suggested, even the Audit Office’s report was “extraordinarily hedged and timid, and failed to make a substantive assessment of the actual independence of the evaluations undertaken” by the department:

Of thirty-five evaluations on the department’s 2018–19 workplan, fifteen had not commenced. Of the remaining twenty, eight had been published and twelve withheld from publication… In at least four cases (involving very significant and sensitive program evaluations) the department was waiting to brief the minister or awaiting his noting of a brief. In plain language, the minister was preventing timely publication of the evaluations.

Further, Dillon observed, Parkinson’s response to the audit “fails to acknowledge or address in any way the negative content of the audit.” Is it likely that the system will engineer something better if it can’t acknowledge its own failure to do as it says?

Which brings us back to the Productivity Commission’s Indigenous Evaluation Strategy, a draft of which was released in June. The PC has always attempted to pitch its proposals to government within the “Overton window” — that range of options that will be taken seriously by powerful people. Given that constraint, as I’ll explain, I respect its compromises on policy. But the point of the PC’s independence is that, however much it compromises on the policy, it spares no one, least of all itself, the truth. What the great scientist Richard Feynman wrote about science is also true of social science. For me, it’s a holy grail of social policy and aligns nicely with Orwell’s advice: “The first principle is that you must not fool yourself, and you are the easiest person to fool.”

5. Putting Indigenous people at the centre: the words

There’s a kind of ambiguity at the very heart of the PC’s draft strategy that’s increasingly common. It’s Orwellian in the bad sense. I guess the genre was introduced into polite society by the “vision statement.” Here one states an aspiration as a fact. You know the kind of thing: “PHP Residual Solutions is the world’s foremost residual solutions provider.” At least in its awkward baldness, it’s not misleading. We all know that global domination is an aspiration, not a fact.

But this fusion of fact and fancy appears as the fundamental building block of the PC’s draft strategy: “The Strategy puts Aboriginal and Torres Strait Islander people at its centre, and recognises that governments need to draw on the perspectives, priorities and knowledges of Aboriginal and Torres Strait Islander people if outcomes are to improve.”

One of the ways to ensure we remain fixed to the spot with Lord Acton’s fault line yawning beneath us is to encourage the idea that saying something is doing it. Does the PC know how to put Indigenous people at the centre of its strategy? Can it point us to better and worse examples of doing so? Can it highlight cautionary tales where grand claims have been made that are belied by the facts on the ground? These are some of the questions — pointed, uncomfortable questions — that we need to answer if we’re ever to step over Lord Acton’s fault line and enter the promised land of “how.”

At the level of programs, rather than evaluation, there are at least two perilous steps in the expedition to get from saying to doing — from signing the cheques to putting the resources of government properly at the disposal of Indigenous people and their communities:

1. We need to learn how to put Indigenous people and communities at the centre of these programs — or, to put it differently, how to realise their agency within them.
2. Then we need emerging successes to spread. That requires validated new knowledge of what’s working in the field — always fragile in large organisations to say nothing of systems of organisations — to trump the institutional imperatives that so often frustrate the spread of successful practice.

To me, these are the great priorities for the Indigenous-specific programs I have focused on in this essay, though analogous priorities would apply when considering the impact of general welfare programs on Indigenous people and communities. And any evaluative strategy would emerge from an appreciation of how evaluation might contribute to their wellbeing. As progress was made it would shed light on how further priorities might be set.

But the draft strategy makes clear that this is not the kind of priority-setting the PC has in mind. Its initial priorities reproduce those of COAG’s Closing the Gap report, and their foremost characteristic is their legibility to the system. They’re even arranged around the system’s existing organisational structure, which includes families, children and youth, health, education, economic development, housing, justice, land and waters. Makes you wonder what isn’t a priority! And all of them identify a “what” rather than a “how.”

6. Putting Indigenous people at the centre: the actions

How will we get Indigenous people and perspectives into the centre of evaluation? In their submission to the PC, researchers from Inala Wangarra and the University of Queensland argue that:

“Accountability” has become a lopsided concept, whereby the focus is overwhelmingly on service providers being accountable to government, and where there is no concomitant focus on the accountability of government to the most important stakeholders: Aboriginal and Torres Strait Islander peoples.

So might placing Indigenous people at the centre of an evaluation strategy involve making service providers and government policies accountable to Indigenous people? This possibility doesn’t seem to have made it into the PC’s strategy, even as a “what.” And even if it had, I’d argue that what the PC has endorsed is likely to be implemented in a way that actively obstructs getting to the “how.” The PC talks about the importance of “whole-of-government” approaches to evaluation. That sounds innocuous enough — commonsensical even. But why does it have me thinking of “whole-of-church” approaches to the solar system at the time of Galileo?

The only way I can imagine a whole-of-government agenda not doing more harm than good is if it were to imagine itself as being at the service of solving the concrete and urgent problems in the field — by identifying good practice in the field, for example, and coordinating the system to expand its influence.

Despite senior officials’ and politicians’ protestations that they aspire to encourage innovation in the field and spread and scale “what works,” progress has been conspicuously lacking. Peter Shergold saw this as a major problem as he rose through the ranks of the public service, but after over a decade at its commanding heights conceded there’d been little change. As he put it in 2005:

If there were a single cultural predilection in the Australian Public Service that I could change, it would be the unspoken belief of many that contributing to the development of government policy is a higher-order function — more prestigious, more influential, more exciting — than delivering results. Perhaps it is because I have spent so much of my career in line agencies, learning to deliver Indigenous, employment, small business, and education programs that I react so strongly against this tendency.

Eight years later he confessed that little more progress had been made:

Too much innovation remains at the margin of public administration. Opportunities are only half‐seized; new modes of service delivery begin and end their working lives as “demonstration projects” or “pilots,” and creative solutions become progressively undermined by risk aversion and a plethora of bureaucratic guidelines.

In its preoccupation with grander narratives than identifying what works and spreading it, the PC sets its evaluation process up to be driven by the system rather than its intended beneficiaries, however much it protests that they’re “at the centre.” In a familiar move, the PC suggests that its strategy is driven by four principles, each identified by a pleasing adjective with them all arranged in a pleasing diagram. According to this diagram, evaluation should be “Credible, Ethical, Transparent and Useful.” But these words are so general, so capaciously flaccid, that they constrain no one, like a scientific hypothesis that couldn’t possibly be falsified. And so, rather than constraining (and so guiding) practice, those words will come to mean whatever people want them to mean, often in retrospect to justify whatever practice is chosen.

Note two further aspects of the high-level pronouncements echoed by the Productivity Commission. First, the PC speaks of evaluation as if its function is to bolster the accountability of those in the field to their senior managers, with evaluation’s function being to objectively certify the extent to which the program meets the system’s stated objectives. Second, it shows little awareness of how broad and permissive this relatively new discipline of evaluation is. In reaching for some actionable means of validating that it is embracing a thing called “evidence-based policy,” evaluation is taken to be something far more settled and definitive than it is — as if getting something evaluated were like getting an auditor to check financial accounts or an engineer to check the structural integrity of a bridge.

As Michael Dillon has observed, the assumption that there are or should be simple linear relationships between objectives and performance is “problematic in cross-cultural contexts and certainly not necessarily the case in the… Indigenous domain.” In that regard the system — and the PC — seems oblivious even to the existence of “goal-free evaluation.” There, the evaluator investigates the impacts of the program without referring to — or ideally even knowing — a program’s stated goals.

In an increasingly managerial world oriented to the needs of organisations and their senior managers, this unconstrained focus deploys the evaluator’s skills in an open-minded way that can more fully reflect the interests and aspirations of other actors in the system — most particularly, intended beneficiaries of the program and the families and communities of which they are a part. Goal-free evaluation puts the evaluator in the best possible position to notice and document all consequences, both good and bad. It can also improve program hygiene just as double blindness adds to the hygiene of a randomised controlled trial.

7. The anatomy of Lord Acton’s work

Then there’s the question of exactly how evaluation will identify what is and is not working, and how these findings will find improve policy and practice.

This raises several challenges at the heart of the PC’s draft strategy. First, evaluation should be independent so that it is candid. Second, it should be published, in order to help develop a “knowledge commons” around “what works” (and what doesn’t) and to strengthen incentives for policy, programs and practice to follow the evidence. Yet past behaviour shows that the system responds to such constraints by saying one thing and doing another. So why would it be any different here?

Indeed, the woods are full of regimes in which higher-order objectives are foisted on policymakers to do the Lord’s work (Lord Acton’s work that is). These systems allow those at the top to say one thing as they face towards an objective in general, while they do another thing that quietly prevents it happening in particular. And thus ensues a prosaic variant of something Oscar Wilde told us about life:

Yet each man kills the thing he loves…
The coward does it with a kiss,
The brave man with a sword!

Freedom of information regimes sit atop Lord Acton’s fault line. And the discomfort this induces is all too often relieved with strategic cowardice. Having been lowered from on high, freedom of information faces boldly towards transparency. At least in general and at least when it comes to the saying. When it comes to the particular, to what is actually done, officials travel in the other direction. Transgressions go off the record — into corridors, personal phones and email accounts — or are reclassified “cabinet in confidence” or some such. And that’s just the tip of the iceberg as far as actions that are routinely taken to delay and obfuscate transparency under FOI.

If FOI solves its problems the coward’s way, regulation reviews use the sword. Today, new regulation can’t be introduced without a “regulatory impact analysis” duly demonstrating that its benefits exceed its costs. Australia introduced it in 1986, and it seemed like such a good idea that it was replicated around the world — but invariably with the same (desultory) result. Here’s the British Chambers of Commerce back in 2007:

Both Conservative and Labour administrations approach deregulation with apparent enthusiasm, learn little or nothing from previous efforts and have little if anything to show from each initiative.

Sound familiar? Regulation review is another take on the Lord Acton quickstep. Those at the top introduce a compliance regime, but those administering it are trying to get things done for their ministers. So they obey the letter but not the spirit of the regime, and it degrades into empty box-ticking.

8. Getting past Lord Acton’s fault line

To recap: as attractive as they sound, independence and transparency cannot be imposed without setting off powerful and perverse incentives. Any attempt to deal with these dilemmas must look them in the eye. I foregrounded them in 2016 with my own proposal for an evaluation architecture. I called it the evaluator-general to stress the importance of independence and transparency, and also to structurally separate the delivery of services from the means by which we validate their fitness for purpose.

The organisation of the public sector already honours this principle of structural separation — between doing and validating the effects of what we’re doing. Thus, the Audit Office and the Bureau of Statistics are independent information and integrity agencies whose work helps inform us of the success or otherwise of other “doing” agencies directed by ministers — such as the health department and Treasury. At the same time, we expect all these agencies to collaborate — sometimes quite closely.

My proposal for an evaluator-general provides the institutional scaffolding within which the same close collaboration amid structural separation between doing and knowing can be brought right down to operations in the field. That way independence and buy-in can grow quietly from the bottom up within organisations rather than being heroically imposed from the top in a grand gesture that experience suggests will fail and fail again.

My aim was to nurture the self-accountability of those out in the field — Feynman’s imperative that one mustn’t fool oneself — and to build system accountability on that foundation. That’s how Toyota revolutionised manufacturing productivity in a way that’s now imitated the world over. It found a way to build from “how.” It did so by placing the workers on the line, the suppliers and the customers at the centre.

Are my ideas viable or just naive? We’ll only know when we give something like them a good try. We’d need no more than a dozen or so teams to try them. In the PC’s near 400-page background paper there’s some reporting on these problems of independence and transparency, but not in the context of any critical vision or clear explanation of how they can be overcome.

9. Independence-for-hire and the he-who-pays-the-piper problem

The PC’s incuriosity extends to its ignoring the incentive issues arising from how evaluation is commissioned and conducted. As I’ve argued, allowing firms in our private sector to appoint their own auditor profoundly compromises auditors’ independence. By contrast, the auditing of government finances is overseen by an independent auditor-general. Still, while it’s far from optimal, we’ve made the independence-for-hire of private sector auditors work tolerably by specifying highly prescriptive auditing standards. With evaluation, things are very different, there being any number of ways to conduct evaluations to serve numerous tastes and purposes. So evaluators’ independence-for-hire provides wide scope for doing Lord Acton’s work.

As I’ve argued elsewhere, independence-for-hire sits at the heart of a “now-you-see-it-now-you-don’t” catch 22 that prevents promising developments in the field even becoming visible to the system, let alone having their expansion supported by it.

It goes like this. Responding to all the stirring visions of government “scaling what works,” non-government organisations seek government funding to expand their most promising programs. At this point, departments of finance oppose such funding, as well they might, until the programs are independently evaluated. They don’t take responsibility by commissioning the evaluation themselves or even specifying what kind of evaluation they require. Thus, when the NGO returns, a few hundred thousand dollars poorer, with a Deloitte, PwC or Lateral Economics report in hand (we’re cheaper!), it’s ignored again because independence-for-hire isn’t independence. And so the process of “scaling what works” is stopped dead in its tracks.

Though it understands the value of independence in evaluation, the PC completely flubs the “independence-for-hire” problem, simply associating contracted-out evaluation with independence. And it won’t bite the bullet and recommend true independence because it knows this would be rejected out of hand. But to keep the idea of independence in play, it proposes Lord Acton’s independence — an independent Office of Indigenous Policy Evaluation that will “oversee” evaluation, though the actual evaluation will continue to be conducted within the very agencies whose performance is being evaluated.

No doubt the PC hopes that this might introduce some independence into the process. But progress, if any, will be agonisingly slow. Allowing agencies to do their own regulatory impact analysis has kept the tiger of regulation review pristinely toothless for thirty-five years now in every country where it’s been introduced. The old Office of Regulation Review operated within the PC itself, but the greater notional independence it had there made not the slightest bit of difference. The requisite boxes were ticked and regulations — both the good and the bad — went on piling up as normal.

10. Stated intentions and animating imperatives

It’s Lord Acton pretty much all the way down. The PC’s draft strategy stresses the need for evaluations to:

• be done ethically
• involve and engage Indigenous people
• be respectful of and in sympathy with Indigenous cultures and knowledges.

Now, each of these is a commendable objective as a “what.” As I keep saying, the hard part is working out the “how.” And tackling each of these matters productively requires great insight. Further (and astonishingly), the importance of each of these requirements is relatively new to the system even as a “what.” Should we really put that same system in charge of learning the “how”? What will happen is already a foregone conclusion — the PC more or less recommends it. Rather than proceed humbly, foregrounding its ignorance, the system will go through its well-worn routines. Codes of practice will be developed. I assume there’ll be lots of consultation.

But these codes won’t deliver what is written on the packet any more than the mission statement “putting families at the centre” would have delivered Family by Family. However well-intentioned, these codes’ animating intent — what will matter when push comes to shove and someone might end up on the telly or in a headline — will be the institutional safety of those developing and administering the codes.

This is what happens when the system’s commanding heights are put in charge of delivering something that is difficult and context-sensitive but not highly valued in our political culture. Those defending Indigenous interests would be well advised to look on the burgeoning performance regimes in numerous sectors — particularly education and university research — where more and more practitioner time is taken up complying with relentlessly expanding requirements from bureaucracies that have neither the slightest knowledge of nor regard for what’s going on out in the field. As the accountability theatre ramps up, administrative numbers and salaries swell at the centre and performance declines. As Britain’s Institute for Government documented in a different context, inquiries and restructurings abound and new ten-year plans are announced once every three or four years.

I recall when, in response to another paedophilia scandal, South Australia strengthened its child safety requirements. The very department whose lapses had produced the outrage refused to stagger the starting date of the new system for different community organisations. With the department’s processing capacity thus overwhelmed, it took over a month to clear the new paperwork. Family by Family was paralysed. If exceptions were allowed to the deadline, they were for more important folks than us. Overnight, practices that had worked brilliantly and safely for several years — that placed families at the centre of the program — became an offence. I don’t know about then, but today the department describes itself as “a customer-focused organisation that puts people first.”

In fact, an evaluation was done on Family by Family. The process was a train wreck. From memory numerous preliminary ethics processes took around nine months, though this was simply to ask families questions about their progress — as they’d been asked regularly within the program. The evaluation ignored the program’s effect on children. Why? Because getting that aspect through the ethics procedures would have been too expensive, uncertain and time-consuming. How ethical can you get?

When the evaluation finally began, the department funding the program wouldn’t give evaluators the data to identify our cohort of families. So the evaluation was forced to compare impacts on all families in the host suburb against two other areas (one of which was bizarrely incomparable). As I recall, the result was mildly positive but inconsequential — unsurprisingly, given the small number of families involved. To use J.K. Galbraith’s term, it was all “innocent fraud” — that is, all that effort and money produced an outcome that amounted to nothing. But its worthlessness was a system failure despite the best of intentions of everyone in it.

I expect that the National Health and Medical Research Council, which issued the ethics guidelines, the family services department and the university centre for family studies thought of themselves as putting people first. But far from nurturing the innovation breaking out on the edges of the system — driven by bright, idealistic, young professionals and increasingly enthusiastic families — the incumbent organisations imposed their own routines and imperatives, each one making the labyrinth denser, more bewildering, more dysfunctional, each one making it harder to put the families first.

Whether or not the evaluation report was released (I don’t believe it was), we all cooperated in covering up its worthlessness, which required nothing more than not to advertise it. This is just one close-up of a phenomenon the disillusioned development economist William Easterly has called “the cartel of good intentions.” It is built on Lord Acton’s fault line. But you won’t see any serious engagement with any of this in the PC’s material on Indigenous evaluation.

11. The perils and the promise of candour

You may think what I’ve written so far is scathing. Yet, as I indicated above, I think the PC makes the right basic calls in its draft strategy. Bereft as the report is of suggestions about how to bring it about, it nevertheless endorses more Indigenous involvement in evaluation. And it backs independence and transparency. In a system that’s nowhere near ready to seriously engage with such things, it also makes defensible compromises in shepherding those values into policy. The real shame is that the pathologies of the existing system are deeply entrenched and yet they hardly get a look-in in the commission’s analysis. So any strategy for shifting them requires something much more hard-headed — more problem-focused — than four pleasing adjectives and a well-intentioned tagline about putting Indigenous perspectives at its centre.

Here we get to Orwell’s point. The greatest service the PC could do Indigenous people — the way it could really put their interests at the centre of its concerns — would be to express itself simply and candidly. Its draft strategy asserts that program participants and the broader community should “have confidence that policies and programs are being assessed objectively and independently.” Poppycock. It should stop pretending and fess up on behalf of the system. Having recommended a highly compromised form of independence for now, it should explain that the system isn’t ready for much candour right now and explain why.

Now you can see the power of Orwell’s advice about speaking simply. Speaking simply makes it hard, excruciating even, for you to cover your tracks — to mask your motives — with the usual sophistry. Once the officialese is jettisoned (or should that be official-ease?) the discomfort that the system is defending itself against becomes its own discomfort in explaining the sorry situation it is dealing with. And the only way to relieve that discomfort would be to go further and sketch out a longer-term plan to reach the outcome described in the honeyed words.

12. Towards the final strategy

For the final strategy to deliver a minimum viable product, I think it needs changes to the draft.

First, it should base its policy compromise on a much harder-headed understanding of the obstacles that stand between us and the land of “how.” After explaining why the whole system can’t possibly embrace real independence and transparency at the moment, it should go on to sketch its own vision of how that might be grown from the bottom up. I’ve shown one possible model with my proposal for an evaluator-general, which involves structural separation between the system’s doing on the one hand and its knowing and evaluating on the other. It needn’t be grandiose and system-wide: it can be built on a small scale and grown from there. Some submissions to the PC seem to think it has merit. The PC itself gives the idea considerable elaboration, but only as reportage. If it has a better model it should set it out.

Second, if the strategy is its contribution to thought, its direct contribution to action should be to call for and begin the process of designing a new burst of energy and innovation that might grow at the margins of current activity and begin to spread through the system.

Here, the current weakness of the system lies not so much in the lack of promising experiments in the field as in the relationship between them and the system itself. The system must be able to identify, validate and acknowledge the best of those experiments. Currently, it can’t do that. Evaluation can play some role in fixing that, though we should guard against something that’s already clearly in evidence — the system grabbing hold of evaluation as a deus ex machina, it’s next fad diet that will save it from itself.

And there are two far graver obstacles to progress. First, as those in the field can attest, our politicians frequently play to their own political advantage irrespective of the evidence. Second, bureaucracies have terrible trouble responding to knowledge of what’s working from the field, for such bottom-up learning is countercultural in a hierarchy where power is at the top. Further, if learning were to rise from the bottom at any scale, it would involve the discomfort and uncertainty of change for large numbers of people.

The PC can do little about the first of these more serious problems. But it can hope to be influential regarding the second. I think it’s possible to be very concrete and specific about what is necessary here. The system can only sustainably expand what works by bolstering the status of the individuals and communities who have made it work and giving them much more authority and resources within that system.

Those at the centre of the system are just as important as the successes in the field, but there’s nothing unique about them — or there shouldn’t be if the system is working properly. Those in the system need to be made accountable not just for talking about expanding what works but for making sure it happens, despite the discomfort it will undoubtedly cause. To that end, a regular report could be recommended, by the auditor-general or some other independent guardian of integrity in the system, to document, say every two years, what progress was being made towards this goal of spreading “what works” and particularly the increasing empowerment of those who make it work.

For those of us who call ourselves Australians to properly begin the task that governor Arthur Phillip began with such high ideals and so little to show for it, we can only do it to the extent that non-Indigenous people and their institutions unloose themselves from those “anxious avaricious tentacles of the self.” To the extent we falter, the soft voice of conscience will keep whispering that destiny to us. •

This essay benefited from helpful comments on earlier drafts from Romlie Mokak, Keryn Hassall, Janina Gawler, Michael Griffith, Jon Altman, Mike Dillon, Christos Tsiolkas and Clive Kanes. As always, I am wholly responsible for the essay’s remaining inadequacies. The title “Orwell that ends well” is shamelessly stolen from my friend Konstantin Kisin.

The post Orwell that ends well? appeared first on Inside Story.

So, if the benefits of a job guarantee are so big, what’s the problem?

The most commonly cited problem is probably the least compelling: that a job guarantee would cost a lot of money. Estimates are often around $20 billion to $30 billion a year. These numbers are big, but misleading. After all, this money doesn’t vanish. It goes into goods, services and household savings. One person’s spending is another’s income.

More importantly, the cost of a job guarantee must be weighed against the social costs of inaction. And with the government’s real borrowing costs at or below zero, and no convincing reason to repay debt so long as GDP growth exceeds government bond yields, the cost argument is weaker than ever.

But a job guarantee has bigger problems — macroeconomic, operational, political and the existence of a more effective alternative — that make it a poor choice.

The macroeconomic problem is that a job guarantee can’t guarantee a job for everyone. Unemployment has a “natural rate,” estimated at between 4 and 5 per cent in pre-Covid Australia. If unemployment falls below this rate, inflation increases and interest rates rise, hurting investment and consumption and bringing unemployment back up to this natural rate.

Arguments that we can defy that kind of economic gravity are unconvincing, with big trade-offs. They usually rely, among other things, on having the government set or heavily influence wages, which would kill more jobs than it creates. The better approach is to get the natural rate of unemployment lower (which can only be done through productivity-enhancing reform) while stimulating demand. Governments could do both, but don’t.

A job guarantee faces more daunting operational challenges. The Australian Bureau of Statistics shows that the long-term unemployed often face complex and self-reinforcing challenges, ranging from insufficient skills and training to poor physical and mental health, limited social capital and higher rates of drug and alcohol abuse. The long-term unemployed need more than just a job.

Many of these things are caused by long-term unemployment as much as they are causes of it, but they are nevertheless hurdles to be cleared before the first interview. Advocates of a job guarantee recommend programs to boost education, training, health and job-readiness — programs that, again, should be implemented today outside of any job guarantee, but aren’t.

Then there’s the question of where the guaranteed jobs would come from. Most proposals advocate wage subsidies (encouraging private sector employment), direct government employment (such as community projects) or a combination of the two. Reviews of Paul Keating’s Job Compact show that the private sector rarely comes to the party; most people are employed directly by government.

Government is economically justified in employing people to supply public goods and services (infrastructure, defence, healthcare, education), but most of these jobs require long-term (not short-term) employees with specific skills. This means there is a limited pool of productive jobs the government can offer without either crowding out the private sector or creating big inefficient programs. That’s why economists preferred Julia Gillard’s price on carbon over Tony Abbott’s “green army.”

These operational questions just scratch the surface. Will unemployed people be forced to take a guaranteed job? Is the rest of the social safety net abolished? Are people and their families required to move interstate for work? What happens if people don’t leave the guaranteed job to take a private sector job even if the wage is higher? Can someone be fired from a guaranteed job? Do these jobs provide superannuation, leave and other entitlements? Is there a risk that the guarantee stops people searching for other jobs?

To be fair, none of these questions is new. Advocates of a job guarantee have answers for all of them. But their answers all involve (and rely on) the same thing: a huge, highly competent and highly coordinated bureaucracy that gives significant attention to detail, working in a flexible and patient system that can be tailored to the unique circumstances of Australia’s unemployed people.

This strikes me as a tall order. Governments are pretty good at one-size-fits-all. But when we want something more tailored and individualised, we usually leave it to markets, where the role of government is to shape incentives and top up incomes. It’s hard to think of examples where the government has successfully delivered tailored, individualised solutions to the public on a large scale. The government’s response to Covid-19 is a case in point.

This brings us to the political challenge. Advocates of a job guarantee are the first to acknowledge that it occupies a difficult space in politics. Many on the political left see it as work-for-the-dole on steroids: a right-wing, neoliberal conspiracy to undermine and destroy the safety net by stealth. Many on the political right see it as nothing more than rank socialism: a massive expansion of government and the abandonment of free markets.

Perhaps these attitudes will change. But the fact that neither side of politics is currently willing to champion an idea that has been around for generations suggests a job guarantee’s political feasibility is far from guaranteed.

But the biggest problem with a job guarantee is encapsulated in my favourite quote from The Simpsons: “We’ve tried nothing and we’re all out of ideas.” The same is true when it comes to Australia’s unemployment challenge.

Unemployment is rising rapidly and is likely to stay high for many years. What are we doing in response? The government has reduced the size of JobKeeper, reduced the size of JobSeeker and reduced other stimulatory spending. Structural reforms like tax reform, product market reform and labour market reform are nowhere to be seen. The Reserve Bank has stopped quantitative easing, ruled out doing more, and shrugged off the unconventional policies being deployed in other countries. The welfare safety net has been inadequate and poorly targeted for decades, with no serious attempts to fix it or tackle the complex challenges facing the long-term unemployed.

The notion that Australian governments have “tried everything” and must now turn to radical approaches like a job guarantee is unconvincing when our existing tools remain largely unused. Nobody doubts that these conventional policies — fiscal policy, monetary policy and structural reform of the tax and welfare system — if thoughtfully implemented, would reduce unemployment.

The unwillingness of governments to use these existing tools highlights the real problem: a lack of political will to fix a system that works for the majority. Perhaps Covid-19 is the political circuit-breaker we need. But the fact that an idea as old as a job guarantee still struggles to garner support suggests it is not up to the job. •

The post Is a job guarantee the answer? appeared first on Inside Story.

In developing the job guarantee proposal, Pearson has linked up with economist Bill Mitchell, a leading proponent of Modern Monetary Theory, or MMT. Mitchell argues that fiscal deficits are not inherently bad and that seeking to control inflation by maintaining a “buffer” of unemployed people (the current orthodoxy) is economically damaging. While the lively international debate about the feasibility of MMT is important, the job guarantee proposal doesn’t stand or fall according to how you view MMT.

Proponents argue that a universal job guarantee, set at the minimum wage, would have three important benefits. It would act as an “automatic stabiliser” (in Keynes’s terminology) by countering undue rises or falls in demand across the economy. It would forestall the significant economic and social costs of structural unemployment. And it would allow the central bank to focus squarely on managing inflation rather than having to attend to both inflation and employment targets.

In an opinion piece in the Weekend Australian, Pearson made plain what was driving his interest in this issue: “My people, consigned to welfare and structural exclusion from the real economy in the post-60s era of growing unemployment, have been victims of public policy choice for which there existed a better and more humane alternative.” He went on to outline his long campaign against passive welfare and its “bitter harvest”: “social problems, broken families, intergenerational poverty, lower life expectancy, egregious rates of out-of-home care for children, juvenile detention and adult incarceration.”

Although the necessary legislation would be national, the scheme would be administered through local government, Pearson wrote. He distinguished it from work for the dole — “It’s a full-time, minimum-wage job” — and stressed that the payment would replace unemployment benefits and end the churning of “hapless clients” through welfare-to-work programs.

Three weeks later, Pearson and Mitchell followed up with a two-pronged argument for their idea. First, focusing on the employment gap for Indigenous citizens, they cited a recent national cabinet pledge (not then public) to raise the Indigenous employment rate from 49 per cent to 60 per cent of working-age people by 2028. When it was finally announced on 29 July, the target was set at 62 per cent by 2031. With the mainstream rate currently 75 per cent, this new Close the Gap target concedes that four in ten Indigenous people will be without a job for the indefinite future.

Second, focusing on mainstream employment, they pointed to current estimates of 7.4 per cent unemployment and around 11.7 per cent underemployment. Figures recently published by Mitchell suggest that an annual $50 billion in government outlays could create 1.24 million jobs and bring employment down to 4 per cent. This fiscal stimulus would also have the flow-on effect of increasing private sector demand for labour, and its cost would come down as the private sector picked up.

Pearson and Mitchell point (persuasively, in my view) to the illogicality of the government’s recent decision to withdraw fiscal stimulus in the face of ongoing community shutdowns and rising unemployment.

Finally, they argue that separating Indigenous disadvantage from mainstream disadvantage is a poor policy choice:

[It] allows a pall of exceptionalism to be cast over the constantly depressing and outrageously out-of-step numbers that characterise Indigenous disadvantage. It’s as if the country — inured to the bad numbers — has come to accept that little can be done.

The country needs to address inequality and poverty as an Australian problem, not just an Indigenous problem.

So, how should we assess Pearson and Mitchell’s job guarantee plan?

The Australian’s editorial on 8 July 2020 provided an early critique. Headed “The Promise and Pitfalls of Modern Monetary Theory: Printing Money Doesn’t Reduce Deficits or Create Lasting Jobs,” the editorial takes aim at Pearson and Mitchell for overreach, the cost of administration, and the putative lack of fiscal self-control if “a populist National, a clueless Green, or a Labor class warrior” were they to control the Treasury benches.

“Pearson’s is a mammoth, brave proposal, one that would redefine the role of the state,” said the editorial, conceding that “In the midst of the greatest social and economic calamity in ninety years, there has to be more scope for imagination and ambition in our policy approach.”

Nevertheless, it saw a number of hurdles. The cost and administration of the scheme “would be vast,” work incentives would be skewed, some citizens wouldn’t want to work or train, and welfare would still be required for those who fall through the cracks. “While the policy edifice is failing Indigenous people, a neat solution is a chimera,” it summed up, concluding with the trite observation that:

we live in a complex, even messy world… How can you hope to manage the economy?… As an analytical tool the theory [MMT] has merit. But with printing money in the real world, there is a day of reckoning or just a long stagnation. Our income can never be guaranteed, so we need to earn and pay our way.

The value in this editorial is that it begins to set down the outlines of the case against the Pearson–Mitchell proposal — and it appears to be a collection of time-worn chestnuts synonymous with the slogan “private good, public bad.”

The Australian relies on the ideological trope that fiscal responsibility (austerity, in other words) must at all times be paramount in policy-making and administration — an idea already blown to smithereens by the pandemic. It also assumes that government’s role should be minimised and the concomitant red and green tape shredded — a view also blown out of the water by the exigencies of the pandemic. And its argument rests on a belief that complexity and messiness make for expensive policy and programs. Well, yes, but that reflects the world we live in. Markets and Adam Smith’s “invisible hand” are amazing mechanisms for allocating resources, but they require strong and independent regulatory oversight if they are to work in the public interest.

What is missing from the Australian’s critique is an acknowledgement of the devastating costs (both financial and intangible) of an unemployment rate in excess of 10 per cent — and much higher among young people — over a sustained period. A recent Productivity Commission working paper on the consequences of the global financial crisis reports that “workers aged twenty to thirty-four experienced nearly zero growth in real wage rates from 2008 to 2018, and workers aged fifteen to twenty-four experienced a large decline in full-time work and an increase in part-time work.” Imagine what the commission will report in 2030 about the consequences of the current crisis.

A second omission from the Australian’s response is any acknowledgement of past policies directed at full employment, including New Deal–era programs in the United States and Australia’s own 1945 White Paper on Full Employment, which underpinned the postwar boom. The white paper’s full employment focus continues to this day as one of the legislated core functions of the Reserve Bank.

The third major omission is any conception of a dynamic and evolving role for government not just as a provider of public goods but also as a manager of risk. A job guarantee can be viewed as an institutional mechanism to retain, strengthen and develop the nation’s human and intellectual capital. To take just one example, the laws governing limited liability corporations are a form of risk insurance for shareholders. As the American economist David Moss points out in When All Else Fails: Government as the Ultimate Risk Manager, it wasn’t initially obvious that such innovations were required or would work. Today, they underpin the financial markets that raise most of the world’s capital for investment. I don’t hear any calls for this “red tape” to be removed.

Ultimately, though, the problem with the Australian’s editorial is that it focuses on the costs of delivering a job guarantee but entirely ignores the costs of failing to deliver one. Yes, a job guarantee would have implications for other policies. But it should be included on policymakers’ list of potential priorities and assessed against all others.

Leaving employment policy to the private sector is a choice of policymakers and governments, and it has serious consequences for citizens who can’t find work. Conveniently for governments, employment levels are made to seem as if they are someone else’s responsibility. Notwithstanding the rhetoric of the government (and indeed the opposition), the current orthodoxy allows governments to avoid hard decisions about social priorities. It means they can dodge the question: is full employment a priority or not?

In other words, I am a strong supporter of the Pearson–Mitchell proposal. If implemented, it would expand social inclusion, alleviate financial disadvantage and undoubtedly have other positive spin-offs for individuals, while providing a considerable impetus to social and economic infrastructure in local and regional communities. It would also make a huge contribution to eliminating Indigenous disadvantage, although it is not a silver bullet in that regard.

Like any complex public policy proposal, the guarantee will present challenges. As with planning for postwar reconstruction in the 1940s, designing the scheme will throw up many issues, the administrative systems required will be complex, and unintended consequences will emerge, particularly in the implementation phase. Tension is inevitable between the Commonwealth, as the funder of the program, and the delivery agencies (currently proposed to be local governments) over modes of operation, allocation of labour resources, and lines of accountability and reporting. These are not insurmountable challenges, but they do point to the importance of maintaining a degree of flexibility in the overall architecture of the scheme.

Despite the substantial merits of this proposal, though, the likelihood of any Australian government implementing it over the next five years is close to zero. This is not down to any fault in the proposal; it reflects the quality, risk aversion and blinkered ideologies of our governments and public institutions.

Would any modifications to the proposal make it more attractive to government? While a key virtue of the Pearson–Mitchell proposal is that it is universal, it may be that a second-best option, more limited in scope, will have a better chance of being implemented. This wouldn’t preclude the eventual adoption of a universal scheme and would provide an opportunity to test what will inevitably be a challenging and complex reform.

The economic and social crisis arising from the pandemic certainly demands more than business as usual, and its impact is likely to persist well beyond the current political cycle. This suggests that a proposal focused on the current crisis — rather than an open-ended scheme — might be more politically palatable. With a ten-year horizon, for instance, the effectiveness of the policy could be assessed based on its tangible record in cushioning the economic impacts of the crisis.

Another possibility would be to introduce the job guarantee across remote Australia, replacing the current Community Development Program, which is widely acknowledged outside government circles to be less than effective and highly punitive in its implementation. The levels of unemployment and underemployment are far worse in remote and very remote Australia, and it is already clear that current policies are doing very little to turn that around.

Even this scaled-back version would meet political resistance, but the Commonwealth’s very modest Indigenous employment ambitions in the new Closing the Gap program — and the absence of any strategy to meet even those meagre targets — suggests the need to try something new. A mainstream job guarantee in remote Australia would automatically target a substantial proportion of the most disadvantaged Indigenous citizens in the nation.

However a job guarantee program is rolled out, the unique circumstances of remote Australia will require particular attention. Indigenous organisations would expect to co-design the program, and community-controlled organisations would expect accreditation as job providers. The decentralised demographics and legitimate cultural aspirations of the remote Indigenous population will also create challenges. The lack of resources for managing the extensive and growing Indigenous land estate will need to be a focus, and the guarantee must build on successful innovations like the “working on country” programs that fund over one hundred ranger groups across the nation.

In what is clearly shaping to be a once-in-a-century financial, health and social crisis, the job guarantee is an idea whose time has come. It would align squarely with both major parties’ claim that job creation is the key priority for government. It would provide stimulus over the next decade. It would build rather than waste our most precious national resource, the skills and intellectual capital of our citizens. It would provide a strategy to reject the idea that the nation’s prosperity requires the impoverishment of a significant proportion of our citizens, particularly our youth. And it would open up employment opportunities to structurally excluded Indigenous communities and citizens — a choice the nation has lacked the political will to reverse.

In the shadow of a potentially existential climate crisis, we need all hands on deck. The national interest requires that we use all the human resources available in economically, socially and environmentally productive ways. •

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The simplified system, said Morrison, “will make it easier for people to comply with requirements and spend more time searching for jobs, which is the key element of welfare reform.” Moreover, “this investment will also help us stop the rorts by giving our welfare cops the tools they need on the beat to collar those who are stealing from taxpayers by seeking to defraud the system.”

Those were the days. The government was in its first term and Morrison was an ambitious, gung-ho minister with a fondness for the police and military analogies that had stood him in such good stead in party circles when he was overseeing Operation Sovereign Borders.

Robodebt started the same year — though it didn’t acquire its pejorative nickname until later — and it reflected Morrison’s punitive approach. The increasing potential of automated data-matching — in Morrison’s words, the fact that more government systems were talking to each other — was for the first time making it cost-effective to pursue overpayments of welfare benefits.

The problem was that the systems were talking different languages. Crucially, the tax office was supplying income figures that couldn’t be matched to the benefits people were receiving. The government went ahead anyway, putting the onus on welfare recipients to prove the figures wrong, and causing real hardship and trauma, including reported suicides, among vulnerable people.

A program that had previously reviewed 20,000 cases a year conducted more than 900,000 reviews in the four years to the end of August last year, with 734,000 identified as having been overpaid. Except that many of them hadn’t been. Most of the reviews looked at benefits paid under Newstart and Youth Allowance, though they were eventually extended to other payments, including the age pension, the disability support pension, Austudy and the parenting payment.

Subsequent events have culminated in the government’s promise to pay back $721 million to 373,000 Australians for 470,000 illegally recovered and often non-existing debts. With almost two-thirds of the debts having been reversed, the government’s early depiction of the sunlit uplands looks particularly ironic.

Speaking on the same day as Morrison in 2015, human services minister Marise Payne was just as effusive about how data analytics would inform policy decisions. “Improvements to real-time data sharing between agencies will mean that, with customer consent, their information won’t have to be provided twice,” she said. “Improved data sharing will also significantly increase the government’s ability to detect and prevent fraud and non-compliance. This means customers who [simply] fail to update their details with us will be less likely to have to repay large debts and those who wilfully act to defraud taxpayers will be caught much more quickly.”

When applied to robodebt, this enumeration of the new system’s benefits turned out to be wrong or misleading in every detail. The data shared was not real-time: annual income figures from the tax office were averaged out to compare them with fortnightly benefit payments, producing many wrong assessments. Customers were not asked for their consent: they were pursued to provide information the government already had or was responsible for obtaining.

On top of all that, the relatively few perpetrators of welfare fraud are also being repaid their robodebt money because the government finally had to concede that the whole scheme broke the law. That admission came more than two years after Terry Carney made exactly that point as a member of the Administrative Appeals Tribunal. Carney, now a professor of law, has since described robodebt as “illegal, immoral and ill-constructed.”

The government is continuing with “online compliance intervention” — robodebt’s official title — but it will no longer use income averaging and it has promised other “refinements.” It has yet to give a clear commitment not to try to recover some of the same debts by different means. As Morrison put it earlier this month, the decision to refund the money “doesn’t mean those debts don’t exist. It just means that they cannot be raised solely on the basis of using income averaging.”

The government is also forging ahead with upgrading and increasingly automating its welfare payments system. Properly designed — and that’s a big caveat in the light of recent experience — the modernisation should make it easier for people to claim their correct benefits and easier for the government to make sure that they are paid the correct amounts.

The Welfare Payments Infrastructure Transformation project — the one described as among the biggest in the world five years ago — has another two years to run. Services Australia, formerly the Department of Human Services, claims that it has made practical improvements, including introducing prefilled claim forms using information already available to the government, enabling claims via mobile devices and verbally, and speeding up claims processing for some students and the unemployed. It boasts that the number of questions on the online claim form for students and trainees has been reduced from 117 to thirty-seven.

But, as the robodebt experience demonstrates, many of the new system’s claimed advantages are double-edged. The “digital assistants” introduced to answer customer questions, for example, mean less human interaction, which is reflected in staffing reductions that have already taken place. But most of us already know just how frustrating it can be dealing with digital assistants.

Similarly, analytics will be used to “proactively provide support to those who need it.” And also to take it away? A new “payment utility platform” promises same-day payments but also “simpler debt repayment processes.” In the wake of robodebt, how many people will be keen to use it?

A new “entitlement calculation engine” will determine payment levels. And if a person wants to challenge the calculation? Presumably they will be expected to sort it out with one of the new digital assistants.

It is one thing to increase automation for people well versed in the ways of the digital economy, but it is entirely another to impose it on vulnerable people who may or may not be familiar with online processing. As Australian Council of Social Service chief executive Cassandra Goldie told Inside Story this week, “Robodebt fundamentally failed because we stripped out the ‘human’ in human services. Instead it was up to individuals to try and prove their innocence in a David versus Goliath battle with automation.” For Goldie, humans must have a role in decisions about essential services like income support and “we must build in ways to enable people to easily correct decisions where mistakes have been made.”

In the end, it is how the system is designed that will determine the nature of the experience for its users and how much emphasis is placed on ferreting out suspected wrong claims.

Judged by the guidance from the top, the bias will be towards limiting entitlements. In 2018 the government introduced ParentsNext to add another layer of obligations to those already imposed on parents on low incomes who receive parenting payments. According to a Senate committee report, one in five parents had their payments suspended for missing appointments or failing to participate in “pre-employment” programs under this new scheme.

The social services minister who promised in 2015 to use the modernised welfare system to sool the “welfare cops” on to beneficiaries is now the prime minister who says the refunded debts still exist.

Having initially refused to apologise for robodebt for fear of legal liability, Morrison thought better of it and, in response to a pointed question from Bill Shorten, assured parliament of his deep regret for any hardship caused. But government services minister Stuart Robert immediately added that 939,000 Australians had $5 billion worth of debt “that the government lawfully has to collect across a whole range of programs.” Message? We’re still coming after you.

In her 2017 book Automating Inequality, American political scientist Virginia Eubanks describes how digital eligibility systems, matching algorithms and other tools have been used in the United States to drastically cut the welfare rolls. “At their worst these systems act as empathy overrides, allowing us to turn away from the most pressing problem of our age: the life- and soul-threatening legacy of institutional racism, classism and sexism in America,” she said in a speech last year. “They allow us to ignore our moral responsibility by replacing the messiness of human relationships with the predictable charms of systems engineering.”

It doesn’t need to be that way. But governments will have to resist the temptation to succumb to the convenience of allowing machines to make decisions that require judgement, compassion and humanity. •

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Strikingly, the technology to do this has been available for years. It took the pandemic to make people try something different, work through the initial difficulties and conclude that the new way is better. The shift in sentiment has been such that the stock market value of Zoom exceeds that of the world’s seven largest airlines combined.

But the really big change has been the transformation of income support. On 1 March, when Australia recorded its first fatality as a result of the coronavirus, the government was still committed (at least officially) to a budget surplus. It had resolutely refused to increase the Newstart unemployment benefit, frozen in real terms by the Howard government in 1997.

Despite ample evidence to the contrary — including sharply increasing rates of underemployment — the government’s operational assumption was that anyone who wanted a job could get one, and an individual’s unemployment reflected his or her personal defects (a lack of job readiness, misguided job searching or just plain laziness). This assumption was reflected in a range of policy initiatives, including punitive compliance regimes, the Work for the Dole scheme and the rollout of cashless welfare cards.

Within a few weeks, everything changed. The government suddenly discovered that none of the usual rules applied. Unemployed workers could be paid a liveable income, called JobSeeker, at twice the value of the grossly inadequate Newstart. Under a second program, JobKeeper, businesses could continue to employ workers even if there was no work for them and no money coming in to pay them. Contracts were not inviolable laws of nature but social conventions that could be varied to meet the needs of the crisis.

The JobSeeker and JobKeeper programs have been highly effective in maintaining income for Australian households, even as the economy has gone in to what the government has called hibernation. There has been little evidence of the widespread economic suffering experienced in countries with weaker responses, most notably the United States.

But these schemes can’t last forever in their current form. The fact that JobKeeper is higher than the age pension is hard to defend, either politically or in terms of social welfare. It is an emergency response to the very specific circumstances of the pandemic, in which many businesses have been forced to close temporarily.

The Morrison government’s “snapback” would simply end JobSeeker and JobKeeper in September, six months after their inception. But most economists, notably including Reserve Bank governor Philip Lowe, doubt that this can be done without pushing the economy into a deep recession. Regardless of the macroeconomic analysis, there’s a more important question: even if we could return to the policies of the pre-pandemic years, should we?

The free-market economics underlying the desire to cut back public spending were discredited by the experience of the global financial crisis and the disastrous failure of austerity in Europe and elsewhere. The politics of welfare restriction are those of division and culture war, and are now directly opposed to the “we’re all in this together” lesson of the pandemic.

One way of extending that lesson into the post-pandemic era would be to adopt the concept of a liveable income guarantee or — to use the term put forward just before his untimely death by the great British economist Tony Atkinson in his book Inequality: What Can Be Done? — a “participation income.”

The idea of a participation income rests on the principle that everyone has a right to a living income along with an obligation to contribute to society. The first part of that principle has long been recognised in systems of income support for those unable to work because of age, disability or unemployment, or because they need to care for young children.

Under the market liberal ideology that has held sway since the 1970s, eligibility and support in all these categories have been tightened. The qualifying age for the pension has been increased to sixty-seven (from sixty-five for men and sixty for women). The Austudy scheme has been restricted to students over twenty-five. Applicants for disability pensions face increasingly stringent tests. Supporting parents are pushed onto Newstart as soon as their youngest child turns eight. Unemployment benefits have been frozen and compliance measures made ever more punitive.

The first step towards a participation income would be to reverse the changes of the past thirty years by setting all benefits at the same rate as the age pension and restoring more generous eligibility criteria. If we could afford these policies thirty years ago, we can afford them now.

Apart from jobseeking, what kinds of activity might we consider to be participation? Most of the many possibilities have precedents, but they haven’t been considered as part of a comprehensive program of social participation. They include:

• volunteering in support of organisations and causes, which might include firefighting and surf lifesaving, women’s refuges, or major public events like the Commonwealth Games

• working on grant-funded community projects, along the lines of the Community Employment Program introduced under the Hawke–Keating government

• setting up a small business

• artistic and creative activity (which were a notable aspect of the New Deal–era Works Program Administration in the United States)

• full-time study.

Obviously, the participation payment would not be available to people who are already in full-time employment. And, as with the age pension, assets and means tests would apply to people who receive investment income.

How we deal with intermediate cases — people with limited income from part-time work, for instance — would be guided by the principle that a well-integrated tax–welfare system should avoid creating the high effective marginal tax rates that result from the interaction of marginal income tax rates and the rates at which benefits are withdrawn through means tests.

Compliance measures within the tax and welfare systems should also be integrated. Currently these are massively asymmetrical, with the tax system essentially operating on the basis of self-assessment, subject to auditing, and the welfare system working on the assumption that recipients are cheats and must therefore be subject to draconian compliance rules.

The extreme example was the robodebt scheme (abandoned for now, but still set for a comeback) in which repayments were demanded from recipients on the basis of a mechanical and unreliable estimate. The asymmetry is even more striking when we remember that a single form of tax avoidance (profit-shifting by multinationals) is estimated to cost the Australian public nearly $10 billion a year, many times the amount recouped (and often then repaid) through the robodebt scheme.

As with the tax office’s business activity statement, the appropriate compliance regime for a participation income is a return, submitted quarterly and subject to audit. The assumption should be one of social solidarity rather than division.

How much would this cost? The current JobSeeker supplement is estimated to cost $14 billion over six months, or $28 billion if it were extended for a full year. If the benefit were set permanently equal to the age pension, the cost would be about half this much at the high rates of unemployment associated with the pandemic, and no more than a third (less than $10 billion a year) in the context of a recovery.

The number of people potentially eligible for a participation income but not currently receiving a benefit is harder to estimate. The largest group that might fall into this category, totalling around one million, are those who would like to work but are not currently searching. But many of these people are already receiving benefits or live in high-income households. Assuming half a million additional recipients and a cost of $24,000 per year, the budget cost would be $12 billion a year. Some of this would flow back to the government through a higher level of demand and resulting increased tax revenue.

The cost of the proposal may be compared with the revenue cost of the federal government’s Stage 3 tax cuts proposed for 2024–25, most of which benefit high-income earners. Treasury has estimated this as $95 billion over six years, or $16 billion a year.

Some observers might worry that people will be tempted to drop out of the paid labour force and rely on a participation income instead. As mentioned, the high prevalence of underemployment suggests that this would not be a huge problem. Most people would rather have a full-time properly paid job than a welfare benefit. To the extent that the system is incapable of providing this, a participation income is a reasonable alternative.

As we emerge from the first phase of the Covid-19 crisis, and also look back on the global financial crisis, we can, if we choose, try to patch up a system that is manifestly failing to deliver good outcomes. Or we can draw on the success of our collective response to the pandemic and start building something better. Contrary to Margaret Thatcher’s famous remark, There Is An Alternative. •

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New research from economists Atif Mian, Ludwig Straub and Amir Sufi shows that this cycle is fuelled by inequality. Wealthy people have cornered a greater share of national income, and are saving more. Less well-off people are receiving a smaller share of income, and borrowing more. The resulting decline in interest rates has kept the cycle going.

It sounds eerily similar to the situation in Australia, and it’s not the only cycle that’s increasing inequality. A lack of competition between firms is having a similar effect: transferring wealth from poor consumers to rich shareholders. Breaking these self-perpetuating cycles will be critical to Australia’s economic recovery.

The nub of the problem is that rich people have a nasty habit: they save too much and spend too little. This isn’t necessarily a problem if their savings are invested in expanding businesses, creating jobs and contributing to economic activity. Sadly, though, Australia’s well-documented increase in inequality hasn’t been accompanied by an increase in investment. Quite the opposite: while inequality has grown, investment has flatlined.

Mian, Straub and Sufi’s research shows that this “savings glut of the rich,” as they call it, is creating as well as financing the debts of the non-rich. Too much saving and too little investment has depressed interest rates; and lower interest rates are fuelling debt levels among non-rich households, which are borrowing to keep up. For the first time, this research shows, the rise in the share of income taken by the rich can explain almost all of the increased household debt of the non-rich.

We can see a similar cycle playing out elsewhere in the economy. In the Oxford Review of Economic Policy last year, Joshua Gans, Andrew Leigh, Martin Schmalz and I showed how market power is transferring wealth from poor people to rich people. The mechanism is straightforward: big companies have more power to increase their mark-ups, and so they do. That might be good for shareholders (who get higher profits), but it’s bad for consumers (who pay more to consume).

With poor people spending most of their income on consumption and owning few shares, and rich people spending a smaller proportion of their income but owning lots of shares, market power increases inequality. This is a serious problem in a country like Australia, where more than half of our industries are concentrated and, unsurprisingly, mark-ups have risen 60 per cent since 1980.

What to do? Australia’s inequality problem isn’t new, but we are becoming increasingly aware of just how damaging it is economically, politically and socially. More alarmingly, we are learning how the macroeconomic and competition effects are creating self-perpetuating cycles of inequality. The recovery from Covid-19 will require deep structural reform to lift growth, and also presents an opportunity to break these cycles through holistic reform of tax, welfare and competition.

The tax system is too generous to the rich, and the welfare system is too mean to the poor. Tax reform is an opportunity to remove the incentives for companies to borrow rather than seek new investors (by introducing a corporate equity allowance, for example) and to tackle the tax breaks that boost the savings of the rich (by reducing superannuation tax concessions, for example). It is an opportunity to broaden the tax base to fund public investment projects that boost productivity.

We can also change the welfare system to directly reduce poverty and thus inequality. Covid-19 hit households at a time when their debts were already high. Strengthening the safety net and boosting household incomes in a way that preserves incentives to work — such as through an earned income tax credit — would help repair household balance sheets and reduce the debt burden constraining consumption.

To boost competition, the government should reform the laws that shield many industries from competition — including those in airlines, pharmacies, coastal shipping, the legal profession and the medical profession. Opening up mature industries to fresh investment is a good way to reduce market power.

The laws regulating mergers and acquisitions should be tightened to guarantee more scrutiny of proposed mergers in industries that are already concentrated. And more can be done to make it easier for people to start new businesses, including the use of profit-contingent loans, the scrapping of non-compete clauses, and the release of appropriately zoned land by state governments.

Past epidemics have one thing in common: they made inequality worse. There’s no reason to think Covid-19 will be any different. The Australian economy can’t afford to snap back to old habits. •

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Public discussion about migration to Australia tends to simplify a complicated and nuanced reality. Annual permanent migration to Australia stood at 179,085 in 2018–19, made up of approximately 62 per cent in the skilled stream, 27 per cent in the family stream and 11 per cent in the humanitarian stream, which includes refugees. As of 4 April 2020, around 2.17 million people were living in Australia on temporary visas, including roughly 672,000 New Zealanders, 565,000 international students, 203,000 international tourists, 118,000 people on working holiday visas, 139,000 temporary skilled visa holders, and about 90,000 people on temporary graduate visas. This total also includes more than 280,000 people on bridging visas but not the estimated 50,000 to 100,000 people without a visa.

This picture is complex enough without delving into the quagmire of visa categories and conditions that apply to refugees and asylum seekers, depending on how they arrived and where in the immigration process they are.

Rather than focusing on visa categories, though, we want to explore two much more important questions. How can Australia respond to the individual needs of migrants as they settle here, regardless of their visa category? And how can we best support all migrants to participate fully in Australian society and the economy?

Despite the fact that temporary visa holders benefit Australia in many ways, the federal government largely expects temporary migrants to look after themselves while they are here. Yet they bring many benefits. They pay tax; they fill skills gaps and labour shortages in sectors including health and care, logistics and agriculture; and they often live and work in regional locations crying out for residents and workers.

Temporary migrants also support some of our largest industries. The Victorian government estimates that just one group — the 250,000 international students who came to the state last year — contributed $12.6 billion to state revenue. And, while there have been calls to put Australian workers first, studies show that migrants don’t disadvantage local workers, and can actually lift their participation in the workforce.

A new report by Eve Lester has found that the federal government treats migrants predominantly according to their visa status rather than their individual needs. Funding or contractual arrangements often mean that non-government agencies largely follow these government policy and program settings, leaving temporary migrants particularly vulnerable.

Lester stresses that the term “temporary” is in many ways misleading. For many migrants a temporary visa is a step towards permanent residency, although this goal has become increasingly hard to attain. Lester notes the growing underclass of “permanently temporary residents” that live in “a holding pattern that makes them highly exploitable and in which they hover at the margins of socioeconomic engagement.”

The current approach to migrant services “creates cracks through which those in the grey areas will invariably fall,” says Lester. Women on temporary visas who are experiencing intimate partner violence, for instance, often face barriers to seeking help, such as fear of deportation or losing custody of their children, and limited English skills. Most are ineligible for Centrelink financial support or childcare subsidies, and social and community housing is largely inaccessible to them. They often have no option but to remain in a dangerous situation.

While the federal government has funded the Red Cross to provide a small one-off emergency relief payment to temporary visa holders at risk of destitution, the exclusion of temporary migrants from its broader response is only deepening this disadvantage. In the short term, expanding existing pandemic measures to include temporary visa holders in vulnerable situations is vital. Australia could also learn from how other countries are tackling labour shortages in the health sector, including by fast-tracking overseas skills recognition for refugees and new migrants.

All states and territories are now providing grants or other support for international students and/or other temporary migrants unable to return home. Some universities are also filling the gaps with emergency support funds for stranded international students. In each case, this reflects an understanding of not only the short-term imperative of supporting these Australian residents but also the long-term implications of their exclusion.

Nearly 300,000 temporary visa holders are thought to have left Australia since the start of the year. With immigration paused indefinitely, none will be arriving to replace them. This gives us the opportunity to ensure that migrant services are more effective when borders reopen.

Fortunately, we already have the blueprint and tools we need to achieve this. Last year a panel led by former senior public servant Peter Shergold set out a compelling blueprint for improving the settlement experience of humanitarian migrants. Their proposals would link the efforts of Commonwealth, state and local governments to industry and the community sector, reducing the wasteful fragmentation built into the current system. This approach could equally be used to support other vulnerable migrants in Australia.

Their proposals for humanitarian migrants have been endorsed and promoted by the federal government, and many are already in train. For instance, the Department of Home Affairs, where Australia’s immigration programs sit, took over management of settlement services and English-language programs in mid 2019. Alison Larkins has been appointed to the new role of the Commonwealth coordinator-general for migrant services, and a new Refugee and Migrant Services Advisory Council, with members from civil society and the private sector, was announced in February this year.

Reforms are being tested now to ensure the national employment services system, Jobactive, adapts much more effectively to an individual’s journey, employers’ needs and local circumstances. This should mean a far better service for all unemployed and underemployed Australians, and more resources for those with complex needs. More flexible delivery of the Adult Migrant English Program is also slated for testing this year. Experience with JobSeeker and JobKeeper should point the way towards targeted wage subsidies and higher levels of unemployment support for the most disadvantaged jobseekers.

Locally connected, place-based approaches to delivering critical services have been widely commended and are achieving good results. These approaches use local networks to lift social and economic participation. In Victoria, for example, Wyndham City Council and its partners have been running the Wyndham Employment Trial to boost economic participation for young people and humanitarian migrants. Eighteen employers are recruiting, and ninety-four humanitarian migrants have been placed in employment.

Working arrangements built during the trial are helping local organisations to respond in a coordinated way to the challenges of finding work for jobseekers in the wake of Covid-19. The success in Wyndham sheds light on how we can better support refugees and vulnerable migrants to settle in Australia.

Fully implementing the necessary governance and service reforms, and scaling up effective place-based approaches to include broader groups of migrants and others facing disadvantage will ultimately lead to more successful settlement and a more inclusive society.

It has been estimated that greater social and economic inclusion will yield serious economic benefits for Australia. Queensland alone stands to gain $250 million over ten years by making better use of the skills of migrants and refugees. Reducing gaps in participation, employment and income by 25 per cent relative to the average Australian jobseeker for just one annual humanitarian intake could be worth $180 million to the federal budget over ten years as well as $484 million in income for those refugees and their families.

Refugees are known to be Australia’s most entrepreneurial migrants — they are nearly twice as likely as other Australian taxpayers to run businesses — and every 1000 new refugee businesses generates $98 million in annual economic activity and taxes.

The pandemic has exposed Australia’s disjointed approach to migrant support, but it has also inadvertently created a chance to do better — to enhance Australia’s recovery and, at the same time, bed down the reforms we need to harness the full potential of Australia’s migrant population.

A lot of the thinking has already been done, and Canberra has created the necessary governance mechanisms. Now is the time to grasp the opportunity to scale up these initiatives. •

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For many conservatives, industrial relations reform is little more than a way of attacking the power of trade unions. Yet cooperation with the union movement has played an important role in creating an effective response to the pandemic.

The same was true in the Accord era following the severe recession of the early 1980s. The original Accord, negotiated between the Australian Council of Trade Unions and the Hawke–Keating government, allowed increased government spending to produce a rapid economic recovery while winding down the rate of inflation. Any post-pandemic weakening of the union movement through industrial relations reform would make this kind of cooperation much less likely.

The other major thrust of industrial relations reform has been the replacement of standard forms of full-time permanent employment with a variety of alternatives that provide more flexibility for employers while in most cases reducing workers’ control over their own lives. Permanent employees working under award conditions have been replaced by casuals, converted into supposedly independent contractors, outsourced to labour-hire firms or pushed into the gig economy. This has reduced the effectiveness, and complicated the implementation, of the JobKeeper program, which starts from the premise that workers have jobs with the employer for whom they do their work.

The same point can be made about unemployment policy. Reforms to welfare policy since the end of the 1990s recession have been premised on the assumption that jobs are plentiful. Hence, if people are unemployed for more than a short time, they must either be deficient in employability or shirking. The consequent policy is a combination of “case management,” designed to improve job readiness, and coercive measures to force the unemployed to seek work.

The assumption is that no one needs to be unemployed in the long term, so there is no need to provide an unemployment benefit sufficient to meet basic needs over an extended period. Unemployed workers can simply draw on savings or defer non-urgent expenditures.

Beyond reducing working conditions and demonising the unemployed, not much else is left in the neoliberal reform toolbox. Scott Morrison has referred to the Productivity Commission’s five-yearly Shifting the Dial review, which he received as treasurer in 2017. As I observed at the time, that report was a grab-bag of policy recommendations dating back as far as the 1990s; the fact that they were still on the agenda was mostly because — as in the cases of carbon pricing and road pricing, for instance — they were in the too-hard basket. Not surprisingly, hardly any of them have since been implemented.

Shifting the Dial’s most significant contributions focused on improving “human capital,” the workforce skills and capabilities generated by better education and better health. This would undoubtedly be a good starting point for a long-term reform agenda, if the will exists.

Any reforms to employment and unemployment policy should be based on Australia’s successful response to the pandemic rather than a doubling down on policies that, even before the crisis, produced stagnant wages, growing inequality and high levels of underemployment.

The ideal response would be to use the JobSeeker and JobKeeper schemes as the basis for a fundamental transformation in our approach to work and welfare. JobSeeker could become the basis of a “participation income,” set at a liveable level (say, equal to the age pension) and available to anyone with no market income and a willingness to contribute to the community, whether through job search, full-time study, volunteer work, or caring for children or disabled or elderly relatives.

JobKeeper could be the starting point for a renewal of the commitment to full employment that was a central feature of the decades of widely shared prosperity after the second world war. In the absence of continued support from the federal government, neither the Reserve Bank of Australia nor the business sector has the capacity to prevent sustained high unemployment, even after lockdown restrictions are relaxed.

If we truly want reform, we should not trawl through the remains of the neoliberal agenda of the late twentieth century. Rather, we should aim to achieve a positive transformation of our society and economy, and end this crisis better than we started it. •

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The more I think about the aged care impasse, the more I have come to see the sector’s seemingly intractable issues as symptomatic of a more fundamental failure: one that underpins the litany of ineffectual policy reforms, deficient regulation, negligent provider practices and lamentable outcomes experienced by many aged care recipients. This failure is not unique to politicians or providers, but their failure in this respect is more consequential. It is a collective failure that implicates us all. Fundamentally, the failure of Australian aged care is a failure of imagination.

“For all the death, we also die unrehearsed,” Les Murray writes at the end of his poem “Corniche.” This line of Murray’s has been on my mind lately, because it strikes me as incisively true, and yet not. Death is the surest thing we know, but its particular contours are unknowable. It is out there for each one of us like a distant comet in the night sky, hurtling towards us at an incalculable velocity. We do not know when death will reach us — only that it will.

And yet it could also be said that in the twenty-first century, we rehearse our deaths continuously. We live in a golden age — a dark age, perhaps — of cinematic and literary dystopianism. We voraciously consume scenarios in which natural disaster, climate change, alien life forms or malevolent technology threatens our survival. We contemplate death and the ways we might die all the time.

The appeal of this dystopian ideation is clear: it offers us a cathartic encounter with fears of societal collapse and the animalistic return to Darwinian imperatives, and then a predictable return to order at the narrative’s end. The lights of the movie theatre come up, the last page of the novel is turned, and we are back in our own unscathed bodies, exhilarated to be spared.

Many recent cinematic dystopias centre on the body’s vulnerability and fallibility. In the blighted desert landscape of Mad Max: Fury Road, humans are vampirically mined as “blood bags” and select women are held captive as breeding stock, useful only for furthering the human race. The characters in Bird Box must navigate the world blindfolded to avoid eye contact with monstrous entities that, upon being seen, force them to involuntarily commit suicide. In A Quiet Place, Earth has been invaded by extraterrestrial predators with hypersensitive hearing, consigning the human characters to creep around trying — and often failing — to avoid making any noise. In Get Out, the bodies of young black men and women are parasitically occupied by white counterparts, who leach the vitality from their hosts.

Many of these narratives also serve as morality tales: the virtuous, able, alert and tough survive; the immoral, weak and clumsy perish. Watching these films, the viewer is encouraged to adopt a position of superiority and to anticipate the disaster before it befalls a character: I would never make that fatal mistake, we tell ourselves. I would know better; I would survive.

Amid all this feverish post-apocalyptic speculation about the manifold ways humanity might be brought to the brink of extinction, there is one pervasive unacknowledged norm. The protagonists with whom we identify — whose struggles and trials and fears we vicariously experience — are overwhelmingly young. The healthy body is the default. The young have more at stake; their prospective loss is imbued with the poignancy of a life cut short in its prime. The middle-aged are at best ancillary characters, killed off through overconfidence or acts of self-sacrifice for the greater good. And the elderly? The elderly are nowhere to be seen in these brave new worlds. They are invisible. They don’t exist.

Of course, there is a notable exception to this rule of narrative exclusion. Senicide — the killing of the elderly, most often at an age of perceived inutility — stretches back centuries as a fate meted out in literature. The Jacobean satirical play The Old Law (1618–19) by Thomas Middleton and others — in which men are involuntarily executed at eighty and women at sixty — is an early progenitor of what is now an established geronticidal trope within dystopian fiction.

Anthony Trollope’s final novel, The Fixed Period (1882), envisages a future in which euthanasia is mandated after a fixed period; the elderly are shunted off into a college, the Necropolis, for retirement at sixty-five and then execution at 67.5. In Huxley’s Brave New World (1932), the elderly are killed at sixty, then cremated and recycled into fertiliser. In P.D. James’s Children of Men (1992), sixty-year-olds are subjected to a mass drowning called the Quietus. In Christopher Buckley’s Boomsday (2007), baby boomers are offered incentives to commit suicide at seventy. In Lidia Yuknavitch’s The Book of Joan (2017), the execution age is set at fifty; humans are recycled into a water supply for a colony orbiting the Earth on a satellite. In the horror film Midsommar (2019), elders of a cult must commit ättestupa — a ritual suicide by jumping off a cliff, drawn from Nordic folklore — at seventy-two.

It is no accident that the extermination age in these examples hovers around retirement age. Retirement is typically the point at which one is no longer economically productive, and therefore ceases being of value to the community. In many of these examples, the inutility of the aged body is further underscored by its transformation into useful resources such as fertiliser, water or fuel; this commodification underscores the fundamental importance of contributing productively to the community, even after death.

Senicide is, of course, not solely the province of fiction; documented instances exist of various cultures having supposedly killed the elderly through history, including in Sardinia, where women known as accabadoras would bludgeon or suffocate the elderly, and in Japan, where the possibly apocryphal practice of ubasute involved dumping elderly relatives on a mountaintop to die of exposure. In present-day India, in the southern districts of the state of Tamil Nadu, the well-documented phenomenon of elderly relatives being killed by family members is known as thalaikoothal, a practice in which the elderly are given cold oil baths to reduce the body temperature, then fed tender coconut water and milk, prompting renal failure. These overt acts of senicide are supplemented by the decades-old epidemic of “granny dumping” in the United States and elsewhere, wherein elderly relatives are abandoned far from home by family members who can no longer afford their healthcare and who view care giving as overly onerous.

This senicidal thinking is founded on the premise that human worth is aligned to productivity: a concept that stretches back to Plato’s Republic, where Socrates argues that medical treatment and intervention is only appropriate if it allows a productive citizen — Socrates proffers the example of a carpenter — to fulfil his role in the community. When the carpenter ceases to work and contribute productively to the community, Socrates argues, there is no sense in unnecessarily prolonging his life; therefore, medical treatment should be withheld: “No treatment should be given to the man who cannot survive the routine of his ordinary job, and who is therefore of no use either to himself or society.”

In dystopian literary narratives, the ruling generation typically justifies overt violence towards the aged through the lens of economic rationalism: the elderly, according to Margaret Cruikshank in Learning to Be Old (2003), are viewed as burdensome “parasites [who are] expensive to maintain” and consume resources without contributing anything of worth to the community.

Lionel Shriver picks up this theme of the economic burden of unproductive elderly citizens in her 2016 novel The Mandibles, set in 2029 after a market crash devalues the US dollar, consigning families to live in cramped squalor. In Shriver’s future, inheritance impatience is rife, and the elderly are shot en masse as an act of retribution for the crime of having sent the inflation rate soaring because of the cost of their pension benefits.

Yet the elderly are punished not only for perceived economic crimes but for environmental ones, too. Margaret Atwood’s 2014 short story “Torching the Dusties” underscores how easily scapegoating morphs into legitimised violence. “Torching the Dusties” centres on the residents of a retirement community, Ambrosia Manor, who are besieged by a mob of irate protesters who belong to an anti-elder movement, Our Turn. Our Turners burn down nursing homes with their occupants inside while wearing baby-face masks, and see their vigilantism as retribution for the wastefulness and greed of the previous generation.

It is not difficult to see real-world echoes of millennials’ visceral dislike and resentment of baby boomers in Shriver’s and Atwood’s dystopias. This intergenerational hostility has been further underscored recently by “OK Boomer” memes, and accusations such as those made by Bruce Gibney that boomers are a “sociopathic generation” who have “mortgaged the future.”

The eldest of the boomers, now in their mid seventies, will be the next cohort to enter residential aged care, if they haven’t already. While the average age of home-care adoption is eighty for men and eighty-one for women, and the average age of admission to permanent residential aged care is eighty-two for men and eighty-five for women, there is no minimum age requirement for access to aged care, and boomers suffering from early-onset conditions will already be receiving care in one way or another. The most common term used to describe the looming influx of the balance of the boomer generation into the aged care system — “silver tsunami” — likens boomers’ longevity and the associated ballooning cost of aged care to the onset of a natural disaster.

Kurt Vonnegut’s story “Tomorrow and Tomorrow and Tomorrow” goes further in directly apportioning blame to the elderly for the degradation and depletion of Earth’s resources. Set in 2158, in a world in which a drug called anti-gerasone has drastically extended the lifespan of Earth’s inhabitants, Vonnegut envisages a future in which insatiable pursuit of longevity by the elderly is responsible for nightmarish overpopulation, food shortages and the depletion of natural resources, consigning the remainder of the population to live in squalor and subsist on seaweed and sawdust. While Vonnegut illuminates the cruelty and greed of impatient descendants who try to kill off 172-year-old protagonist Harold “Gramps” Schwartz by sabotaging his anti-gerasone, he also offers a cautionary tale about the perils of failing to gracefully accept one’s mortality. It is desirable to die at an appropriate time, and indecent to live too long.

So it goes.

In truth, the apocalypse has already arrived for Australia’s elderly. We treat older people as a separate and subhuman class, frequently viewing them as a burden on their families, the community and the state. Increasingly, this dehumanisation has taken a corporatised tone; as the elderly exit the workforce, they become a commodity to be mined for profit and dividends by the aged care industry.

The profits posted by Australian aged care providers are directly financed by the government, which contributes the vast majority of the sector’s funding. Commonwealth funding is tipped to reach $21.7 billion in the year 2019–20, which represents 80 per cent of the sector’s total funding. Of this amount, approximately 68 per cent is spent on residential aged care; the rest goes to home-care, home-support and flexible aged care packages. Consumer contributions finance the remaining 20 per cent, either through often exorbitant Refundable Accommodation Deposit bonds, which at the most recent estimate represent a $27.5 billion contribution to providers’ coffers, or through Daily Accommodation Payments, basic daily fees or home-care payments.

Yet in spite of the high proportion of government funding underwriting the aged care industry, there is little transparency about how much providers spend on primary care. Reforms ushered in by the Aged Care Act 1997 mean that providers no longer need to demonstrate that the funding they receive via the Aged Care Funding Instrument is spent on care; rather, expenditure of taxpayer funds is entirely at providers’ discretion, and they don’t need to return any unspent monies to the government. The correlation that one might expect to see — higher funds equating to higher expenditure on care — doesn’t always play out. In 2017, Bupa’s funding from both the government and residents’ fees increased, yet it paid almost $3 million less to employees and suppliers.

Compounding this lack of transparency are the financial reporting requirements themselves. While three providers — Regis, Estia and Japara — are ASX-listed entities and therefore subject to stringent reporting requirements to ASIC, many other providers can file limited financial statements under the reduced disclosure requirements set by the Australian Accounting Standards Board, meaning there is minimal scope for scrutiny of their financial practices. While not-for-profit providers represent 55 per cent of all residential aged care providers and two-thirds of home-care providers, the ever-increasing share of for-profit providers, especially in the residential sector, signals that aged care is big business in Australia.

Australia’s top six for-profit aged care providers — Bupa, Opal, Allity, Regis, Estia and Japara — received $2.17 billion in government subsidies in the 2017 tax year while also posting significant profits and using aggressive tax-minimisation strategies such as discretionary trusts. Bupa, Australia’s largest private aged care provider, made a profit of $663 million in 2017, 70 per cent of which ($468 million) came from government funding. Opal, Australia’s second-largest private provider, posted a total income of $527.2 million in 2015–16, 76 per cent of which came from government funding, yet it paid a mere $2.4 million in tax on a taxable income of $7.9 million.

The foreign-ownership structures of several of the major players — Bupa is headquartered in the UK, and Opal belongs to a parent company in Singapore — have further enabled providers to pursue aggressive tax-minimisation strategies. In 2019, after a ten-year dispute with the Australian Taxation Office, Bupa paid $157 million in restitution for the alleged practice of “thin capitalisation” — that is, using high-interest offshore debt to artificially reduce its taxable income. The abolition of probity requirements by the 1997 Aged Care Act has further eroded the government’s capacity to assess, scrutinise and regulate ownership of aged care providers.

Yet at the same time that private providers are posting huge profits and paying minimal tax, the standard of Australian aged care is cratering. Most sensationally, Bupa posted a $560 million profit in 2018, the same year it made headlines when more than half of its aged care facilities across Australia were failing basic care standards, and 30 per cent were deemed to pose a serious risk to the health and safety of residents. With approximately 6500 frail and vulnerable residents spread across its seventy-two facilities, Bupa is now considered “too big to fail” and remains open in spite of repeated sanctions and scandals. Clearly, in the absence of strict regulation and public reporting, privatisation has only served to enable and entrench abuse and negligence, rather than to drive poor providers out of business.

The monumental failures of Australian aged care have been in plain view for a long time, well before prime minister Scott Morrison called the royal commission in 2018. Over the past decade, seventeen reviews and inquiries into the aged care sector have been handed down, many of which have passed with little media interest and the implementation of few or none of the proposed reforms.

To take one prominent example, the 2017 Carnell–Paterson Review of National Aged Care Quality Regulatory Processes — intended in part to probe how horrific abuse at the Oakden nursing home in South Australia could occur while the facility remained fully compliant and accredited — made ten sweeping recommendations to achieve tougher regulation and greater transparency within the aged care sector. These included the creation of a public register of the outcomes of complaints and investigations, the implementation of a public star-based rating service to track provider performance, increased powers for the complaints commissioner, and the adoption of clearer clinical-care measures in the assessment and accreditation processes.

More than two years after these findings were handed down, only a handful of aged care reforms have been passed, and none of the recommendations specifically aimed at achieving tougher regulation and greater public transparency have been implemented. Many have not even been considered. The government cites statutory secrecy under the Aged Care Act, Commission Act and Privacy Act as its justification for not making the reporting of complaints about provider performance more transparent. But the undue influence of peak bodies — which represent the interests of providers and vehemently oppose transparency measures — has also decreased the government’s appetite for reform. The government’s hands-off, market-driven approach to aged care is grounded in economic rationalism, callously ignoring the inconvenient fact that the physical and mental frailty of aged care recipients, combined with the dearth of public information about provider performance, preclude aged care “consumers” from exercising meaningful “choice.”

Perhaps most frustratingly, many of the issues plaguing the sector today were foreseen and thoroughly canvassed more than twenty years ago during the Senate inquiry that preceded the passage of the 1997 Aged Care Act. The removal of staff-to-patient ratios was predicted to result in compromised care, and experts also predicted that the accreditation process was inadequate to stop this from occurring. In the two decades since, review after review has exposed chronic understaffing, inadequate regulation and accreditation, the lack of transparency, and the poor care outcomes in the sector — and in each instance, successive governments of both political persuasions have responded with piecemeal reforms or no reforms at all.

This government inertia has played out against a backdrop of escalating failures in the sector, including a 170 per cent increase in serious risk notices in the year prior to the royal commission being called, and a 292 per cent increase in serious noncompliance. The standard of care in residential facilities has deteriorated unabated: between 2003 and 2013, there was a 400 per cent increase in preventable deaths in Australian aged care facilities from choking, falls and suicides. In 2017–18 alone, there were 3773 reportable assaults, including 547 reportable sexual assaults and rapes. These statistics represent a fraction of the true number, because they only account for incidents in which the perpetrator does not have an assessed cognitive or mental impairment. Given that more than half of aged care residents suffer from dementia, the actual assault figures are likely to be significantly higher.

In addition to these extreme instances of neglect, mistreatment and abuse, baseline levels of primary care are also shocking in both residential and home care. In the royal commission’s interim report, commissioners Richard Tracey and Lynelle Briggs noted a voluntary survey filled out by 1000 aged care providers that cited 274,409 self-reported instances of substandard care over a five-year period, including 112,000 instances of substandard clinical care and 69,000 incidents of substandard medication management. Considering that this survey was undertaken by fewer than half of Australia’s 2695 aged care providers and that there are only approximately 240,000 aged care residents in Australia today, along with approximately 118,000 home-care package recipients, it is evident that Australian aged care is failing on an industrial scale. And as Australia’s population rapidly ages — the number of Australians aged seventy years and older is projected to almost triple over the next four decades, reaching seven million by 2055 — the size of the problem will only grow exponentially.

Indeed, as the commissioners noted, if population trends identified in 2014 hold true, “more than a third of all men and more than half of all women will enter residential aged care at some time in their lives.” The difficulty the sector faces in attracting and retaining qualified staff, combined with the high rates of turnover and low skill base of the workforce, places even more pressure on providers’ capacity to accommodate these ever-increasing numbers. And while some providers are posting colossal profits, others are not making any profit at all. In 2019, the Aged Care Financial Authority reported that approximately 44 per cent of residential aged care providers are operating at a loss, and many are at risk of closure: factors that are only likely to wreak more chaos in the sector in the future, and produce more catastrophic outcomes like the recent shock closure of Earle Haven.

The sector’s failure to provide safe and dignified care is compounded by inadequate regulation; too often, providers are asked to “self-assess” or interpret vague and elastic guidelines rather than conform to hard and fast quantifiable standards. The commissioners also noted in their interim report that the regulatory regime administered by the newly formed Aged Care Quality and Safety Commission is “unfit for purpose.” The lack of effective oversight means that families often turn in desperation to installing hidden CCTV cameras to confirm their suspicions of abuse and neglect.

As the distressing footage screened on the ABC’s two-part Four Corners investigation, Who Cares?, in September 2018 and subsequent news bulletins have shown, our most vulnerable citizens are being slapped across the face by abusive carers, injured through “rough handling” — a dehumanising euphemism that anywhere other than an aged care facility means “assault” — raped and sexually assaulted in their most vulnerable state, drugged unnecessarily, cruelly restrained, and left to sit in distress in their own faeces and urine. There have even been several cases of aged care residents infested with maggots, including a dying woman in palliative care who was found with maggots living inside her mouth. Much of this abuse and neglect would never have come to light without the determination of relatives and advocates.

While media coverage of aged care has been dominated by the failures in residential care, the home-care sector has not performed any better. Due to a near total lack of regulation of home-care providers, there has been rampant rorting, including exorbitant administration fees levied that, in some cases, effectively halve the package for the recipient, as well as neglect, abuse, assault and even rape of older Australians in their own homes. The issues of unskilled, unqualified and unscrupulous staff in residential care also extends to home care: in March 2019, the royal commission heard from a health department witness that eight out of ten applicants applying to provide home-care services were unqualified “bottom feeders” who view the provision of care as nothing more than a “business opportunity.”

Even accessing care in the first place is proving increasingly difficult for older Australians. Thousands die each year while waiting for the Home Care Packages, or HCPs, they need, while others endure extraordinary time frames for their HCPs to come through. In the financial year ending June 2018 alone, more than 16,000 people died while waiting for HCPs, and as of June 2019, 119,524 people were languishing on the waiting list. The royal commission reported that actual wait times are significantly longer than the public guidelines cited on the My Aged Care website, which provides an estimate of twelve-plus months as the expected time for levels 2–4 HCPs.

The stark reality, according to the health department, is that for those requiring the highest level of support — a level 4 HCP — the mean waiting time is twenty-two months, and a quarter of those people will wait three years to receive care. The consequences of this logjam, the commissioners note, are dire, including “inappropriate hospitalisation, carer burnout and premature institutionalisation.” The federal government’s response to the royal commission’s interim report was to announce funding for a further 10,000 packages, which represents less than 10 per cent of the number required to clear the waitlist.

While the royal commission has played a valuable role in exposing the policy failures that have wrought the current state of affairs, as well as the shocking scale of the endemic abuse and neglect across the sector, it is fair to say that the concomitant outrage has been muted. Real-time media monitoring demonstrates 300 per cent less media coverage of the aged care royal commission than there was of the banking royal commission. It is difficult to imagine the mistreatment of any other vulnerable group being met with such widespread indifference. And the apathy and cognitive dissonance of politicians — many of whom, like aged care minister Richard Colbeck, who is sixty-one, are not far from retirement age and may be facing entry to the aged care system far sooner than they think — are profound.

As someone who cares deeply about this issue, having given evidence to the royal commission about the sadistic mistreatment my father has been subjected to in aged care, I admit I am baffled by this lack of empathy for older people. It is a failure that flies in the face of the obvious: as Proust says in Time Regained, “life makes its old men out of adolescents who last many years.” We are all ageing every day; it is the one activity that every human being on earth is doing continuously.

If we are lucky, we too will one day grow old. Old age is, ultimately, what we are supposed to aspire to.

The utopian fantasy of a comfortable retirement — years replete with travel, golf, walks on the beach, and bouts of grey nomadism underwritten by a fat super account and a paid-off mortgage — is the enduring (if increasingly unobtainable) Australian dream. Even the faintest suggestion from Labor that it might tinker with franking credits and therefore impinge on the lifestyle of retirees was enough to swing a federal election. Yet in spite of all this aspirational saving and leisure planning, we devote no time to contemplating the realities of ageing or the possibility that the frailty and vulnerability that often accompany old age may one day arrive for us. The one way we cannot imagine ourselves spending our final years is in an aged care facility. It is not an exaggeration to say, as Simone de Beauvoir once did, that “old age fills [us] with more aversion than death itself.”

Perhaps this is because, for all of our utopian and dystopian imagining, the reality of ageing is too frightening to contemplate. When I think about my father — a man who was once a livewire, a brilliant scholar and mineral metallurgist, and who is now consigned to a wheelchair with Parkinson’s disease, dementia, incontinence and a host of other complaints too numerous to list — his loss of selfhood, independence and agency overwhelms me.

My father relies on carers for the basic actions that so many of us take for granted: they brush his teeth; they toilet, shower, dress and feed him; they hoist him in and out of his wheelchair. He frequently hallucinates, finds himself lost mid-sentence, suffers from sudden panic attacks when he loses his bearings, and often doesn’t recognise his own bedroom. He cannot co-ordinate his movements to even pick up a cup and drink from it. He has difficulty swallowing due to his Parkinson’s and is at constant risk of choking: a common cause of death among Parkinson’s sufferers. His personality has changed. His body and mind are no longer in sync; he lives in continual frustration and confusion. He will spend the rest of his life wandering lost in a wilderness of his mind’s own making. The French philosopher Catherine Malabou, writing about destructive brain plasticity in Ontology of the Accident (2012), best describes the state my father lives in: “Between life and death,” she says, “we become other to ourselves.”

The fear of becoming other to ourselves — of not knowing who we are, of losing agency and control — is so acute precisely because it threatens the very foundation of selfhood. We spend our childhood and youth striving towards self-sufficiency and independence; the notion of that independence eroding is terrifying. While I am bereft for my father and the precarious, vulnerable state he is consigned to, I resist imagining myself in his place, even though I know intellectually it is possible the same things may happen to me. The very thought produces an overwhelming existential terror in me, a visceral fear.

So what would it mean to admit to myself that one day I may become old? It would mean accepting that my mind, which I prize above all things, may flicker out like a tired filament, that I may not be able to keep pace with the conversations and arguments I take for granted, that I may forget the people around me, that I may forget who I am, my very name. I may not know where I am. I may become vulnerable — utterly vulnerable — to strangers. That, worse, I may lose control over my body, which may rebel against me in humiliating ways; that I may not be able to walk, or speak, or even swallow. I may become diminished in the eyes of others. There may come a time when nobody listens to what I say because I no longer make any sense. I may no longer be able to taste food, as dementia sufferers cannot; I may no longer be able to see, or hear, or smell. My world may become blanched of colour, texture and joy. It is hard to imagine that a life without all those powers and pleasures is any kind of existence at all, but I am haunted by the knowledge that this litany of privations is exactly how my father experiences his days.

It is tempting to embrace the consolatory fantasy that those with diminished cognition don’t remember or can’t understand the full weight of what is happening to them — but the painful truth is that, bereft of memories of the past or the prospect of the future, my father only experiences an unceasing present tense. His impossible fate is to inhabit his every remaining minute in the throes of his needs, his discomfort, his hunger, his longings and his frustrations without the refuge of nostalgia or the prospect of change. Above all, to imagine becoming old is to admit a fundamental truth that threatens me viscerally: I may one day become worthless to others. I may become invisible.

But my father’s frailty and diminished quality of life are not the only things I must try to imagine: I owe it to him to also try to comprehend the negligence, neglect and abuse he has experienced in his aged care facility, which formed my testimony to the royal commission. Dad sustained a broken hip and was lying on the floor for God knows how long before someone found him, because there was nobody to take him to the bathroom. He suffered six broken ribs — including two that went untreated and were partially healed by the time they were found by a radiologist — from two other falls incurred for the same reason. He has been given contraindicated medication that effectively left him without his Parkinson’s medication for months. He has been frequently left unclean, without his dentures or his glasses, or without a cup of water within reach. He has suffered numerous injuries and infections that have gone undiagnosed and untreated.

Most unforgivably of all, he has been deliberately abused and neglected by a malicious carer, who left him in soiled incontinence pads for hours, who shut the door on him and told other staff he was sleeping when he was awake and desperate to be showered, who taunted him and told him to get his own nappies out in the hall, and who pushed his wheelchair away from his bed on purpose, leaving him immobile. When I try to imagine myself in my father’s place, I can only begin to speculate about his emotions — fear, despair, sadness, impotence, helplessness — before I’m overcome with grief and rage.

It would be destructive, perhaps even madness-inducing, to live with the continual awareness of our mortality. We go to extraordinary lengths to repress our awareness of death; this repression is a protective mechanism that likely serves an evolutionary function. The poet Philip Larkin described this repression in “Aubade,” his great contemplation of death, as the mind “blank[ing] at the glare.” To live in constant terror and awareness of death is no life at all. Yet we rarely interrogate the cost of the fantasy of our own immortality. As Ernest Becker says in his extraordinary work The Denial of Death (1973), man literally drives himself into blind obliviousness with social games, psychological tricks, personal preoccupations so far removed from the reality of his situation that they are forms of madness — agreed madness, shared madness, disguised and dignified madness, but madness all the same.

Among the most destructive forms of shared madness are our collective fantasies about the end of life. I have heard these same stock fantasies from my friends, colleagues, family members and acquaintances so often that I have even started to catalogue them: they are varieties of magical thinking, delusional and destructive because they stand in the way of genuine concern and understanding for the elderly. These fantasies also hamper our capacity to imagine our own futures realistically and contemplate our own far more likely fates as recipients of some form of aged care.

The most common fantasy I hear when I mention aged care is that of voluntary suicide. “I’ll kill myself before I ever go into a nursing home,” people tell me nonchalantly: a farcical pronouncement that presumes that they will be well enough to kill themselves before life gets bad enough that they need to. Nobody does this, and nobody will, but it is a powerful and enduring fantasy because it suggests we will exert agency at the precise moment when we have none. It is also something my father used to say repeatedly; of course, he, like everyone else, never really meant it.

People my own age (late thirties/early forties) often buy into what I call the commune fantasy, in which a group of friends age and die together, chipping in to buy a common property to live in, pooling resources and paying for carers together like a geriatric co-op. This fantasy presumes, of course, that all the friends in the group will have the same care needs at the same time, will sell their assets simultaneously, will be able to oversee their own care needs even if those needs include cognitive impairment or dementia, and will somehow be able to afford the astronomically expensive medical equipment used in aged care facilities, including hoists, pneumatic mattresses and a twenty-four-hour nursing and caring staff. Essentially what someone means when he or she tells me about their utopian aged care kibbutz is this: I will build my own private nursing home from scratch. This, for all the obvious reasons, also never happens — but it is a powerful fantasy precisely because it suggests that in our time of greatest need, the tribe will be there for us.

Then there are the technological optimists, who believe that by the time they reach old age, the conditions that the elderly suffer from now will have been eradicated by science, or a fountain of youth will render these problems moot. This is, of course, a profoundly narcissistic approach — what about all the elderly suffering in aged care in the meantime? — as well as a ludicrous one.

People also fantasise about dying peacefully in their beds, although as our life expectancies increase without a commensurate extension in our quality of life, we are more likely to become institutionalised than previous generations, rendering this scenario less and less likely.

And finally, there are the fatalists who joke darkly about how we won’t know any better because we’ll all be drooling in wheelchairs parked in front of a television. I don’t get the sense that those who say this really believe it. Rather, they say it flippantly, jokingly, although the subtext is more sinister. The system’s broken and nothing can be done to fix it. Why bother trying?

My blood thunders when people repeat these fantasies to me, because ultimately such magical thinking begets apathy and inertia. If we refuse to imagine what it is like to age — and accept that one day we, too, will become old — then nothing changes and the appalling status quo will continue. Our collective failure to imagine the lives of the elderly is the primary obstacle in the way of genuine empathy: an empathy that should be predicated on the acknowledgement that one day we will join their ranks. If we spent as much time contemplating the realities of the end of life as we do fictive dystopias and the extermination of humanity, we would have the reforms we need in aged care, and greater human rights and dignity for our elders.

In the meantime, the shambolic, diabolical state of aged care remains a horror each successive generation seems bent on discovering for itself, when it’s far too late. More’s the pity. As Larkin wrote: “Most things may never happen: this one will.” •

This essay is republished from GriffithReview 68: Getting On, edited by Ashley Hay (Text), where a referenced version can be found.

The post Magical thinking and the aged care crisis appeared first on Inside Story.

Let’s start with the things that need changing. One of the biggest cracks revealed by Covid-19 is an increasingly casualised workforce. More than 2.6 million Australians are in casual employment with no paid leave. This was bad in normal times because it meant increased uncertainty for households, resulting in less spending, less labour mobility and fewer people taking the risk of starting a business or going for a new job. But when Covid-19 struck, this casualised workforce became an even bigger liability. More people in insecure work meant more people losing their jobs, exacerbating the downturn. This problem has come home to roost, leaving the government scrambling to extend the already expensive JobKeeper payment to the casuals who were originally excluded.

The same is true for Australia’s social safety net. Covid-19 revealed what economists have been saying for many years: that payments like Newstart (now called JobSeeker) are grossly inadequate. The human cost of this neglect has been substantial. But economists warned that the neglect also meant that Australia had weaker “automatic fiscal stabilisers” — programs that routinely increase government spending when the economy is slow and then ease that spending when the economy strengthens. JobSeeker contributes to this process because it is paid to unemployed people, whose numbers grow when the economy weakens. But the decline in the generosity of these payments over many years (because they are indexed to inflation instead of wages) has made our economy less resilient to shocks and less able to bounce back. Again, this has come home to roost: the government has been forced to step in, increase the payment and foot the bill.

Another crack revealed by Covid-19 is debt. The problem isn’t government debt: Scott Morrison and his colleagues could increase spending by three-quarters of a trillion dollars and we would still be average among G20 countries. It’s the high level of household debt in Australia that has made the crisis worse. As I wrote last year, weak balance sheets mean households have smaller buffers. As a result, the downturn in household spending has been sharper, and that has also required a bigger government response.

Covid-19 has also revealed how deepening distrust in government and institutions over time has made it harder to manage the pandemic. The Edelman’s Global Trust survey asked Australians to rank government, business, the media and non-government organisations by how competent and ethical they were. None were found to be both. According to those surveyed, businesses are competent but unethical. NGOs are ethical but not competent. And the government and the media were neither.

Forty-five per cent of Australians distrust these institutions. Yet, at various points in the crisis, the government and the media seem puzzled about why Australians aren’t listening to them. Inconsistent messaging and the lack of coordination between the federal and state governments — another serious long-term challenge exposed by Covid-19 is the weakness in our Federation — have not helped.

If the old saying “never waste a crisis” holds true, then there are plenty of problems we could use the Covid-19 pandemic to fix. Reversing the casualisation of the workforce, strengthening automatic stabilisers, boosting the safety net, better managing household debt, increasing trust in institutions and strengthening the Federation are at the top of that list. The government’s rhetoric of a “snap back” to normal times shouldn’t be used as political cover for ignoring these problems.

But not everything needs fixing. Calls have already been made to change things about the Australian economy that not only are vital to our long-run economic interests but are also playing a critical role in our recovery. Two things stand out: trade and foreign investment.

The most fundamental automatic stabiliser Australia has is its floating exchange rate. When the economy is weak, the exchange rate falls, making our exports and assets cheaper than those from other countries. This boosts our exports and increases foreign investment, both of which play a vital role in supporting the Australian economy and will be crucial to Australia’s recovery.

It is therefore perplexing that the government and a growing number of commentators are going out of their way to try to weaken these benefits. The government announced last week that it would make it harder for foreign investment to flow into Australia, arguing that the economy is weak and needs to be protected. This is silly. It shuts off a vital source of growth, particularly given investment has been so anaemic for so long, and it ignores the fact that making assets cheap during a downturn is exactly why we have a floating exchange rate in the first place. It is a feature of our economic system, not a flaw.

The same is true for trade. A weaker Australian dollar is a boon for Aussie exporters. Once economies are reopened, a vital source of our recovery will be the goods and services bought by our trading partners, the return of tourists to our shores and the return of students to our universities. Calls for Australia to come out of Covid-19 less trade-dependent are a recipe for disaster. Those who advocate it should be held accountable for the slower, longer recovery that will follow.

Although misguided, fears of an open economy are understandable in the current environment. Open economies have lifted billions of people out of poverty and have immeasurably increased the living standards of Australians. But they also mean that global shocks and even problems in one country can quickly become a problem in ours. This is the downside of openness, and we are currently living it. But while some wariness is understandable, this should not blind us to the long-run benefits of openness, particularly when it will be so vital to our recovery.

Distinguishing between the things we should change in the Australian economy and the things we shouldn’t will shape Australia’s recovery from Covid-19. Now is not the time for policy on the run. •

Adam Triggs is Director of Research in the Asian Bureau of Economic Research at ANU’s Crawford School of Public Policy and a non-resident fellow in the Global Economy and Development program at the Brookings Institution.

The post Rebuilding the economy after Covid-19 appeared first on Inside Story.

The allowance will dramatically accelerate the sacking of temporary entrants, of which there are many: around 500,000 overseas students, 140,000 working holiday-makers, 120,000 skilled temporary entrants, 90,000 temporary graduates, more than 200,000 bridging visa holders (most of whom are either partner visa applicants or asylum seekers), and more than 16,000 temporary protection visa holders. Add to that around 60,000 overstayers and the unknown number of the 600,000 people who were in Australia on visitor visas in December 2019 and haven’t gone home.

Remember that very few of these people have any social support to fall back on, even though they have been paying the full rate of income tax. Many will not be able to find a flight home or won’t have the money to pay for one. Some are in genuine fear of persecution if they return home. Unless the government acts soon, it will have created a humanitarian disaster within Australia.

Assuming the government doesn’t wish to extend the JobKeeper allowance to temporary entrants, what should it do?

First, the immigration minister should announce that all temporary entrants (including short-term visitors) whose visas will expire before 30 June 2020 will automatically be given a new visa of the type they currently hold, valid until 31 August 2020.

That date assumes we will have passed the peak of the crisis by then and people will more readily be able to get home. It would significantly reduce the number of temporary entrants making enquiries at departmental offices, thus helping to reduce the spread of the virus.

Second, the health minister should create a new Medicare item enabling all temporary entrants and overstayers to attend a doctor (by telehealth if appropriate) at no cost if they have flu symptoms or may have been in contact with someone who has recently returned from overseas. Where needed, the item should also cover the costs of a coronavirus test and hospital treatment. Overstayers would be given an assurance that they will not be reported to immigration authorities if they contact a doctor.

Once again, the objective would be to reduce the spread of the virus.

Third, the social security minister should extend special benefits to all temporary entrants with work rights (including NZ citizens and visitors required to self-isolate) until 31 July 2020, given that many will lose their jobs and find it difficult to get home.

Access to special benefits requires applicants to establish financial hardship, which will limit take-up. Applications should be taken online and/or over the telephone to minimise risks of further queues at Centrelink offices. Centrelink staff should be able to undertake identity checks in conjunction with the Department of Home Affairs.

Fourth, the social security minister should issue regulations providing a once-off payment equal to the cost of a flight home for temporary entrants (including visitors, overstayers and unsuccessful asylum seekers) who don’t have the necessary funds. The objective would be to prevent these people from becoming destitute. Arrangements should be negotiated with relevant foreign governments to compensate the Australian government for these payments.

Fifth, the treasurer should extend the JobKeeper allowance to any temporary entrant currently working in critical occupations such as health and aged care. At the same time, the immigration minister should introduce a regulation enabling any temporary entrants working in these occupations to secure a further twelve months on a visa of the type they currently hold, with applications to be made online or by telephone free of any application fee.

This would ensure Australia has the staff it needs in these key occupations. Recognising the role they will play in supporting Australians through the crisis, these temporary entrants should be provided with a clear pathway to permanent residence at the end of the twelve months.

Sixth, the immigration minister should increase places available for partners of Australian citizens and permanent residents in the 2019–20 and 2020–21 migration program. This should be possible without increasing overall numbers given there is likely to be a large shortfall because of the coronavirus. Australian citizens and permanent residents should not have to live separated from their partners at this difficult time.

Finally, noting that there will be a shortfall in numbers migrating to Australia under the Offshore Humanitarian Program in 2019–20 and probably in 2020–21, the immigration minister should fast-track permanent protection visas for the 16,000-plus long-term temporary protection visa holders in Australia. It is well beyond time that the government recognised that there is no chance these people will ever be able to go home, and thus no point keeping them on temporary protection visas.

The government needs to move quickly on all these fronts to avoid a humanitarian disaster. •

First published in Pearls and Irritations.

The post Lives in limbo appeared first on Inside Story.

The package effectively doubles the rate of the new JobSeeker payment (formerly Newstart) for most people without children. Until now, a single recipient without dependants received a maximum of $565.70 per fortnight. Lone parents and people over sixty who have been on benefit for at least nine months got more, and each member of a couple got somewhat less. For the six months from 27 April the government will use a time-limited coronavirus supplement to boost the payment by $550 per fortnight.

Importantly, the extra $550 will go to all current recipients, including those who have been getting less than the maximum because they have assets or are in part-time work. It will also go to both existing and new recipients of the youth allowance, JobSeeker payment, the parenting payment, the farm household allowance and the special benefit.

Thanks to Monday night’s amendments, the list of recipients will also include full-time students receiving Abstudy, Austudy and youth allowance for students, bringing to as many as 1.3 million the number of people already on payments who will receive the special supplement.

Added to that — according to the government’s estimate — will be around one million new recipients, who will include permanent employees who are stood down or lose their jobs, sole traders, the self-employed, casual workers and contract workers, all of whom will need to have met the income tests and be jobless because of the coronavirus. Also included will be people who need to care for people who are affected by the coronavirus.

Some conditions will be relaxed. The assets test for three benefits — the JobSeeker payment, the youth allowance for jobseekers and the parenting payment — will be waived for the duration of the coronavirus supplement. The normal one-week waiting period will also be waived, as will the liquid assets test waiting period (which can be up to thirteen weeks). People already in this waiting period will be given immediate access to payments.

Importantly, the coronavirus supplement will be paid automatically. Current recipients will receive the full $550 on top of their regular payment without asking for it.

These changes significantly boost Australia’s working-age social security payments, at least temporarily, and push us up the global ranking. As this chart shows, Australia has been at the bottom of the pack compared with the “replacement rate” — the percentage of previous earnings covered by unemployment payments — in other OECD countries.

Courtesy of the Conversation

A number of countries have boosted their payments, at least temporarily, in response to the coronavirus. The chart below shows where Australia and New Zealand and France now sit, compared with the 2019 replacement rates of other countries. Australia has risen towards the middle of the pack, with our short-term earnings replacement rate climbing from 38 per cent to 68 per cent as a result of a near doubling of the base rate. (Replacement rates will be lower for higher-income workers who lose their jobs and higher for part-time workers and casuals.)

Courtesy of the Conversation

It is worth noting that other countries are adopting different approaches to target support. Denmark, for example, is providing a direct supplement of 75 per cent of wages to employers, up to a ceiling, on the condition that they don’t lay off workers. That’s less than Denmark’s current replacement rate of 84 per cent, but if it is successful it would effectively mean that Danish workers would continue to receive their normal salary (a 100 per cent replacement rate).

The Australian government has indicated that the stimulus package is “scalable,” meaning that it is possible to increase the dollar amounts even further and extend their duration. It has already fixed some gaps in its initial plan relating to students and newly arrived residents and temporary visa holders. Permanent residents will be eligible for assistance immediately and not subject to current waiting periods, which can be up to four years.

Reports suggest that special payments (and the coronavirus supplement) will be made available to temporary visa holders who lose their jobs or suffer “significant financial hardship” because of the coronavirus. It is unclear, however, whether this will apply to foreign students in Australia and New Zealanders. Another group whose status should be clarified urgently is made up of people who have applied for permanent residence and are still in that application process. A case exists for treating them as if they had already become permanent residents.

A remaining downside with potentially big unintended consequences is the failure, so far, to adjust the spouse income test, which will stop many potential recipients from receiving benefits and create a perverse “benefit cliff.” If a jobless person’s spouse is working and not receiving JobSeeker or equivalent payment, then his or her payment will be reduced by 60 cents for every dollar the partner earns over $994 each fortnight. If the working partner has an income of $1840 per fortnight, the recipient gets the full supplement of $550 per fortnight; if the working partner earns $1850 a fortnight, just $10 more, the recipient gets nothing. Single people face the same abrupt cut-off.

That ceiling on your partner’s earning, $1850 per fortnight ($925 per week), is right in the middle of the Australian income distribution. We calculate that, among two-earner couples aged twenty-five to fifty-four, about half the primary earners who lose their job will get the coronavirus supplement, but only somewhere between a quarter and a third of secondary earners will get it. (These are rough estimates based on Australian Bureau of Statistics income survey estimates of personal income distributions.) Given that in most couples the secondary earner is female, the different treatment has the potential to discriminate against women.

One way to eliminate the cliff would be to better integrate the coronavirus supplement into the income support system, so that people with spouse income above these cut-offs would continue to receive a reduced payment. The government has asked for power to fix this issue via regulation, but has not yet announced how it will tackle it.

An extra million recipients (according to the treasurer) will mean that the share of the working-age population receiving income support climbs from 14.2 per cent to 18.7 per cent. That’s an increase of 4.5 percentage points, bigger than the 3.5 and 3.8 percentage point increases during Australia’s two previous postwar recessions, in the early 1980s and early 1990s.

In both of those recessions, the unemployment rate shot up from under 7 per cent to near 10 per cent or higher within a year. This year’s job losses will occur in half that time, and won’t all be reflected in the unemployment rate. The non-participation rate is likely to rise as people decide to neither work nor look for work. The best measure to watch to track the labour market will be the reduction in hours worked.

International experience suggests that the reduction will be substantial. Service Canada is reported to have received more than 500,000 applications for employment insurance in the past week, twenty times the number recorded in the same week a year ago and equivalent to about 2.5 per cent of the labour force. Similar trends have appeared in the United States. In Australia, we are already seeing the payment system struggling under the load of new applications.

Our economic response to the coronavirus must have a key goal of sharing the economic costs. The government has made an excellent start in the package announced on Sunday and extended on Monday. But we have to be prepared to ramp up and expand support in the interests of fairness. •

This article draws heavily on a piece published yesterday in the Conversation.

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If this new payment does feature in the second stimulus package, the government will be following the advice of economists from both the left and the right. Conservative economist Greg Mankiw, for example, who chaired George W. Bush’s Council of Economic Advisers, says that “fiscal policymakers should focus not on aggregate demand but on social insurance.” His counterpart in Barack Obama’s White House, Jason Furman, agrees:

Do as much as possible using existing structures and previous laws. For paid leave, you need to invent something new because there is no structure there. But for almost everything else, you can use unemployment insurance, the SNAP program, Medicaid. Once you get through everything on health and everything targeted, you still have two problems: One is you potentially have tens of millions of people in great need who aren’t eligible for one of those programs. Second, the total amount, even if you max out on health and targeted [programs], just isn’t as large as what could be helpful economically. So the third thing I’d do is get people cash.

In many Western countries, most people are eligible for generous unemployment insurance that is paid automatically when employed people find themselves unable to work. But Australia’s system of social protection is quite different, and singularly unsuited to filling the income gaps that come with widespread illness and possible economic collapse. The federal government’s new payment may fill part of the gap — but will it go far enough? Are other countries acting in ways we should consider?

Most other countries have a combination of unemployment insurance for people who lose their jobs (typically paid for between six months and two years) and a social assistance payment for those who are entering the labour force but yet to find work, are leaving casual employment, or are unemployed for a longer period. Unemployment insurance typically provides a significant fraction of the individual’s normal earnings, though for a limited period. As well as helping people cope with unemployment it is a significant part of the “automatic stabilisers” that help maintain demand in the face of recessionary shocks.

By contrast, Australia’s JobSeeker payment (which replaces Newstart today) is a means-tested benefit paid at a very low rate — less than 40 per cent of the minimum wage. When assistance with housing costs is taken into account, it is the lowest jobless benefit relative to wages among the twenty-seven OECD countries. Moreover, the means-testing and waiting periods built into the system can stop people with working spouses or accessible savings from receiving any support whatsoever.

For the 37 per cent of the Australian workforce without paid sick leave, support during illness (or self-quarantine) is also very limited. In fact, when it comes to sick leave, we’re not much better prepared for coronavirus than the United States, although the government has recently said it will relax the current one-week waiting period for payments.

WHAT ARE OTHER COUNTRIES DOING?

In New Zealand, the country whose social security system is most like our own, the government announced a stimulus package totalling 4 per cent of GDP earlier this week. Among NZ$2.8 billion in initial income support and stimulus measures are a permanent weekly across-the-board NZ$25 increase in benefits from 1 April, a doubling of the Winter Energy Payment for 2020, and the removal of the hours test from the in-work tax credit.

A new Covid-19 leave payment scheme will provide support through employers (and to sole traders and the self-employed) for people unable to work because they are sick, in self-isolation or caring for dependants in either of these circumstances. Employers will still be expected to meet all of their sick leave and other employment entitlements. For those who are self-isolating, the entitlement period will be fourteen days; those who contract Covid-19 will be covered for the entire period of illness.

Full-time workers will receive NZ$585 per week under the scheme — close to 90 per cent of New Zealand’s minimum wage and an increase of 167 per cent on normal rates of support. (Although existing jobseeker support is only NZ$214 per week after tax in New Zealand, its accommodation supplement provides much higher levels of support for housing costs.) The scheme is open to all firms, and to the self-employed and contractors, but not to those who can work from home.

The scheme will initially run for eight weeks, at which point the government will reassess. Employers will have to declare that they meet the criteria for receiving this funding, and the government has made it clear that any false declaration would constitute fraud.

Ireland is also introducing a Covid-19 Pandemic Unemployment Payment for employees and self-employed people who lose their jobs or are changed to part-time or casual work. The payment has a simple one-page application form — a striking contrast with the thirty-five-page claim form for Australia’s existing Australian Sickness Allowance (now being phased out) — and will be paid at a flat rate of €203 per week, or more than half the minimum wage, for up to six weeks. Recipients will be required to use that time to apply for the normal jobseekers payments.

France’s government announced last week that it would use the established principle of “technical unemployment” to enable workers to retain their jobs if they are not able to work because of self-isolation. Under the rules, workers will receive 84 per cent of their usual net salary. Companies wanting to be part of the scheme will receive a response from the ministry of work “within forty-eight hours.”

In an address to the nation earlier this week, French president Emmanuel Macron declared that France was “at war” and indicated that “for entrepreneurs, traders, artisans, a [new] solidarity fund will be created, funded by the State, and to which the prime minister will also propose that the regions contribute.”

Denmark announced a three-month period, until 9 June, during which the government will pay 75 per cent of employees’ salaries up to a maximum of DKK23,000 (US$3300) per month, with companies paying the remaining 25 per cent. Employees will be obliged to take five days of vacation or time off before receiving the payments.

“If there’s a big drop in activity, and production is halted, we understand the need to send home employees,” prime minister Mette Frederiksen told a press conference on 15 March. “But we ask you: Don’t fire them.”

Canada has also announced an emergency aid plan of more than 3 per cent of GDP. For households, assistance includes:

• a temporary boost to Child Benefit payments, delivering about CA$2 billion in extra support

• a new Emergency Care Benefit of up to CA$900 per fortnight for up to fifteen weeks, to provide income support to workers, including the self-employed, who have to stay home and don’t qualify for paid sick leave or employment insurance

• a new Emergency Support Benefit to provide up to CA$5 billion to workers facing unemployment who are not eligible for employment insurance

• a six-month, interest-free reprieve on student loan payments

• a doubling of the homeless care program.

WHAT SHOULD AUSTRALIA DO?

Like other countries, Australia is facing both a health crisis and an economic crisis. Large sections of the economy are likely to be shut down, and widespread unemployment is likely. Dramatic responses are called for, and transfer programs to cushion these shocks should play a central part.

With the exception of New Zealand and Ireland, the other countries we’ve mentioned are building on their social insurance models by providing an insurance payment to those who are unexpectedly losing their job. If the Australian government provides similar forms of assistance to the new job losers, Australia will move closer to a social insurance model of unemployment insurance (albeit temporarily). This would better cushion people who might lose their jobs but still leaves payments for the long-term unemployed and those entering the labour force at below poverty-line levels.

Whatever its apparent virtues, the social insurance model is losing its relevance in the modern labour market. It assumes that most workers have a long-term attachment to a job; but this is becoming less and less common. Moreover, as more and more people are moving in and out of different jobs the distinction between job loss and failure to gain a job becomes less important. Especially in hospitality and entertainment — industries particularly affected by Covid-19 — many people who are working in one week will be jobseekers the next. When industries start to close down, those looking for work will be just as much affected as those losing their job.

So, while the government’s plan to introduce a temporary social insurance–type payment as a vital part of its crisis response is welcome, it should be accompanied by more adequate support for the most disadvantaged in our community. Some early indications suggest that the government might make concessions by increasing the rate of Newstart’s successor, the JobSeeker payment. As it stands, though, it is less than 40 per cent of the minimum wage. The budgetary constraints usually given as the reason for not increasing support for the unemployed should no longer apply during the crisis of 2020. •

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Now suppose this policy has longer-term benefits: that it could automatically boost the economy during times of weakness without the time lags associated with infrastructure and other stimulus spending; that it would automatically withdraw from the economy when times were good without the permanent cost of tax cuts and other stimulus measures; and that it would boost economic growth and reduce volatility.

And suppose the cost of this policy was only 0.6 per cent of the federal budget, meaning it could be funded without losing the politically cherished budget surplus.

Sound good? Then, congratulations, you support increasing Newstart.

Newstart is the main income support payment for people who are unemployed. Compared to the age pension, disability support payments, the minimum wage and average wages, it has shrunk dramatically over the past twenty-five years. This is bad news for the economy, and even worse news for the 723,000 people who are forced to live off it.

While the age pension has doubled in real terms since 2000, Newstart has remained unchanged. The reason is simple, but illogical. Newstart is indexed against inflation whereas other government payments are indexed against wages, which more accurately measure living standards. If inflation and wages moved together, this wouldn’t be a problem. But wages have outgrown inflation by 40 per cent over the past twenty-five years, meaning that Newstart recipients, in real terms, have fallen far behind.

By any measure, people on Newstart are among the most disadvantaged. If a society can be judged by how it treats its most vulnerable, Australia is not looking good. An analysis by ANU economists Ben Phillips, Matthew Gray, Cukkoo Joseph and Richard Webster shows that the poverty rate among households that depend on government payments as their primary income (apart from the age pension) rose from 39 per cent in 1993 to 80 per cent in 2017.

Before we get onto the economics, it’s worth rebutting some of the common misconceptions about Newstart.

The idea that people on Newstart are lazy young urban-dwellers is not only factually incorrect (the typical Newstart recipient is a middle-aged woman living outside the big cities) but ignores the fact that, across the economy, there is only one vacant job for every 4.4 unemployed people. It’s hard to take a job that doesn’t exist. Macquarie Bank has shown that the best way to reduce unemployment is to create more jobs: the two move in lockstep. They probably won’t win the Nobel Prize for that discovery, but those who dismiss the unemployed as being lazy seem to have forgotten this most basic arithmetic.

Despite all its controversy, Newstart happens to be one of the cheaper welfare programs around, costing less than one-seventh of the age pension. Increasing Newstart is also the quickest, easiest and most effective way of reducing poverty in Australia.

The argument that increasing Newstart reduces the incentive to find a job is similarly baseless. Newstart is so low that the Grattan Institute found it actually prevents people from looking for work. Many people on Newstart are already working but can’t get enough hours. And if you’re aware of research findings on intergenerational disadvantage, you’ll know that your childhood postcode shapes your life outcomes. Demonising the poor, in other words, is a bit like demonising someone who didn’t win at a game of luck.

There is also a strong economic case for increasing Newstart.

Consider the short-term benefits first. You didn’t have to go to the Boxing Day sales to know that the economy is not doing well (you were more likely to get hit by a tumbleweed than an enthusiastic shopper!). And it’s little wonder. Compared to the first half of the decade, retail spending growth over the past five years is down 30 per cent, quarterly wage growth is down 40 per cent and consumption growth is down 15 per cent. The rate at which the economy creates new businesses has fallen from 14 to 11 per cent. Investment now contracts each quarter by an average of 0.4 per cent and productivity growth has flatlined. GDP growth remains around global financial crisis levels.

What the economy needs is more demand. While businesses have stopped investing and expanding, their profits are at record highs, the ASX200 has broken new ground, bond yields and interest rates are at record lows and share buybacks and dividend payouts are at unprecedented levels. The message from the data is clear: businesses are awash with cash, and can easily get more if they want it, but they will only invest and hire if there is demand for what they sell.

Enter Newstart. The ANU’s economists show that the poverty gap for people on Newstart — the absolute difference between a household’s income and the poverty line — has increased fivefold from $25 in 1993 to $124 in 2017. This means that Newstart recipients have what economists call a “high marginal propensity to consume,” a fancy way of saying that they are forced by their dire circumstances to spend every dollar they receive. In other words, every dollar spent on Newstart goes straight into the demand-side of the economy rather than being saved. In normal times, this stimulus would be offset by rising inflation, rising interest rates and an appreciated exchange rate (as well as more spending on imports). But as economists Jason Furman, Larry Summers and Olivier Blanchard have shown, these effects are dramatically weaker in the low-inflation, low-interest environment in which we live, meaning the stimulus effect is even larger.

The economists at Deloitte Access Economics have crunched the numbers. They estimate that, even with these offsetting effects, increasing Newstart by a meagre $75 per week (ANU modelling suggests $100 would be optimal) would boost GDP by $4 billion and create an additional 12,000 jobs by 2021. They show that the benefits disproportionately flow to regional and remote communities (given that’s where most Newstart recipients live) and would boost wages, corporate profits and government coffers through the increase in demand in the economy.

But it’s in the long-run that an increase in Newstart makes the most economic sense.

Newstart is what economists call an automatic fiscal stabiliser: it automatically increases government spending when the economy is weak (through payments to the rising number of unemployed people) and reduces demand when the economy is strong, thus stabilising the economy over the long-term.

Economists like automatic stabilisers because politicians have demonstrated an inability to manage fiscal policy responsibly. They either spend too much when the economy is strong (Howard) or cut back spending when the economy is weak (Gillard, Morrison). The IMF shows that more than half the fiscal stabilisation observed in advanced economies is because of automatic stabilisers rather than government decisions.

More importantly, the IMF shows that Australia could do much better in strengthening our automatic fiscal stabilisers, and hence boosting growth and reducing volatility. Australia lags behind the United States, Japan, Canada and most others. We are more than a third behind New Zealand. The cost is significant. By having stronger automatic fiscal stabilisers through measures like an increase in Newstart, annual Australian GDP growth could be up to 0.3 percentage points higher and volatility — the extent to which GDP growth lurches from boom to bust — could be reduced by up to 20 per cent.

The macroeconomic case for increasing Newstart is just one of many reasons to do it. As the acclaimed American poet, Maya Angelou, once said, “When we give cheerfully and accept gratefully, everyone is blessed.” The same is true in economics. •

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Comparing the economy’s performance in the second half of this decade with the first half reveals just how badly things are going. Quarterly wage growth is down 40 per cent. Retail spending growth is down 30 per cent. Consumption growth is down 15 per cent. Investment now contracts each quarter by an average of 0.4 per cent. The rate at which the economy creates new businesses has fallen from 14 to 11 per cent and GDP growth is now at global financial crisis levels.

The treasurer is quick to blame a weak global environment, but this doesn’t stand up to scrutiny. He’s correct that the global environment is weak and riddled with downside risks, but thus far it has been supporting the Australian economy rather than weakening it. Average quarterly growth in net exports has been six times higher in the second half of this decade than in the first. The Australian dollar has supported our exporters by falling 16 per cent from its 2018 peak, and low global interest rates have made it cheaper for our governments, banks, firms and households to borrow abroad.

The problems in our economy are home grown. The weakness in the global economy and the damage caused by the trade war will indeed hurt the Australian economy, but that pain is yet to come. Global trade growth has fallen by half and foreign investment by a fifth since 2017 and the eventual deal between the United States and China will almost certainly hurt, not help, Australia: diverting Chinese demand for agricultural produce away from Australian farmers and towards those in America.

So, what’s the plan? There doesn’t appear to be one. Or, if there is one, the government is keeping it very close to its chest.

We were told after the federal election that tax cuts and interest rate cuts would come to the rescue, encouraging households to increase spending. Even back then, this argument was unconvincing. The data shows that Australian households are deleveraging — paying down record levels of household debt — and are thus more likely to save any windfall gain than spend it. Reserve Bank officials have made this point repeatedly. As for interest rate cuts, the Reserve’s own analysis shows that the full effects of its cuts probably won’t be felt until 2020. No surprise, then, that despite lower tax and interest rates, retail spending hasn’t changed in the slightest and household consumption continues to stagnate.

The bright spot is housing. House prices and clearance rates are increasing once again. Many hope this will support the economy through wealth effects and a boost to construction. But even if homeowners spend their windfall rather than bank it (the latter of which seems more likely in the current environment), inflated asset prices are hardly the growth strategy we were hoping for.

The critical problem is that the sources of long-run sustainable growth — investment and, more importantly, productivity — are nowhere to be seen.

Investment in Australia has been so weak for so long that we are now experiencing “capital shallowing,” with the ratio of capital to labour starting to fall. This is a big problem. A shrinking capital stock means weaker long-run growth. Productivity growth is similarly anaemic. The Productivity Commission showed in June that labour productivity growth for 2017–18 was less than a fifth of its long-run average.

The absence of these long-run drivers of growth paints a bleak outlook. Other than a lack of action, it’s alarming that both sides of politics appear to have mischaracterised the problem, proposing solutions that will achieve little.

The immediate problem facing the Australian economy is clear when you look at the data. Consider the following. While investment is contracting, corporate profits are at record highs, the ASX200 has broken new ground, bond yields and interest rates are at record lows and share buybacks and dividend payouts are both at unprecedented levels — up 140 per cent compared to the four-year average. Qantas has recently bought back almost a third of all its shares and is by no means alone.

What does this tell you about the economy? It tells you that businesses are awash with cash and can easily get more if they want it. It tells you that trying to boost investment in this environment through investment allowances, instant asset write-offs, corporate tax cuts or any of the other measures being proposed by both sides of politics to pump more money into businesses is like giving a glass of water to a drowning person. It also tells you that trying to make already cheap money even cheaper with further cuts to already low interest rates (either by cutting the cash rate to reduce short-term interest rates or using quantitative easing to reduce long-term interest rates) won’t have the effect it previously did.

Put simply: the problem isn’t supply, it’s demand. Businesses will only invest, expand production and make more stuff and produce more services if they think they can sell them. If they can’t see demand, they won’t increase supply. The only things businesses see when they look out their windows is collapsing department stores, declining consumption, indebted households, a risky global environment and a federal government actively weakening demand by taking more out of the economy than it is putting back in (in other words, by running a budget surplus). Australian businesses would be crazy to invest in this environment, and they’re not.

To boost investment, we need to boost demand, and there are plenty of levers available to the government to achieve exactly that.

Increasing Newstart is not only the moral thing to do, it will put money into the pockets of people who will definitely spend it. Increasing the minimum wage will help the most vulnerable and will push up wages across the economy for the millions of Australians who either receive the minimum wage or receive an award wage that is linked to it. The government should abandon its plan for budget surpluses given weakness in the economy, and it should expand trade liberalisation to boost external demand.

Further tax cuts are an option, but tax cuts are a long-term structural response to a short-term problem. Increased spending makes more sense, particularly given the government can borrow and spend at the cheapest interest rates in history.

For long-run productivity, the best time to implement structural reform is anytime. The lowest-hanging fruit is competition reform. Multiple industries in Australia are completely sheltered from competition. Airlines, pharmacies, the legal profession, the medical profession, coastal shipping and numerous other industries are run by firms that are sheltered by law from having to compete. Cracking these industries open will unleash productivity. Competition is the fundamental ingredient of a well-functioning capitalist economy. Without it, inequality rises, wages fall, investment collapses, growth falters and mark-ups rise. Sound familiar?

The Australian economy needs demand, not even cheaper cheap money. Until we properly understand the problem, we will keep producing ineffective solutions. •

The post It’s the demand-side, stupid! appeared first on Inside Story.

Janice Evans works the night shift in a casino on a reservation in Mississippi. She is guaranteed US$8.35 an hour, but in a good week she might receive twice that much including tips. When the weather is hot, people come to the casino for the air conditioning, but on many weekends in autumn they stay at home on Friday, Saturday and Sunday nights to watch football. Janice’s fortnightly take-home pay in 2012–13 varied between $1200 in July and $900 in February, and from September to November she had to cut back on food purchases.

Elsewhere in Ohio, Sarah and Sam Johnson have apparently stable middle-class incomes of roughly US$65,000 combined before taxes, but spend about US$6000 a year more than they earn. Their expenses — mortgage, insurance and food — are mostly predictable. But even though they have health insurance coverage from their employers, it is low-premium, high-deductibles coverage, meaning that they have paid significant out-of-pocket expenses for minor surgery, MRIs and an emergency room visit, and owe money on a specialised credit card for medical expenses. These expenses have been exacerbated by other unexpected costs: a major leak in a water pipe in their home, and one of their cars breaking down and having to be replaced by a cheap car that then required substantial repairs later in the year. While the Johnsons’ average monthly spending is around $4800, it was nearly $10,000 in one month and close to $8,000 in another.

During 2012 and 2013 a team of ten researchers lived in Ohio, Kentucky, California, Mississippi and New York, where they repeatedly interviewed these three families and members of another 232 households. Their aim was to track every dollar the householders earned, spent, saved and borrowed, every gift they gave or received, every donation they made to charity or friends, and any government benefits they were paid. The results were then analysed by Jonathan Morduch and Rachel Schneider for their book The Financial Diaries: How American Families Cope in a World of Uncertainty.

Morduch and Schneider’s focus is on income volatility — the extent to which a household’s income in any month can vary from its average monthly income over the year. They found that the average household in their sample experienced upward spikes in income during 2.2 months of the year and dips during 2.4 months, adding up to some degree of volatility during a total of 4.6 months. But a high-volatility group of households experienced spikes and dips during an average of 6.6 months a year.

Poorer households — those on around 42 per cent of median income in 2012 — tended to experience more and larger spikes and dips, ranging from 49 per cent below the monthly average to 58 per cent above. But even those classified as having “moderate incomes” (at least 84 per cent of median income) experienced fluctuations between minus 44 per cent and plus 49 per cent. Only 2 per cent of households recorded no significant monthly variation.

It wasn’t only incomes that ebbed and flowed. Spending was also volatile, partly because many families were effectively living from payday to payday, putting off paying bills in some months and trying to catch up in others. Many expenses — rent or a mortgage, for example — were predictable, but others — car or housing repairs and medical expenses — were unexpected.

As Sarah and Sam Johnson’s experience showed, healthcare costs are a big factor. According to Morduch and Schneider, the Johnsons were “unlucky but not so unusual”: about a quarter of the households had sent a family member to an emergency room during the year and about one in ten had a family member hospitalised.

The Financial Diaries makes up for its relatively small sample of households with its richly detailed accounts of how individual households cope with volatility. A broader picture comes from a large set of US data used in a JPMorgan Chase study of the income and consumption habits of 2.5 million bank account holders, transaction by transaction, between October 2012 and December 2014.

The study found that income and consumption were more volatile on a monthly basis than they were from year to year. Seventy per cent of the sample experienced annual income changes of more than 5 per cent between 2013 and 2014, but 89 per cent experienced monthly income changes of more than 5 per cent. Similarly, 41 per cent experienced income fluctuations of more than 30 per cent month-to-month but only 26 per cent experienced more than a 30 per cent change in annual income. Wages and salaries were the major contributor to volatility.

A study of further data from this source found that most of the month-to-month volatility in take-home pay occurred among individuals who stayed in the same jobs. While four-in-ten individuals experienced a job transition in a given year, this accounted for only 14 per cent of the month-to-month volatility in labour income.

The risk factors uncovered in the Financial Diaries — working on commission, relying on tips, coping with healthcare expenses in the absence of universal health insurance — may seem specific to the United States. But evidence from Great Britain reveals similar experiences there, albeit for different reasons.

In Tracking Income: How Working Families’ Incomes Vary through the Year, researchers at the London School of Economics enlisted 180 householders to report on their income and expenditure during the 2003–04 financial year. Nearly half dropped out of the study during the year, but complete week-by-week information was available for the remaining ninety-three.

Of those families, only seven had a stable weekly income over the course of the year, with another twenty-one having “broadly stable” income (within 15 per cent of the annual average for ten or more four-week periods out of the full thirteen periods). Thirty-two families stayed within 15 per cent of the average for ten or more periods but had large “blips” in other periods. Twenty-six families had erratic income patterns — eight of them highly erratic, with four-week earnings varying by up to £1000 per month, or in one case from a high of £2500 to a low of zero.

These variations reflect changes both within the household (in partnership status or number of children) and at work (starting, changing or stopping jobs). While benefits and tax credits generally helped stabilise incomes — rising when earnings fell and vice versa — in some cases they amplified income changes.

A more recent report on irregular pay from the Resolution Foundation, a British think tank, used anonymised transaction data from over seven million Lloyds Banking Group accounts. It found that monthly pay fluctuations are the norm for the majority of employees, with only the 9 per cent of employees who remained with the same employer throughout 2016–17 experiencing monthly fluctuations in take-home pay of more than 5 per cent. More than four in every five steadily employed low-income earners on around £10,000 per year had volatile pay, compared with two-thirds of those on around £35,000 a year. The absolute average monthly pay change for those with a steady job was highest (in excess of 15 per cent) for those on the very lowest earnings.

Do the same patterns exist in Australia? The short answer is that we don’t know — partly because of a lack of data.

The Household, Income and Labour Dynamics in Australia survey, or HILDA, provides very detailed and useful information on income changes over time — but only between years. Using HILDA data for 2002–07, the Income Inequality, Mobility and Economic Insecurity in Australia study found that the lowest 10 per cent of earners carried over 30 per cent of total volatility risk and the lowest 20 per cent accounted for 46 per cent of lost wellbeing due to income uncertainty. It seems highly likely that changes within years would add to overall income volatility, as the JPMorgan Chase study found.

Drawing on the Australian Bureau of Statistics’s 2016 Characteristics of Employment Survey, researchers Iain Campbell and John Burgess found that more than half of all casual workers in Australia and 15 per cent of permanent employees reported earnings (excluding overtime) that varied from one pay packet to the next in their main job. The ABS’s 2018 survey found that 24 per cent of all employees reported earnings varying from one period to the next (excluding overtime payments), 21 per cent often working a different number of hours each week, and 19 per cent with no guaranteed minimum number of hours each week. The survey doesn’t tell us, however, how much their earnings varied from week to week.

A recent large-scale study surveyed 1101 Australian adults who had been unable to pay a debt when it fell due within the previous two years. Of the participants, around 44 per cent were employed, 36 per cent derived their income primarily from social security payments, and around 7 per cent received both wages and a Centrelink payment. The most common tipping points into financial hardship included unforeseen expenses (37 per cent), a reliance on income support (33 per cent), unexpectedly large utility bills (27 per cent), physical health problems (27 per cent), mental health problems (22 per cent), not enough work (20 per cent) or unemployment (more than six months, 17 per cent; less than six months, 10 per cent). Significantly less prevalent were factors such as gambling (4 per cent) and alcohol and drug addiction (3 per cent).

While this study suggests that income volatility could be a factor for those without enough work, it doesn’t measure income changes directly. One study that did try to do that was a survey of seventy low- and moderate-income households in suburban Melbourne by the Brotherhood of St Laurence and RMIT University. It found that over half of the participants experienced highly erratic variations (greater than 25 per cent) in their fortnightly incomes. One group of nine households had variations greater than 60 per cent.

An analysis of those findings noted that many of these households reported having provided incorrect wage estimates to Centrelink. Casual work and fluctuating hours of work make it hard for households to estimate incomes accurately, and Australia’s highly income-tested benefit system can magnify the impact of reporting errors by cutting benefits in the immediate fortnight (if the estimate of earnings was too high) or in the subsequent fortnight (if the estimate was too low). Most of the study’s respondents sought to cope by reducing spending on food, recreation, utilities, medical care and transport. Just over a third borrowed money from family or friends.

But a comparison of two other studies suggests that Australian households are less likely to experience financial stress than American households. Since 2002, the US Federal Reserve Board’s Survey of Household Economics and Decisionmaking, or SHED, has been providing a wide-ranging overview of the economic wellbeing of American households, including how they deal with unexpected expenses. SHED found that 27 per cent of American adults were forced to skip some form of medical treatment in 2017 (compared with 32 per cent in 2013). Skipping dental care was most common, with 19 per cent going without treatment because of cost in 2017.

Australia’s HILDA survey has collected information on indicators of financial stress in Australia every second year since 2001. The results for 2014 show that about 1.1 per cent of its sample did not have medical treatment when needed, 0.5 per cent went without medicines prescribed by a doctor, 5.2 per cent went without dental treatment and 3.3 per cent went without a yearly dental check-up for their child. These deprivations could potentially overlap, but even cumulatively they show many fewer difficulties with medical expenses than in the United States — not a surprising result given the difference in healthcare systems.

While the measures may not be fully comparable, Australian data also show that emergency expenses generally created fewer difficulties for households. In 2015–16 around 13 per cent of Australian households said they would be unable to raise $2000 in a week for something important. In the United States, the 2017 SHED found that 41 per cent of American adults would either borrow or sell something or not be able to pay if faced with a $400 emergency expense (a reduction from around 50 per cent in 2013). Of this group, 29 per cent — 11.9 per cent of all households — said that they would not be able to pay the expense right now. The percentage of households is slightly lower in the United States, but the amount of money is much lower.

Inequality of wealth is a significant factor. While wealth is much more unequally distributed than income in all countries, the disparities are much greater in the United States than in Australia. According to the latest Credit Suisse Global Wealth Report, mean wealth per adult is about 20 per cent higher in Australia than in the United States, but median wealth in Australia, at $191,000, is nearly four times higher. About 6 per cent of adult Australians have less than $10,000 in wealth; in the United States, the corresponding figure is 28 per cent. Put another way, the least wealthy 60 per cent of Australians have 17.2 per cent of total wealth whereas the least wealthy 60 per cent of Americans have 3.2 per cent of total wealth.

Yet a high share of Australians’ wealth is held in the form of housing and superannuation, neither of which is readily available to meet unexpected expenses. In 2015–16, the least wealthy 20 per cent of Australian households had only $10,000 in financial assets apart from superannuation, and owed $13,000 on student loans, credit cards and/or motor vehicle loans (not including mortgages), suggesting considerable vulnerability for this group.

American wealth data rank households by their incomes rather than by their net worth. On this measure, the poorest 20 per cent of US households had an average of US$6700 in net financial assets. In Australia, the figure was A$63,200. (The difference between the rankings by income and wealth reflects the fact that low-wealth householders tend to be young people who have not had time to accumulate financial assets or housing, while the lowest income group is made up of older people who have had many years to accumulate savings and pay off their debts.)

The very modest wealth held by the bottom half of American households is likely to both reflect and reinforce the greater likelihood of financial stress, which in turn will be influenced by the different levels of public coverage of health costs, the level of the minimum wage, and the conditions of employment faced by workers.

The Financial Diaries provides important insights into the challenges of income volatility for American households. It also clearly has implications for a wide range of other public policy challenges — for financial inclusion, for minimising recourse to payday lenders, for relieving household indebtedness, for providing financial counselling, and for increasing the effectiveness of insurance. Volatile incomes pose challenges for income-tested benefit programs and for the collection of taxes to finance social programs. Volatility may also create a climate in which wage demands fall, wage growth stalls — and budget projections are less accurate.

The labour markets of Australia and the United States are different in important ways, as are our social and economic institutions, and the Australian welfare system seems to be more effective in offsetting the risks associated with volatile incomes. Australia’s more comprehensive healthcare coverage seems particularly important. Australia’s tighter employment protections and higher minimum wages could be expected to lessen the impact of income volatility and may be associated with the very different distributions of wealth in Australia and the United States, and thus the different availability of assets to cushion against income shocks.

But Australian households do face significant income risks. HILDA’s longitudinal data show that illness and disability are particularly common, with around 40 per cent of the Australian population experiencing a serious personal injury or illness each year over a ten-year period, and nearly 70 per cent of men and 64 per cent of women needing to cope with a close relative or family member’s serious injury or illness in any ten-year period. Over a nine-year period in another HILDA report, 22 per cent of men and 16 per cent of women were dismissed from their job. Thirty per cent of people who were twenty-five or younger at the survey’s start were dismissed from their jobs over the period. As a result, only 2.2 per cent of the Australian population stayed within the same percentile of the income distribution between 2001 and 2010. According to the latest HILDA survey, around a quarter of working-age men and nearly a third of working-age women experienced a period of income poverty in the ten-year period after 2001.

We also know that Australia has one of the highest levels of part-time employment of any high-income country and the highest level of underemployment in the OECD. A 2015 OECD report, In It Together, found that the share of part-time temporary employees in Australia is the highest of all the countries included, being four times the OECD average and nearly twice the next-ranked countries, the Netherlands and Japan.

The absence of detailed figures on month-to-month income volatility — which we know is likely to be more common than year-to-year volatility — is a glaring lack in Australian social data. It’s one that will need to be remedied if we are to avoid the worst consequences of precarious labour markets. •

The post Expecting the unexpected appeared first on Inside Story.

In March 2016, this coastal town became the first trial site for the cashless debit card, a new, stringent way of quarantining welfare payments. Just 20 per cent of a cardholder’s welfare payment is credited to his or her bank account, with the remaining 80 per cent sequestered on a debit card that can’t be used at any alcohol or gambling outlet.

I have worked on the far-west coast of South Australia for over a decade now, and have written a book about my research into the entangled questions of mining, conservation and native title there. In the middle of 2017, I embarked on research about “lived experiences” of the debit card trial in Ceduna. I sought to hang around with and listen to people affected by the card, spending approximately three months in Ceduna over the last year and a half, and visiting Yalata on four occasions. This is the anthropological method: it involves endeavouring to become a part of the everyday lives of the people one is hoping to better understand.

I have volunteered for the Red Cross’s Driver Mentor program, accompanying learner drivers around town. “I’ve got my bush licence,” joked one confident young person who learned to drive at an early age out at the former Koonibba mission. I’ve also driven with people who have settled in Ceduna as adults. I’ve singed the fur from kangaroo tails over a smoky fire in the mallee scrub, and watched evening tennis matches as galahs careen low across nearby paddocks. I washed a lot of tea cups at a local drop-in centre; I joined the gym.

I was not there to generate more statistics, to abstract or to generalise. I asked people about their prison tattoos. I learned how tricky it is to germinate Sturt’s desert pea seeds. I watched knitting projects take shape. I asked people about their working lives and I also asked people about forms of labour that don’t get recognised as work: the care of siblings, of close kin, of other relatives’ children, or of the sick and grieving.

Sometimes I borrowed a bike, sometimes I gave or accepted lifts around town. I called in at the craft shop to check for fresh eggs and jelly cakes. I found at the Aboriginal arts and culture centre an eye of focused creativity and peace in the midst of a chaotic storm of circumstances and events that were often desperately cruel. I remain dazzled by the large canvases by consummate artist Verna Lawrie, the energy of Glenda Richards’s Seven Sisters works and the meticulous detail in Ashley Pompey’s paintings.

By September 2016, the Ceduna trial covered 752 people, including the residents of the remote community of Yalata, northwest of Ceduna, and a number of other nearby Aboriginal localities. Although census data shows that only around 22 per cent of the 3500 people who live in the Ceduna local government area (which excludes Yalata) are Indigenous, around three-quarters of the people on the trial are Indigenous.

A second trial of the card, in Western Australia’s East Kimberley region, began in April 2016 and a third started in the Goldfields region of Western Australia in March 2018; in both regions, the card is issued to all welfare recipients of working age except if they’re on a veterans’ payment. At the site of the fourth trial, a predominantly non-Indigenous area including Hervey Bay and Bundaberg in Queensland, the card is issued only to those aged thirty-five and under.

The card originated in a report published in 2014 by a mining magnate that was subsequently taken up, modified and implemented by the federal government. In The Forrest Review: Creating Parity, Andrew “Twiggy” Forrest called for what he called a cashless Healthy Welfare Card. When I asked about the origins of the scheme, one of the card’s proponents in Ceduna immediately nominated an opinion piece by Forrest in the Australian around the time of the report’s release. Another interviewee emphasised that this was “co-designed” social policy — that conversations with Aboriginal community members were crucial in the lead-up to the agreement between the federal government, the Ceduna district council and five Indigenous organisations in August 2015.

But many of my research participants describe a profoundly disempowering process. They first heard of the card, they said, in news reports of the agreement’s signing. On the subject of consultation, I noted down comments such as this: “None of those government officials ever spoken to the community. It’s like they was all cherrypicked. The mayor, he picked the people that favoured the card, so the government officials spoke to the people that favoured the card.” And this: “They pulled the blanket over everyone, and just secretly said that everyone is on the card, without informing the community about it.” And this: “No one was told about it. It was all very underhanded and sneaky.”

Journalist George Megalogenis has recently described those Australian regional and rural areas that have largely been bypassed by two decades of skilled migration as being “older and whiter than the nation at large,” warning that Australia risks a split “between those who are globally connected and those who are yelling stop.” Of course, Megalogenis has in mind the populist movements fuelling Trump’s election and Brexit, and, in Australia, Pauline Hanson’s political resurrection. But other grassroots political possibilities are evident in Ceduna, where a tenuous alliance of affected citizens has seeded new friendships. “It did bring the Aborigines and the whites closer because we were working together with a single aim,” says one opponent of the card.

A small group of locals arranged for a public meeting to take place the month following the agreement’s signing, at the Foreshore Hotel. About thirty people, Indigenous and non-Indigenous, old and young, went along — “the biggest variety of people,” according to one of my interviewees. “We tried to get the mayor to come,” I was told. “We give them all invitations to come. ‘This is your community people here: we want answers. We want a consultation, that we were never given.’ But no, we were on our own.” Another person told me, “Basically the feeling was: how could this go on without us… knowing. Without talking to people about it?” Two more meetings organised by concerned locals followed.

It was only after the federal legislation implementing the card had passed on 15 October 2015 that a more widely publicised public meeting was held at a local football club. This one was attended by the federal human services minister at the time, Alan Tudge. Two weeks later came a protest organised by card opponents. “We marched on the main street!” I was told proudly.

The perceived contempt shown to a senior figure from Yalata at that November 2015 meeting at the club made a deep impression on a number of my interviewees: “Mr Tudge was so rude. He was so rude to that lady and she’s an Aboriginal elder, she’s really high up in their hierarchy. I had never seen anybody… He just totally ignored her. It was just awful.” Sure, meeting attendees rambled, were nervous, or furious, says another interviewee, but they were there to express themselves, remembers another. A number felt that some of the government visitors, standing at the back of the hall with their arms crossed, were “snickering” at the contributions of some of the attendees.

Why was the debit card first tested in Ceduna? There’s a long and complex answer to that question — and it partly depends on whom you ask, of course — but drinking is central. Who is drinking, and how to help them stop are the key questions, and they have no easy answers.

A Senate inquiry into the debit card legislation drew numerous submissions highlighting the Yalata community’s resolve to stem the flow of community members into Ceduna chasing gubby, or grog, and detailing the heavy costs involved. An elderly Pitjantjatjara woman explained to me that she was constantly counselling kin she encountered in Ceduna. “I say, ‘Wiya, wanti [no, leave it]… get on with your life, hey? You’ve got kids. You’ve got family at Yalata. Why, what are you doin’ here?’” The broader Indigenous community on the far-west coast has been grappling with the effect of alcohol on the community’s health and happiness for decades.

So, while many of my Aboriginal informants expressed cynicism about their “leaders,” ”representatives” or cousins who sit in an office and sign away their community’s rights, and speculated about how they were induced, threatened and/or rewarded, my belief is that they are community-minded people in search of a circuit-breaker.

But focusing on the intentions of those in positions of institutional power is not the point. What I’m here to find out is what it’s like to be on the debit card.

It’s like being “taken back,” an elderly man told me, “to the days when old people were given a pinch of tea, some sugar and salted beef.” Or, for some Indigenous and non-Indigenous women, it’s like being taken back to periods of their life when they were controlled by — “under the thumb” of — a “bossy man.” How grimly ironic, given that the state casts itself as protecting women by restricting the amount of cash available to be pooled and drunk away. This same logic, of course, was also deployed in the Howard government’s 2007 Northern Territory intervention.

I interviewed an Aboriginal grandmother whom I’ll call June (I’ve used pseudonyms throughout this article). “I was [a] very respectable woman!” she emphasised. “I feel strongly that I don’t want to be on it, because it’s taken responsibility away from me… It’s treating me like a little kid again.” A more ambivalent response came from Shaun, who fretted about children growing up in drinking households and hoped the card was helping: “It’s got its cons, and it’s got its non-cons, and to me, I just like my money in the bank and spend it how I wanna spend it. Not being dictated to, how it’s gotta be spent and the percentage-wise, and it’s taken the independence away from me.”

Dustin went further: “But to be on this card it feels like, I tell you, if you’ve ever been to prison…” I haven’t; he has. “Stripped of rights” again, he feels that being on the card results in unending stress.

The shame-inducing aspects of this punitive and race-based policy are consistently highlighted by opponents of the card. Drawing on a survey of participants, the evaluation of the pilot says that “only 4 per cent… explicitly raised ‘stigma’ or ‘shame’ associated with the card as an issue at Wave 2.” In the Wave 1 data, collected nine months earlier, around six months into the Ceduna trial, the figure was 6 per cent. But shame can be hard to measure. It creeps across cheeks, or makes one fumble or look down, feeling squashed. Shame might recur as experiences accumulate. Robert, for example, remembers moving schools and suddenly finding himself “one little blackfella” in a large high school. “I just felt so alone… I was sort of copping it left, right and centre: black this here, black that there.” A short survey is a woefully inadequate instrument for capturing that kind of experience.

Besides, anthropologists have long noted that the meaning of shame in Aboriginal Australian communities is quite different from how the notion is used in the broader community. In Aboriginal English, “shame” (kunta in Pitjantjatjara) might refer to an experience of being distinguished as an individual, for good or bad reasons. For example, I ran into a young person who had just collected a NAIDOC Week award on behalf of a relative. The experience of accepting the award on stage was described as “shame,” even if this was a joyful moment. This can be partly explained by the cultural value placed on egalitarianism in Indigenous communities. Because the debit card was issued to so many fellow relatives and community members, most people shook their heads when I asked about the issue of shame in Yalata. There was no shame involved because everyone was on the card. “Just usual, I suppose,” said one person. “Like the Medicare card and everybody uses that. Like that to me, you know, you’re not shame.”

The response was quite different in Ceduna. Many people shared their perspective of finding the card an “insult,” of feeling “targeted” and “punished,” of being involved in the trial as a “degrading” experience. “When I pull [the debit card] out,” June began, then she stopped and sighed. “It makes me shamed I come to the shop. There are a lot of people standing back looking: they got money in their pockets, you know. Then I thought, ‘I wonder what they’re thinking?’”

This shame was experienced most acutely after the card was first introduced. As one person said, “I felt like I was, what do you call…? A stigma was attached. You were being segregated. You know, you were looked down upon.” Here’s Robert again: “I just feel like I’m another person to blokes that’s got regular job, and me, pulling the grey card out in front of them, that’s embarrassing. ‘Oh, he’s on the Indue card,’ you know.” (Indue is the company contracted by the federal human services department to issue the card and administer the trial.) “Yeah, you get your little smirks and stuff like that around the place.” Another response was to shrug off shame defiantly — why should I feel ashamed? some people said. I am not lesser because I need government assistance.

The card doesn’t work at the municipal tip, I was told. And an Aboriginal couple explained that they preferred to order car parts online, and fix their vehicles themselves: “eBay doesn’t accept the cashless welfare card,” one of them said, “and my car’s still off the road. Now, that’s a big problem.” In fact, the informal cash economy is important to many people I spent time with. As Tracey explained, “I buy everything in my house, like my kids’ beds, my bed, the fridge, the microwave, even clothing, everything just about that I own was purchased off of this Buy Exchange [a local website where people swap, sell and buy second-hand goods, using cash]. You find that with a lot of community members here. When you haven’t got money to go splurge and buy, you know, [an] $800 telly, when you can buy the same telly for maybe 50 per cent.”

The debit card uses EFTPOS technology, so it is widely accepted, even at second-hand or opportunity shops. But, yeah, the op shop. Tracey squirms, “I really feel it there… They’re elder people and they’re very well respected in the community. It makes me feel like I’m a drug user or something like that because I’m on the card, where it’s not the case at all. So that’s why I think that it’s sort of stereotyped there that if you’re on the card you’re… When you could just be a simple Centrelink recipient.”

Helen has found the card unpredictable. “I can be at the chemist and pay for my meds, I can go up to the post office, and it won’t work. I can come back to the supermarket and it will work, or vice versa and anywhere in between.” Pre-existing anxieties have been exacerbated in this case. “It’s just the trepidation.”

These experiences notwithstanding, many people I spoke with took care to note that “some people” like the card. It was nearly always women who told me they liked it; they like the app they can use to check their card’s balance, and are pleased to find more money saved at the end of the fortnight.

Partly, too, people didn’t want me to believe that their perspective on the card was shared by everyone. Not only is it considered culturally improper to impinge on others’ capacity to speak for themselves, but I came to realise that they were also saying, “I was spoken for. I have been spoken about. I have not been listened to. But I won’t speak for others, or over the top of them.”

But it’s not correct to assume that people with drink, drug or gambling problems are opposed to the card, and clean-living recipients accept it. I came to see that the most articulate and passionate critics of the card were often those attuned to broader colonial, racial and social injustices and injuries, and sought to understand the card in a historical perspective. They had a lot to say, and our conversations ranged from terra nullius to the implementation of the Community Development Program, a disastrous federal employment scheme that many of my research participants are also enrolled in. Those who liked the card, on the other hand, tended to leave these larger issues in the background, with more immediate familial concerns claiming their attention.

Responses to card proponents’ frequent assertions that things are “quieter” in town were mixed. Is it true? If so, is it the card? Or is it the work of the mobile assistance patrol bus, which transports people home or to places where they can rest and rehabilitate? (The bus is part of a concerted “service reform” project under way in Ceduna since 2013.) Or is it the stringent electronic “ID tech” system restricting the purchase of alcohol, introduced in 2012? It could equally be the community paramedics, who have worked humbly and with great success since September 2016, building up relationships with the Aboriginal community and connecting people with the medical system before things get dire.

And anyway, what does it mean to say things are “quieter”? “A lot of our people are transient,” Rexy from one of the local social services told me. “So things might look quiet one minute, and then they’re full-on the next, you know? It’s not like, ‘Oh, it’s working because it’s quiet.’ We’d usually say, ‘It’s quiet. Must be people gone somewhere, you know? Where’ve they all gone?’ And then all of a sudden they’re all back.” Funerals, cultural business, fluctuations in weather all play a part. “It’s not even about whether you see people or don’t see people. Even when you don’t see people, some of our people are concerned, because then we think, well, if they’re not there… where are they?”

In the East Kimberley, the cashless debit card is referred to as the “white card,” because of its perceived imposition of white designs. In Ceduna, it is the “grey card,” after its silver-grey appearance, or the “Indue card.” Researchers Elise Klein and Sarouche Razi have established that Indue was granted more than $10.8 million (of the $18.9 million spent up to April 2017) for building and operating the card technology in both Ceduna and the East Kimberley during the trial.

Consultancy firm ORIMA was contracted to evaluate the pilot. The shortcomings of its evaluation have been highlighted by numerous authors, who point out that self-reported “behaviour change” may well be influenced by the interviewee’s reluctance to admit to drinking or, especially, illicit drug use (a limitation acknowledged by ORIMA). Most damningly, the Australian National Audit Office released a report in July 2018 analysing the implementation and performance of the cashless debit card trial. According to the auditor, it is difficult to ascertain “whether there had been a reduction in social harm” as a result of the card’s introduction.

I didn’t seek to evaluate the card in this way. My starting point was “Tell me about your life,” not “Your life is a problem, has it been fixed?” But I did ask: does the card stop people from drinking? One person, living in a household of heavy drinkers, shook his head ruefully in response: “Drunks gonna drink!” Other Aboriginal interlocutors told me, “They’re clever, Aboriginal ones are.” Seeing family members with “lots of grog,” even tawny port, banned from sale at local outlets, a speaker asked, “Eh, where you mob get that, you’re not allowed to…?”

Another person reflected, “Since this card has come out it’s only made people smart. They know how to do the loopholes and it’s not stopping the people that enjoy the alcohol every week. It’s never stopped them.” Another responded more specifically: “What they’ll do is they’ll go buy a laptop on the card and then flog the laptop.” “For cheap?” I asked. “Yep. Cheaper, yeah. Well, they buy radio or they buy a telephone. What do ya call the…? An iPhone and then they’ll flog the iPhone for less, to get money to go to grog.”

Here is not the place to discuss the abysmally low Newstart payment rates, and the fines regime of the Community Development Program. But it is important to note that when people flog a big-ticket item for less than they paid for it, or use their debit card to fill someone else’s fuel tank but accept a lower amount of cash as payment — both examples my research participants related to me — people with little to spare are further impoverished.

I have spent time with people who told of their serious problems with alcohol over the course of their lives. As I got to know them, they spoke more candidly about the long process of overcoming their addiction as well as the traumatic life events that precipitated their descent. In each case, these people had endured horrific deaths of those closest to them. The conjunction of support from other individuals, personal determination, access to rehabilitation services, and the other assistance that enabled them to break their drinking habits casts doubt on whether a blunt instrument like the card can stimulate any meaningful transformations.

What next? Legislation is currently before parliament to extend the Ceduna, East Kimberley and Goldfields trials to mid 2020, and the card is still being rolled out at the Queensland site. @IndigenousX founder Luke Pearson’s observation is apposite:

White Australia has long believed that the mistreatment of Indigenous Australians could never be perpetrated against them, but we are already seeing this happen with cashless welfare cards being rolled out to non-Indigenous people, work for the dole, and other punitive measures that were first trialled on Indigenous people. The denial of rights that Indigenous people never even got the chance to enjoy is now plaguing the rest of the country as well.

Meanwhile, a Yalata person told me, despairingly, “We’ve lost our vision. A card cannot give vision to the community.” I was reminded of novelist Alexis Wright’s observation: “It is almost a miracle wherever you find a really solid Aboriginal-defined vision forging its way through a maze that only seems to work to destroy possibility.”

While my research participants are convinced that “no one listens to us,” the poor are keen observers of those who make policy and pronouncements about their lives, just as Aboriginal people across Australia offer astute insights into the ways of whitefellas. They notice those advisers who seemed to snicker down the back of the footy club when hearing the testimonies and questions of people whose very presence at a public meeting attests to their sheer bloody tenacity. I talked to others about Malcolm Turnbull’s visit, when he described the cashless debit card as an exercise in “practical love.” A small crowd of gathered dissenters wasn’t feeling it. “He turned his back on us,” a highly respected local Indigenous woman told me bitterly. Another person summarised: “They think we’re rubbish.” •

I am the grateful recipient of a Macquarie University Research Seeding Grant, which supported the fieldwork undertaken for this research.

The post “We’ve lost our vision. A card cannot give vision to the community” appeared first on Inside Story.

Labor claims that most of those hit by the change are wealthy retirees who are not paying their fair share of tax. Scott Morrison counters that abolishing refunds of unused imputation credits will mainly hurt low-income earners. So, who’s right?

Part of the confusion stems from the fact that data on what retirees earn, what they own and what tax they pay is highly fragmented. Personal income tax returns provide only a patchy picture of the earnings and wealth of retirees. Superannuation payouts have been tax-free since 2006: they don’t even have to be declared on personal income tax returns. And drawdowns of savings other than superannuation to fund retirement — whether shares, bank deposits or investment property — are not declared as income.

Australian Bureau of Statistics surveys tell us which retirees own shares and what other assets they own, but not whether they receive imputation credits or claim other deductions, or precisely how much income tax they pay. Meanwhile, data on self-managed super funds — which will pay most of the extra tax — is not connected to members’ personal income tax returns or retirees’ other assets.

Picking up these various threads and weaving them into a coherent story about who would pay more tax under Labor’s reforms is no easy task. But here goes.

Australia’s dividend imputation system ensures that shareholders are not taxed twice on corporate profits. “Franking credits” are attached to dividends paid to shareholders, reflecting any company tax already paid, and can be used to offset any personal income tax the shareholder owes to the Tax Office.

Refunds for unused franking credits were introduced in 2001. The logic was simple: people with no or low income should receive equivalent tax treatment as others. Any unused or “excess” franking credits left after someone had reduced their tax liability to zero were returned via a cheque from the government.

Labor’s plan would restore the pre-2001 system: most taxpayers could still use imputation credits to offset other tax owing to the ATO, but those with no income tax liability — mainly retirees and their self-managed super funds — would no longer be able to claim cash refunds.

The government claims that 54 per cent of people affected by Labor’s policy — some 610,000 individuals — have taxable incomes of less than $18,200. And it says that 86 per cent of the value of all franking credits refunded are received by those with taxable incomes of less than $87,000 a year.

These claims are deeply misleading. Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.

Take the example of a self-funded retiree couple with a $3.2 million super balance, plus their own home, and $200,000 in Australian shares held outside super. Even drawing $130,000 a year in superannuation income, and $15,000 a year in dividend income, they would report a combined taxable income of just $15,000, and pay no income tax whatsoever.

And is the treasurer seriously suggesting that 610,000 retirees actually get by on less than $18,200 a year, or nearly 20 per cent below the poverty line? If that were anywhere close to the real story, it would signal a full-blown retirement-income crisis.

Whoever they are, Scott Morrison’s 610,000 “low-income earners” are clearly not the poorest retirees. Few, if any, are maximum-rate pensioners.

A single retiree receiving the full age pension has an income of $23,318 a year, and more if he or she earns extra income in dividends from shares. All this income would show up as taxable income if this retiree submitted a personal income tax return — as required to claim refundable imputation credits.*

Some maximum-rate couple pensioners could have a taxable income below $18,200. The maximum-rate pension for a couple is $32,000 a year, or $16,000 each. So one half of such a couple could receive dividends of up to $2200 a year (including refunded franking credits) and still receive a full pension. The maximum hit for them from Labor’s policy would be $660 a year.

But most of those affected by Labor’s policy who declare taxable incomes of less than $18,200 a year are far from being low-income earners. They are either part-pensioners, or not receiving any pension at all. And they’re drawing much of their income from tax-free superannuation.

When superannuation withdrawals are stripped out from income in ABS survey data, as is done to calculate taxable income, almost half of the wealthiest 10 per cent of over-sixty-fives report incomes of less than $18,200. On average, though, they have wealth of nearly $2 million — and that’s even before considering the value of their home or any other property assets they might own.

Of course, there will be examples of seniors with low incomes being hit hard by the change. But media reports highlighting their plight rarely tell the full story.

When we hear of part-pensioners with a taxable income of less than $18,200 a year being hit by Labor’s plan, it is worth asking why they’re only receiving a part-pension in the first place. As single retirees, they must have either an assessable income of more than $27,700 a year or assets exceeding $253,750 (excluding the family home if they’re a homeowner) or $456,750 (if they rent). To be on a part-pension, a retired couple will have an income of between $40,000 and $78,000 a year, and assets of between $380,500 and $1 million.

The full story is that many part-pensioners are relatively wealthy, especially because the home is excluded from the pension assets test. Half of all pension payments go to those with assets of more than $500,000. Almost 20 per cent of payments go to those with assets of more than $1 million. They’re clearly much better off than the bottom 40 per cent of retirees, who draw a full age pension.

Nor is it clear that incomes are the best way to judge just how well-off retirees are. People build up retirement savings during their working lives, which they then draw down to fund their retirement. Or at least that’s the idea.

One reason so many retirees report such low incomes is because they only draw down very slowly on their retirement savings, or not at all. One recent study found that at death the median pensioner still had 90 per cent of their wealth as first observed.

Many retirees who report having very low incomes in retirement have substantial retirement nest eggs. A retiree homeowner with $1 million in super, enough to make him or her ineligible for a full pension, but drawing down at the minimum required rate of 4 per cent, would declare an annual income of just $40,000 a year. And although $40,000 a year, even tax-free, may sound low relative to average full-time pre-tax earnings, retirees tend to have lower expenditure because they are no longer saving and typically are no longer paying off a mortgage. This is a well-off group; few working-age Australians have the chance to accumulate $1 million in superannuation, and pay off their own home, before they retire.

It’s also worth remembering who will pay most of the extra tax under the Labor policy. About 33 per cent will be paid by (mainly wealthy) individuals who own shares directly, 60 per cent will be paid by self-managed superannuation funds (typically held by wealthier retirees), and the remaining 7 per cent will be paid by super funds regulated by the Australian Prudential Regulation Authority.

The poorest half of all retirees own less than 2 per cent of all shares held directly. By contrast, the wealthiest 40 per cent of retirees own 97 per cent of all shares held directly, and the wealthiest 20 per cent alone own 86 per cent of all shares held directly.

Among self-managed superannuation funds (primarily held by wealthier retirees), half of the refunds are currently going to people with balances over $2.4 million.

For more than a decade, superannuation tax concessions have been absurdly generous to older people on high incomes. They are one of the major reasons older households pay less income tax in real terms today than they did twenty years ago, even though their workforce participation rates and real wages have jumped.

These age-based tax breaks help to explain why the proportion of seniors paying tax almost halved in twenty years, from 27 per cent in 1995 to 16 per cent in 2014. The rise of these “taxed-nots” coincides with the introduction of the Senior Australian Tax Offset in 2000, and tax-free super withdrawals in 2007.

Generous super and other age-based tax breaks have been funded by deficits. The accumulating debt burden will disproportionately fall on younger households.

The government’s claim that abolishing refundable imputation credits will mainly hit low-income earners is deeply misleading. Taxable income ignores the largest source of income for many wealthier retirees: tax-free superannuation.

Retirees with the lowest taxable incomes are likely to be wealthier self-funded retirees — precisely the group Bill Shorten wants to target. About 14,000 maximum-rate pensioners and 200,000 part-pensioners would be hit, but the vast bulk of the revenue would come from wealthier retirees. That’s the real story. • 

* The Pensioner Guarantee, announced by Labor soon after the original policy was released, ensures that every recipient of an Australian government pension or allowance who has direct shareholdings or shareholdings via an SMSF before the cut-off date would continue to receive cash refunds. The Parliamentary Budget Office estimates this change reduces the revenue from the policy by $300 million, or around 5 per cent, in 2021–22. In other words, most of the revenue was never coming from those with low levels of income and wealth.

Of course, even with the Pensioner Guarantee not all people adversely affected by the policy change would consider themselves wealthy. But they have generally accumulated a reasonable nest egg — especially if they also own their own home.

People over sixty-five are not eligible for the pension if they have assets of at least $564,000 apart from their home (if they are homeowners), or $771,000 for non-homeowners. A retired couple will have assets of at least $848,000 (homeowners) or $1,055,000 (non-homeowners).

• An update to this analysis, accounting for subsequent changes by Labor to exempt all pensioners from the policy, can be found in Grattan’s submission to the parliamentary inquiry into the implications of removing refundable franking credits.

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During any fortnight, more than five million Australians, or roughly a quarter of the adult population, receive an income-tested social security payment — an age pension, a disability support pension, Newstart, a carer’s payment, a parenting payment or one of seven other categories of income support. Around another 855,000 families have their income supplemented by family tax benefits, and 900,000 or so families, many of them not receiving social security benefits or other family payments, are assisted with childcare costs.

As we look over longer periods, receiving social security payments becomes ever more common. According to the latest Household, Income and Labour Dynamics in Australia survey, around 70 per cent of working-age households include someone who received an income support payment at some point between 2001 and 2015 (not including those receiving an age pension or family payments).

In these terms, the social security system is among the core institutions of contemporary Australian society. It can also be regarded as one of the main levers not just of social policy but also of economic policy. Australian governments have used the social security system to stimulate household spending during recessions or to avoid recessions — as at the time of the global financial crisis — and have adjusted the social security system to assist longer-term economic restructuring.

Other links between social policies and the economy are real, albeit more difficult to measure. The International Monetary Fund has shown that higher inequality is bad for growth, and we know that social spending helps individuals to deal with life-course events — having children, retiring, becoming frail — and with the risk of unemployment, adverse health events and family break-up, all of which a majority of families face at some time.

Yet people receiving social security payments are sometimes portrayed as a poorly behaved or even fraudulent minority. Critics see welfare income as a failure of individual character, or as the result of political parties “addicted to spending.” They express fears about the sustainability of spending trends, particularly in times of fiscal restraint or “budget repair.” It has even been argued that most Australians are now “voting for a living” rather than working, and one commentator reached the rather surprising conclusion that the majority of Australians are “a drain on the nation’s wealth.”

Social policy is inherently controversial. But public policy-makers and commentators need at least to understand its evolution, and how changes in direction came about, if we are to meet the challenges of the future.

So what have been the trends in social security spending? As the chart shows, spending on cash benefits grew dramatically between 1965 and 1983, and has stayed roughly at that proportion of GDP ever since. Spending increased from around 3 per cent to 4 per cent of GDP in the early 1970s — the period mostly covered by the Whitlam government — but the great expansion was mainly under the Fraser government, when spending rose to 7.2 per cent of GDP.

Source: Calculated from OECD Social Expenditure database, and Whiteford and Angenent (2002). The OECD data are adjusted for consistency over time by excluding spending on public service retirement pensions (added to the database in 1990) and payments from workers’ compensation schemes (added in 1995).

Of course, that increase was partly the result of policies the Fraser government inherited from the previous government, including significant increases in pension and benefit rates and new payments such as the supporting parent’s benefit. But its own initiatives, such as the conversion of tax rebates for children into family allowances, contributed too. The stagflation of the period helped drive the trend, with unemployment rising in the months leading up to the 1983 election and the election of the Hawke government.

What is perhaps most striking is the relative stability of social security spending since then. At the start of the Hawke government, the figure was 7.2 per cent of GDP; thirty years later, at the end of the Rudd–Gillard–Rudd government, it was the same percentage. It had risen as high as 7.9 per cent when the economy was recovering from the deep recession of the 1990s, but only fell to 6.2 per cent in 2007, the high point of the greatest economic boom in Australia’s modern history.

In some respects, the stability of spending on age pensions — the costliest cash benefit in Australia and most other OECD countries — is even more striking, peaking at 3.1 per cent of GDP in 1983 and remaining below that level over the subsequent three decades. Spending on age pensions is now scarcely different from its level in 1975.

This is puzzling in many ways. The single rate of an age pension when the Whitlam government came into office was around $10,800 (in 2018 terms), and it was $13,200 when it left office, a substantial increase of around 22 per cent. In 2018 it is around $23,300, with nearly half of the difference being a result of the Rudd government’s pension increase in 2009. The share of the population aged sixty-five and over has also increased very significantly over this period.

The apparent stability of total spending also disguises the fact that a lot of paddling was going on below the surface. A rough index of the pace of changes to the Social Security Act can be calculated from published compendia of legislative provisions, which unfortunately only go up to 2000.

In the first sixty years after Federation, summarised amendments to the Act average just under 1.5 pages per year. The Whitlam government doubled the pace of change, but the Fraser government saw the rate drop back to just under two pages per year. The Hawke and Keating governments multiplied this fifteenfold, and in the first four years of the Howard government the index increased by a further 60 per cent. By then it was taking an average of fifty pages to describe each year’s amendments to the Act.

Many of these policy changes came as the result of reviews of the social security system, notably the Henderson poverty inquiry of the 1970s, the social security review chaired by Bettina Cass between 1986 and 1988, the first McClure review in 2000, the Harmer review of the age pension in 2008–09 and the second McClure review in 2015. Government reviews of the tax system in 1985 and 2001, and the 1994 Working Nation report on unemployment also influenced the design of the system in important ways. But many important changes to social security over this period also reflected decisions made in the annual federal budget with the aim of saving money rather than pursuing a longer-term vision for social security.

This multitude of changes makes it difficult to discern an overall trajectory of social security policy, which at times has expanded coverage and generosity in one area while cutting back in others. Yet the architecture of the system has been relatively stable, and many of the main programs we know today are essentially the same as they were in 1969 or even in the 1940s, albeit under different names.

In his 1997 book, The Institutional Design of the Australian Welfare State, Francis G. Castles observed that “almost nine decades” after the first Commonwealth income-support schemes were introduced in 1909, five features remained fundamental to Australia’s main income-support benefits: they were income-tested, they lasted as long as they were needed, they were paid at a flat rate, they were funded from general revenue, and they replaced only a relatively small proportion of average wages. Two decades on, those basic features remain.

Up to a point, at least. Some aspects of the system are significantly different from the social security system of the 1970s and 1980s — particularly family payments, the superannuation guarantee and the recently introduced paid parental leave scheme. But the last two of these provisions do conform to Castles’s characterisation of Australia’s system as a “wage earner’s welfare state,” with the superannuation guarantee being an employment-contingent benefit initially provided through industrial agreements and then effectively mandated as a condition of employment, and paid parental leave partly mimicking an employment-contingent benefit.

The area of spending that has changed most significantly over time is assistance for families. The Fraser government “cashed out” income tax rebates for dependent children to create a new family allowances payment in 1976. These and other family payments were soon frozen, at a time when the number of children in families receiving income support was increasing as a result of rising unemployment and greater assistance for lone parents.

The Hawke government made more extensive use of social policy to achieve economic policy goals. It reached a series of Prices and Incomes Accords with the trade union movement designed to moderate wage increases and so reduce unemployment. Households were to be compensated for the effects of wage restraint with increases in social spending, a large part of which would come through the tax and social security systems.

The Accords were also associated with changes in spending on non-cash benefits, not only in areas like healthcare and education but also in housing and childcare. The union movement labelled these part of the “social wage.” The most important was the reintroduction of the universal health insurance scheme known as Medicare. Coming into operation in February 1984, the scheme was partly financed by a 1 per cent levy on taxable income. Public spending on healthcare increased from 3.8 per cent of GDP in 1983 to 4.3 per cent in 1985.

Under the previous system, public support for healthcare costs had essentially been restricted to people on social security benefits or very low earned incomes. Households with higher incomes could afford to take out private health insurance and thus benefit from tax concessions.

In a study of the impact of these policies over the period from 1981–82 to 1993–94, economists David Johnson, Ian Manning and Otto Hellwig found that the social wage increased from around 17 per cent to 23 per cent of disposable cash income. Proportionally, the largest increases were in housing, childcare and concessions, which doubled in real terms; as a share of increases in the social wage, higher spending on healthcare was by far the most significant, with spending rising from just over 10 per cent of average household disposable income to 15.6 per cent.

The economists also estimated that the redistributive impact of non-cash benefits increased by about a third over this period. The share of social-wage income received by the bottom 60 per cent of households increased by 2.2 percentage points and the share of the richest 40 per cent fell correspondingly.

Increases in the social wage were complemented by changes in social security and taxation policy. As a result of increasingly generous payments for children, spending on family payments increased from 1.1 per cent of GDP to 2.2 per cent, the largest increase in benefits of this kind in any OECD country. By 1996, Australia had gone from spending below the OECD average to being the second-highest spender.

Spending also became much more targeted. In 1983, at the initiative of the previous Coalition government, extra payments were introduced for working families on very low incomes. Over time, the Labor government significantly expanded these payments, as well as increasing rates and lowering the income-test withdrawal rate. As a result, the proportion of families receiving the payments expanded from around 1 per cent in 1983 to around 14 per cent by 1998. Over the period 1983–96, the real rate of payment per child in these low-income families increased by more than 60 per cent. The payments were set as a proportion of the married rate of pension, effectively the same as linking them to wages.

Income-testing also expanded at the other end of the income distribution, with the introduction of means-testing of family allowances in 1987. Overall, the proportion of children covered by family assistance dropped significantly among higher-income families but generosity increased for children in low-income families. It was a powerful instrument of compensation for the adverse labour market trends of the 1970s and 1980s, albeit one restricted to families with children.

Changes in the taxation system were also important. A review of the tax system in 1984–85 led to a range of base-broadening measures, including the extension of the capital gains tax and a new tax on employer fringe benefits. The top income tax rate was cut from 60 per cent to 46 per cent, its regressive impact partly offset by changes at lower income levels. The basic tax threshold was not indexed, and fell by about one-third in real terms; with other thresholds also not fully indexed, average rates of tax tended to increase. For low-income earners, however, these regressive changes were offset by rebates. In effect, the tax system became more “targeted.”

In a study for the OECD, Michael Förster and Mark Pearson found that between 1984 and 1994 the share of social security payments going to the poorest 30 per cent of the working-age population increased from 58 per cent to 62 per cent. In both years, Australia directed a higher share of social security spending to low-income groups than any other OECD country. The share of taxes paid by the poorest 30 per cent fell by more than any other country, while the share of taxes paid by the richest 30 per cent increased by nearly ten percentage points to around 65 per cent of total direct household taxes, the largest increase in the share of taxes paid by the rich of any OECD country.

From the 1990s on, policies to assist families were first strengthened and then restricted. Further increases in payment rates came under the Howard government, particularly for single-earner and lone-parent families with children, up until 2003. Then spending on families started to decline as a proportion of GDP, initially because of the rapid growth in GDP but then, after 2009, as a result of policy changes under the Labor government.

In the process, Labor undid its historical linking of family payments to wages, guaranteeing that future family payments will be less effective in reducing child poverty. The current government has further reduced outlays in this area. Overall, the fall-off in spending between 2003 and 2014 was the most rapid of any OECD country.

The fact that Australia went from the most rapid increase in spending on family payments to the most rapid decline can be seen as symbolic of changing perceptions of the role of welfare spending. But there have been exceptions to this general trend. Technically, Australia did not go into recession during the global financial crisis of 2008–09. In part, this reflected the fact that Australia put in place one of the largest fiscal stimulus packages in the OECD during 2008–10, equivalent to 4.6 per cent of 2008 GDP, with a very large component delivered through pensions, family payments and tax refunds.

Since then, though, the politics of “budget repair” has come to dominate discussions of social policy. The rhetoric of government shifted to references to “lifters” and “leaners” and then to “the taxed and the taxed-not.” In practical terms, the policy change has not been entirely successful; in fact, the best label for the past five years is “attempted austerity,” with the Senate rejecting a wide range of social security changes from the 2013–14 budget onwards, and more than $10 billion of “zombie measures” sitting in the forward estimates for a number of years.

Nevertheless, a recognition of the positive contribution social policy can make to dealing with economic challenges seems to have given way to the view that social policy is itself an economic problem. Let’s hope we don’t have to wait for an economic challenge like the recessions of the 1980s and the 1990s or the global financial crisis before Australia once again recognises the importance of maintaining adequate social security. •

The post Why social policy counts appeared first on Inside Story.

The report might be “page after page of gaslighting the very real hardships faced by tens of millions of Americans,” as one expert on poverty described it, but it also represents a complete reversal by the Republicans. For years they have proclaimed the War on Poverty to be a failure. It has been “a stalemate at best,” declared House speaker Paul Ryan in 2016, reprising a long-held position at the launch of his own plan to dramatically scale back the welfare safety net. Yet Republicans now say the War on Poverty has worked so well it is no longer needed.

That’s where last month’s report comes in. Its main role is signalled in its title, Expanding Work Requirements in Non-Cash Welfare Programs, and the headline above the accompanying summary, “Poverty Has Declined in the United States, and Work Requirements in Welfare Programs Are Not a Punishment.” It is intended to support the push by President Trump and Republican congressional leaders to impose or step up work requirements for Americans who receive benefits from federal safety net programs. With control of Congress and the White House, Republicans see this as a once-in-a-generation opportunity to overhaul programs they have long argued are wasteful, easily exploited and encouraging of dependency.

Not necessarily coincidentally, the United States is engaged in a war of words and data with the United Nations. This began in December last year with a very blunt statement from Philip Alston, the Australian lawyer who is the UN special rapporteur on extreme poverty and human rights, following a visit to the United States at government invitation. “American exceptionalism was a constant theme in my conversations,” he said. “But instead of realising its founders’ admirable commitments, today’s United States has proved itself to be exceptional in far more problematic ways that are shockingly at odds with its immense wealth and its founding commitment to human rights.”

Six months later, Alston’s formal report on the state of poverty in the United States singled out Trump’s policies for criticism. “The policies pursued over the past year,” it said, “seem deliberately designed to remove basic protections from the poorest, punish those who are not in employment and make even basic health care into a privilege to be earned rather than a right of citizenship.” It seems likely that a secondary aim of the Council of Economic Advisers report was a rebuttal of Alston’s work.

Using 2016 census data, Alston found that 12.7 per cent of the population, some forty-three million Americans, live in poverty (defined in 2016 as US$12,486 per year for a single individual under sixty-five and US$24,339 for a family of four with two children under eighteen). Around 18.5 million of them live in extreme poverty (that is, an annual income less than 50 per cent of the poverty level) and 5.3 million live in “third world conditions of absolute poverty,” defined as less than $4 a day. Children comprised 32.6 per cent of all people in poverty.

The US representative at the United Nations and other international organisations, Nikki Haley, objected strongly to Alston’s findings, calling them “misleading and politically motivated.” The Trump administration’s report claims that only 3 per cent of the population is in poverty and no more than 250,000 Americans are in “extreme poverty.”

How is it possible to reach such different conclusions? The problem starts with definitions of poverty and how these are used. The federal government’s official poverty measure, which determines access to welfare programs, is calculated annually by taking the census bureau’s poverty thresholds and adjusting them using the consumer price index. This year, the figure is US$12,140 for a single person and US$25,100 for a family of four. Those who live in households with earnings below those incomes are considered to be in poverty.

The other yardstick, the supplemental poverty measure, includes an estimate of real household expenditures, as well as income from all sources, including government programs, and yields higher thresholds. It isn’t used to determine eligibility for government programs, though many argue it should be. In 2016 the supplemental poverty measure was 14 per cent, 1.3 percentage points higher than the official poverty rate of 12.7 per cent. Research has shown that poverty measured in this way has fallen since 1965, but entirely because of government programs.

Some conservatives claim that America’s real poverty rate is close to zero. “Our poverty program has actually been enormously successful if you measure it in the appropriate way,” declared a Cornell University economist who was a member of the Council of Economic Advisers. “It’s time to acknowledge we succeeded.”

Meanwhile, the Stanford Center on Poverty and Inequality ranks the United States last of the top ten most well-off countries in terms of labour markets, poverty, safety nets, wealth inequality and economic mobility, and says that the country is “a clear and constant outlier in the child poverty league.”

Armed with the Council of Economic Advisers report, Donald Trump and the Republican leaders in Congress have set about adding or stepping up work requirements in three programs: Medicaid (which currently provides healthcare cover to sixty-eight million people, including fifteen million with disabilities); the Supplemental Nutrition Assistance Program (better known as food stamps, which provides food and nutrition to forty-five million); and several federal housing assistance programs that currently assist 4.5 million households.

In January, the administration issued a guidance to the states to allow them to withhold Medicaid from recipients unless they have a job, are in school, are a caregiver or volunteer, or participate in other approved forms of community engagement. In April, Trump signed an executive order instructing his cabinet to find other social services for which they could impose work requirements or make existing requirements harsher. In June, House Republicans passed a farm bill that imposed harsher work requirements for recipients of food stamps; these changes were stripped out by the Senate, leaving the bill hostage to Paul Ryan’s demands for more stringent work requirements.

Realistically, none of these efforts is going anywhere fast. Aside from Congress’s failure to enact legislation, the states’ attempts to impose workforce requirements have been stymied since late June, when the Trump administration lost the first court test of work requirements.

In a seminal case with widespread ramifications, a US District Court judge struck down the Department of Health and Human Services’s approval of Kentucky’s request to impose work requirements on Medicaid recipients. The judge found that the approval failed to demonstrate that a work requirement was consistent with the purpose of the Medicaid program — to furnish medical assistance — and that this rendered the approval “arbitrary and capricious.” “While plaintiffs and their amici assert that these proclaimed health benefits are unsupported by substantial evidence, the Court need not enter that thicket,” the judge went on. The department’s case failed for a more basic reason: “it is little more than sleight of hand.”

Such a judgement sends a strong message. If the federal or state governments want to implement work requirements, they face a very high bar in arguing the connection to health.

It’s worth noting that Kentucky (represented in the US Senate by Senate leader Mitch McConnell and Rand Paul, both fierce opponents of Obamacare) had very successfully implemented an expansion of Medicaid under Obamacare in 2014, making 500,000 additional low-income people eligible for benefits. An evaluation showed that the cost to the state budget was more than offset by revenue generated by extra economic activity, giving a net gain of nearly US$820 million to state and local governments through to 2021. Yet the current governor, a Tea Party Republican elected in 2015, has opposed the expansion. Miffed at his inability to implement work requirements, he has ended dental and vision benefits for Medicaid expansion recipients.

Trump administration officials remain committed to work requirements because they believe the measures not only reduce reliance on government programs but also improve a person’s physical and mental health. But there is little evidence of health improvements after welfare-to-work transitions, and the statistics show that many people who leave welfare, especially women, remain poor.

Welfare advocates agree that encouraging people to work is a good thing, But they argue that imposing strict requirements on already vulnerable populations, particularly coupled with an aggressive effort to slash funding and shrink public assistance programs, could be disastrous for those in need. The consequences could be especially dire for those already having trouble finding and keeping a job, including single mothers who can’t afford childcare, people who lack access to transport, and those suffering from mental illness.

In reality, the majority of people receiving federal welfare benefits who can work, do work. Using data from 2013 (before the expansion of Medicaid under the Affordable Care Act), the Council of Economic Advisers report found that more than half of the working-age, non-disabled beneficiaries of Medicaid, federal housing support or food stamps worked fewer than twenty hours a week. The report failed to consider whether beneficiaries had the capacity to work extended hours, despite the fact that most of the people of working age who were enrolled in Medicaid in 2013 were pregnant women or the poor parents of very young children. Kaiser Family Foundation data from 2017, after Medicaid’s expansion, found that 60 per cent of Medicaid enrolees had full- or part-time jobs.

Trump and his supporters’ belief that welfare programs primarily benefit racial minorities is not accurate: the number of white Americans who benefit from Medicaid (43 per cent) is almost equal to the combined total of African Americans (18 per cent) and Hispanics (30 per cent), and the figures are similar for food stamps. Of families getting help from the Temporary Assistance for Needy Families program, 30 per cent are black, 37 per cent Hispanic and 28 per cent white. No one seems to remember that Ronald Reagan’s infamous “welfare queen,” who engaged in major fraud, was white.

In Trump’s world, intentions are as good as actions and ideology overrides evidence. His continuing demonisation of the “undeserving poor,” often using dog whistles and racist terms, plays to his base, many of whom are struggling economically. His rhetoric amplifies the “us versus them” divisions and signals to his resentful white supporters that they are the real victims and that he will protect them against those who threaten their livelihoods and way of life.

UN rapporteur Alston summed it up: “I have been struck by the extent to which caricatured narratives about the purported innate differences between rich and poor have been sold to the electorate by some politicians and media, and have been allowed to define the debate. The rich are industrious, entrepreneurial, patriotic, and the drivers of economic success. The poor are wasters, losers, and scammers. As a result, money spent on welfare is money down the drain. To complete the picture we are also told that the poor who want to make it in America can easily do so: they really can achieve the American dream if only they work hard enough.”

The underlying racist leanings of the attack on welfare are demonstrated by how states plan to impose work requirements. Proposals from red states like Kentucky, Michigan and Ohio all include exemptions for the counties with the highest unemployment, which tend to be rural, majority-white, and GOP-leaning. The result would be a disproportionate impact on African Americans and Hispanics in urban areas.

It is no surprise, given the current political climate, that the attack on welfare is being extended to include immigrants. The Trump administration is advancing a plan to punish legal immigrants for accepting the food stamps, public housing, Medicaid and other government benefits to which they are entitled. This is designed to appeal to Trump supporters and to help galvanise Republican voters before the midterm elections.

But this strategy could well run foul of Title VI of the Civil Rights Act, which prohibits race-based discrimination in federal assistance programs. Under the statute, even policies that are racially neutral on the face of it, but have a heavier impact on a particular group, could be illegal.

Alston’s report highlighted the human rights dimensions of these policies. “The United States is alone among developed countries,” it said, “in insisting that, while human rights are of fundamental importance, they do not include rights that guard against dying of hunger, dying from a lack of access to affordable health care or growing up in a context of total deprivation.”

Venturing into another highly charged area, the report also noted that people living in poverty and minorities are being systematically deprived of their right to vote by gerrymandered electoral districts, artificial and unnecessary voter identification requirements, obstacles to obtaining such identification, manipulated polling station locations, and a general ramping up of obstacles to voting, especially for those without resources.

These problems didn’t start with Donald Trump, but they have been magnified under his presidency, and his prejudices have played into the hands of the increasingly conservative Republican law-makers in Congress. Their rhetoric obscures the fact that most of the increased benefits of a strong economy and tax cuts have gone to higher-income earners and that, despite low unemployment, many people remain trapped in volatile jobs and have limited savings. And for people born into poverty, getting out takes time: in the United States it is estimated to take five generations.

The upcoming midterm elections will be decisive for many reasons, not least for the future of America’s poor and the welfare programs they rely on. Helping them to clear the hurdles and get out to vote will be important. International evidence shows that bolstering turnout leads to an increased political focus on welfare expansion and greater resource redistribution, one way of addressing rising inequality. •

The post How America’s War on Poverty became a war on the poor appeared first on Inside Story.

Here in Australia, there’s less unanimity. Shadow assistant treasurer Andrew Leigh has highlighted how the richest Australians have taken a rising share of overall income since around 1980, and the newly elected national president of the Labor Party, Wayne Swan, wants to see a renewed effort to reverse that trend. Yet treasurer Scott Morrison says inequality is falling rather than rising.

Part of the disagreement comes down to the question of what we are measuring and over which period. In the decade since the global financial crisis, income inequality in Australia has remained stable or even fallen slightly, but that fall came off a historic high for inequality. There is little doubt that inequality is worse now than it was in the early 1980s. As the IMF reported in its Fiscal Monitor for 2017, “Australia is among countries with the highest growth in income inequality in the world over the past thirty years.”

The Australian Bureau of Statistics’s latest analysis of inequality, released in June, reinforces the point. This is the ABS’s most comprehensive study yet, and not only takes account of the impact of income tax and social security benefits on households, but also factors in government-provided health, education and other community services, along with the GST and other indirect taxes. According to this broader measure, inequality is lower than we thought, but it has risen in recent decades.

At least Australia has enjoyed growing prosperity, Scott Morrison might reply. After all, as the Economist has pointed out, our economy has exceeded the record set by the Netherlands by racking up “the longest stretch of growth in modern history.” This is the message the government highlighted in the budget papers and has used in international promotional campaigns. But when we look at the trends over a longer period, that claim also becomes questionable.

Here, a timely new book from Oxford University Press offers a valuable comparative perspective. Inequality and Inclusive Growth in Rich Countries aims to identify which policies have been successful in limiting the rise in inequality by promoting income growth for those on middle and lower incomes. It analyses in detail the experiences of ten rich countries — Australia, Belgium, Canada, France, Germany, Italy, the Netherlands, Spain, Britain and the United States — over recent decades, showing that stagnant incomes and rising inequality can be dealt with where the political will exists. (Disclosure: I wrote the chapter on Australia.)

A particular theme of the book is a phenomenon that has been called “decoupling,” the process by which the incomes of working-age households have risen more slowly than per-capita gross domestic product. This means that economic growth hasn’t benefited households up to the median level of income — the point at which half the earners receive less and half receive more — as much as it did in the thirty years following the second world war.

What explains this divergence between the growth in per-capita GDP — the measure trumpeted by politicians — and the growth in median household incomes? Basically, the differences come down to the fact that the two sets of figures are collected from different sources for different purposes.

Per-capita GDP is a measure of total domestic economic output, regardless of where it’s consumed; household income surveys only gather information on Australian residents. Certain income sources —imputed rent, retained profits, or in-kind benefits — are included in GDP but not reported in household surveys. Non-responses to household surveys, and misreporting by survey staff, also affect comparability.

Once collected, the two sets of figures undergo different adjustments. Per-capita GDP is adjusted using the GDP “deflator,” which takes account of price changes among all goods produced in Australia. Household income is adjusted using the consumer price index, which takes account of price changes among goods consumed by households. A higher growth in CPI relative to the GDP deflator indicates that households are faced with relatively faster-rising prices.

While GDP growth is expressed in per-capita terms, median income is commonly “equivalised,” with total household income divided by the square root of the household size to reflect the fact that it’s cheaper per person to live together. Because the composition of households is changing over time, a further incompatibility arises: as the average household gets smaller, the economies of scale fall, producing a lower growth in median income compared to a per-capita measure.

Finally, it’s important to bear in mind the difference between “per capita” and “median.” Per-capita GDP growth will outpace median income growth if incomes grow faster in the top half of the distribution.

In Inequality and Inclusive Growth in Rich Countries, Brian Nolan (the book’s editor), Max Roser and Stefan Thewissen apply this distinction to the available data. They show that between 1981 and 2010 real per-capita GDP in Australia grew by an average of 1.83 per cent each year, while real median equivalised household income grew by an average of 1.21 per cent. The gap — 0.62 per cent — was the tenth-highest among twenty-six OECD countries, though only half the disparity for the United States. It is worth noting that about 40 per cent of the divergence in Australia is due to inequality, whereas the figure is about 25 per cent in the United States.

Over the whole period from 1981 to 2010, the growth rate of per-capita GDP in Australia was the equal eighteenth-highest of the twenty-six countries and the growth rate of median income was seventeenth-highest — not exactly world-beating.

Most importantly, household income growth for working-age households varies dramatically across those years. As this chart shows, the period from the early 1980s to the mid 1990s is very different from the subsequent period.

Source: Our World in Data

In the early 1980s real incomes fell or were stagnant for virtually all households except in the highest decile (the richest 10 per cent). Real incomes grew very modestly in the second half of the decade, again with the exception of the richest 10 per cent. Real average income then fell among all income groups in the early 1990s, but the drops were greater for households below the median than for those above. Incomes grew much more strongly for all groups in the second half of the 1990s and the early 2000s, although the gains were nearly twice as great for the highest-income group as for the lowest. This growth — which had started in 1992 — was only sufficient to get lower-income Australians back to where they had been in 1989.

The period from 2003 to 2008 stands out. Real average incomes grew by between 6 and 11 per cent per year for a full five years. Again, the richest did best, but all household groups enjoyed unprecedentedly high rates of growth. Households below the median did better than those in the next four deciles.

Real average incomes for households in the bottom half of the working-age income distribution declined after the global financial crisis, although this time the richest income group also experienced a fall. While the figures are not shown here, income growth has remained modest since 2010, except among poorer age and disability pensioners, who benefited from the Rudd government’s increase in the pension in 2009.

Overall, these divergent patterns of income growth resulted in rising levels of inequality among working-age households. Although incomes rose significantly, all but the richest 10 per cent lost ground. For the sixth to the ninth deciles, income shares were broadly stable until 2003, then fell until the global financial crisis and didn’t subsequently recover.

The share of the richest 10 per cent of working-age households increased from 20.4 per cent to 24.7 per cent. As a result, the Gini coefficient — the most common measurement of inequality — increased from around 0.27 to 0.33 over the period, somewhat less than for the total population (including those of pension age).

Even though income distribution widened among working-age households below the median, these figures suggest that the increase in inequality resulted mainly from the richest pulling far ahead of the median rather than from the poorest falling significantly behind. For the period as a whole, the richest 10 per cent were the only group to increase their share of income.

The most striking feature of these results is the extreme divergence between periods. A period of negative or very low income growth was followed by a period of positive growth, a deep recession, a longer period of solid growth, and five years of supercharged growth across the distribution, culminating in a final period that looks more like the 1980s.

Also striking is the fact that the half-decade from 2003 to 2008 accounts for a very substantial component of the improved living standards households experienced across the whole period. For the lowest three income deciles, those years contributed more than the entire net increase in real incomes since 1981–82 — in other words, without the mining boom they would have gone backwards. For the next two deciles they contributed more than 80 per cent of the total, and for the remainder they contributed two-thirds.

Moreover, the 2003–08 period constitutes a very substantial moderating factor in terms of the overall discrepancy between the growth in per-capita GDP and the growth in median equivalised disposable household income, with real median income growing faster than per-capita GDP by close to five percentage points per year. Indeed, if the 2003–08 period had followed the long-term trend then the discrepancy between per-capita GDP and median income would have been nearly three times as great, and significantly larger than in the United States, although not as large as in several Eastern European countries.

The 2003–08 mining boom and its impact on Australia’s terms of trade look like a once-in-a-generation event that’s unlikely to be repeated, at least in the immediate future. This raises the question of whether Australia is truly a miracle economy, or whether is has once agin showed itself to be a lucky country.

These divergent trends raises two obvious questions. What are their causes, and what role has government policy played in offsetting or reinforcing them?

Let’s start with trends in work-related earnings. Because these are the most important source of income for working-age households, changes in the level and distribution of earnings are likely to be a major contributor to overall income inequality.

The chart below shows trends in the ratio of the ninetieth percentile of full-time earnings to the tenth percentile. This ratio increased between 1975 and 1983, before the first income survey. For most of the next ten years, it remained stable or, if anything, declined slightly. Starting in around 1993, wage disparities steadily increased, then fell slightly at the end of the period. At the beginning of this period, a high-wage worker was being paid about 2.6 times the wage of a low-paid worker; by 2016, the ratio had increased to around 3.3 times.

Source: OECD (2017), “Earnings: Gross Earnings: Decile Ratios,” OECD Employment and Labour Market Statistics database (accessed 14 September 2017)

Trends in the labour market also play a role in inequality. The most up-to-date analysis of long-term labour-market changes in Australia comes from economists Michael Coelli and Jeff Borland at the University of Melbourne. They examine two related indicators, job polarisation and earnings disparities.

Job polarisation occurs when high-skill and low-skill employment accounts for a larger share of the job market at the expense of middle-skill jobs. Coelli and Borland’s analysis of data from the 1960s through to 2011 concludes that the share of employment in low-skill jobs increased by 2.2 percentage points and the share in high-skill jobs increased by 17 percentage points. The share in middle-skill jobs, meanwhile, fell by 19.2 percentage points. This polarisation primarily occurred in the 1980s and the 1990s, and was primarily a male phenomenon.

In their analysis of earnings disparities, the two researchers point out that in 2013–14 the lowest decile of income earners worked an average of ten hours per week, and the second decile worked around fifteen hours per week — in both cases mainly as a result of unemployment, non-participation in the labour market, or part-time work. At the other end of the income scale, highly paid full-time workers worked around forty hours per week.

The next two charts show trends in the labour-market status of men and women aged sixteen to sixty-four between 1978 and 2016. They use ABS labour force survey data and figures from the OECD’s wages database to identify the extent of low pay, defined as the percentage of full-time workers earning less than two-thirds of the median. All percentages refer to a percentage of the population rather than a percentage of those in the labour force.

The charts focus on the proportion of the working-age population who can be defined as being in “good jobs” — in other words, full-time workers who aren’t in low-paid employment. They show that the proportion of men in good jobs was above 70 per cent at the beginning of the period. This fell throughout the 1980s and again in the recession of the early 1990s by about 10 percentage points. The figures continued to fall at a slower rate until 2016, with the overall result that between 1978 and 2016 the proportion of men in good jobs fell by nearly 16 percentage points.

Source: Author’s calculations from labour force survey data and the OECD wages database

About a third of that decline is explained by the increase in the proportion of men who weren’t in the labour force (up from 13 to 18 per cent), and another third by men in part-time work who weren’t looking for longer hours. Roughly another fifth of the group, or 3.3 percentage points, was made up of part-time workers who would like to work longer hours. In total, more than half of the total change reflected an increase in part-time work.

While the proportion of men who were unemployed doubled between 1978 and the peak of the 1990s recession, it subsequently fell to the point where it was no higher in 2016 than it had been in 1978. Low pay among full-time workers has increased, but not strongly. Its highest point was just before the global financial crisis, but it only contributed around 8 per cent of the overall change.

The second of these two charts shows the corresponding data for women. The trends run in the opposite direction, with the proportion of women who are not in the labour force falling from nearly half of those of working age to less than 30 per cent. The proportion who are underemployed and looking for longer hours increased more significantly for women than for men, while the proportion of women working part-time but not looking for longer hours rose by close to 10 percentage points. Low-paid full-time female workers made up a slightly higher share of the population at the end of the period compared to the beginning. Overall, women in “good jobs” rose from about 24 per cent to 30 per cent of the female population, which only partly offset the fall in the proportion of men in well-paid full-time jobs.

Source: Author’s calculations from labour force survey data and the OECD wages database

Over the whole period, the share of the total population of working-age in “good jobs” fell from 47 per cent to 41 per cent.

It could be argued that not all part-time jobs are “bad jobs,” and it’s certainly true that the majority of those who work part-time are not seeking longer hours. If we treat people who are happily working part-time as having “good jobs,” then the increase for women would be greater — from around 38 per cent to 54 per cent — and the fall for men would be lower — from 74 per cent to 64 per cent. Of course, this is an upper limit: not all part-time jobs, even if those in them are not seeking longer hours, are well paid.

Both young men and young women may not be seeking longer hours because of study commitments, while many workers may accept low-paid part-time jobs because of family and other care commitments. Nevertheless, the share of part-time work is very high in industries where low pay would be expected. As Jeff Borland has pointed out, 47 per cent of men and 62 per cent of women employed in retailing were part-time, as were 57 per cent of men and 67 per cent of women working in accommodation and food services, and 41 per cent of men and 51 per cent of women working in healthcare and social assistance. These jobs are not likely to be well paid.

Finally, let’s look closer at the period since the global financial crisis. Technically, Australia didn’t fall into a recession during that downturn, partly because the federal government launched one of the largest fiscal stimulus packages among OECD countries. The boost was equivalent to 4.6 per cent of 2008 GDP, with a very large component delivered through payments to households.

What has happened since then to household income levels and their distribution? The table below shows that by 2015–16 real mean incomes were only 2.7 per cent higher than they had been eight years previously, and real median incomes only 2.8 per cent higher. The Gini coefficient fell from 0.336 to 0.323 — although it was still higher than at any time prior to 2007–08. The reduction in inequality largely reflected a fall in the income of the top 20 per cent, with the self-employed bearing most of the losses.

The income share of the poorest 40 per cent of the population increased somewhat over this period. The ratio of incomes of the tenth percentile to the median increased quite significantly from 46 per cent to 51 per cent, the highest it has been since the income surveys began.

Source: Australian Bureau of Statistics, Household Income and Wealth, Australia, 2017, Catalogue No. 6223.0

Overall, what is most striking about these figures is the very slow growth in real mean and median household incomes — for the median, less than 3 per cent in total, or about 0.35 per cent per year for the previous eight years. This is only slightly higher than the growth rate between 1985 and 1989 (0.23 per cent per year), considerably below the growth rate between 1995 and 2001 (2.1 per cent per year), and much less than the growth rate between 2003 and 2008 (7.2 per cent per year).

Australia might not have experienced a large drop in living standards following the global financial crisis, but the rise in household incomes has slowed considerably and inequality has remained broadly stable. Moreover, the federal government’s social policy priorities have moved more strongly to “budget repair,” with proposed cuts in social security spending likely to have the largest impact on lower-income families. This helps explain why the period since 2012 more closely resembles the late 1980s than the more rapid growth from the mid 1990s to 2008.

“Budget repair” almost inevitably implies that the social security system will become less effective in reducing inequality. Because the Australian social security system targets the poor more heavily than any other rich country, the OECD expects that cuts in social security would increase inequality to a correspondingly greater degree.

The government’s current tax plans will also make personal income tax slightly less progressive. More significantly, the proposed “speed limit” on Commonwealth tax levels will  severely limit the government’s capacity to meet the challenges of population ageing and respond to further increases in inequality.

These decisions contrast with the 1980s and 1990s, when the Accord between the Hawke–Keating government and the trade unions brought tax reform — including broadening of the tax base — and improvements in the “social wage,” which partly offset the trends to higher inequality associated with the labour-market changes during that period. •

The post Good times, bad times appeared first on Inside Story.

I want to argue that the share of tax paid by the highest earners needs to be judged in relation to the share of total income they receive — not simply their proportion of the population. The more unequal a society, the more the rich should be expected to pay in taxes. Compared to other high-income countries in the OECD, Australia’s income tax system is very progressive, yet the overall level of taxes paid by Australians — including high earners — is lower than in most.

The Coalition plan would extend the 32.5 per cent tax rate to taxpayers in the current 37 per cent bracket, beginning in the mid 2020s. It would increase the cut-in point for the highest marginal tax rate from $180,000 to $200,000. As a result, the majority of taxpayers would face the same marginal tax rate regardless of whether they earn $41,000 or $200,000 per year. Once the budget goes into surplus (which the government expects to happen in 2019–20), personal income tax revenue would be capped at 23.9 per cent of gross domestic product, or GDP.

Labor’s plan involves slightly larger cuts for lower- and middle-income groups by 2019–20, followed by further reductions for lower- and middle-income groups after that, but offers much less assistance for higher-income groups.

Both approaches have been analysed and in some cases criticised. The Grattan Institute argues that the Coalition’s plan sacrifices necessary revenue to pay for lower taxes on high-income earners, and that the richest 20 per cent of taxpayers would benefit most from the proposed flattening of the scale. Nevertheless, it says, “the plan itself doesn’t make the tax system much less progressive.”

The Centre for Social Research and Methods at the Australian National University has assessed the Coalition’s proposals and compared the government’s and the opposition’s plans. It, too, concludes that the government’s plan would lead to a modestly less progressive tax system, as would the Labor policy, but that the difference would not be large. Under the Coalition, the share of tax paid by the richest 20 per cent of households would fall from 61.2 per cent currently to 58.3 per cent in a decade; under Labor, it would fall to 59.1 per cent.

A range of other assessments of the tax plans appear on the Budget Forum website of the ANU’s Tax and Transfer Policy Institute. Miranda Stewart discusses the advisability of the “cap” on Australia’s tax-to-GDP ratio, as well as the desirability of flattening the income tax scale. She concludes that “the government’s personal tax rate cuts, if fully implemented, would flatten our income tax rate structure more than ever in the past.” Bob Breunig argues that, while income tax cuts have their attractions, cutting rates without broadening the tax base poses a substantial risk to the budget’s bottom line. Teck Chi Wong points to the fact that the budget papers offer no analysis of the budget’s distributional impact. And Andrew Podger argues that both the Coalition’s and Labor’s plans complicate the income tax scale, mainly via the income-tested tax offsets they include in order to limit the cost of next year’s tax cuts.

This discussion, and other coverage of the budget, raises two main questions. What is a fair share of tax from each income group, and how much tax in total should be collected from Australians?

Fair share? It depends how you look at it

Finance minister Mathias Cormann has one answer to the first question. “We will be prioritising low- and middle-income earners when it comes to tax relief,” he said on 5 May, “but of course it’s important that the tax policy settings are appropriate overall.” He went on: “Higher-income earners overwhelmingly carry the heaviest tax burden in our economy today, and obviously, if we want to ensure that Australians are incentivised and encouraged to work hard… there’s got to be appropriate reward for effort as well.”

It’s a familiar theme. Back in 2013, the Financial Review’s Fleur Anderson was suggesting that “the middle class and the professions are staging a revolt as they find their growing share of the tax burden too hard to bear, after over a million people were made exempt from the tax system over the past ten years.” In that newspaper and elsewhere, commentators pointed to the Australian Tax Office’s tax statistics for the 2010–11 financial year, which showed that the top 5 per cent of income earners paid 34.1 per cent of net income tax and the top 25 per cent paid just over two-thirds. (The share paid by the top 5 per cent had fallen to 33.0 per cent by 2015–16.)

Just last week, also in the Financial Review, Chris Richardson of Deloitte Access Economics quoted Tax Office data showing that the top 1 per cent of earners pay 17 per cent of all personal income tax and the highest-earning 10 per cent pay 55 per cent. “That’s not what Mr and Mrs Australia think is happening…” he wrote, “mainly because the analysis you’ve been reading has talked dollars rather than shares of tax paid.”

But is “share of taxes paid” really the right way of looking at whether the tax system is fair?

Data released by the government in budget week showed that the roughly 400,000 taxpayers who earn more than $180,000 per year have a median tax bill of $85,000, which equates to an effective income tax rate of 36 per cent. The effective tax rate for those earning less than $87,001 (the point at which the second-highest marginal tax rate cuts in) was 19 per cent.

The most obvious reason why the top 1 per cent or 10 per cent pay a higher share of tax is that they receive a much higher share of taxable income. Tax Office figures show that in 2015–16 the highest 1 per cent of income taxpayers — just over 100,000 people earning $330,000 or more per year, which adds up to about $72 billion of taxable income, or an average of roughly $720,000 per taxpayer — paid 16.9 per cent of net tax but received 9.6 per cent of all taxable income. (After their income taxes, that 1 per cent of taxpayers still netted about 7.2 per cent of all after-tax income.)

So even if Australia had a completely flat tax — a single rate with no tax-free threshold — very high–income earners would still pay close to 10 per cent of all income taxes. They pay 16.0 per cent rather than 9.6 per cent because Australia has a progressive income tax scale: the rate of tax paid increases as the taxpayer’s income increases.

Rates of income tax currently begin at zero on incomes up to $18,200, with rates of 19 per cent, 32.5 per cent and 37 per cent up to $180,000 per year and 45 per cent above that level (not including the Medicare levy and the low-income tax offset). The stepped scale means that the marginal rate of income tax paid will always be higher than the average rate of income tax paid, and the most important contributor to this phenomenon is the zero rate on incomes up to $18,200. So long as we have a zero-rate range, the income tax system will be progressive.

But is it too progressive? Should the richest 1 per cent pay 17 per cent or so, as they currently do, or should they pay closer to the 10 per cent that would apply if we had a completely flat tax?

How Australia compares

Australia’s overall level of taxation is well below the average of other high-income countries in the OECD. The latest figures, from 2015, show that the ratio of total taxes to GDP in Australia was 28.2 per cent of GDP while the OECD average was 34.3 per cent. That put Australia at twenty-eighth place out of thirty-five, with most of the countries with lower tax-to-GDP ratios being lower-income countries — including Mexico, Chile and Turkey — and the outliers being the United States and Switzerland.

The composition of Australia’s taxation is also very different from that of other OECD countries, this time apart from New Zealand. Personal income taxes made up about 41 per cent of total tax revenue compared to an average of 24 per cent across the OECD, making us the second-highest in the OECD, and the share of taxes paid on corporate income was the third-highest. Australia also has relatively high taxes on property, but mainly because we have widespread home ownership. Taxes on goods and services are relatively low, mainly because the goods and services tax, or GST, ranks at thirty-three among the similar taxes in thirty-five countries.

But the main reason for our relatively low level of total taxation is that our government does not collect social security contributions, and we therefore rank equal last (with New Zealand and Denmark) on that measure. On average across OECD countries, employee and employer social security contributions account for just over a quarter of total tax revenue, or close to 8 per cent of GDP.

This is also a significant part of the reason why income taxes account for so high a proportion of total revenue in Australia. Social security contributions are very similar to income taxes, however, with employee contributions usually being deducted at the same time as income taxes in the countries that collect them. Like income taxes, they are generally counted as direct taxes on households or individuals. Employer social security contributions, by contrast, are usually treated as if they were indirect taxes, even though they too are paid directly to government and are commonly regarded as effectively being paid by employees through lower wages.

It is sometimes suggested that tax comparisons should take account of the superannuation guarantee paid by employers in Australia. As Treasury argued in its 2015 Re:think tax discussion paper, “Australia’s compulsory superannuation system — the superannuation guarantee — is sometimes equated to a social security tax. However, as it is paid directly into private superannuation accounts (currently set at 9.5 per cent of an employee’s ordinary time earnings) rather than to the government, it does not meet the definition of a tax.” It’s also important to remember that twelve other OECD countries also have either mandatory occupational or private pensions, or schemes that are close to mandatory under industrial agreements.

But the lack of social security contributions still gives a clue as to why Australia has a relatively low level of overall taxation.

Compared to other rich countries, Australia is well down the OECD rankings in terms of government spending and taxation, with the third-lowest level of government spending and the fourth-lowest level of overall government revenue. And a major reason for Australia’s low overall level of spending is that our outlay on social security is among the lowest of the OECD countries. Total government spending as a proportion of GDP in Australia is about 78 per cent of the OECD average and spending on areas other than social protection is about 90 per cent, but spending on social security benefits is only about 70 per cent of the OECD average.

Tax revenues in Australia are about six percentage points of GDP below the OECD average, and our total level of spending is eight percentage points of GDP below the average, with our social security spending being four percentage points of GDP below average. In this sense, our low social security spending accounts for nearly half of our overall lower spending and consequently our lower taxes.

As the chart shows, spending on cash benefits in 2014 was 8.6 per cent of GDP, the sixth-lowest level of thirty-five OECD countries. Why so low? Our social security system differs markedly from those in most other countries. In Europe, the United States and Japan, as we’ve seen, social security is financed by contributions from employers and employees, with benefits related to past earnings; this means that higher-income workers receive more generous benefits if they become unemployed or disabled, or when they retire.

Australia makes flat-rate payments, financed from general taxation revenue, that are income-tested or asset-tested. The rationale for this approach is that it reduces poverty more efficiently by concentrating the available resources on the poor and minimises adverse incentives by limiting the overall level of spending and taxes.

In fact, Australia relies more heavily on income-testing than any other OECD members. OECD figures show that nearly 80 per cent of Australian cash-benefit spending is income-tested, compared to just over half in Canada, 37 per cent in New Zealand, around 26 per cent in Britain and the United States, and less than 10 per cent in most European countries. (These figures include spending on state government workers’ compensation schemes and federal and state public service pensions, which are not income-tested.)

As a result, lower-income earners receive a bigger share of benefits than in any other OECD country. The poorest 20 per cent of the Australian population receives nearly 42 per cent of all social security spending; the richest 20 per cent receives around 3 per cent. In other words, the poorest fifth receives twelve times as much in social benefits as the richest fifth. In the United States, the poorest get about one and a half times as much as the richest. At the furthest extreme are countries like Greece, where the rich are paid twice as much in benefits as the poorest 20 per cent, and Mexico and Turkey, where the rich receive an extraordinary five to ten times as much as the poor.

In economic terms, income-testing can be seen as analogous to taxing. Social security recipients lose between 40 and 60 per cent of any income earned above “free areas” (currently between $52 and $84 per week for single people receiving allowances or pensions). When these withdrawal rates overlap with the income tax system, recipients can face very high effective marginal tax rates, created by the combination of income tax paid and benefits withdrawn. They might lose 70 per cent or more of any earnings, a reduction greater than the top marginal income tax rate.

Income-testing also affects the way the Australian tax system is structured, and particularly its treatment of low incomes generally. As we’ll see, this has important implications for the overall progressivity of the tax scale.

Distributing taxes

The distribution of taxes across countries or across time can be compared in a number of ways, none of them perfect but each throwing some light on the question. Using administrative data from the Australian Tax Office and its overseas equivalents — as the finance minister and many newspaper articles do — can be misleading because the reported statistics are not always directly comparable. Complicating the picture further is the fact that income tax is paid by different proportions of the population in different countries (in Australia it’s around half of all adults, or roughly ten million individuals).

We can calculate the taxes individuals must pay at different income levels by using the tax schedules of each country. The OECD publishes estimates of these statutory tax liabilities at different wage levels in its series Taxing Wages. It includes calculations of the income tax liabilities and the employee’s social security contributions payable by individuals at 67 per cent, 100 per cent and 167 per cent of the average wage, and by families with and without children, using different combinations of earnings by each partner.

According to these data, Australia ranked twenty-fourth out of thirty-five countries in 2017 in terms of the taxes paid by a worker at 67 per cent of the average wage, twentieth for a worker at 167 per cent of the average wage, and twenty-eighth according to the level of total tax revenue, suggesting that Australia is more progressive than average.

While these figures are extremely useful for understanding how the tax systems work in each country, in Australia’s case they don’t include most taxpayers — for example, 67 per cent of the average wage is close to the median income taxpayer, while 167 per cent of the average wage is close to the ninety-second percentile of the distribution of taxpayers. Comparisons based on this source, at least for Australia, leave out the bottom half of taxpayers and most of the richest 10 per cent.

A related OECD series, Benefits and Wages, provides more detailed spreadsheets of the income tax liabilities and social security contributions of employees in different family types at single percentiles of the average wage, from zero to 200 per cent. They include families receiving social security benefits but don’t cover the richest 3 per cent of Australian taxpayers, who pay roughly 30 per cent of net taxes.

To compare progressivity across countries we also need to know the share of the population at different income levels. For this purpose, the best source of data is household income surveys — the type of data that the Centre for Social Research and Methods at the ANU used in its analysis of the potential impact of the federal budget. These data are more comprehensive because they cover the entire population, including people who don’t pay income tax, and they combine the incomes of all members of a household and then adjust for the number of people who live in the household.

The most recent analysis of the progressivity of household taxes by the OECD was in Growing Unequal?, a report published in 2008. The chart below shows the share of direct taxes (income tax and employee social security contributions) paid by the richest 10 per cent of households in OECD countries around 2005. The rather surprising result of this analysis is that the share of direct taxes paid by the richest is highest in the United States — a finding that provoked a good deal of controversy. (Disclosure: I wrote the chapter with this finding in the OECD report, although the calculations were made by other colleagues at the OECD.)

After the United States, the distribution of taxation tends to be most progressive in the other English-speaking countries — Ireland, Australia, Britain, New Zealand and Canada — and in Italy, followed by the Netherlands, the Czech Republic and Germany. Taxes tend to be least progressive in the Nordic countries and in France and Switzerland.

Part of the explanation for the US finding is that, as we’ve seen, the progressivity of the tax system partly depends on the level of inequality of taxable income. In other words — all other things being equal — the greater the share of income received by the rich, the greater their share of taxes paid.

Among high-income OECD countries, the United States ranks third-highest according to income received by the richest 10 per cent of households (after Italy and Poland). The richest 10 per cent of American households capture 33.5 per cent of income, compared to an OECD average of 28.4 per cent and 28.6 per cent in Australia.

One way of adjusting for this inequality is simply to divide the share of taxes paid by the share of income. On this measure, the United States still has the most progressive system of direct taxes in the OECD: the richest 10 per cent pay a share of taxes that is 35 per cent higher than their share of income. But Australia moves from being ranked the fifth most progressive to the second most progressive, with the richest 10 per cent paying a share of taxes that is 29 per cent higher than their share of income.

Other OECD measures reach very similar conclusions. One is the concentration coefficient, which is calculated in the same way as the better-known Gini coefficient, but with taxes ranked by the share of income held by different income groups. As Growing Unequal? shows (see page 107), dividing the concentration coefficient of taxes by the concentration coefficient of income results in Ireland having the most progressive direct tax system in the OECD, with the United States and Australia coming in at second and third positions respectively.

Why is the Australian tax system more progressive?

The progressivity of the tax system does not tell us how high the level of taxes is; a more progressive tax system is simply one where the level of taxes increases with income at a more rapid rate than in a less progressive tax system. One of the main reasons why Australia has a more progressive system than most other high-income countries is not that high-income groups pay high rates of tax but that low-income groups in Australia pay very low rates of tax.

Growing Unequal? (page 116) gives comparative figures for around 2005. It shows that the poorest 20 per cent of Australian households paid only 0.8 per cent of all direct taxes, compared to an average for twenty-three OECD countries of 4.2 per cent. This was the lowest share of all OECD countries, and far short of up to 6 per cent in Denmark and Sweden and 12 per cent in Switzerland. The taxes paid by the poorest 20 per cent of Australian households were 0.2 per cent of total household disposable income, the equal lowest in the OECD.

On average for all Australian households, direct taxes were 23.4 per cent of equivalent household disposable income, compared to an average among twenty-three comparable OECD countries of 28.3 per cent, placing us sixth-lowest in the OECD, a ranking similar to that found when total taxes are expressed as a percentage of GDP.

While the richest households in Australia pay one of the highest shares of direct taxes, this does not mean that the taxes paid by the rich are higher than in other countries. The chart below shows the taxes paid by the richest 10 per cent as a share of their disposable income. When people talk of the “tax burden,” this is what they are likely to be most concerned with — how much of my income do I pay in taxes?

The chart below shows that the richest 10 per cent of households in Australia paid 37.8 per cent of their disposable income in taxes, just below the OECD average of 38.8 per cent, a little higher than in Britain but lower than in Canada, the United States or New Zealand — and very much lower than in Denmark, Sweden and Iceland.

It is notable that in some of the countries where the rich pay a low share of total taxes, the share of their income paid in taxes is extremely high. The most striking example is Denmark, where the richest 10 per cent pay not much more than 25 per cent of direct taxes, but pay tax at an average rate of 70 per cent.

Put another way, the poorest 10 per cent of Danish households pay 2.5 per cent of household taxes and the richest 10 per cent pay 26.2 per cent of taxes, a ratio of about 10.5 to one. In Australia the poorest 10 per cent pay 0.2 per cent of all taxes and the richest 10 per cent pay 36.8 per cent of household taxes, a ratio of 184 to one. The progressivity of the Australian tax system is much greater than the progressivity of the Danish system, but mainly due, as we’ve seen, to the very low share of taxes paid by low-income Australian households.

The reason why low-income Australians pay very low taxes reflects the nature of our social security system. In many European countries social security benefits are a high proportion of previous earnings, while in Nordic countries, where they also tend to be high, they involve a mix of more universal provisions and earnings-related provisions. In these countries, it makes sense to tax social security benefits as if they were ordinary income because they replace a large share of previous income.

In Australia, where benefits are more modest and flat-rate, it makes little sense to tax them highly. If benefits are intended to alleviate poverty, then imposing higher levels of taxation on them would imply that we were paying people too much. Instead, we ensure that people receiving benefits are not liable for income tax on their basic payments through the combination of a high basic tax threshold, the low-income tax offset (which replaced earlier special tax offsets for pensioners and beneficiaries) and the seniors and pensioners tax offset, as well as the exemption from tax of family payments.

Two ways to target welfare

A corollary of the fact that our benefit system targets the poor more than any other country’s is that our tax system claws back less of our spending.

The chart below shows OECD estimates of the proportion of direct taxes (income taxes plus employee social security contributions) that are paid out of cash transfers. In Australia, direct tax payments made from social security benefits amount to only 0.2 per cent of GDP, with the only countries with lower levels of direct tax paid out of benefits being lower-income countries. At the other extreme, high-spending Nordic welfare states collect direct taxes on benefits of close to 3 per cent of GDP, or in the case of Denmark around 4 per cent of GDP.

The next chart shows OECD estimates of clawbacks through indirect taxes, including the GST in Australia and value-added taxes in Europe. Again, Australia has one of the lowest levels in the OECD, at around 0.7 per cent of GDP, compared to 2.5 per cent or more in a range of Nordic and other European welfare states.

The final of these charts shows the combined effects of direct and indirect taxation on the level of social spending, expressed as a percentage of gross social spending. Australia had the equal third-lowest level of tax clawback in the OECD in 2011, at 4.9 per cent of social spending. At the other extreme, in Luxembourg, Finland and Denmark, 20 per cent of a much higher level of spending is clawed back.

The fact that Australia overall has the most income-tested social security system of all OECD countries is linked to the fact that we tax cash benefits less than most. Income-testing is a way of taxing in advance rather than clawing back spending through the tax system after payments have been made. Each can be regarded as differing ways of seeking to achieve rather similar goals.

Is that the whole story?

As we’ve seen, the progressivity of the tax system is usually measured according to the difference between the tax rates paid by high-income and low-income groups. Australia’s system is highly progressive not because we tax the rich heavily but mainly because we tax the poor very lightly. This is primarily the result of a relatively high tax threshold, which benefits all taxpayers by reducing the average rates of tax they pay to well below their marginal rate. The combination of our low level of social security spending and low tax on social security benefits results in lower levels of average taxation overall.

But the conclusion that Australia has a relatively progressive tax system can be challenged in several ways. First, not all high-income earners actually pay the taxes that would normally be assumed to apply to their circumstances. As the Age’s economics editor Peter Martin has pointed out, forty-eight millionaires paid no tax at all in 2017, according to what were then the latest Tax Office statistics (compared to seventy-five reported in 2014, fifty-five in 2015 and fifty-six in a 2016 article).

These examples certainly mean that the income tax system is not as progressive as it is intended, but they don’t mean the system is not progressive overall. The forty-eight who paid no tax in the 2017 report, for instance, had an average pre-tax income of close to $2.5 million dollars, or a combined $120 million — about one-fifth of 1 per cent of the $70 billion-plus declared taxable income of the richest 1 per cent in 2015–16. These cases might show that effective progressivity is less than the statutory progressivity of the tax scale, but the Tax Office data show that this group still pays a high share of total income tax.

More serious is the second objection, which hinges on the issue of money held in tax havens. In The Hidden Wealth of Nations, economist Gabriel Zucman estimates that assets in tax havens amount to around 8 per cent of global financial assets. (In Russia’s case, the figure is 75 per cent.) The release of the Panama Papers in 2016 prompted the Tax Office to investigate 800 “high net-wealth Australians,” according to the Financial Review, although the scale of their offshore holdings was not stated.

Third, it’s important to remember that income tax and other direct taxes are not the only taxes paid by Australians. The table below shows estimates of the share of direct and indirect taxes paid by different income groups in Australia between 1984 and 2015–16 in the case of direct taxes, though only up to 2009–10 for indirect taxes and total taxes. (The Australian Bureau of Statistics will publish more up-to-date estimates of indirect taxes and total taxes, for 2015–16, within the next twelve months.)

The table ranks households by their gross income without adjusting for household size, because these data are readily available from the 1980s onwards and are less affected by definitional changes over time. The share of direct taxes paid by the richest 20 per cent has gone up over time, although it was not quite as high in 2015–16 as two years earlier. This partly reflects a higher share of income going to the rich between the 1980s and the mid 1990s.

Although the share of indirect taxes paid by the rich has been broadly stable, the poorest 20 per cent of households pay a much higher share of these taxes than they pay of income taxes, most recently close to 10 per cent, up from around 8 per cent in the 1980s.

The share of total taxes paid by the richest 20 per cent is very similar to their share of income. In 2003–04, the richest 20 per cent of Australian households received 49.8 per cent of private income before taxes and paid 48.2 per cent of total taxes. On this measure, total direct and indirect taxes are substantially less progressive than direct taxes alone — in fact, they are closer to proportional than progressive.

It’s therefore possible to argue that the reduction in income inequality achieved by the Australian tax–transfer system is primarily brought about on the spending side of the equation (although, of course, that spending is funded by tax revenue).

That’s not to say that governments haven’t been conscious of the impact of indirect taxes on overall progressivity. When the GST was introduced in 2000 it was accompanied by income tax cuts designed to compensate low-income taxpayers. Effective income tax thresholds were increased, making that part of the system more progressive, even while the overall system actually became less progressive.

As the table above shows, between the 1998–99 and 2003–04 surveys the overall tax system became less progressive because of the increased share of much-less-progressive indirect taxes: in fact, the ratio of total taxes paid by the richest 20 per cent to the taxes paid by the poorest 20 per cent was cut from seventeen-to-one to a little more than twelve-to-one between 1998–99 and 2003–04. In other words, the complaint that income taxes have become more progressive ignores the fact that this partly reflects regressive changes in other parts of the tax system.

While indirect taxes make the Australian tax system much less progressive, they are unlikely to change Australian rankings in international comparisons. The level and coverage of value-added taxes in most other OECD countries are much higher than for the GST in Australia. New Zealand’s GST rate, for instance, is 15 per cent, and it covers a broader range of purchases than Australia’s; many European countries have value-added tax rates of 20 per cent or higher and also have a broader coverage than here.

Speed limiting the future

While much of the discussion of the federal budget tax proposals has focused on the “fairness” of different plans, an important element is the proposed federal tax cap of 23.9 per cent of GDP. This is based on an average of tax levels from 2000–01 to 2007–08, a benchmark that doesn’t make much sense. As Ross Gittins observes, “in none of those eight years did the [tax-to-GDP] ratio actually hit 23.9 per cent. Rather, it ranged between 23.3 per cent and 24.3 per cent. Indeed, it exceeded 23.9 per cent in five of the eight years.” Setting the average as a cap and allowing some years to be below this level is actually equivalent to reducing the future average tax rate. Moreover, as Gittins points out, the cap would require tax cuts when the economy is doing strongly and tax revenues are rising — that is, tax cuts would be hazardously pro-cyclical.

In the longer run, as Miranda Stewart argues, “It seems likely we will need to increase our tax level somewhat in future, to ensure fairness and sufficient investment in Australia, in a changing and risky world with an ageing population. At least, this is a debate we should have.”

Mike Keating, a former head of the finance and prime minister’s departments, argues in Pearls and Irritations that “it will be necessary to increase the ratio of government revenue to GDP by three percentage points over the next three decades. In our view, that is not much to maintain an inclusive society, and it would still leave Australia as a low tax country.”

Reinforcing the point, he notes that both “the Committee for Economic Development of Australia and the Grattan Institute have independently concluded that budget repair will require action to be taken on both the revenue and expenditure sides of the budget, and that most of the proposed fiscal adjustment will have to come from increased revenue. Indeed, the Grattan Institute is quite adamant that ‘governments will not be able to restore budgets without also boosting revenues.’”

The 2015 Intergenerational Report projected that government spending on healthcare will increase from 4.2 per cent to 5.7 per cent of GDP by 2055, on age pensions from 2.9 per cent to 3.6 per cent of GDP, and on aged care from 0.9 per cent to 2.1 per cent of GDP. Spending on other payments to individuals, by contrast, would fall from 4.5 to 3.4 per cent of GDP, with much of this being accounted for by a fall in family payments.

Like the architects of the proposed tax cap, the Intergenerational Report assumed that the federal tax-to-GDP ratio stays at 23.9 per cent of GDP for the whole period. With stable tax revenues and rising age-related spending, budget deficits would persist over this forty-year period, the cash deficit reaching about 6 per cent of GDP in 2054–55 and net debt rising from 15.2 per cent to 60 per cent of GDP.

At the time, I pointed out that the report’s assumed continuation of legislated policies would mean that payments to the unemployed and families would nearly halve relative to projected future wage levels. Unemployment would stay fairly constant, but with those who experience it becoming increasingly impoverished. Family Tax Benefit Part A for the lowest-income families would nearly halve relative to wages by the middle of the century, leading to a significant increase in the depth of child poverty.

If we assume that the age-related spending projections are accurate and we do not want to see the deep impoverishment of future low-income working-age Australians — or at least we believe that deep poverty will be unacceptable in a significantly richer future Australia — then we certainly do need to debate how to increase future tax revenues. (We might also want to increase foreign aid, which has been cut for five years running, and in an uncertain international environment it may be necessary to increase defence spending.)

The public seems to agree. In the latest Per Capita Tax Survey, around 87 per cent of more than 1500 respondents favoured increased spending on health, nearly 78 per cent favoured increased spending on education, and 55 per cent wanted more spent on social security. Around 44 per cent believed they paid around the right amount of tax and 43 per cent thought they paid too much. Two-thirds believed high-income earners pay too little tax.

Is increased progressivity of the tax scale the answer? Those who question whether high-income groups pay an “unfairly high” share of tax are likely to say no, yet the Per Capita survey suggests this is where a majority of Australians think the answer lies.

As we’ve seen, though, high-income groups in Australia do not face particularly high average tax rates by international standards. It is certainly possible to increase the effective progressivity of the tax system by broadening the tax base and addressing tax expenditures and concessions like negative gearing.

It is particularly important to remember that we should look at the whole system of taxes and transfers and other social spending when setting policy directions. The progressivity of just one part of the overall system of taxes and transfers should not be the only factor taken into account in determining whether we have a fair distribution of taxes and spending.

This lesson was underlined by social policy analysts Walter Korpi and Joakim Palme in their 1998 article, “The Paradox of Redistribution and Strategies of Equality.” They show that the main determinant of the degree of redistribution achieved by Nordic welfare states is the amount of revenue they collect, even though their tax and welfare systems are not as progressive as Australia’s. The lesson of international comparisons is that it is necessary to balance progressivity with the collection of the revenue needed for social spending. The federal budget’s tax measures can scarcely be seen as a step in the right direction. ●

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The Super Guarantee works by forcing people to save while they are working so they’ll have more to spend when they retire. But it’s no magic pudding. As the Henry Tax Review and others have noted, higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today.

This is more than just economic theory. When the Super Guarantee rose from 9 to 9.25 per cent in 2013, the Fair Work Commission’s minimum wage decision stated that the proposed increase was “lower than it otherwise would have been in the absence of the Super Guarantee increase.”

Sources: Superannuation Guarantee (Administration) Act 1992 as amended; 1995­–96 Budget Speech; Labor’s Fairer Super Plan, April 2015

Yet the policy set in train by the Rudd and Gillard Labor governments means that the Super Guarantee will rise incrementally from 9.5 per cent of wages today to 12 per cent by July 2025. Tony Abbott’s government delayed the increases but stuck to the same goal.

The superannuation lobby argues that working Australians need more super to fund a reasonable retirement. But the truth is that current levels of compulsory super contributions, along with non-super savings (such as shares, bank deposits and interests in businesses or investment properties) and the age pension, are likely to provide a reasonable retirement for most Australians.

Our research predicts that low-income Australians who make compulsory super contributions for forty years will, after accounting for inflation, retire on an income of well over 100 per cent of their working-life wage. (This is also known as a “replacement rate” of more than 100 per cent.) In other words, many low-income Australians will get a rise in pay when they retire, because the age pension and the income they get from compulsory retirement savings will be higher than the wage they received during their working life.

Notes: Results from modelling the retirement income of a person born in 1985, who works uninterrupted from thirty to seventy, and dies at age ninety-two. Superannuation and pension policy is as legislated (Super Guarantee to rise to 12 per cent by 2025­–26). Includes savings outside super. Employment earnings adjusted to account for movements up and down the earnings distribution. Retirement savings drawn down so that a small bequest is left in addition to the home. Source: Grattan Retirement Incomes Model

In calculating replacement rates, the super industry assumes that incomes should grow through retirement in line with future living standards, and not just keep pace with inflation. But it’s expensive — people must save through their working life for a higher standard of living after retirement than they had when they were working.

Even under this higher standard, though, Australians’ retirement incomes are still adequate according to international benchmarks. Most retirees can expect a wage-adjusted retirement income of at least 70 per cent of their pre-retirement income. Seventy per cent happens to be the replacement rate for median earners used by the Mercer Global Pension Index and endorsed by the OECD. Australian retirement incomes are even further above the World Bank’s target replacement rate for the average worker, which is 50 to 60 per cent of pre-retirement earnings. Most people have much lower spending needs in retirement, particularly in the later stages of life when government covers most of the significant costs of health and aged care.

Retirees of today — many of whom didn’t benefit from compulsory super contributions for their whole working lives — already feel more comfortable financially than younger Australians. The non-housing expenditure of retirement-age households is typically more than 70 per cent of that of working-age households. And pensioners who own their home are less likely to suffer financial stress — based on measures such as skipping meals or not being able to heat their home — than working-age Australians. The retirees of tomorrow might be more worried, but they can expect to be even better off than the retirees of today.

Notes: Results from modelling the retirement income of a person born in 1985, who works uninterrupted from thirty to seventy, and dies at age ninety-two. Includes savings outside super. Employment earnings adjusted to account for movements up and down the earnings distribution. Retirement savings drawn down so that a small bequest is left in addition to the home. Voluntary superannuation contributions partially offset the fall in compulsory contributions if the Super Guarantee remains at 9.5 per cent. Draw-down behaviour does not change. Assumes employees absorb any Super Guarantee increase in the form of lower wages. Source: Grattan Retirement Incomes Model

Of course, the super lobby wants you to believe another story. The Association of Superannuation Funds of Australia, or ASFA, has prepared its own measure of what is needed to live a “comfortable” retirement, and argues that most workers won’t achieve it. Many have argued that, as a result, the average Australian isn’t saving enough.

But ASFA’s measure of a “comfortable” retirement supports an affluent lifestyle more luxurious than most Australians enjoy during their working lives. It was originally designed to quantify a “comfortably affluent” lifestyle for those in the top 20 per cent of retirees. Then it was relabelled as “comfortable,” which misleadingly implies that anyone with less income will be “uncomfortable.” The average household can only reach ASFA’s “comfortable” benchmark in retirement by being “uncomfortable” while working.

All of this means that increasing the Super Guarantee to 12 per cent will further increase replacement rates for low- and middle-income earners — but only at the cost of lower earnings during their working lives. In fact, increasing the rate may even reduce retirement incomes for low-income earners, for two reasons.

Notes: Results from modelling the retirement income of a person born in 1985, who works uninterrupted from thirty to seventy, and dies at age ninety-two. Superannuation and pension policy is as legislated (Super Guarantee to rise to 12 per cent by 2025­–26). Includes savings outside super. Employment earnings adjusted to account for movements up and down the earnings distribution. Retirement savings drawn down so that a small bequest is left in addition to the home. Voluntary superannuation contributions partially offset the fall in compulsory contributions if the Super Guarantee remains at 9.5 per cent. Draw-down behaviour does not change. Assumes employees absorb any Super Guarantee increase in the form of lower wages. Source: Grattan Retirement Incomes Model

First, the more superannuation someone has, the less age pension they will receive in retirement. For each $1000 of assets above the pension asset test threshold — currently $253,750 for a single homeowner and $456,750 for a single renter — a pensioner now loses $78 a year in pension payments.

Second, the age pension is indexed to wages (which exclude compulsory super contributions), which means that increasing the Super Guarantee reduces pension growth. Our research shows that increasing the rate to 12 per cent would make future pension payments 2 per cent lower than otherwise. By suppressing the value of their pension payments, it could make existing pensioners worse off by up to $460 a year for singles and $640 a year for couples.

Notes: Results from modelling the retirement income of a person born in 1985, who works uninterrupted from thirty to seventy, and dies at age ninety-two. Includes savings outside super. Employment earnings adjusted to account for movements up and down the earnings distribution. Retirement savings drawn down so that small bequest is left in addition to home. Voluntary superannuation contributions partially offset the fall in compulsory contributions if the Super Guarantee remains at 9. 5 per cent. Draw down behaviour does not change. Assumes employees absorb any Super Guarantee increase in the form of lower wages. Source: Grattan Retirement Incomes Model

Nor will lifting the Super Guarantee do much to help women with broken work histories. Superannuation is a contributory system: since women tend to earn less than men over their working lives, they accumulate fewer retirement savings and receive lower incomes in retirement.

The main beneficiaries from a higher Super Guarantee will be high-income earners, who already reap most of the benefits from generous superannuation tax breaks. By being forced to put even more into super, they’ll no longer pay income tax on that income; it will instead be taxed at a flat 15 per cent rate as extra contributions to their super fund.

Notes: Results from modelling the retirement income of a person born in 1985, who works uninterrupted from thirty to seventy, and dies at age ninety-two. Includes savings outside super. Employment earnings adjusted to account for movements up and down the earnings distribution. Retirement savings drawn down so that a small bequest is left in addition to the home. Voluntary superannuation contributions partially offset the fall in compulsory contributions if the Super Guarantee remains at 9.5 per cent. Draw-down behaviour does not change. Assumes employees absorb any Super Guarantee increase in the form of lower wages. Source: Grattan Retirement Incomes Model

Raising the Super Guarantee doesn’t just reduce workers’ take-home pay, it also hits the federal budget. Instead of workers receiving wages that are then taxed at full marginal tax rates, the extra compulsory contributions to their super fund will be taxed at a flat 15 per cent. The 2014–15 budget calculated that delaying an increase to the Super Guarantee of 0.5 percentage points saved $440 million in 2017–18. Raising the Super Guarantee to 12 per cent could therefore cost the budget around $2 billion a year in additional tax breaks.

The purpose of superannuation is to save for the future and reduce future age-pension payments. In both the short and long term, though, superannuation costs the budget more than it saves, because the tax breaks cost the government more than the pension savings.

A Treasury analysis in 2013 estimated that the tax revenue foregone as a result of moving to a 12 per cent Super Guarantee, added to past increases in the Super Guarantee, would exceed the budgetary savings from lower age-pension spending by 0.4 per cent of gross domestic product a year. Eventually — by 2050 — the net budgetary cost of superannuation tax breaks will be “only” 0.2 per cent of GDP a year. On these trends, superannuation won’t start saving the budget money until about 2060 — and then there will be eighty years of budget costs to pay back before government is in front.

Based on these figures, the Super Guarantee, including the planned increase to 12 per cent, will increase Commonwealth net debt by 10 per cent of GDP by 2050. These numbers may have improved since the federal government changed the age-pension assets test and modestly tightened superannuation tax breaks. But even then, it’s unlikely that the Guarantee will “help” the budget any time soon.

Notes: The 2010–11 federal budget predicted that increasing the Super Guarantee by 0.25 percentage points would cost the budget $240 million in 2013–14. The 2014–15 budget predicted that not increasing the Super Guarantee by the previous government’s policy of 0.5 percentage points would save $440 million in 2017–18. These cost estimates were done before recent policy changes: a higher pension assets test taper rate and tightening of superannuation tax breaks. These changes will add up to a fiscal saving of 0.1 per cent of GDP in 2018–19 (higher taper rate saves $1 billion, super tax changes save $0.1 billion). Shaded area indicates 2010–11 budget policy. Sources: The Treasury Charter Group 2013; Budget papers; Grattan analysis

Despite what the super lobby claims, the current 9.5 per cent Super Guarantee — taken together with the age pension and non-super savings — is sufficient to deliver an adequate retirement income for low- and middle-income Australians. Increasing the rate will not help these earners in retirement: most of the benefits will flow to high-income earners, while low-income Australians could cop both lower incomes in retirement and lower wages today. And it will cost the budget money.

If our politicians really want to help low-income workers and are serious about fixing the federal budget, they should abandon plans to raise the Super Guarantee. They will need to act soon if they want to cancel the incremental increase in the Super Guarantee scheduled for July 2021, because new enterprise agreements currently in negotiation will take into account the increase in the Guarantee when setting wage rates. ●

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The system’s main elements not only remain intact, they are being expanded as part of a much wider shift to automating welfare — or what might be called government by algorithm. And despite the improvements, robodebt (which goes officially by the more antiseptic title of Online Compliance Intervention) is still making mistakes and causing anguish.

In 2017, no fewer than 1,385,276 people received debt notices from the Department of Human Services. Only 3.7 per cent or 51,230 of them went through the robodebt system, which compares income data provided by welfare recipients with information held within the government. This is a substantial drop from the previous year, perhaps reflecting a more measured approach by the government after the controversy of 2016 and 2017. But the emphasis is on expansion, with the department telling me it plans to increase data-matching, including through robodebt, to more than 600,000 reviews a year. The logic behind this, from the government’s point of view, is clear: data-matching, particularly in its automated form, has made it much more cost-effective to pursue overpayments of welfare benefits.

This is part of a bigger modernisation of the welfare system over a seven-year period, in what the Department of Human Services calls “one of the world’s largest social welfare ICT system transformations.” Given that the department and Centrelink have been using a computer system that began operating in 1983, an upgrade certainly seems justified. This isn’t just the government’s view: the National Welfare Rights Network’s Kate Beaumont said in 2015 that the new system promised to reduce the administrative burden on recipients and result in reductions in overpayments and debt recovery.

The developments here are in line with the automation of welfare delivery and monitoring in other Western nations. In the United States, where most welfare programs are delivered at the state or county level, automated eligibility is now “standard practice in almost every state’s public assistance office,” writes political scientist Virginia Eubanks in her recent book Automating Inequality. More than that, predictive models and algorithms are increasingly being used to target and withhold assistance.

In Britain, a single universal credit is being introduced to replace six separate government benefits. In 2013 the National Audit Office found the scheme to be riddled with major technical problems, prompting the Labour opposition to label it a “titanic-sized IT disaster.” Due to be rolled out nationally by last year, it is at least five years behind schedule.

There’s no doubt that an efficient administration using modern computer power and algorithms can process welfare claims more efficiently. But the experience with robodebt and with automatic programs overseas provides some cautionary tales. Those same tools can be used for culling the welfare rolls, justifiably or not. According to Eubanks, automated eligibility systems, ranking algorithms and predictive risk models are being integrated into human and social services in the United States “at a breathtaking pace, with little or no political discussion about their impacts.”

In 1973, nearly half of the Americans living below the poverty line received benefits from the Aid to Families with Dependent Children program, or AFDC. A decade later, after the widespread introduction of automated welfare management systems, the figure had dropped to 30 per cent. Today, fewer than one in ten benefit from its replacement program, Temporary Assistance to Needy Families, or TANF.

Automation is not solely responsible for this dramatic fall. From 1996, president Bill Clinton’s quest to “end welfare as we know it” imposed time limits and an array of strict conditions on benefits. Because welfare fraud looms large in the popular imagination, it can provide political cover for drastic measures.

Depending on how it is defined, rates of welfare fraud in the United States have been calculated to be as high as 10 per cent for improper payments, including fraud, and as low as 0.8 per cent based on the proportion of allegations that result in criminal convictions. Either way, fraud goes nowhere near providing an explanation for falls in welfare numbers of the magnitude that occurred in the United States. (In Australia, according to an analysis of more than $200 billion in Centrelink payments, the savings from detected fraud amount to less than one-fifth of one per cent.)

But all welfare systems have an inbuilt tension between helping those in need and minimising disincentives to work. That makes the design of the system, and the motivation behind the design, critical. In 2006, the government of Indiana, led by Republican governor Mitch Daniels, a long-time critic of AFDC and TANF, sought expressions of interest in outsourcing and automating the administration of TANF and two other schemes, the food stamps program and Medicaid. The riding instructions could not have been clearer: welfare dependence had to be cut, and financial incentives would be given for reducing eligibility. Daniels described the state’s welfare system as the worst in the United States, “irretrievably broken,” wasteful and fraudulent.

The goals were achieved in spectacular fashion. In two years, a million applications across the three programs were rejected, a 54 per cent increase on the previous three years. When the contract with IBM for the new system was signed in 2006, 38 per cent of poor families with children received benefits under TANF; by 2014, despite the worst economic downturn since the Great Depression, the figure was down to 8 per cent. The campaign went far beyond any notion of tough love to become a brutal attack on the poor that reinforced the trend towards increasing inequality — one of the factors in the rise of political populism in the United States.

Critical to the new system in Indiana — as it was to the initial rollout of robodebt in Australia — was reducing the scope for human discretion. No government employee dealt with a case from beginning to end: when people called for help, they always spoke to a different person — if they were lucky enough to get through. A lawyer told Eubanks that 95 per cent of the Medicaid applications he handled involved errors made during processing, resulting in eligibility mistakenly being denied. Any deviation from the rigid application process, however minor, was interpreted as a “failure to cooperate” and used to deny eligibility. Previously this had been a punishment of last resort for those who refused to participate in assessing eligibility. Now, in Eubanks’s words, “failure to cooperate” became “a chainsaw that clear-cut the welfare rolls, no matter the collateral damage.”

She cites the case of Omega Young, who missed an appointment in 2008 to authorise her continued access to Medicaid because she was in hospital with terminal cancer. Although she rang to say she couldn’t make it and gave the reason why, her medical benefits and her food stamps were cut off for “failure to cooperate.” Months later, with her medical bills reaching $10,000, she won an appeal that restored her benefits. The decision came the day after she died.

Eventually, after the public controversy put pressure on IBM, the company produced a 362-page document outlining how to fix problems such as “inaccurate and incomplete data gathering” and “incorrect communications to clients,” leading the Indiana government to cancel the contract and abandon the plan.

In 2016, Allegheny County in Pennsylvania introduced a “predictive risk” computer model aimed at forecasting where child abuse and neglect were most likely to occur. It uses 132 variables to rate the risk of children being mistreated, including the length of time parents spend on public benefits, past involvement with the child welfare system, the age of the mother, whether the child was born to a single parent, mental health issues and periods in jail.

When the model was applied to historical data in New Zealand, where it was first developed, it was found to predict with “fair, approaching good” accuracy whether a finding of mistreatment of children would be established by the age of five. Tested against similar data in Allegheny County, it scored a predictive rate of 76 per cent. If that sounds impressive, Eubanks points out that with 15,139 reports of abuse and neglect in Allegheny in 2016, it would have produced 3633 incorrect predictions. In the first nine months of the new model’s operation, more reports than previously were identified for investigation and those rated as a higher risk were more likely to be substantiated. But, Eubanks adds, of the higher-risk reports that triggered a mandatory investigation, 28 per cent were overridden by a manager and dismissed and only 51 per cent of the remainder were substantiated.

The goals set for the Allegheny system are limited and it is used to support human decision-making rather than replace it. Five other cities and states, including New York City and Los Angeles, have since introduced similar systems in what Eubanks describes as “a nationwide algorithmic experiment in child welfare.” The question is whether other jurisdictions will be as careful about placing clear boundaries around their operation. The NZ government stopped trials of the system in 2015 after a new minister, Anne Tolley, took over the social development portfolio. A briefing document on the project leaked to the media showed that she had written in the margins, “Not on my watch! These are children not lab rats.”

Australia, too, is looking at the possibilities of predictive analytics. According to the head of enterprise architecture at the Department of Human Services, Garrett McDonald, such a system could aim to minimise overpayments and thereby prevent debts occurring. At IBM’s Think 2018 conference in Las Vegas last month, he quoted the example of people on benefits being required to estimate their income over the next twelve months, with those who underestimated receiving excess payments from the government that needed to be recovered.

“So what we’re looking at,” McDonald said, “is how do we deploy predictive analytics so we can take a look at an individual’s circumstances and say ‘what do you think the probability is that you may end up with an inadvertent overpayment and how can we engage with you proactively throughout the year to help true that up, so that you don’t reach the end of the year and have an overpayment that we need to recover?’” If it sounds positive, it also suggests an extra level of prying into “an individual’s circumstances.”

Privacy is a real concern for the targets of these schemes. An electronic “coordinated entry system” for homeless people introduced in Los Angeles has been widely lauded for its greater efficiency. It combines data from a disparate array of homeless services and matches it to available resources, reducing overlap and double dipping. Assessment for the scheme includes an intrusive survey that asks questions about experiences of sexual assault and family violence, mental health problems, suicide attempts, drug taking, unprotected sex and prostitution; algorithms use this information to determine those with the greatest need for accommodation. As Eubanks observes, this creates a dilemma for the homeless: “Admitting risky or even illegal behaviour… can snag you a higher ranking on the priority list for permanent supportive housing. But it can also open you up to law enforcement scrutiny.”

The Turnbull government has budgeted to save $3.7 billion in the four years to 2019–20 “primarily due to measures to enhance the integrity of social welfare payments, including expanding and extending data-matching activities with the Australian Taxation Office.” It is data-matching that lies at the heart of the robodebt scheme: where wage or salary figures supplied by employers to the ATO appear to be higher than those reported by people who are or have been on benefits, the computerised system notifies them by letter about the discrepancy and asks them to check their employment income. If the figure is deemed not to have been challenged, demands are made for payments, including through debt collection agencies.

In the way the system operated in 2016 and 2017, this process occurred irrespective of whether people received the initial letter — they often went to old addresses — or whether the recipients were able to clear the multiple hurdles in their way. In 2016, thirty-six million calls to the department went unanswered, according to the Community and Public Sector Union, and those that were answered often involved long waits.

To date, debt recovery has focused on people on unemployment benefits and youth allowances, which make up $1.5 billion of the total expected savings of $3.7 billion over four years. On 1 July last year, the automated system was extended to include shares, bank interest and other non-employment income. A system that was used to recover debts mainly from those on benefits such as Newstart and the parenting payment now covers pensioners and other retirees more likely to have other assets. Age pensions account for $1.1 billion of the anticipated $3.7 billion in savings, parenting payments $700 million and disability support pensions $400 million.

In the context of almost $80 billion a year spent on these programs, these may not seem large amounts. For some groups, though — such as the unemployed, who receive very meagre benefits to start with — the savings targets represent a significant proportion of outlays. The government aims to recoup almost 4 per cent of total unemployment and sickness benefits payments of $10 billion a year, for instance. This may well be a realistic goal from the department’s point of view. The introduction of robodebt meant that the Department of Human Services planned to suddenly expand a system that had sought to recover debts from 20,000 people each year to an estimated 783,000 debts in 2016–17. It appears that this target, provided to an inquiry by the Commonwealth ombudsman, was not achieved, with the department not responding to a request for the actual figure. Instead, it repeated that it was increasing data-matching reviews to more than 600,000 a year.

Conservative governments have tended to be particularly heavy-handed when it comes to pursuing welfare recipients. In 2016, then human services minister Alan Tudge said to those who allegedly owed money to Centrelink, “We’ll find you, we’ll track you down and you will have to repay those debts and you may end up in prison.” It is not an attitude likely to encourage people to cooperate with the government, particularly when overpayments are often inadvertent and frequently the result of government errors. Reducing the scope for humans to exercise discretion made the system much harsher.

The Commonwealth ombudsman reported that the letters notifying Centrelink customers of alleged income discrepancies were “unclear and deficient in many respects,” omitting crucial information such as the helpline telephone number, the fact that help from a human was (theoretically) available, and the fact that an extension of time could be provided to supply information.

Robodebt shifted the onus of proof wholly to the individual to check the accuracy of the information in the letter. A major reason for errors in the debt calculations was that the income figures the ATO passed on to the department from employers were on an annual basis, whereas the department calculates benefits on fortnightly income. If it did not receive contrary information, the department’s policy was to average the ATO figure over the year, meaning the debts calculated were often too high because many people had interrupted periods of work and were entitled to full benefits when unemployed.

If people challenged the department’s demands — which required particular persistence — debts were often reduced to zero or a fraction of the initial assessment. One of the cases in the ombudsman’s report concerned a woman who received a debt notice for $5875. When she supplied bank statements and an employment contract showing she had stopped working for an employer whom the department assumed had employed her for the whole year, this was ignored and she received a letter from a debt collection agency demanding immediate payment of the full amount.

When she contacted Centrelink again, she was told that she needed to provide payslips and a separation certificate. When she said she had been unable to obtain them from her employer because the business had changed hands multiple times, and that she had provided bank statements instead, she was told there was nothing further that could be done. She eventually succeeded in having her case referred for manual reassessment and the debt was reduced to zero. She joined the more than 10,000 people — not counting those who gave up the fight — whose debt was reduced to zero in the fourteen months to September last year.

The experiences with robodebt have a parallel with the welfare system in Indiana, where “refusal to cooperate” was used on the slightest pretext to deny or cut off assistance. In Australia, a lack of response to a Centrelink letter was assumed to mean a failure to cooperate, even though it often was the result of the letter being sent to an old address or people being unable to get through on the telephone.

The robodebt controversy has at least caused the government to temper its hardline approach. Centrelink delayed sending out letters over Christmas and the new year to spare people anxiety over the holiday period. It accepted and has at least partly implemented the ombudsman’s recommendations, including by providing access to a dedicated helpline (no helpline number was provided in the initial letters), delaying action to recover debts when people seek a review, allowing people to use bank statements rather than payslips to verify their income, offering more assistance to vulnerable people and no longer automatically charging a 10 per cent debt recovery fee.

As well, Centrelink has recruited 1000 people on contract to bring total staff dealing with customers to about 2500. It now sends out registered letters, which are returned if people have changed addresses. (The Australian Council of Social Service estimated that more than 6500 people first heard about their alleged debt when they were contacted by a debt collector.)

The National Social Security Rights Network (previously the National Welfare Rights Network), the peak body for community legal centres with social security practices, has received fewer requests for help since the initial controversy. Joni Gear, the Network’s legal project officer, says this is partly because people have become more familiar with the system and partly because the department has put considerable effort into improving its communication with people affected.

But she adds that the basic process remains the same, and human checking for errors still doesn’t occur at the initial stage. Debts are still being wrongly assessed and the onus of proof remains with the person accused of having been overpaid. “We have a lot of issues with this type of system, particularly for people who are still social security recipients. It’s a huge burden to have to comply with this process and quite stressful, thinking potentially you have a substantial debt and to have to prove you aren’t being overpaid.”

Gear says the improvements to the system still leave many social security recipients stranded because they are not familiar with an online process. “We need to make sure that face-to-face customer service still exists for these people and that they don’t fall through the cracks.”

What the government didn’t do is adopt the majority recommendation of a Senate committee — that is, of its Labor and Greens members, with Coalition senators dissenting — that the robodebts system be suspended until fundamental issues of procedural fairness were addressed. But the Department of Human Services is hoping that “George” will relieve some of the pressure on its staff. George, a robot, is “starting to explore solving some significant challenges that we have in our face-to-face servicing,” according to the department’s chief information officer Gary Sterrenberg. “One of these is violence. George is able to detect violence in a crowd and that gives us signals to be able to help our staff avoid those situations.”

So people whose frustrations boil over because of the lack of empathy shown by the department’s computers can be brought to heel with the help of another computer. A perfect example of government by algorithm.

“Automated decision-making shatters the social safety net, criminalises the poor, intensifies discrimination and compromises our deepest national values,” writes Virginia Eubanks. Perhaps it doesn’t need to be that way, but it will require the wonders of modern technology to be deployed in a much more sensitive way than they have been to date. ●

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It probably won’t happen; both numbers rest on optimistic assumptions. But they imply that if this budget works as intended, 95 per cent of the job of turning our deficit to surplus will be achieved by Australians paying higher taxes, and only 5 per cent by spending cuts.

And this is a Coalition budget.

Last night treasurer Scott Morrison delivered what he called a “practical” budget. It is quite different from anything the government has delivered since taking office in 2013, quite different from all but one of Peter Costello’s budgets – the one that introduced the GST – and quite different from the rhetoric the Coalition has poured out for more than a generation in support of cutting taxes and spending.

This budget raises taxes and spending. It aims to repair the budget balance in the medium term yet weaken it even further in the short term. It is not that different from the budget that shadow treasurer Chris Bowen sketched out during the election campaign.

Labor lite? Some in the Abbott camp would call it Labor heavy, a tax-and-spend budget. Politically, this is a seachange for Malcolm Turnbull and Scott Morrison. They have dumped the concerns of the right and headed out to plant the Liberal Party’s flag on the political middle ground, and take it back from Labor.

To me, it tells us that Turnbull is no longer worried about a threat to his leadership from Abbott. The enemy he is now focused on is Bill Shorten. And this politically bold budget has made giant strides in narrowing Shorten’s room to manoeuvre.

Is this a one-off shift, to break the impasse on reducing the budget deficit, with no wider consequences? Or is this, and the emergence last week of Gonski 2.0 to increase schools funding, a lasting change of tack? Is Malcolm Turnbull taking charge of his party, rather than letting it take charge of him, and steering it back to his natural habitat in the middle ground?

In economic terms, the budget is not perfect, but there are many good things. If you believe its numbers – and in some cases that’s challenging – it’s more of a tax, spend and save budget. In the next four years it aims to raise a net $20 billion of extra taxes, spend a net $14 billion of them, and put the other $6 billion towards reducing the budget deficit.

By and large, Morrison and his colleagues have chosen their tax victims with care. It will not be easy for Labor to fight the tax rises (although, seeing the outrage Bill Shorten and Tanya Plibersek are now voicing on behalf of overfunded Catholic schools, anything is possible). By and large, they have boosted spending in places where Australians want them to spend more – abandoning the harsh “zombie” spending cuts of Abbott’s 2014 budget. And by scrapping “savings” they could not deliver, and (at least notionally) keeping that $6 billion, they have improved their chances of finally getting the budget back into surplus.

The economics of this budget are not bad; the politics are quite extraordinary. Let’s start with that first.

Since he lost control of the tax reform debate at the start of last year, Malcolm Turnbull has appeared to be a prisoner of the Coalition’s conservative wing. He has backed away from positions he was previously identified with, on issues from tax reform to same sex marriage and climate change. As Abbott’s intention to take back the leadership became clearer, so did Turnbull’s retreat from his own views. On issue after issue, he seemed to be looking over his shoulder at his rival, asking, “What would Tony do?” and then doing it himself.

But the more Turnbull tried to please the Liberal right and the Nationals, the more he alienated mainstream Australia, those in the broad centre of public opinion. They have little interest in politics, but on many issues they hold the kind of views the right-wingers disparage as “Labor lite.” They want the budget deficit fixed, but not by harsh spending cuts like those proposed in the 2014 budget. They want their kids to go to well-funded schools. They want to have good hospitals there when they need them, they want good public transport as well as good roads, and they don’t see why the Coalition is holding up action on same sex marriage and climate change.

Abbott made no attempt to appeal to this broad centre, which was why he lost thirty Newspolls in a row. When Turnbull became PM, mainstream Australia greeted him as a saviour, but gradually soured on him as he failed to deliver. The only really significant reform Turnbull drove personally was the proposed refugee swap with the United States – but then ran into President Trump, with the result that, six months later, not one refugee has yet been freed.

The Coalition resumed its slide towards life in opposition. Since September it has lost eleven Newspolls in a row. It had reached that danger point where people were starting to switch off mentally, and stop listening to Turnbull. Unless he did something dramatic, or some rainbow of luck fell on him, it would soon be too late to revive his leadership – or the Coalition’s fortunes, since it had no other viable leader. 

When the WA election ended in a thrashing for the Coalition, I argued that the 2017 budget was the Turnbull government’s opportunity to reboot, and reoccupy the political middle ground. I can’t claim any credit, but that is exactly what it did yesterday. In many ways, this was like an election budget, except that it hit enough revenue targets to let the government reduce its overdraft, rather than simply hand out more largesse.

Don’t underestimate this change. For years, Coalition treasurers and shadow treasurers have chanted the mantra “no new taxes.” In their policy decisions, the two parties repeatedly looked after the rich, and took money off the poor. Under the Howard government, the Bureau of Statistics estimates, the Gini coefficient, the measure of inequality, shot up from 0.29 to 0.34. Howard got away with it, because he was a masterly politician, and a lucky one. But that’s a rare combination.

The 2017 budget is quite the opposite. It plans to gradually withdraw money from overfunded schools, and distribute it where it is most needed. It puts a new tax on five big banks (the CBA, Westpac, ANZ, NAB and Macquarie, raising $6.2 billion over four years). It puts a new tax on employers who import skilled workers ($1.2 billion, earmarked for a fund to train Australians in skills), closes a loophole on rental investors claiming dodgy deductions ($800 million), and beefs up Tax Office resources to take on tax avoiders (hoping for $1 billion from the black economy and the Mafia, and another $1.6 billion from tax cheats in the building industry). Not too many votes lost there.

The banks of course will pass on the tax to their customers. Grattan Institute chief John Daley estimates that it could add an extra 0.03 or 0.04 per cent to mortgage interest rates. The government can’t stop them; Morrison’s only threat was to direct the overworked Australian Competition and Consumer Commission to investigate when they do so, and expose them for passing on a tax intended to be paid by their shareholders.

The tax is justified as an annual insurance premium for the implicit government guarantee of bank borrowing, which allows the banks to borrow money on global markets far more cheaply than otherwise. When Labor tried to impose a similar tax, at the urging of the Reserve Bank and other financial regulators, the Coalition blocked it in the Senate. How times change.

The biggest single revenue measure is an across-the-board tax on most of us: a further 0.5 per cent rise in the Medicare levy from 2019, in order to fund the unfunded half of the National Disability Insurance Scheme. I doubt that many Australians will complain about that. They want the NDIS in place, they know it has to be paid for, and the Medicare levy is a fair and appropriate way of doing it.

Yet you could not have imagined the government doing it a year ago, or imposing any of the other tax rises. It inherited a budget deficit of $37 billion, promptly blew it out to $48 billion with unfunded spending, and has reduced it only back to $38 billion for 2016–17. The Coalition’s first three years failed to reduce the deficit at all. Whatever it saved in spending cuts was immediately spent on other things, or given away in tax cuts. The budget is still spending $1.09 for every $1 of revenue it raises.

Morrison has again blamed the Senate for frustrating the spending cuts proposed in the 2014 budget – the 20 per cent cut in university funding, for instance, and making young people wait six months before going on the dole. In fact, those measures would have saved only $3 billion a year. The Senate has been used as a scapegoat for the government’s lack of fiscal discipline.

But on that front, Scott Morrison’s second budget has made three significant changes. First, if its numbers are right, its policy decisions will raise a net $6.25 billion – entirely between 2019 and 2021 – to reduce the deficit and then ensure a surplus. (The numbers are dodgy, though, because they assume a rapid rebound of wages growth from less than 2 per cent now to 3.75 per cent by 2020–21. Wages growth lifts income tax, which lifts the budget’s bottom line.)

Second, by committing the Coalition to raise taxes, Morrison has opened the way to finally getting the budget back under control, and not just promising to do it.

A relevant comparison: in the eight years after the Howard government introduced the GST, its revenues averaged 25.4 per cent of GDP and its spending 24.2 per cent. If these budget projections are right, by 2020–21 revenues will again be 25.4 per cent of GDP, and spending 25 per cent – of which roughly 1 per cent will be on the NDIS, which did not exist in Howard’s time.

Third, the budget abandons the remaining unpassed spending cuts from its first term in government. This worsens its bottom line by $13 billion over four years, but restores its honesty and credibility. Unfortunately, the budget also proposes new spending cuts that are unlikely to pass the Senate – its second attempt to squeeze billions of dollars from university students and new graduates is likely to die the same death as its first – but they are of a lesser order, and the bargaining on them has yet to begin.

The main spending cuts were flagged well in advance, with a bit of dissonance last week when, on successive days, education minister Simon Birmingham outlined big cuts to funding for the university sector – including a 5 per cent cut in university funding, and accelerated repayments by young graduates with HECS/HELP debts – followed by big increases in funding for schools.

Tertiary education is already Australia’s third-biggest export industry, and if nurtured well, it could provide a vital source of income for the nation for generations. Yet Birmingham was instructed to come up with savings as big as those the Senate has rejected since 2014. What is the benefit to Australia in cutting university budgets, or in creating disincentives for young people to study? I don’t get it, and I’d be surprised if the Senate does either.

The proposed freeze on family benefit payments, announced in March, continues a squeeze by governments of both sides, which is gradually turning family benefits from a near-universal right of parents into a welfare measure for the poor. I, for one, regret this. Children are the future of the country, and parents face high costs in raising them. The family benefit is a contribution made by society at large to those costs. A welfare system without universal benefits is one subject to perverse poverty traps, which reduce incentives to work. We should thoroughly debate this one.

Take away the decision to scrap the zombie spending cuts and, on paper, the rest of the budget’s new spending initiatives are roughly balanced out by spending cuts. In practice, the new spending is far more likely to get through the Senate than the cuts are. The cuts include the latest round of whack-the-unemployed, a new “three strikes” policy which would see repeat offenders lose half a payment the next time they breach the rules (such as missing an appointment), lose a full payment the time after that, and be thrown off all support for a month if they commit a third breach.

A second measure would allow welfare recipients to be put on the cashless debit card if they cite a drug episode or hangover as an excuse for missing an appointment. A third measure proposes a random trial in which 5000 young people on welfare would be tested for drug use, with a similar penalty if they test positive. Morrison told journalists this would help them get off welfare, since drug dependency is often a key factor keeping them out of work.

Other important spending measures include lifting the freeze on Medicare benefits, which was not going down well in the bush or in marginal seats. Some very expensive new drugs will be added to the pharmaceutical benefits scheme, and paid for by forcing manufacturers to reduce the price of older drugs. But how to restrain the growth in health costs is another issue we really need to debate.

There is no space here to debate the new school funding model, which has been well covered in Inside Story by Dean Ashenden and in the Financial Review by Tim Dodd.

Overall, this is a budget with more to applaud than oppose. But some of it is tricky, and nowhere more so than in one of its key selling points: infrastructure. 

You’ve heard the sales pitch. More than $70 billion of investment in new roads, rail, airports and bridges over the eight years to 2020–21. The Commonwealth to build its own rival to Sydney airport out in Western Sydney, and fund road and rail links to it. A $10 billion National Rail Program to fund regional and urban rail improvements. A further $8.4 billion to build the Melbourne-to-Brisbane inland rail. $1 billion for Victoria, half of it pledged to regional rail. The Commonwealth to help fund the new Labor government’s Metronet scheme in Perth. There’s a lot happening here.

Morrison has talked up this sort of spending as “good debt,” an investment in the future which should be paid for largely by the future taxpayers who benefit from it. If well chosen, projects like these generate economic and social returns which more than cover their cost. Borrowing to build them is different from borrowing to pay for your current spending, which – apart from education spending – generates no such benefit in future.

I’m with him on that, and with Treasury when it argues in the budget papers that for the Commonwealth, even the net operating balance used by state governments as their budget bottom line doesn’t work. The money the Commonwealth gives the states to invest in road and rail appears in the budget as recurrent spending, not investment, because the Commonwealth is not doing investing itself. Take that out, Treasury says, and by 2018–19 the net operating balance – revenues minus recurrent spending – would be virtually back in balance, two years before the underlying cash balance gets there.

But there is no sign of this infrastructure spending binge in the budget papers. The two big projects – the Western Sydney airport and Inland Rail – are both being funded off-budget, like the National Broadband Network. The government will borrow up to $13.5 billion to invest in both projects as equity; but in the case of Inland Rail, it concedes that the project will still be in the red in fifty years’ time. Moving them both off-budget, but under Commonwealth ownership, means spending on them will not be counted in the budget’s bottom line.

The infrastructure spending recorded in the budget papers is set to fall, quite steeply, over the next four years: from $9.2 billion in 2017–18 to $5.1 billion in 2020–21. That might mean the government has decided its plans for next year, but not for four years’ time, which is fair enough; but if so, it means future spending growth might not be as restrained as the budget papers suggest – making the 2020–21 surplus less secure.

And when it comes to Victoria, the government is using theatrics to substitute for delivering the goods. The $1 billion infrastructure package in the budget is just an upgrade of the $877.4 million it has already offered Victoria in place of the $1.45 billion the state claims it is entitled to under the Commonwealth’s asset recycling initiative. It’s just prolonging the argument. Why not fix it?

On the data provided in the budget papers and ministerial statements, the Turnbull government plans to provide $3.9 billion in 2017–18 for transport infrastructure in the PM’s home state of New South Wales – $4.6 billion if you include a concessional loan to the WestConnex road project – yet just $796 million for Victoria. Victoria will get just 9 per cent of Turnbull government spending, New South Wales 45 per cent.

The funding for specific projects includes $1 billion for Sydney (excluding the WestConnex loan) but only $193 million for Melbourne. Of the $5.7 billion earmarked as grants for specific projects next year, 18 per cent will be invested in Sydney, and 3 per cent in Melbourne – which is taking almost a third of Australia’s population growth.

The Andrews government is difficult to deal with, but the Turnbull government shows no interest in reaching a solution. It acts like its priority is to look after New South Wales and Sydney. The PM’s claim last week that Victoria receives 20 per cent of road funding was false, and he surely knows that. Why allow this silly little parochial anti-Victorian bias to continue? Why not fix it, and move on to bigger issues?

Big issues are lying in wait. Yesterday’s budget papers barely mentioned climate change. But next month, chief scientist Alan Finkel will deliver his report on how Australia should meet its goal of reducing greenhouse gas emissions in 2030 by 26–28 per cent from 2005 levels. That’s a 50 per cent reduction in emissions per capita – whereas, on the government’s own estimates, our emissions have risen by almost 2 per cent since the carbon tax was scrapped in 2014.

The budget brought back the old Malcolm Turnbull. It’s a long time since we’ve seen him around climate change policy; that’s been handled by the other Malcolm, the one who looks like Tony Abbott. His government’s budget shows a sea change in priorities – but will that extend to other areas? Its response on climate change will tell us. •

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Australia’s welfare system follows broadly the same pattern, though demography and the design of our system mean that we redistribute more from rich to poor and less across the life course than does Britain, or any other OECD country. Partly, this reflects our younger population; partly, it’s because we demand less tax from older people.

In both countries, many people call on government support at some time during their working lives – because they become unemployed, ill or disabled, for instance, or because they face extra child-rearing demands after a breakdown of family relationships. Even in Australia, which has the most income-tested system of any rich country, nearly two-thirds of working-age households receive an income-tested benefit during any ten-year period, yet only around 1 per cent of households depend on benefits across a full decade.

Conventional point-in-time analyses of who receives benefits and who pays taxes don’t reveal the fact that many more people benefit from social spending than is commonly understood, or that low-income groups contribute much more in taxation than shows up in a single-year survey.

As John Hills pointed out in an article marking the recently published second edition of Good Times, Bad Times, the British debate

still assumes that we can be divided neatly between those who pay in, and those who take out. Allied with the escalating stigma attached to those who are at any one moment receiving benefits and the notion that a large share of public spending goes on people who are out of work, this makes further savings from “welfare cuts” sound attractive – and politically costless, since those affected will be “them” rather than the “us” voters are assumed to be.

As Hills also observes, perceptions of who benefits from welfare, and who pays for it, don’t simply reflect the difficulties of understanding admittedly complex data. The perceptions also rest on the myth referred to in the book’s subtitle:

It’s skivers against strivers; dishonest scroungers against honest taxpayers; families where three generations have never worked against hardworking families; people with their curtains still drawn mid-morning against alarm-clock Britain; “Benefits Street” against the rest of the country; undeserving and deserving…

This theme – of a divided “them” and “us” – runs across a hundred tabloid front pages and through a dozen TV programs focused on an assumed unchanging “welfare-dependent” underclass.

Change the terminology, and some of this sounds uncannily familiar to Australian readers. But to what extent have these and other welfare myths really taken hold in Australia?

Hills’s first set of myths relates to the question of who actually receives welfare payments. In a 2012 British survey, people were asked what proportion of the national welfare budget was spent on benefits for unemployed people. Half of the respondents thought unemployed people received 40 per cent or more of spending, and a quarter thought they received more than 60 per cent; the average response was 41 per cent. The real figure was 4 per cent.

In Australia, the real figure is slightly higher, at 4.9 per cent. A 2016 survey by the ANU Centre for Social Research and Methods asked respondents which area of social welfare spending was largest. Forty-five per cent of respondents said payments to the unemployed, which was in fact the second-smallest of the five programs mentioned. Only 22 per cent of respondents thought that age pension spending was highest, yet this form of income support is by far the most significant – $41.6 billion in 2014–15 compared to $10.8 billion for jobseekers.

In the British case, Hills points out, the belief that a high proportion of the money goes to the unemployed sits alongside a belief in widespread fraud. The Department for Work and Pensions estimates that just 0.7 per cent of all British benefits (including pensions) are overpaid as the result of fraud. For Jobseeker’s Allowance, cases of fraud make up an estimated 2.9 per cent.

But when people were asked what proportion of benefits and tax credits was claimed fraudulently, the average response was 27 per cent, nearly fifty times the grossed-up result from the department’s random checks. A quarter of respondents put the figure at 40 per cent or more.

In Australia, Griffith University’s Tim Prenzler has analysed the results of Centrelink fraud and overpayment investigations between 2006–07 and 2008–09. Unlike its British counterpart, Centrelink doesn’t directly provide estimates of fraud but reports on detected errors and fraud prosecution actions and outcomes, usually initiated through compliance and eligibility reviews. In each of the three years, Centrelink initiated close to four million reviews. Around 15.7 per cent of reviews led to cancellations or reductions in payment, but only 0.8 per cent were referred to the Director of Public Prosecutions, and 0.5 per cent were prosecuted. Overall, 0.04 per cent of customers were convicted of fraud over the three years.

Over the three years, fraud investigations were estimated to have produced $380.6 million in gross savings and amounts targeted for recovery, out of the $200 billion–plus spent through Centrelink. In other words, savings from detected fraud added up to less than one-fifth of 1 per cent of all spending over the three years.

Despite the evidence that deliberate fraud is a tiny fraction of social security spending, it remains a mainstay of much reporting of welfare in the Australian media. The Daily Telegraph is a repeat offender. In May 2014, it reported an (unsourced) estimate that one million people could be receiving the disability support pension, or DSP, by 2017. In September of that year, it claimed that “an army of bludgers are using online step-by-step guides to con doctors into giving them disability support pensions.” In December 2014, it described the recipients targeted by new medical requirements for DSP as “rorters,” and reported that the Department of Human Services had “investigated 411 people for dishonestly claiming the DSP, saving the taxpayer a whopping $9.5 million” in the previous financial year.

While that article did mention that a total of $16 billion had been paid to DSP recipients during the year, it failed to divide the dishonestly claimed amounts into the total figure. What that calculation reveals is that fraud accounted for just one-sixteenth of 1 per cent of spending, and the number of people investigated was about one-twentieth of 1 per cent of recipients.

Perhaps the most misleading of the Telegraph’s stories also appeared in May 2014. Under the headline “Slackers & Slouch Hats,” it pointed out that “NSW Disability Support Pensioners now outnumber Australia’s total war wounded by more than 44,000.” The article was illustrated by two photographs: the first showed a queue of about twenty young people, none of whom had an apparent disability, superimposed were the words “NSW DSP Recipients: 270,415.” (Media Watch later revealed that it was a stock image of Swedish university students.) The other was a well-known and striking photograph of a wounded soldier being helped to walk through the jungle in Papua New Guinea during the second world war, with the superimposed words “Nation’s war wounded: 226,016.”

It’s war: the Daily Telegraph’s campaign opens up a new front.

Statistically, this is like comparing apples with pineapples. The population of Australia has grown so much in the intervening years that New South Wales (7.5 million) is now very similar in size to the total Australian population at the time of the second world war (7.4 million), so any comparison needs to build in a factor of more than three. Comparing a group of people aged between sixteen and sixty-five who have been granted payments over an extended period, potentially decades, with a group of generally young people injured in around six years of war is quite a stretch, and the report didn’t point out that roughly 40 per cent of DSP recipients are women, whereas very few of Australia’s war wounded were.

In December 2014, the Press Council judged that the article breached its standards of practice (though not on the grounds of dodgy statistics) because it implied that a high proportion of DSP recipients are “slackers” and should not be receiving DSP. In July of the following year, the council also issued a largely unfavourable adjudication after a complaint from the National Welfare Rights Network about the Telegraph’s September 2014 article on the supposed online guide for DSP “bludgers.”

DSP recipients might have attracted a great deal of unfavourable media attention, but they are not the only group to be stigmatised. In a September 2016 article, “Meet the NEETS: They’re Young and Able, But Completely Unwilling to Look for Work,” the Telegraph referred to a just-released OECD report saying Australia now had 580,000 young people classified as NEET (“not in employment, education or training”). The story “illustrated” life as a NEET with a report, including pictures, of two young women (aged seventeen and twenty-one) from Sydney’s Mt Druitt who would rather spend their days “chilling at Maccas” and taking their old Holden Barina on “off-road tracks” than look for a job. One of them told the paper that she would “never get a job.”

On the same day, the paper published an editorial headlined “We Need a NEET and Tidy Solution to these Bludgers,” again with photographs of the two young women. The next morning, the two girls made it onto Seven’s Sunrise and Nine’s Today Extra, and that evening they were also on Seven’s evening news and Nine’s A Current Affair. Treasurer Scott Morrison said in a radio interview a few days later that he would ask the social services minister to look into the NEET duo’s welfare status.

The story was contested by the online news site the New Daily, which put Australia’s youth unemployment figures into international context. The NEET rate in Australia is about two-thirds of the OECD average and the share of young people in jobs has been consistently above the OECD average for the past thirty years. It also sought to explain the factors behind the NEET status, including longstanding educational disadvantage.

Complicating the issues was the fact that the younger woman turned out not to qualify as NEET. She was not only still at school but also working part-time, and wasn’t receiving a Centrelink payment. According to her father, she was simply “acting up” during the interview. He told the Guardian that she had taken the negative attention very badly, and her mother was organising counselling.

While not as consistent as the Daily Telegraph, the Adelaide Advertiser has taken similar lines in its coverage. In January 2013, under the heading “Single-Parent Women Most Likely to Cheat,” it reported that “South Australian welfare recipients have ripped off nearly $80 million from Centrelink in the past financial year and most of the fraudsters are women.” After the article appeared, the federal Department of Human Services (which had supplied some data to the paper) told the publication that fraud-related debt in South Australia in the past year had been about $2.5 million, not $78 million. That article also attracted an unfavourable Press Council adjudication.

The inaccuracies aren’t always the work of media outlets. In May 2014, the Australian ran a front-page story, “The Single Mum on $55,000 in Pensions, Benefits and Study Aid,” quoting treasurer Joe Hockey’s response to complaints about the 2014 budget’s treatment of single mothers. The treasurer’s office had estimated that she would receive $54,417 in government payments, including the parenting payment, both forms of family tax benefit, several supplements, rent assistance and education supplements.

In July 2014, however, the Australian reported (on page 4 this time) that “Joe Hockey’s welfare mum may not exist,” pointing out that the Department of Human Services had told the Senate estimates committee that “the department did not provide the figures” and was “unable to confirm if the calculations are accurate.”

In fact, the figure Hockey had quoted assumed that the lone parent would receive jobs, education and training childcare fee assistance worth $15,120. Childcare assistance might be a cost to the taxpayer, but it doesn’t form part of a family’s disposable income; to receive it in full you have to be paying more than the amount for childcare costs. (The family would of course be worse off if they did not receive the assistance.)

According to the 2014–15 budget papers, spending on the program was $117.25 million spread across just over 33,000 families with 51,000 children. The average level of assistance per family was therefore around $3500, which means that the treasurer’s “welfare mum” would be receiving more than four times the average payment per family and three times the average for two children. Such a family might exist, but would hardly be representative of lone parents on welfare.

Again in 2016, and again on the front page of the Australian, another article argued that the welfare system was flawed because “thousands of parents claiming government benefits are financially better off not getting a job.” As evidence, the article gave the example of a person who, despite not working, would receive $52,523 in government payments, considerably more than the $49,831 brought home by the median full-time worker. As Greg Jericho pointed out in the Guardian, the paper’s example was a single parent with four children aged four, seven, ten and thirteen who received neither any employment income nor any child support from the father, and who was paying $400 a week in rent.

Hardly typical, in other words. According to research by Ben Phillips from the ANU Centre for Social Research and Methods, only 4 per cent of single parents have four or more children, and only about 2.5 per cent would be eligible for all the benefits this family is assumed to receive.

Of course, it is also misleading to compare the income of a family with four children to that of a single person because their costs of living would be much higher. There are, after all, five mouths to feed and five people to clothe, and the family needs larger accommodation. To compare like with like – a lone parent on benefits to a similar size lone parent family in work – we would need to add roughly $23,000 to the disposable income of the median earner, since they would be receiving roughly the same family payments and rental assistance as the out-of-work lone parent.

In Britain, the argument that people on benefits should not have higher disposable incomes than people in work has been used to justify the “benefits cap,” which imposes an upper limit on the total amount of benefit income people can receive (unless they are working at least sixteen hours per week). The main groups affected are those with large families or high housing costs, or both.

Some commentary simply appears to ignore the real-world trends. Writing in the Australian in February 2015, former federal Labor minister Graham Richardson asserted that the number of people on the DSP “is growing at a phenomenal rate.”

Source: Calculated from Department of Social Services, Income Support Customers: A Statistical Overview (various years), and DSS payment demographic data (various years).

In fact, as the chart shows, the number of people receiving the Disability Support Pension has generally been falling more rapidly than at any time in the past thirty years. Numbers grew by around 5 per cent following the global financial crisis, but the highest rate of growth – 13 per cent in a single year – was between 1991 and 1992. In the first six months of that year, the social security minister was Graham Richardson.

John Hills concludes his book with a call to recognise the real nature of Britain’s welfare state:

How perceptions could be better brought into line with the reality of what is going on is now one of the central challenges facing those making and debating social policies and their future. In a situation where there are rising demands for services from an ageing population on one side and the legacy of crisis meaning tight constraints on resources on the other, we cannot afford to make choices and decisions by myth, rather than in the light of reality.

We face some of the same challenges in Australia, though perhaps the choices here are not yet as sharp as they are in Britain. Given our more targeted age pension, we appear better placed than most economically developed countries to meet these challenges, but balancing competing demands will still be a significant challenge.

Despite the evidence cited above, it may also be the case that the myths of the welfare state are not as deeply ingrained here as in Britain. The “strivers versus skivers” dichotomy seems to have wider acceptance than the “lifters and leaners” distinction does in Australia – at least if we compare the results of the 2015 British election with the response in Australia to the 2014 budget and the ongoing political controversy since then.

The Melbourne Institute’s 2014 HILDA Statistical Report estimates that just over 80 per cent of the individuals in the survey who were under the age of twenty-five when the HILDA survey began in 2001 received a welfare payment at some stage over the next eleven years – a very large group of “them.” But only 1.5 per cent of this group received more than half of their income from welfare payments for each of the eleven years, and just 0.3 per cent received more than 90 per cent of their income for each of those years.

When some news media talk about welfare, they give the impression that “them” are members of a group of people who stay dependent for all of their lives. But this group is tiny – and very disadvantaged. Between the majority who need social security benefits at some time in their lives and the tiny minority who need it all the time lie many complex patterns of social security use reflecting the complexity of people’s lives.

Perceptions and analysis of the welfare state do reflect value positions and we should not expect everyone to agree about the directions for reform. But, as in Britain, the evidence that welfare is not simply a matter of “them” versus “us” is overwhelming. •

The post “Them” and “us”: the enduring power of welfare myths appeared first on Inside Story.

Since just before Christmas, Centrelink’s new automated data-matching system has resulted in a significant increase in the number of current and former welfare recipients assessed as having been overpaid, and therefore in debt to the government. The data-matching system seems to have identified people with earned income higher than the amount reported when their benefits were calculated.

Many of these people were alarmed when Centrelink contacted them about the assumed debt. Their stories have been recounted over the past two months in the mainstream media and in social media. The controversy prompted the shadow human services minister, Linda Burney, to request an auditor-general’s investigation. After receiving more than one hundred complaints about problems with the debt-recovery process, independent MP Andrew Wilkie asked the Commonwealth ombudsman to step in, and he has since launched an investigation. The Senate Community Affairs References Committee will also examine the new process.

This is by no means Australia’s first social security overpayment controversy. The last storm was sparked by the expansion and fine-tuning of family tax benefits in 2000. Under that new system, families were given the option of taking their payments as reductions in the income tax paid on their behalf by their employer. To ensure that this group was treated in the same way as those who received cash benefits from Centrelink, the government introduced an annual reconciliation process. Before the beginning of each financial year, families were asked to estimate what their income would be in the subsequent tax year; later, after they had filed their tax returns, an end-of-year reconciliation process would bring income and family benefits into line.

This seemed like a rational system. People who had been underpaid could receive a lump sum to ensure their correct entitlement. People who had been overpaid would pay back the money that they weren’t entitled to keep. The reconciliation would correct any mistakes people made when they estimated their income for the year ahead (not necessarily an easy task to get right!) and make the system responsive to changes in income during the year.

But many families’ estimates at the start of the year proved to be poor guides to income received during the year. This happened in both directions – some estimates were too high, some too low – but most often the actual annual incomes were higher than predicted. The result was a very large increase in overpayments and, thus, in debts. Before the new system was introduced, just over 50,000 families had debts at the end of each year; in the first year of the new system, an estimated 670,000 families received overpayments. Overall, around one-third of eligible families incurred an overpayment in the first two years of the new system.

This is how the system was designed to work. But for the families who found themselves owing sometimes large and usually unexpected debts, the experience created confusion, stress and anger. It also generated considerable controversy in parliament and the media. So, in July 2001, just before an important by-election, the Howard government announced a waiver of the first $1000 of all overpayments, which reduced the number of families with debts to around 200,000. Further fine-tuning came in 2002, also aimed at reducing overpayments and debts. Then, in 2004, an annual lump sum was added to family tax benefit A with the aim of offsetting any overpayments.

At around this time, Britain was designing and introducing a new system of tax credits for people in work (the working families tax credit) and for families with children (the child tax credit). The system had some features in common with the Australian approach, including an end-of–year reconciliation. The British government was keen to avoid the sort of controversy that had blown up in Australia, so it included a mechanism for changing the level of tax credit not just at the end of the year but during the year as well.

The assessment for credits was initially made on the basis of gross family income in the previous tax year. If recipients reported changes in income and circumstances during the year, then the award was adjusted, and at the end of the year total credits and income were reconciled. But many changes in income and circumstances went unreported during the year and so, in practice, considerable adjustment was required. Over the first few years of the system, about 1.9 million cases of excessive credits occurred each year.

As in Australia, the system caused significant hardship and generated adverse media coverage and much concern. In 2005 and 2006, the British government introduced a number of changes designed to reduce overpayments, including a very substantial increase in the level of the annual income “disregard,” from £2500 to £25,000. This meant that family income could rise by up to £25,000 in the current award year before tax credits were reduced. The amount has since been brought back to the original £2500, which will probably mean overpayments will start to rise again. Processes exist for recovering overpayments of tax credits and housing benefits, and these sometimes attract some media attention, most recently in relation to the use of private debt collectors.

Together with the current Centrelink controversy, the experience of these earlier cases offers four main lessons for social security policy.

First, getting payments “right” in any means-tested system is a complex process necessarily involving trade-offs between responsiveness and simplicity. If the aim is to precisely match income and benefit in real time, then there must be constant updating and checking of income and adjustments of benefits. But such a system would be very intrusive and administratively complex. So systems are designed to pay first and reconcile later, which makes overpayments almost inevitable.

Governments can minimise the impact by disregarding some overpayments, as both Australia and Britain have done in the past. But that is not part of the design of Australia’s latest program of debt recovery. People are being chased partly because the Budget Savings (Omnibus) Act 2016 toughened repayment compliance conditions for social welfare debts. New conditions include an interest charge on the debts of former social welfare recipients who are unwilling to enter repayment arrangements, extended Departure Prohibition Orders for people who are not in repayment arrangements for their social welfare debts, and the removal of the six-year limitation on debt recovery for all social welfare debt.

People ardently dislike systems that they don’t understand and feel are unfair, or that seem to create debts beyond their control. A very stringent approach to collecting overpayments can cause real hardship and generate controversy. It has even been suggested that there may be a punitive element to this, with Centrelink staff not encouraged or required to help people to correct errors.

Second, IT systems are not by themselves the cause of these problems. It is easy to blame the technology when things go wrong, and some problematic factors do indeed appear to be technological. The names of employers provided to the Australian Tax Office and Centrelink don’t always match, for example, and it appears that in some cases the same income is counted twice because the assessment process matches names rather than Australian Business Numbers.

More significantly, Centrelink’s formula can produce false estimates of debts when individuals are asked to confirm their annual income reported to the Australian Tax Office, because it simply divides the reported annual wage by twenty-six. That overly simplified calculation will only produce a useful figure if individuals receive exactly the same income each fortnight, which is often not the case, especially for casual workers, students and other people with intermittent work patterns.

But these problems are not necessarily the fault of the IT, which is only doing what it has been designed to do. More checking by humans would probably reduce errors, but outcomes that result from the design of the policy can’t be resolved by technical fixes.

Third, IT systems are not by themselves the solution either. It is possible that the earlier problems with overpayments of family tax benefits may recur very soon. In early February, the federal government introduced a new omnibus savings bill to parliament, combining and revising several previously blocked welfare measures into a single piece of legislation in order to save nearly $4 billion over the next four years, after allowing for increased spending on childcare and family tax benefits. By far the most significant of the projected savings in the bill – $4.7 billion over four years – result from phasing out the end-of-year supplements for family tax benefit recipients, which were introduced to solve the overpayment and debt problems referred to earlier.

So why would the government think that the overpayment of family payments and the subsequent debt problem will be resolved, as this saving seems to assume? The answer is not entirely clear, but seems to relate to the update of Centrelink’s computer system announced in 2015. “The new technology to underpin the welfare system will offer better data analytics, real-time data sharing between agencies, and faster, cheaper implementation of policy changes,” Marise Payne, the then human services minister, said at the time. “This means customers who fail to update their details with us will be less likely to have to repay large debts, and those who wilfully act to defraud taxpayers will be caught much more quickly.”

Complementing the Centrelink update are proposed changes in reporting systems at the Australian Tax Office, particularly the introduction of a single-touch payroll system. Under the new system, when employers pay their staff, the employees’ salary or wages and PAYG withholding amounts will automatically be reported to the ATO, which can then share this data with Centrelink.

The government seems to be assuming that computer and system updates will provide a technological fix to the problem of family tax benefit overpayments – and thus deliver a saving of $4.7 billion over the next four years. But what if the new IT systems don’t work in the ways envisaged? The Australian Tax Office’s computer system has crashed a number of times over the past year. Indeed, in the very same week that the government introduced the new omnibus savings bill, newspaper reports of this “tech wreck” suggested that the ATO might not be able to guarantee this year’s lodgement of returns in time for the start of the new financial year. The reports also noted that the development of the single-touch payroll system would remain one of the ATO’s priorities for this year.

Finally, to reiterate our first point, these problems have arisen from policy choices and design. Britain is introducing a new system, the universal credit, which will use real-time adjustments to track changes in earnings and seek to match awards to income on a monthly basis. How well this will work in practice remains to be seen. In both countries, trends towards more insecure and variable employment patterns – and hence irregular pay packets – will make balancing accuracy and timeliness in means-tested welfare benefits more difficult. The assumption of regular and unchanging income no longer holds, and this new reality requires a policy, not a technical, solution. •

The post Timing it wrong: benefits, income tests, overpayments and debts appeared first on Inside Story.

Yet this era of unprecedented progress has not extended to Australia’s social service sector. Almost thirty years after Bob Hawke pledged that no Australian child would live in poverty, over 730,000 children do just that. Learning outcomes in our schools are stagnant, particularly among disadvantaged students. Indigenous Australians continue to experience dire life outcomes, including an incarceration rate 14.8 times that of non-Indigenous Australians. Waves of progress have left some of our most important challenges largely untouched.

Much of the problem lies in a lack of focus on outcomes, with few incentives to use the most effective means when spending billions each year procuring social services. While companies are quick to use big data to sell us breakfast cereal, governments have been less adept at using similar tools to support vulnerable Australians. Data on the effectiveness of social programs is often limited and, unlike the information that informs investments on the stock exchange, there is no consolidated and transparent reporting of outcomes achieved by service providers to guide public investments. With tight budgets and great need, the same old approaches are not feasible options to address disadvantage.

Imagine a world where governments could purchase outcomes. They would identify high-need populations, fund tailored programs and measure the results: stable housing for people who have been homeless, for instance, or reductions in reoffending for people leaving prison, or improved learning outcomes from interventions in schools. Once those results were achieved, providers would be paid a price that reflected budget savings as well as social benefits. Funding would be linked tightly to sustainable improvements in people’s lives.

This future isn’t as far-fetched as it might sound. Pay-for-success contracting, or PFS, ties funding to the delivery of outcomes, rather than to inputs alone.

PFS is not new. For instance, nearly two decades ago, the Australian government created the first iteration of a PFS system to help unemployed people into work, currently known as Jobactive. This program has a $6.8 billion budget over five years, making it one of the largest PFS contracts in the world. Participating organisations, like Mission Australia, are paid only after their clients have found and kept a job. The system is far from perfect and hasn’t been rigorously evaluated; but compare it with the alternative where providers are paid for delivering training and career guidance (inputs and activities) instead of the desired outcome – employment. Which approach is most likely to get the results that taxpayers and government want?

Compared to traditional contracting based on inputs and activities, PFS has two strengths: it improves incentives and gives service providers greater autonomy. With the improved incentives under PFS, service providers are discouraged from activity for activity’s sake: training that doesn’t lead to a job, or out-of-home care for vulnerable youth without planning for a stable transition to longer-term options. Even the simple act of tracking the results of a program under PFS provides focus: what gets measured gets done.

Likewise, funding based on achieving measurable targets improves accountability. The goalposts are clear and governments are better equipped to assess success when contracts expire: the wheat can be separated from the chaff. Over the long term, more money will flow to higher-performing programs and organisations.       

The autonomy that service providers enjoy under PFS also enables them to focus on the results they exist to achieve. By reducing or eliminating reporting requirements on inputs and activities, PFS gives providers the discretion to determine the best way to reach agreed targets. The relationship between government and providers evolves from compliance to collaboration. Rather than operating in a contracted straitjacket, people on the frontlines are free to respond to the specific context they face, using all the evidence and creativity they can muster.

PFS will not be appropriate for all sectors or solve all problems. It requires outcomes measurement that is not always possible. And PFS has its limits: funding reform is not a quick fix for all social problems, nor for the development challenges faced in parts of Australia. There are no silver bullets here. Like any system, poorly designed PFS can create perverse incentives, such as short-termism. But when it’s designed and used effectively, PFS can drive higher social returns from government spending.

Why, then, is PFS not the dominant paradigm of social service provision across Australia? Because doing PFS contracting is hard. Specifically, we see four main challenges:

1. Service provider funding needs: PFS creates a timing gap between costs incurred during program delivery and funding received, creating a cash flow challenge for service providers.

2. Obtaining sufficient political will: Risk-averse governments may be reluctant to apply PFS, particularly when it is difficult for voters to grapple with the effectiveness of social sector expenditure, and to build support for change.

3. Technically challenging procurement: Transitioning to PFS contracting involves determining outcome measures, setting targets, establishing outcome prices, selecting appropriate providers and evaluating whether outcomes have been delivered.

4. Data limitations: Often the outcomes of programs are not tracked, with a greater focus on easier-to-measure metrics, such as cost to serve and activity completion.

Social impact bonds and the transition to PFS

The good news is that governments and service providers are experimenting with new tools – including the much-hyped social impact bond, or SIB – to pay service providers for achieving desirable outcomes. SIBs are a type of PFS contract that uses private or philanthropic finance to bridge the funding gap that arises because services providers (typically non-profits) aren’t paid until results have been measured. As Mike Steketee described recently in Inside Story, financiers take on the risk of failure and are repaid by the government if and when targets are met. Two SIBs that prevent children entering out of home care by supporting families have been launched in New South Wales. Another fourteen are in development by state governments from both sides of politics to address social issues including homelessness, chronic health conditions, prison recidivism and substance abuse.

The bad news is that the buzz around SIBs often incorrectly centres on the role of the private sector, thus potentially setting SIBs up to fail. For instance, NSW premier Mike Baird has said that “rising demand for social services amid fiscal constraints has prompted governments to look at alternative sources of funding.” However, SIBs typically don’t expand the funding available for social services. Because private financiers won’t accept sustained losses, they will not add to total spending on social services in the long run. While governments benefit from paying only if the desired outcomes are achieved, this benefit is offset by risk premiums paid to financiers. Ultimately, governments still foot the bill and, in most cases, need to put money aside upfront.

Neither are SIBs primarily about using savings to repay investors. While theoretically plausible, these savings are typically too distant, diffuse and difficult to measure. Few social programs would receive funding if a positive financial return for government was the only metric. Governments sold on the idea of SIBs as “paying for themselves” are realising this is only a half-truth.

All of this noise obscures what will likely be SIBs’ primary benefit: accelerating the transition to greater use of PFS. Specifically, SIBs show promising signs of addressing several of the challenges for PFS expansion. Most directly, they address service provider funding needs (challenge 1) by providing a bridging cash flow.

SIBs have also demonstrated their usefulness as a political circuit-breaker (challenge 2). Tight budgets often leave insufficient funds for existing remedial services, making it difficult to reallocate spending from treatment to prevention. Any shift to prevention may be perceived as a budget cut, and the effectiveness of the new program may be questioned. Complicating the picture is the fact that preventative expenditure (rehabilitation for parolees, for instance) is often accounted for in different budgets from those recording the savings resulting from prevention (unemployment benefits; costs of crime). By linking funding to outcomes, SIBs can break down budget silos and appease sceptics.

SIBs have also been an effective tool for rallying a coalition of people and organisations across the public, private and philanthropic sectors to focus on impact. This increased attention has the potential to cut through the stasis in many of Australia’s social sectors. Would premiers, ministers and the media be so enthused by social sector procurement reform if SIBs, the private sector and “impact investing” weren’t part of the equation? This momentum is allowing SIBs to establish the preconditions for PFS, including a vital increase in data collection and measurement of results.

For PFS to expand, though, government will need more than SIBs. SIBs are small, expensive and hard to scale up. The world’s largest SIB, measured by success payments, is Uniting Care’s Newpin program, which reunites and improves relationships within at-risk families in New South Wales. But the program’s funding – $50 million over seven years – is dwarfed by the total annual Australian social sector expenditure of $395 billion, excluding income support.

SIBs also involve substantial transaction costs. Each of the sixty-plus SIBs around the world is underpinned by a tailored agreement between government, providers, financiers and evaluators. The two SIBs launched in New South Wales each involved almost 12,000 hours of preparatory work, an average of approximately six hours for each child in the program.

In short, as they are now, SIBs alone will never dramatically change the way Australian governments deliver social services.

Building on SIBs to expand PFS

Notwithstanding worthwhile efforts to standardise SIBs and decrease their cost, a much broader PFS system is needed for a dramatic improvement in Australia’s social expenditure. Specifically, government will need to build data collection and management systems, procurement capacity and political will. Fortunately, governments of all stripes are taking steps in the right direction.

There is growing recognition of the need for a more sophisticated procurement capacity (challenge 3). Initiatives such as Tasmania’s Funded Community Sector Outcomes Purchasing Framework and Queensland’s Outcomes Co-Design Framework are a good start. More work is needed, though, to turn the aspirations of these frameworks into practice.

Governments can make progress here by experimenting with hybrid contracting options. For instance, linking a small portion (5 or 10 per cent) of a program’s funding to positive outcomes can drive significant behavioural changes. Mindsets and technical skills also need to be developed; such a process has been supported elsewhere with pro bono support by organisations like the Harvard Government Performance Lab and Oxford’s GO Lab.

Australian governments are also investing in data collection and application (challenge 4). For instance, through its new “investment approach” to welfare, the Australian government has gained insights about those on welfare using fifteen years of data – an approach that could be used to price and track outcomes following interventions by social programs. At the state level, efforts to support better data sharing between governments and providers include the NSW Data Hubs and the Victorian government’s data sharing in response to the royal commission into family violence.

These efforts should continue, with an emphasis on creating incentives for providers to share data, including financial rewards and comparative performance data. In Seattle, for instance, a portion of government funding is tied to the timely collection of data, which is then used to compare performance across programs. Understanding the services delivered and the results achieved will help to fix the right price for outcomes, set appropriate targets and ultimately fund the highest-performing programs.

Zooming out, progress in expanding PFS is constrained by the relatively small group of people and organisations advocating for a more effective social services sector in Australia (challenge 2). In the United States, strong national leadership has come from the Obama administration through the Social Innovation Fund, which has funded PFS technical assistance and investments in data, and has experimented with alternative funding mechanisms. Philanthropy, too, has played a catalytic role. Results for America and Bloomberg’s What Works Cities initiative, for instance, have partnered with governments to enhance their use of data and evidence to improve services. They have also played an important role in supporting the development and successful passage of PFS-specific legislation through Congress. Similar leadership in Australia is sorely needed.

Innovations in the private sector and elsewhere are driven by clear objectives: the thirst for profit, customer satisfaction or even finding a cure for cancer. Likewise, PFS provides government with the opportunity to provide a North Star in the social sector, defining desired outcomes and rewarding achievement. SIBs alone will not get us there; they will form one part of a broader PFS ecosystem. Unless they are seen that way, they risk being treated as little more than a passing fad.

Obama is right; humans are capable of tackling any problem. With the right ingredients – fit-for-purpose funding models, procurement capacity, data and political will – Australian social services should be no exception. PFS provides the means for Australians who are most in need to benefit from this age of extraordinary progress. •

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The Frenchman observed a trend that extended back at least a century. This was the “demographic transition” from a population with high birth rates, high death rates and a low average age to one with low birth rates, low death rates and a high average age. “Ageing happens, as it were, from both ends,” he wrote, “that is to say by a decrease in natality (fewer young people) and by the lengthening of human life (more old people).”

As it turned out, Sauvy was prematurely correct about the decrease in natality. That long-term trend was interrupted by the “baby boom,” which was just beginning when he wrote his essay and was initially believed to be a temporary blip once couples were reunited after the war.

But even in error, Sauvy was closer to the mark than today’s ageing alarmists. In the standard version of the story, baby boomers are seen as the major cause of population ageing, responsible for all manner of social ills. In reality, the baby boom deferred the demographic transition by several decades. If the boom hadn’t occurred, the average age of the population would have risen much earlier.

A more fundamental conceptual error in Sauvy’s framing of the problem, repeated in nearly every subsequent treatment of the topic, is that populations are ageing. This isn’t the case: populations don’t age, people do. In fact, each of us ages at the rate of precisely one year per year, until we die. The longer we avoid death, the older we get and the greater is our contribution to the average age of the population. From this viewpoint, the ageing “problem” is best summed up by a witticism popularised by the actor Maurice Chevalier: “Growing old doesn’t seem quite so bad when you stop to consider the alternative.”

The logical error here is the “fallacy of composition.” The fact that the average age of a population is rising, or falling, says nothing about the individual experience of members of that population. Most obviously, “population ageing” implies a future that is exactly like the one we have at present except that old people are more numerous and young people are fewer. People at any given age, it’s assumed, will have much the same characteristics and live in much the same way as they do at present. This way of thinking is wrong for at least three reasons: because of changes in healthcare, in work and in technology.

First, the assumption that, say, sixty-five-year-olds in the future will be much like sixty-five-year-olds have always been, except more numerous, is inconsistent with the main process leading to population ageing – namely, that people at older ages can now expect more years of continued life. If the average sixty-five-year-old can expect to live twenty years today, he or she must be healthier than the average sixty-five-year-old of the 1950s, who could expect only thirteen years.

The mistaken assumption goes right back to the beginning of the ageing literature. Sauvy, at least, made it explicit: 

A progressive unlevelling occurred because of the considerable progress of techniques and the almost total powerlessness of biology upon senility. Though the infant in its cradle finds its expectation of life increased… sclerosis of the crystalline always begins at twenty-five.

He noted that “this statement is made without prejudice to the possible progress of science in the future,” and his example illustrates the point very clearly. “Sclerosis of the crystalline” is an obsolete term for macular degeneration leading to nuclear cataracts of the eye, which are now both preventable and easily treatable. 

The same is true of loss of mobility and many of the other disabilities traditionally associated with ageing. Improvements in diet and exercise based on a better understanding of conditions like osteoporosis make it possible to maintain good health for longer. Anti-arthritic drugs mitigate the effects of chronic conditions.

Treatments like hip replacements, now routine, provide years of extra mobility. Alarmists often see such treatments as a huge cost burden. But a hip or knee replacement costing $25,000 is a bargain however you look at it. It’s much less than the cost to society and the patient of six months in a nursing home. More pointedly, it’s less than the cost of a new car, seen as a necessity for working-age people to achieve the mobility needed to go to and from work.

Even dementia, where there has been little if any advance in treatment, is declining in its age-specific prevalence. This is a by-product of improved cardiovascular health and (more speculatively) increased education levels among the middle-aged and old. 

These factors, and declines in other sources of premature death – including infant mortality, infectious disease, car crashes and smoking – have helped extend the “standard” lifetime at every stage, with middle age running into the sixties and healthy old age into the seventies and eighties. At the end, there is a period of frailty and decline, leading inevitably to death. The really big costs in the medical system are those incurred in the last year of life. And, by definition, the last year comes only once in a lifetime.

The second and closely related problem is the assumption that patterns of work won’t change. This is illustrated most clearly in the way the Australian Bureau of Statistics divides up the population. For the ABS, the working-age population is made up of people aged fifteen to sixty-four, which reflects the fact that when the definition was formulated it covered the years between the school-leaving age of fifteen and the statutory retirement age of sixty-five. On this basis, the ABS calculates a “dependency ratio,” namely the ratio of those outside the fifteen to sixty-four age range (“dependants”) to those within it.

This definition has remained unchanged even though the school-leaving age has increased to seventeen, compulsory retirement has been abolished, and the pension age is set to increase to sixty-seven (with a further increase to seventy on the cards). In practice, most young people are dependent on their parents into their early twenties and sometimes beyond. Retirement ages are so variable as to defy any precise definition, but it seems clear that after falling for most of the twentieth century, the average age of retirement has started to increase. A truer and more useful comparison would incorporate these changing circumstances.

Finally, and more subtly, discussions of population ageing ignore the technological progress that has been one of the main contributors to reductions in mortality. Technological progress has led to increased productivity and has largely eliminated unskilled jobs in many parts of the economy.

Two implications flow from this. First, young people must spend more time in education to acquire the skills needed for a technologically advanced economy. While dependency ratios are calculated on the assumption that working life begins at fifteen, the reality is that high school completion is the norm, and that a majority of young people acquire post-school qualifications of some kind. The need for education means that the increase in the birth rate sought by former treasurer Peter Costello would take many decades to yield net economic benefits.

The decline in unskilled jobs and the increase in years of education mean that more people are capable of working longer if they choose. In the economy of the twentieth century, access to the age pension at sixty-five was an obvious boon to the typical unskilled worker who might have spent fifty years working in a physically demanding job. This group of workers hasn’t disappeared, but it now represents less than a fifth of the workforce. For the majority, retirement at sixty-five is no longer a physical necessity; rather, it is the outcome of choices, personal in the case of voluntary retirement, or social, in the sadly common case where older workers find themselves unemployed and unable to find new jobs because of age-related bias.

As a society, we have the choice of taking the benefits of improved technology in the form of reduced lifetime hours of work. We could continue, as we did for much of the twentieth century, to lengthen the period of retirement. Alternatively, and more sensibly for many people, we could reduce the intense workload experienced during the peak years of work and family responsibility (roughly age twenty-five to fifty-four) while delaying full retirement until seventy or later.

The increase in longevity produced by improved medical treatments, reductions in the risk of death, and healthier living is a huge boon for Australians, individually and collectively. Yet the framing of the issue around “population ageing” has presented it as a near-catastrophe, not only creating unnecessary negativity but also closing off discussion of the opportunities created by our longer lifespans. We need to stop talking about “population ageing” and start talking about people living longer and healthier lives. •

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In all, the Budget Savings (Omnibus) Bill 2016 contains twenty-four measures totalling $6.1 billion. During his second reading speech, treasurer Scott Morrison described them as the first instalment of $40 billion in budget improvements the government will be seeking to legislate in coming months, including some $25 billion in expenditure savings.

Of the $6.1 billion savings in the bill, roughly half comes from social security payments, with the plan to abolish the “carbon tax compensation” for new social security recipients contributing the single biggest share (about $1.3 billion over the period up to 2019–20). Savings from a range of these measures will be deposited into a special account to help fund the National Disability Insurance Scheme.

So far, most of the opposition to the cuts has focused on the carbon tax compensation cut, which would close the energy supplement to new recipients from 20 September (although transitional arrangements would apply for six months). Payment for recipients of Newstart and Sickness Allowance would fall by $4.40 for singles and $7.90 for couples per week, a cut of 1.6 per cent.

Recipients of these payments, which are already low by any comparable national or international benchmark, already stand to lose another payment, the income support bonus, after a final half-yearly instalment – $111.50 for singles and $185.60 for couples, also a 1.6 per cent cut – this September.

No longer paying compensation for a scheme that has been abolished might seem reasonable, but the compensation package also included income tax cuts for people earning up to $80,000 per year, and most of these tax cuts remain in place. On top of that, closing the supplement means that Newstart will actually be lower than it would otherwise have been for the newly unemployed. This is because the supplement was used to offset indexation increases that would otherwise have applied to Newstart itself.

While opponents of the closure of the energy supplement have focused on its impact on Newstart recipients, it would also affect future recipients of most government payments, including the age and disability pensions, parenting and carer payments, the youth allowance, and the family tax benefit, or FTB. Existing recipients of these payments could also lose the supplement if their income, employment or other circumstances change.

These savings come on top of a complex set of cuts that already affect singles and couples with children. Along with the income support bonus, the Abbott government abolished the schoolkids bonus. The last instalment, paid in July, was worth $215 for each primary school and $428 for each secondary school student receiving youth allowance or whose parent(s) had a (combined) annual income of less than $100,000.

Other changes already legislated have affected families with two or more children and tightened eligibility for FTB part B, or FTB-B. Large families who receive FTB no longer collect the large family supplement, which would have been worth $332.15 this financial year for each child after the third. The government has also removed FTB-B from couples once their youngest child turns thirteen, and from singles and couples where an individual earns more than $100,000 per year – a process begun when the previous Labor government introduced a limit of $150,000.

The government intends to extract further savings from FTB, and has repeatedly stated that the introduction of its childcare package depends on parliament’s accepting those other proposals. Most are zombie measures left over from the 2014 and 2015 budgets; they are estimated to involve about $9.1 billion in savings over the four-year projection period, less increased spending on childcare of $3.2 billion, giving net savings of around $5.9 billion. Around two-thirds of the $9.1 million was to come from changes to social security payments.

The largest of these savings would come from phasing out the FTB end-of-financial-year supplements. The FTB–A supplement is currently worth $726.35 per child, and the FTB–B supplement $354.05 per family. The government would reduce these amounts to $602.25 and $302.95 this financial year, halve them for the 2017–18 financial year, and then abolish them altogether. It would partially offset this loss on 1 July 2018 with a one-off increase to the level of FTB–A of $262.80 per child (which, according to our reading of the draft legislation, would apply only to the so-called maximum rates). Nonetheless, even the most disadvantaged families stand to lose more than $450 per child per year, plus a further $350 per year if they also receive FTB–B, as a result of the proposed savings measure.

Another measure would prevent new recipients from gaining access to the single income family supplement, which is available to families with only one main earner on an annual income of between $68,000 and $150,000. The supplement is currently worth $300, almost as much as the tax cut.

The government is also proposing to extend an existing pause on the indexation of the FTB–A base rate income threshold for a further three years. The threshold is currently set at $94,316, and families whose income exceeds this amount lose 30 cents of the benefit for each extra dollar they earn until their FTB–A payment reduces to nil. The threshold has remained at $94,316 since 1 July 2009, when the Rudd government paused its indexation for five years; after the Gillard government extended the pause for a further three years, indexation was set to recommence on 1 July 2017. The government now proposes to extend the pause for a further three years. In the first year alone, according to our calculations, families on incomes over $94,316 would lose up to $350.40, more than the tax cut.

Other measures in the legislation introduced last week include reducing the level of FTB–B for lone parents once their youngest child turns thirteen, from the current rate of $2832.40 per year to $1000.10; keeping young people on youth allowance until they turn twenty-five; pausing the indexation of income support income-test thresholds for three years; abolishing the job commitment bonus, and the education entry payment and the pensioner education supplement; and pausing the indexation of the FTB–B and paid parenting leave income limits.

On the subject of parenting leave, the government still intends to prevent what it calls the “double-dipping” while providing a one-off boost of $1000.10 to the level of FTB–B for families with a newborn child along with its other childcare reforms.

At the same time, the government appears set on pushing through the tax cut announced in the May budget, which would apply to annual incomes of $80,000 or more. Starting from 1 July this year, individuals on incomes of over $87,000 would pocket $315 – unless they are parents in receipt of FTB, in which case they could find their tax cut effectively voided by other savings measures targeting higher-income families.

Household impacts

Following the 2014 budget, we calculated that the changes proposed at the time would have had a disproportionate impact on low-income households. Since then, many of the 2014 measures have stalled or been modified. Using the same approach as in 2014, we have assessed how the measures listed here add up:

Measures modelled

Measures introduced since the 2013 election
Repeal clean energy income tax changes
Cease indexation of the energy supplement
Abolish the FTB-A per child add-on
Reduce the FTB-B income limit to $100,000
Abolish the FTB-A large family supplement
Restrict FTB-B to couples with a child under thirteen years
Abolish the schoolkids bonus
Abolish the income support bonus

Measures proposed in the 2016 budget
Increase the income tax threshold for 37 per cent rate to $87,000
Close the energy supplement (in the Omnibus Bill)
Close the single income family supplement

Other unlegislated measures
Pause indexation of income support thresholds for three years
Reset the FTB-A end-of-year supplement to $302.95
Reset the FTB-B end-of-year supplement to $153.30
Reduce the FTB-B standard rate for children aged thirteen-plus to $1000.10
Pause indexation of the FTB-A upper threshold for three years (pause for two years included in the Omnibus Bill)
Pause indexation of the FTB-B income limit for three years

We show our estimates of the impact on households of the social security and tax changes in a simplified version in the table below (and in a more detailed way in the version of this article available on Australian Policy Online).

Once again, we use what is called the “cameo approach.” We take a range of hypothetical, working-age households in defined circumstances – according to the number and ages of their children (if they have any) and the split in earnings between adults in a couple, at a range of private incomes at specified levels from zero earnings (that is, receiving maximum benefits) in increments of $20,000 per year up to $200,000 per year. We then model the effects on their disposable incomes of the changes identified in the list above.

Not all the changes discussed in the previous section are modelled; for example, we don’t take into account changes in paid parental leave, and nor do we take account of abolishing the job commitment bonus, the education entry payment and the pensioner education supplement, as these changes will affect people in very specific circumstances and not households in general, and indeed we have not modelled most of the measures in the Omnibus Bill (many of which are compliance measures). If we included these, then some of the affected families could lose even more than shown.

The starting point for our estimates is the tax and benefit system at the time of the 2013 election, assuming the continuation of these policies until the 2017–18 year. Changes actually passed by parliament are shown as results at the time of the 2016 election (legislated measures in the table below), and are compared to what would be the situation in 2017–18 if the 2016 budget measures are passed, with the effects of the zombie or other unlegislated measures. All dollar amounts are expressed in 2017–18 values.

The detailed tables supporting this analysis separate out the effects of changes in fortnightly rates of payment and changes in lump sums received in the financial year. Generally speaking, the negative effects for single people and couples without children come from changes in fortnightly payment rates, while for families with children the most significant losses are caused by proposed changes in lump sum payments.

Change in disposable income due to legislated, budget 2016, and other unlegislated (“zombie”) measures calculated for 2017–18 compared to policy at election 2013

For single people with no private income who are fully reliant on Newstart, legislated measures have already caused a loss of around $236 per year or 1.6 per cent of disposable income. The impact of the passing of the 2016 budget (including the zombie measures) is a further decline in disposable income of around $230 per year, with a total impact of around 3 per cent of disposable income. Losses decline in percentage terms as income increases. Above $80,000 per year, individuals start to gain because of the increase in the threshold for the 37 per cent marginal tax rate from $80,000 to $87,000, producing small positive net gains of between 0.2 and 0.4 per cent of disposable income. (We have not factored in the ending of the temporary deficit levy because it will have expired by legislation.)

For couples without children the patterns are similar. Those on income support payments experience reductions in real disposable income of around $400 per year, with a further $410 per year as a result of Budget 2016 measures; the combined impact is around 3 per cent of disposable income. Losses decline as income rises, and gains start to accrue when one partner earns more than $80,000 per year. These gains depend on the split of the partners’ share of household earnings, with partners who earn the same benefiting most because they both have access to the increase in the 37 per cent threshold once they earn over $80,000 per year.

For lone parents, the already legislated measures bring losses that are greater in dollar terms at higher incomes because of the abolition of FTB-B for those above $100,000 per year. For lone parents with no earnings, that legislation will cause losses of between 0.8 and 4.2 per cent of disposable income for a lone parent with one child, with the higher loss being for those with a child aged over thirteen. Lone parents with two teenagers will lose 5.8 per cent of their disposable income from already legislated measures.

Budget 2016 measures would cause further losses of around 1.6 per cent of disposable income, or between $400 and $570 per year, for most lone parent families on benefits, with the losses declining as a proportion of income and small gains for very high–income lone parents.

The other unlegislated measures cause further losses of just over $600 per year for most lone parents with one child and $2500 where the child is a teenager. Losses are greater for families with a youngest child over thirteen years because of the changes to the structure of FTB-B and they also increase with the number of children because of the ending of the end-of-year supplements for FTB-A payments. Generally speaking, losses are proportionately greater at lower income levels because of the ending of end-of-year lump sum payments for FTB-A and B.

The cumulative effect of all these changes is starkest for lone parents on Newstart with a teenager: they will lose 15 per cent of their disposable income. What is also striking is that lone parents with older children have already experienced a large drop in levels of income support since the “welfare to work” reforms introduced by the Howard government in 2005–06 and the moving of “grandfathered” lone parents from parenting payment single to Newstart by the Gillard government in 2013.

For couples with children, the patterns are broadly similar to those facing lone parents, with a couple with two primary school–age children on benefits losing around 6 per cent of their disposable income and a similar couple with teenage children losing nearly 13 per cent of their disposable income.

While the losses tend to be proportionately greater at lower incomes, they are still substantial for those who are in work. A single-earner couple with one pre-school child, earning around $80,000 per year would lose more than $1000 per year out of their take-home pay of $68,000 as a result of the 2016 budget measures and other unlegislated measures. Similarly, a lone parent, with a teenage child, earning $60,000 per year cumulatively loses more than $3600 out of a disposable income of around $57,700.

It’s important to note some qualifications to these calculations. Our benchmark is the policy settings in place following the 2013 budget. If the Labor Party had won the 2013 election, there would very likely have been changes in policy settings over this period; and Labor had proposed a number of savings measures during the election campaign. So the household impacts should not be taken as a measure of the difference between the effects of the policies of the Coalition and Labor. In addition, households would still be paying the “carbon tax” if Labor were still in office, although its average household impact is well below the losses for low-income groups we’ve described.

Nor have we factored in the impact of the government’s proposed changes to childcare policy. As we pointed out after the 2015 budget, these changes would generally be progressive for the families receiving childcare support. They could also have a positive effect on labour force participation and improve incomes for those moving from welfare to work. But the winners from these changes would be families with preschool children, while the major losers from family payment changes are families with teenage children.

Assessing the trade-off

Australian governments seeking “budget repair” inevitably face difficult choices. Social security and welfare accounts for about a third of federal government spending, and is an inevitable place to look for expenditure savings.

But the Australian social security system is more targeted towards the poor than any other rich country. As the chart shows, more than 40 per cent of spending on cash benefits in Australia goes to the bottom 20 per cent of the income distribution – a share higher than any other country – while less than 4 per cent goes to the richest 20 per cent of the income distribution – far lower than any other country.

Share of social benefits going to low-income households varies considerably across the OECD
Percentage of public social benefits in cash paid to the lowest and highest quintiles, total population, 2011

Source: OECD, Social Expenditure Update, 2014.

This means that proposals to cut social spending inevitably raise questions about distributional impact. While this is true in all countries seeking to deal with large budget deficits, it is more acute in Australia, with cuts in social security potentially having a larger impact on income inequality and poverty than in any other rich country.

A significant part of the difficulties faced by the Coalition government since 2013 relates to the perceived unfairness of its first budget. It’s true that some of the most striking features of that budget – particularly the proposal to make young people wait six months before they could receive Newstart benefits – have been watered down. But its savings measures, including the zombie measures, would still have the largest negative effect on low-income groups in the Australian population.

The question of what constitutes a fair distribution of income, and of taxes and spending, is not straightforward. Our estimates clearly show that the percentage losses in income are greater for low-income groups than for high-income groups, particularly for lone parents with older children whose benefits have already been cut significantly over time. It therefore seems highly likely that these measures will be the subject of ongoing debate. If, as a result, they are not passed by the Senate then the road to reducing the budget deficit may remain blocked.

There are always alternative ways of reining in the deficit, of course. Assuming that this is the right time for tackling the budget problem, there is no reason why an alternative package, broadly distributionally neutral in its impact, couldn’t be designed. The task would be complex, but microsimulation models – such as those run by the University of Canberra’s NATSEM and the ANU Centre for Social Research and Methods – could undoubtedly identify how to balance competing concerns for fairness with measures to reduce the budget deficit. •

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Some measures in the bill have been widely canvassed, especially two related to climate change: the $1.3 billion cut to the Australian Renewable Energy Agency, and the removal of the small energy supplement originally introduced in 2013 to compensate people on government benefits for the impact of the Gillard government’s carbon price.

Other cuts have almost escaped notice, including the proposal to deny recent family migrants access to government payments for at least two years. The government calculates this measure will save $225 million over four years from 1 January 2017.

Most new permanent migrants are already required to wait two years before they can receive Newstart unemployment benefits, youth allowance, sickness payments, Austudy, carer payments and some other payments (and of course these benefits generally aren’t available at all to temporary migrants, no matter how long they have lived in Australia).

The Keating Labor government first introduced a six-month “newly arrived resident’s waiting period” for new migrants in 1993. In 1997, soon after the Howard government took office, the waiting period was extended to two years. But exemptions have existed, most notably for refugees and other “humanitarian entrants,” and for anyone who is the “family member of an Australian citizen.”

It is this second exemption that Scott Morrison wants to remove. The change was first canvassed in December in the MYEFO – the Mid Year Economic and Fiscal Outlook for 2015–16. At the time, social services minister Christian Porter described the exemption as “very curious,” noting that “if an Australian citizen or resident goes overseas and marries and brings back a wife or dependent child, then the wife and the dependent child… have been able to enter the welfare system straight away without engaging in the wait that every other newly arrived migrant has to wait.”

This is not a completely accurate summary of the current situation, however. The vast majority of the new migrants who enter Australia under the family stream are the foreign partners of Australian citizens. Often they are granted a provisional partner visa (subclass 820) and only move to permanent residence after two years (presuming the relationship lasts). They are not eligible for Centrelink payments like Newstart or youth allowance on the provisional visa, which means, in effect, that they are already subject to the two-year new resident’s waiting period.

Foreign partners can only access government payments on arrival if they are granted a permanent visa (subclass 801) upfront; to get that visa they must already have been in the relationship with their Australian partner for at least three years (or at least two years if the couple has a child). In other words, government payments are not available to the partner of someone who simply goes overseas and “brings back a wife.”

The case for removing the exemption for family migrants is laid out in the explanatory memorandum to the omnibus bill:

This change would reinforce the Australian government’s position that all newly arrived migrants should be self-sufficient or seek support from family members and should not expect to be supported by the Australian taxpayer immediately on arrival in Australia… It is reasonable to expect that migrants, particularly those with family members living in Australia, should be financially secure or at least put arrangements in place to support themselves prior to moving to Australia.

This might seem like a fair argument, but it raises at least two issues.

First, why were family members exempted in the first place? What was the thinking of legislators and policy-makers in 1993 and 1997? My quick search through the explanatory memoranda of previous pieces of legislation failed to throw up an answer to that question, but presumably the rationale ran something like this: the nation owes a particular obligation to the immediate family of Australian citizens, above and beyond any obligations that it might owe to other foreign nationals who are granted a permanent visa, such as independent skilled migrants. If that argument holds true, then it should be as persuasive today as it was twenty-three years ago when the newly arrived resident’s waiting period was first introduced.

Second, and more fundamentally, it is logical to assume that the vast majority of family migrants would already “take steps prior to moving to Australia” to ensure that they have financial support during their initial period here. In other words, the exemptions to the waiting period are a safety net and not a feather bed – they are intended to help out Australian families in cases of adversity. It is easy to imagine such circumstances. What if the Australian partner of a newly arrived migrant dies in an accident, for instance? If the omnibus bill passes unamended, the new resident, who may not yet have found a job, would be unable to apply for unemployment benefits. Or what if the Australian spouse is unexpectedly diagnosed with a terminal illness? The new resident would not be able apply for a carer’s allowance to look after his or her partner in a time of need. If the Australian partner becomes violent, then the new resident will have fewer options for escaping: in its submission on the omnibus bill, the Australian Council of Social Services warns that there is “a valid concern” that financial dependence on the Australian partner could “prevent people from leaving abusive situations.”

The government’s response to all these scenarios is to point out that newly arrived residents will still have access to special benefits – a fallback payment made at Centrelink’s discretion to people in severe financial hardship who are “unable to receive any other income support payment.” While the two-year waiting period also applies to special benefits, the Department of Social Services reassured Labor senator Claire Moore (in answer to a question taken on notice in Senate estimates) that new residents would retain the exemption for this payment “if they have experienced both financial hardship and a substantial change in circumstances beyond their control after arrival in Australia.”

Based on immigration department data, more than three-quarters of the estimated 5700 people affected by changes in the omnibus bill will be women. When Senator Moore asked in Senate Estimates whether Social Security had “undertaken any research to examine whether this change will have a negative impact on new migrants’ settlement experiences,” the answer was a succinct “No.” In response to questions about whether any assessment had been made of the impact on new residents’ labour market participation and social welfare, the department responded that it “undertook analysis of previous cohorts that were granted social security payments via the family member exemption” for “the purposes of estimating savings.” Asked whether stakeholders had provided feedback on the proposed changes, the department offered the highly illuminating response of “Yes.” (According to the backbenchers’ brief on the omnibus bill, the “consultation” on removing the exemption involved the Department of Human Services and the Department of Agriculture and Water Resources.)

When the MYEFO changes were announced in December, Labor’s shadow citizenship and multiculturalism minister, Michelle Rowland, condemned the removal of the waiting period exemption for Centrelink payments. She said that prime minister Malcolm Turnbull had “ripped support from newly arrived migrants,” making him “crueller than Abbott.” Yet Labor now appears to have quietly signed up to the change under its election promise to support “responsible savings measures.”

In this way, Australia’s welfare system is eroded, bit by bit, without debate or protest. In fact, without most of us even noticing. •

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Porter developed his theme on Sky News. “In every single category of the very large spend in social services,” he said earlier this month, “the growth is, in any rational observation, unsustainable if it were to go on the way it’s gone on over the last ten years. In all areas, things like the disability support pension and a range of other payments – and there are many of them in the portfolio – they are growing at a rate greater than the ability of the tax base to sustain them.”

If these remarks sound familiar, it’s because they bear a strong resemblance to statements by Porter’s predecessor, Scott Morrison, who argued that “the social services budget could swamp the federal budget” and that “eight out of ten taxpayers work every day to pay our $150 billion welfare bill.” And last year Morrison’s predecessor as social services minister, Kevin Andrews, described welfare spending as “unsustainable” and “relentless.”

The disparity between spending and taxing that worries the Daily Telegraph is essentially meaningless, of course, because it compares spending in eleven years’ time with tax levels today. And, just like the argument that eight out of ten taxpayers work every day to fund the welfare system, the calculation appears to include only personal income taxes, not overall tax revenue (from where social security spending is financed).

Setting the context

To understand changes in welfare spending we need to factor in changes in the context in which welfare dollars are spent – population growth and the impact of an ageing population, for example, and changes in government policies and welfare categories.

One approach draws on the fact that in any year, by definition, the total amount of money spent on a social security program is equal to the number of people receiving the payment multiplied by the average amount of money they are paid. Using this simple arithmetic, it’s possible to look at the factors that determine the number of people receiving benefits and identify what influences the amounts they are paid. (This method has been used in Australia by Peter Saunders of the Social Policy Research Centre at the University of New South Wales, and more recently by researchers in Ireland.)

The number of people receiving payments reflects interactions between Australia’s growing population, changes in the age composition of the population, trends in the job market and in family structure, and the impact of government decisions about who is eligible for payments, as well as changes in other parts of the welfare system. The way individuals respond to changing incentives within the welfare system also affects patterns of payment.

The average level of payments will mainly reflect government decisions about benefit levels and income tests. (It’s important to remember that Australia’s income testing of benefits means that the average level of payments will nearly always be lower than the basic rate of entitlements.)

One of the more important decisions governments make is which indexing approach they will use to ensure that payments reflect changes in community living standards. A number of major payments – the age pension, the disability support pension, or DSP, and the carer payment – are currently indexed to wages, while most other income-support payments and family payments are indexed to prices.

As long as real wages are rising, payments indexed to earnings will rise in real terms – as will the overall cost of those payments, but even if payments are indexed to prices, the overall cost will rise, assuming the population isn’t falling. In these circumstances, the only ways to avoid the payment’s overall cost rising faster than inflation is either to cut the proportion of the population receiving the payment or to cut average benefits in real terms.

We also need to look at the system as a whole, and not just its parts. This is particularly important because Australia has a categorical system of income-support payments. To be eligible for a payment an individual needs to fall into a defined group – by being over the age of sixty-five, for example, or having a disability, or caring for someone with disability, or being unemployed or sick, or studying, or caring for children. We even have a payment – the special benefit – for low-income people who don’t satisfy the criteria for any of the other categories.

For any one person, these categories are mutually exclusive. An individual can simultaneously be over the age of sixty-five and have a disability that prevents him or her from taking paid work, for example, and a lone parent can also be looking for full-time work or caring for someone with disability. But these individuals can only receive one of the categorical income-support payments, even if they are potentially eligible for more than one.

This may make it possible to “game” the system by claiming the payment with the most favourable conditions. But it also means that when government policy changes and a payment is either abolished or phased out, or eligibility conditions are tightened, individuals may be entitled to claim a different payment. This also applies to groups of people at different times: following a change of policy, a class of people who might previously have been able to claim one type of payment might be eligible for another payment.

In fact, some policy reforms are designed to move groups very quickly from one payment to another. If we only analyse one payment at a time we overlook this potential substitution and gain a very limited view of what is actually going on in the welfare system.

The final context for analysing welfare spending is historical. In my earlier assessment I used Department of Social Services, or DSS, statistical reports going back to 1991 and data collected by its predecessor departments since the 1960s. Because the population has not only grown significantly but also changed its age composition, the following charts divide the population into people aged between sixteen and sixty-four (the working-age population) and people aged sixty-five or more.

Picking the trends

Chart 1 shows trends in the percentage of people aged sixty-five and over who received income support of different forms between 1995 and 2014. As it makes clear, the proportion of older people receiving an age pension either from the DSS or the Department of Veterans’ Affairs, or DVA, has increased from around 64 per cent of the population in 1995 to close to 70 per cent in 2014. The proportion receiving a DVA service pension in combination with an income-support supplement, however, has fallen from around 19 per cent to 6 per cent, while the proportion receiving other payments – mainly the DSP, the carer payment or the special benefit – has increased from 1.7 to 2.6 per cent.

The total number of people receiving one of these payments has gone up by close to 700,000, but this is simply because the number of people over sixty-five has increased by 1.36 million. The proportion receiving one or other of these payments has fallen from around 85 to 78 per cent.

Chart 1: Trends in the percentage of the older population receiving income-support payments, Australia, 1995–2014

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Department of Social Services, DSS Payment Demographic Data, June 2014; ABS, Australian Demographic Statistics, 2014.

The decline in the share of the older population receiving a service pension plus an income-support supplement largely reflects the movement of the people who were in service during the second world war into this payment between the 1970s and 1980s and then out again, through death, and the subsequent lack of any large-scale war experience.

Age pensions (either from DSS or DVA) are alternatives to service pensions. But the fact that the increase in the share receiving age pensions was only about half the size of the decline in the share receiving service pensions suggests that potential new entrants are better off than previous groups of people turning sixty-five. And, as compulsory superannuation increases retirement resources in future years, the share of older people receiving an income-tested payment is likely to decline further – although the full effect will not be seen until after 2030 when retirees will have had the opportunity to contribute over their full working lives.

Trends among people of working age differ significantly from those among people over the age of sixty-five. Chart 2 shows the proportion of people aged sixteen to sixty-four receiving income-support payments between 1995 and 2014. After a small jump in 1996 there was a long, steady decline, with a more modest rise and fall since 2008.

Chart 2: Trends in the percentage of the working-age population receiving income-support payments, Australia, 1995–2014

Note: Working age is defined as the population aged sixteen to sixty-four years. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Department of Social Services, DSS Payment Demographic Data, June 2014; ABS, Australian Demographic Statistics, 2014.

The rate in the chart has been calculated to show the impact of one of the most important policy changes in social security over the past twenty years. In 1995, the Keating government began lifting the eligibility age for women to receive the age pension from sixty to sixty-five years. This was phased in between 1995 and 2013, with the number of women aged sixty to sixty-four years receiving an age pension falling from 211,000 in 1995 to zero in 2014.

In order to be consistent over time, female age pensioners between sixty and sixty-four years are included in the working-age group over the whole time period. This figure also excludes a smaller – but growing – group of people who are receiving working-age payments but who are actually over sixty-five years of age.

Chart 2 shows that at the peak in 1996, nearly 25 per cent of the working-age population was receiving basic social security payments. By 2014 the figure was 16.8 per cent, a decline of around eight percentage points, or close to a third.

While numbers on payments are available for 2015, Australian Bureau of Statistics, or ABS, data on the age composition of the population are not. But we do know that the number of working-age people on payments rose by around 1.9 per cent in the year to June 2015 and the total Australian population rose by 1.4 per cent in the year to March 2015. Given that the population under sixteen years of age has been rising at a slower rate than any other group, it seems unlikely that the rate of receipt of payments has changed to any large extent, although it is possible that it has gone up slightly.

What explains these fluctuations? The number of working-age people receiving welfare payments at any one time is strongly related to the state of the labour market. Not surprisingly, it increases significantly in periods of recession. During the last major recession, in the early 1990s, unemployment peaked at 11 per cent, but by February 2008 it had fallen to 4 per cent, the lowest level since 1974. So part of the explanation for the long-term decline is Australia’s very strong employment performance, particularly before the global financial crisis.

But other factors are at work as well, including the dynamics of different categories of payments. Changes in the number of lone parents receiving benefits partly reflect shifts in family formation, for example. People who are unemployed for lengthy periods and experience a disability may drop out of the labour market and end up on the DSP. Unemployment can lead to family breakdown and growing lone parenthood.

Policy changes are also a major cause of trends in the number of welfare recipients. In periods when benefits are more generous or easier to access, the number of recipients naturally tends to grow, while tighter or less generous conditions have the opposite impact.

Reflecting these and other factors, as was shown in Chart 2, the proportion of people receiving welfare payments peaked at nearly one in four of the working-age population in 1996, before falling to roughly one in six in 2008, just before the global financial crisis. After the GFC, the proportion of working-age people receiving benefits rose to 17.5 per cent in 2010, then started to fall again, reaching 16.7 per cent in 2014 – not quite back to the 2008 level, but the second-lowest level in the past two decades.

Chart 3 breaks down trends since 1995, showing what has happened to the share of the working-age population receiving the DSP, the share receiving unemployment-related payments, the share receiving the carer payment, and the percentage receiving any other form of working-age income support, including parents, the sick, wives, widows, partners and recipients of student assistance.

Chart 3: Trends in the percentage of the working-age population receiving selected income-support payments, Australia, 1995–2014

Note: Working age is defined as the population aged sixteen to sixty-four years. These figures are adjusted to include women aged sixty to sixty-four years on age pensions in the working-age payment population and to include people sixty-five years and over and not on age pensions in the retirement age payment population. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Department of Social Services, DSS Payment Demographic Data, June 2014; ABS, Australian Demographic Statistics, 2014.

What is apparent is a fairly steady rise in the share of people on the DSP, from 3.9 per cent of the working-age population in 1995 to a peak of 5.4 per cent in 2011, falling slightly to about 5.2 per cent in 2014. The number of people of working age on this payment fell further from 790,000 in 2014 to 778,000 in 2015. Interestingly, the number of people aged sixty-five and over who receive the DSP rose from around 4000 in 1995 to nearly 40,000 in 2014, presumably because they have not lived in Australia long enough to receive an age pension, but acquired a disability after they settled here.

The long decline in the share of the working-age population receiving unemployment payments before the GFC is also apparent, with an increase in 2008–09 and a sharper increase between 2012 and 2013. The proportion of people on the carer payment rose from a negligible 0.2 per cent of the working-age population in 1995 to 1.4 per cent in 2014.

What is most striking, however, is the trend in the number receiving “other” payments, which peaked at 13.6 per cent of the population in 1996 but had fallen to 5.1 per cent by 2014. In numerical terms, the number of people receiving these benefits has fallen from 1.6 million in 1996 to 781,000 in 2014 (and further to 758,000 in 2015). The improvement in labour-market conditions between 1996 and 2008 is likely to have contributed to the decline in the share of working-age people on these other payments, but policy changes appear to be the most important factor.

What these figures show is that if we only look at the programs in which numbers have been going up – the DSP, the carer payment and, more recently, unemployment payments – then we will have a very partial view of overall trends and miss the contribution of policy changes in other parts of the system.

Looking at the system as a whole

Why has the percentage of the working-age population receiving DSP and the carer payment been rising since 1995, and the share receiving unemployment payments rising since 2008, while the share receiving other payments has declined significantly? The state of the labour market is part of the answer, and so are two other factors that have had a major impact among people of working age: the ageing of the baby boom generation and the major social security policy reforms introduced by successive Australian governments over the past two decades.

Chart 4 shows the age profile of the main social security payments for people of working age in 2014 (the most recent year for which ABS data on the age structure of the population are available), including the Newstart unemployment benefit as well as payments already mentioned. The figure excludes student payments, which primarily go to people under twenty-five, and age pensions, which go to people over sixty-five. (Around 9 per cent of people under twenty-five receive student assistance and 72 per cent of people over sixty-five receive an age pension or another DSS payment.)

Chart 4: Percentage of age group receiving income-support payments by payment type, Australia, 2014

Source: Calculated from Department of Social Services, DSS Payment Demographic Data, June 2014; ABS, Australian Demographic Statistics, 2014.

The proportion of people receiving social security benefits clearly increases with age – doubling from 10.5 per cent of those aged under twenty-five to 21 per cent of those aged fifty-five to sixty-four, although for those between these two age groups rates of receipt only range between 14 and 15 per cent.

Not all payments are higher among older age groups: employment-related payments are received by around 5 per cent of each age group, and the parenting payments peak at around 5 per cent of those aged twenty-five to thirty-four years and then decline. But in the other major categories, payment rates rise significantly with age – particularly for people receiving DSP, who make up around 2 per cent of those under thirty-five, 4 per cent of those aged thirty-five to forty-four, 7 per cent of those aged forty-five to fifty-four and close to 12 per cent of those aged fifty-five to sixty-four.The proportion of people receiving the carer payment also rises from less than 1 per cent of those aged twenty-five to thirty-four to 2.6 per cent of those aged fifty-five to sixty-four. People receiving wives, widows or partner payments are predominantly aged between fifty-five and sixty-four years.

Why? The obvious answer is that the likelihood of acquiring a disability increases with age as a result of lifestyle-related diseases and natural wear and tear, particularly for those with manual jobs. The US Social Security Administration estimates that more than 25 per cent of current twenty-year-olds will acquire a disability before the age of sixty-five. It is also obvious that the number of people who need to care for relatives with disability will rise as the structure of the population shifts.

For these reasons, the number of people receiving social security is influenced not only by changes in the population but also by changes in its demographic profile, particularly by the share of the population in the age groups over fifty years of age.

Chart 5 shows changes in the size of the population in different age groups in Australia between 1995 and 2014, separating out the changes since 2005 from those over the longer period.

Chart 5: Percentage changes in the size of the population by age group, Australia, 1995–2014

Source: Calculated from ABS, Australian Demographic Statistics, 2014.

Between 1995 and 2014 the total Australian population increased by close to 31 per cent and the population over sixteen years of age increased by just over 35 per cent. It is important to understand the implications of this: if all income-support payments were simply indexed to prices and if the share of the population over sixteen and the percentage of the population receiving benefits remained constant, then we would expect real social security spending still to have increased by 35 per cent since 1995.

Different age groups have also grown at very different rates. The number of children in the population has increased by only 14 per cent since 1995, or less than half the rate of the increase in the total Australian population, while the proportion of the population between sixteen and forty-nine has grown by around 20 per cent. Meanwhile, the proportion of the population aged sixty-five and over increased at more than twice the rate of the total population. Even more strikingly, the population aged between fifty and sixty-four – those working-age groups whose receipt of social security is highest – increased by nearly 72 per cent.

But trends in the second half of this period differ in subtle but significant ways. The total Australian population increased at about the same rate as in the whole period, but the share of children rose at a faster rate. The rate of increase in the population aged fifty to sixty-four years fell by close to 70 per cent, but the number of people aged sixty-five years and over grew marginally faster in the second period than it did over the whole period.

These trends reflect divergent demographic movements, primarily the ageing of the baby boom generation and to a lesser extent the increase in total fertility rates after 2000. Baby boomers were born between 1946 and 1964 and started to turn fifty in 1996 and sixty-five in 2011. The ageing of this generation initially increased the percentage of the population in the age groups likely to receive DSP and the carer payment, and more recently has boosted numbers in the age range potentially entitled to the age pension. Up until 1996, as demographer Natalie Jackson has shown, changes in the age structure of the Australian population acted to slow the growth of the DSP. But when people born in 1946 started to turn fifty in 1996, that slowdown was reversed.

The effect of the ageing of the baby boom generation is illustrated in Chart 6, which shows the change in the number of people by years of age between 1996 and 2014 (after taking account of deaths and migration). The largest population increase is among fifty- to sixty-seven-year-olds, with each year group being around 100,000 larger than the comparable group in 1996. Cumulatively, there were 1.9 million more people aged fifty to sixty-four – the age at which rates of receipt of the DSP start to rise significantly – in 2014 than in 1996.

Chart 6: Change in number of people sixteen and over by age, Australia, 1996–2014

Source: Calculated from ABS,Australian Demographic Statistics, 2014.

Between 1996 and 2012 the proportion of people of working age receiving the DSP rose from 4.3 per cent to 5.6 per cent. If the age structure of the population had held constant at 1996 shares, then the figure would have been 5.0 per cent – in other words, roughly half of the total increase can be said to be unrelated to changes in the labour market, the incidence of disability or individual behaviour, but simply reflects changes in the age structure of the population.

The chart also shows that, beginning in 2015, the increase in the size of each year cohort will decline significantly, and then increase again, before declining again. For example, while there were 93,000 more fifty-year-olds in 2014 than in 1996, there were only 42,000 more forty-nine-year olds (and 15,000 more each of thirty-five- and thirty-six-year-olds). These shifting patterns suggest shifts in the number of potential inflows into the DSP and other payments predominantly claimed by people over fifty.

More importantly, a series of policy changes from the late 1980s and mid 1990s also had a major impact on the number of people receiving the DSP and other payments.

One of the most important of these was the increase in the age pension qualifying age for women from sixty to sixty-five, as already mentioned. Before 1995, women receiving the DSP were required to shift to the age pension once they turned sixty, and women who became disabled after turning sixty weren’t able to claim the DSP unless they had lived in Australia for less than the ten years needed to qualify for an age pension.

As the cut-off age started to increase, women with disabilities in this age group increasingly claimed the DSP. As Chart 7 shows, the proportion rose from close to zero to 13.3 per cent by 2013. (Age breakdowns by gender are not available for subsequent years.) But as the number of women receiving the DSP went up, the number receiving the age pension went down – and, as Chart 8 shows, it went down by much more.

Chart 7: Change in percentage of women aged sixty to sixty-four years receiving the DSP, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

In 1995, only about 650 women aged sixty to sixty-four received the DSP and 212,000 received the age pension. By 2013, 86,000 women in that age group received the DSP, and only 27,000 were age pensioners. (And since 2014 none have received the age pension.) The number of female carers has risen from 132 in 1995 to more than 24,000 in 2013. Where once 67 per cent of women of that age received a pension or other payment, now the figure is 31 per cent. Overall, close to a quarter of the growth in the number of DSP recipients over the past twenty years can be accounted for by the growth in the number of women aged sixty to sixty-four receiving the DSP rather than the age pension. And close to 10 per cent in the growth in numbers of recipients on the carer payment is accounted for by this age group.

Chart 8: Percentage of women aged sixty to sixty-four years receiving the DSP, age pension or other income support, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; ABS, Australian Demographic Statistics, June 2013.

In future, these two major pressures on the DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – won’t operate to the same extent. Because the last of the baby boom generation turned fifty in 2013, the pressure on the DSP numbers should have started to lessen. The younger part of the baby boom generation won’t turn sixty-five until 2028, but the rate of increase will slow because that age group is not growing as rapidly. In the United States, for similar reasons, both the Social Security Administration’s actuaries and the Congressional Budget Office project that spending on the US disability insurance program will fall as a share of GDP in the coming decade as baby boomers convert from disability to retirement benefits and are replaced in the peak disability-receiving ages by smaller cohorts. If anything, the effect is likely to be even stronger in Australia because the increase in the pension age for women was also fully phased in by 2014 and this pressure will also decline.

It is worth remembering, however, that the Rudd government announced an increase in the pension age for both men and women from sixty-five to sixty-seven years, to phase in between 2017 and 2023. Some of the people affected by this change will probably be entitled to the DSP, leading to an increase in numbers on the DSP after 2017, but past experience suggests that the overall number of people in this age group receiving payments will reduce.

In addition, the 2010–11 budget included revised access procedures for some DSP claimants, to commence on 1 January 2012, and new participation requirements from 1 July 2012, affecting current and new DSP recipients under the age of thirty-five who are assessed as having a work capacity of eight hours or more a week. As shown in Chart 9, these changes appear to be associated with a very large slowdown in the rate of increase in the number of people being paid the DSP, albeit after a relatively large spike in numbers following the GFC (after a lag).

Chart 9: Annual average percentage change in the number of people receiving the disability support pension, Australia, 1995–2015

Perhaps as a result, the most recent figures for numbers on the DSP show a fall from around 827,000 in 2012 to 814,000 in 2015; excluding people over sixty-five who receive the DSP this is a fall to around 5.2 per cent of the working-age population, about the level it has been since 2002.

“Dependency” payments

What explains the reduction in the number of people receiving payments other than DSP, the carer payment or Newstart?

Starting in the 1980s and continuing for more than twenty years, the federal government began phasing out a number of other payments or limiting access to new claimants. Access to Widow B pension, for example, was limited in 1987, and then closed to new entrants in 1997. In 1994, the government introduced the partner allowance to provide support to the partners of beneficiaries who had previously received a “married rate” of payment; then, in 1995, it restricted this to older women without recent workforce experience while introducing Parenting Payment Partnered for partners with dependent children. As well as phasing out these payments, the government changed the income test for unemployment payments in 1995 to require both individuals in a couple to claim the benefit in their own right, and part of their individual earnings did not affect their partner’s benefit entitlements.

The wife pension was closed to new entrants in 1995; the partner allowance and the mature age allowance were closed to new claimants in 2003; and by 2008 there were no longer any recipients of the mature age allowance. Since 2005, new grants of the widow allowance have been limited to women born on or before 1 July 1955.

Most of these payments had effectively been based on the assumption that women were “dependents” of men, or in the case of widows that they had been dependent and should not be expected to look for work. Even the lower age for women to receive the pension had been partly based on the assumption that women would want to leave the workforce at roughly the same time as their assumed older husbands. Economist Bob Gregory has also argued that these changes affected the likelihood of partnered men claiming payments, because their behaviour could be influenced by their partner’s failure to qualify for a payment.

These changes had a profound impact not only on the total number of people receiving welfare payments but also on which payments they received. In the mid 1990s, the “closed payments” – mainly for women – were received by around 4 per cent of the working-age population; now, only 1 per cent of the population receive their successor payments.

About 1.3 per cent of the working-age population are receiving the carer payment. As with the age pension/DSP trade-off for older women, the rise in the number of people on the carer payment is more than offset by the decline in the number of people on these “dependency” payments.

A further change to parenting payments by the Howard government in 2006 required new lone parents with a youngest child aged eight or over to claim Newstart rather than parenting payment single and for partnered parents with a youngest child aged sox years and over to claim Newstart rather than parenting payment partnered. Parents already receiving the benefits, however, were “grandfathered” and continued to receive these higher levels of benefit.

What about the unemployed?

Two main factors have driven the growth in Newstart numbers. The number of people receiving unemployment benefits tracks broader labour-market trends fairly closely, and so the increase in the unemployment rate from around 5 per cent to closer to 6 per cent since June 2012 could be expected to result in roughly 100,000 additional people on benefits.

Changes to the DSP under the previous government, which appear to have slowed its growth, may have increased numbers on Newstart, while policies designed to shift people from parenting payments to the lower Newstart payments since 2006 (and particularly since the beginning of 2013) have also added to the total.

The Gillard government forecast that around 10,000 people would lose all entitlement to benefits in 2013 as a result of the decision to move the “saved” lone parents from parenting payment single to Newstart, and that around 75,000 would transfer onto Newstart. (This effect is the same as the substitution between the age pension and the DSP, carer payment and other closed benefits, as described above.)

The monthly statistics on labour force payments show that between December 2012 and February 2013 the number of people on unemployment payments jumped from around 700,000 to 796,000, an increase around four times as great as the corresponding periods for the previous two years. Moreover, around 83 per cent of the increase was made up of women, reinforcing the impression that this very large jump is mainly explained by parents transferring from parenting payments.

The table below shows trends in the number of lone parents receiving either the parenting payment single or Newstart between 2006 and 2014. From a negligible number of lone parents receiving Newstart in 2006, the number has grown to around 120,000 in 2014. Data on the number of lone parents receiving other payments such as the carer payment or the DSP are not publicly available, and it is possible that a sizeable number of people who would otherwise have received the parenting payment single would now be receiving one or other of these payments, if they were eligible. Nevertheless, Table 1 shows that while Newstart numbers have grown significantly, the total number of lone parents receiving one or other of these payments has fallen.

Number of lone parents receiving either parenting payment single or Newstart, Australia, 2006–2014

Source: Data provided by ACOSS from answers to Parliamentary Questions on Notice

Chart 3 showed that the share of the working-age population receiving Newstart has risen since 2008, with about 300,000 more people on Newstart in 2014 than just before the GFC. In 2014, as Table 1 shows, there were about 100,000 more lone parents on Newstart and 100,000 fewer on parenting payment single than in 2008, and as suggested earlier a rise in the general unemployment rate by 2 percentage points could have been expected to add around 200,000 more people to Newstart.

While the situation is complicated by other changes in the population – including a fall in the number of lone parent families since around 2003 – these figures suggest that a very significant component of the rise in numbers on Newstart can be explained either by labour-market change or deliberate policy change.

What has happened to spending?

Not surprisingly, governments interested in balancing the federal budget are most concerned with program spending, even if the number of recipients is one of the main drivers of aggregate spending. Governments also tend to focus on nominal spending over the forward estimate period.

Just as it is preferable analytically to focus on recipients of benefits as a percentage of the population, it is also preferable to treat spending as a percentage of GDP as the best measure of the affordability of the system. This is because, as we’ve seen, real spending will grow simply as a result of population growth, even if all other parameters are held constant.

The most consistent and comprehensive time series on social spending as a percentage of GDP can be found in the OECD Social Expenditure database, which provides overall levels of public social spending up to 2014, though details of spending disaggregated by program are available only to 2012. (The social spending figures for Australia aggregate federal and state government spending, but virtually all spending on cash benefits is undertaken at the federal level.)

Chart 10 shows trends in spending on age and related pensions (mainly DVA payments) from 1995 to 2012. With the exception of the year 2000, spending on age and related pensions has remained between 3 and 3.4 per cent of GDP. (The spike in spending in 2000 is the result of the compensation package for the introduction of the GST in that year.) These pensions are indexed to wages, so the stability of spending as a per cent of GDP is likely to reflect the declining coverage of the service pension, as discussed earlier.

Chart 10: Spending on age and related pensions, Australia, 1995–2012

Source: OECD Social Expenditure database.

Chart 11: Spending on working-age cash benefits, Australia, 1995 to 2012

Source: OECD Social Expenditure database.

Chart 11 shows trends in spending on the other major cash transfers from 1995 to 2012. Overall, spending has fallen from 5.5 to 4.9 per cent of GDP over this period. Spending on working-age payments spiked in 2008, at the time of the stimulus payments made during the GFC. Excluding “other incapacity” (mainly state government workers’ compensation payments) overall spending fell from 4.7 to 4.3 per cent of GDP.

Spending on the unemployed – which includes spending on parenting payments in the OECD’s definition – fell from 1.2 to 0.6 per cent of GDP. The only component to rise as a percentage of GDP was disability payments (which include the carer payment), from 1.1 to 1.5 per cent of GDP.

Spending on family cash benefits rose substantially from 2.1 to 2.6 per cent of GDP between 1995 and 2003, but has since fallen back to 1.9 per cent of GDP (although with a spike at the time of the GFC).

Overall, the spending trends in the OECD data are consistent with the picture derived from considering trends in the number of recipients. Spending has gone up in some categories, notably the DSP and carer payment, but spending in other social security areas has fallen to more than offset these rises.

Where to from here?

The data show a prolonged fall in the number of welfare recipients since the mid 1990s, reflecting a long period of economic growth, a strong labour market, and the positive impact of policy changes since the early 1990s. While trends have not been as positive since 2008, they have been mild by the standards of earlier economic downturns in Australia. Trends in spending as a per cent of GDP show broadly similar patterns, with no evidence of major increases after 2008.

This analysis also shows that past trends are not necessarily a reliable guide to the future. The two main pressures on DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – are unlikely to continue to have such a significant impact, suggesting that numbers of recipients and levels of spending relative to GDP are unlikely to grow in the near future unless there is some form of economic shock.

While concerns about relentless growth are difficult to substantiate – particularly when the total number of welfare recipients is close to its lowest level in the past twenty years – we should not be complacent.

Our main concern should be to avoid any significant blow-out in unemployment. Previous increases in unemployment in the recessions of the 1980s and 1990s had very long-term consequences, particularly for jobless families with children. Nor should we be complacent because welfare numbers are at their second-lowest level in the past two decades. Successive governments have argued that the “best form of welfare is work” and it is clear that the economic wellbeing of individuals and families is much greater in paid work than outside it.

The problems that some people on welfare face in moving into work require a comprehensive analysis, however. Not all these problems are caused by the welfare system: other barriers to work include labour-market programs that are not equally effective for all, a lack of job opportunities in the regions where people live, poor public transport, inadequate and expensive child care, mismatched skills, and negative employer attitudes to people disadvantaged in the labour market. Changing incentives in the welfare system through reform of eligibility for specific payments is only part of an effective response to these challenges.

In addition, the growth in the size of the population aged sixty-five and over will put upward pressure on spending over coming decades. Preparing for the continued ageing of the population, however, does not necessarily imply that the solution is to seek to further cut spending on working-age payments. •

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Members of the audience might have been excused if this juxtaposition of wartime soul-searching and the 2015 birthrate recalled to mind Marshal Pétain’s announcement of France’s capitulation to Nazi Germany in June 1940. “Too few children, too few arms, too few allies” were to blame for the defeat, according to the leader of Vichy France. Then again, the idea that the French system was born in 1945 (in fact, it largely dates back to 1928–30 legislation) shows how social security slots into a complex of liberation mythology that remains deeply ingrained despite the work of historians like Robert Paxton.

This tension put the invited historians in a delicate position. Jean-Pierre Azéma, who stepped in for an ill Jean-Pierre Roux, spoke of the ruin of France at the end of the war, his sombre tone dispelling the effervescence created by the minister’s address. Some of the audience voted with their feet, hoping perhaps to find another croissant in the foyer of the amphitheatre, while both my neighbours voted with their fingers, squiggling on their smartphones.

Azéma then vacated the podium for Bruno Valat, whose work has challenged much of the mythology surrounding the 1945 reforms. Valat admirably navigated the conflicting obligations of academic integrity and celebratory mood by reasserting the key findings of his research while emphasising what was new and ambitious in the postwar reforms. He referred in particular to the vision of social security as the basis of true social democracy, symbolised by the elections for the boards that governed the system in their early years.

The day was then given over to a series of roundtable discussions. As at other conferences on the topic, it seemed to me that women, while usually outnumbered by men, had a better grasp of both the financial and the practical dimensions of social security. Too often, however, speakers had a firm grip on only one of these aspects, and some had neither financial nor practical insights to share. One speaker, just before the lunch break, lectured those of us still paying attention on the contradiction inherent in a system that compensated medical expenses without requiring citizens to take any responsibility for their own health. Most of the audience reacted to this exhortation by massing outside for a collective smoko.

After the thousand or so of us had been treated to a free lunch, Touraine engaged her ministerial counterparts from Germany, Sweden, Luxembourg and Tunisia in a discussion about the future of social security in Europe. They were joined by Jonathan Gruber, an outspoken advocate of Obamacare and professor of economics at MIT. Both Andrea Nahles, the German labour minister, and the impressive Swedish social security minister, Annika Strandhäll, spoke about the refugee situation, an issue that otherwise failed to rate a mention. Nahles pointed out that the arrival of so many young refugees had turned the demographic challenge of the German social security system on its head. Strandhäll agreed: “We are trying to see this as one of the possibilities to save the retirement system.”

Strandhäll also refreshingly reminded the audience that social security is “something which touches every citizen in my country.” This may have been implied throughout the day, but not one French speaker explicitly said it. Each of us was given a printed textile carry bag, complete with colourful badge, which included a glossy magazine profiling writers and philosophers, film directors and even a rugby player and recounting their thoughts on social security. There was no mention of ordinary people, and there didn’t appear to be many in the audience either. As I wandered among the panels of a poster exhibition during the lunch break, I felt thankful that I’d managed to get my hands on a suit jacket. Apart from my jeans and lack of tie, I looked very much the part.

The ministers then discussed the future of Europe-wide social security. Romain Schneider, Luxembourg’s social security minister, reported on a “willingness for convergence” at two high-level European social policy meetings. But there was a need, he said, “to direct countries in the right direction” (diriger les pays vers des orientations correctes) in order to avoid a rush “to the bottom” – an allusion to a minimum safety net–style scheme. Schneider also characterised the meetings as “small, informal lunches,” underlining the risk that European social reform would remain the province of “an exclusive club” of officials and politicians. This allusion to one of the most persistent criticisms of the eurozone – that it is a monetary union bereft of political or social structures – prompted Nahles and Strandhäll to express deep concern that talk of social reform might involve finance ministers but exclude their counterparts in social portfolios.

Yet the social security and social affairs ministers also professed a sentimental attachment to national systems, which made it difficult to see how greater European convergence might be achieved. Strandhäll, while acknowledging the consensus for the free movement of labour, nonetheless felt it “important for there to be different social models,” and frankly acknowledged that Swedish unions would not be happy with talk of a (substantially reduced) European minimum wage. Touraine, in an attempt to wrap up the discussion on an optimistic note, inadvertently alluded to similar difficulties stemming from national political considerations. “I am very attached to diversity,” she said. “We do not have the same histories; do we need the same retirement system everywhere in Europe?” Nowhere is it written down, she concluded, that all countries should have the same retirement age.

Europe certainly presents a variety of social security systems, all of which could serve as models for a eurozone scheme. But one of the lessons of the Greek “crisis” – which has been overshadowed by the refugee situation – is that issues like disparities in national pension ages do generate strong popular feeling and diminish the will for common solutions. Without genuine convergence of social security systems, the future of Europe-wide social security looks dim.

As the day unfolded I reflected on the representation of social security in France, how their system differs from Australia’s, and the implications of the Australian model of social security for democracy. The French, in my experience, are positively “chauvinistic” in their pride about the sécu, and sometimes I’m asked whether Australia has its own social security system. The fact that Australia adopted age pensions and unemployment benefits decades before France usually comes as a surprise to my questioners, and I have seen French historians struggle to convince incredulous listeners that their country was a relative latecomer to social security.

It’s hard to picture an Australian government of any persuasion throwing a gala event to celebrate social security – Gough Whitlam’s state funeral is probably about as close as we’ll ever get – and I doubt even a new constitution or preamble for an Australian republic would mention social security as the French constitution does. Yet the basic features of the Australian model – universal, flat-rate and income-tested benefits financed from consolidated taxation revenue – means that reforms have the potential to affect all of us, making the entire electorate a pervasive interest group, an effect reinforced by compulsory voting. In an era of small government, social security has come to the fore as one of the key areas of political responsibility. This may in some cases limit the scope for reform, as Tony Abbott and Joe Hockey found out, but governments willing to introduce evidence-based reform may well find themselves rewarded by voters.

In France, by contrast, the social security system presents a far more complex picture. Payments are often set as a percentage of past income, and eligibility for pensions is linked to years of workforce participation. The state is not directly responsible for running the system, which is administered through separate bodies – think of the Australian superannuation system. As social security’s share of the national budget has increased, its financing has become subject to creative accounting, which has only served to make the system more opaque.

While everybody furiously agrees on the importance of social security reform, that reform has proved incredibly difficult over the years, a situation not helped by the division of power. France abandoned elections for social security boards in the 1960s and only reintroduced them on one occasion in the early 1980s, but responsibility for social security is still shared between an executive, which doesn’t sit in parliament, and the different levels of government. This makes reform difficult – a point underlined by the fact that French social security reform has often proceeded by presidential decree rather than parliamentary process. The 1945 legislation, enacted before the first parliament of the postwar republic met, is a case in point. Yet still French politicians emphasise a democratic dimension of the system.

The day was brought to a close by president François Hollande, who delivered a highly polished but on the whole uninspiring speech. The silhouettes of people hoping to jump the cloakroom cue became more numerous as his peroration turned into an awkward meditation on progress. Then there was applause and the rest of us filed out of the auditorium and into a street blocked off by the heavy police presence accompanying the president. I weaved my way through the barricades and away from the building before too many people had the time to light up. •

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As an alumnus of the Harvard Law School, Nader was one of their own, and the commonality was evident in a certain shared degree of acuity. Yet this concentration of America’s young elite included future Democrat and Republican senators, corporate leaders, speechwriters, policy-makers and think-tank aficionados. What they were applauding was a fiery condemnation of a state of affairs many of them would subsequently work to perpetuate.

“A rising tide lifts all yachts,” Nader declared at one point, to audible appreciation. He wasn’t talking about climate change: his theme was the great wealth divide in American society, and he was countering the neoliberal catchcry that a rising tide in the national economy lifts all boats. He spoke of the need to address a democracy gap, inveighed against government control by corporate extremists, and warned of a rising tide of poverty as a result of the political failure to establish a minimum wage.

With a rhetorical flair he may well have learned at Harvard, he invoked a spirit of nationalism to counter that of the American right, and called for a return of the courageous reforming spirit that led to women’s suffrage, unions, the abolition of slavery, civil rights. “You think they settled for the least worst? Somehow we live in a period of American history where we settle for too little.” The peroration echoed his landmark Minneapolis campaign speech. “The greatest asset that the concentrators of power in our country have is that they’ve been able to rely on our own feeling that we can’t fight them,” he said on that occasion. “We can’t build democracy, we can’t establish systems that will fulfil life’s possibilities for ourselves and our children and grandchildren.”

Evidently, he was right about that. It was stirring stuff, but in the event it stirred less than 3 per cent of the American electorate. Fifteen years later, Bernie Sanders is campaigning on much the same ground and so far his rallies have peaked at 10,000, exactly on a par with Nader’s. Since Nader’s run a decade and a half ago, the wealth gap has widened and the right has strengthened its hold on Congress. The systems of welfare, worker protection and financial regulation are in disarray. Few people seriously expect to witness President Bernie Sanders delivering the State of the Union Address.

But why not? Why, in the United States, Britain, Australia and other major democracies is so insignificant a portion of the electorate concerned by the shift in power to corporate interests and the consequent extreme wealth gap? Asked recently what he’d do to change the conversation on the US economy, Sanders said he would bring Joseph Stiglitz to the table. Stiglitz, Nobel prize-winner and former chief economist of the World Bank, has become the doyen of left-wing economists. His most recent book, The Great Divide, is a collection of articles originally written for the New York Times and Vanity Fair, most of which are concerned with the causes and consequences of the global financial crisis. It also includes some semi-autobiographical reflections on earlier periods: the postwar “dirty industrial America” in which he grew up, and the 1960s, when he was strongly influenced by the civil rights movement and was present at Martin Luther King’s “I Have a Dream” speech in August 1963. Stiglitz’s PhD research at MIT was devoted to understanding the economic causes of inequality, and the essays here track those causes through changing cultural and political frameworks. It seems things are getting worse, and dramatically so.

Stiglitz directs his first salvo at the Bush administration. “Though conservatives rail against deficits,” he says, “they seem to have a particular knack of creating them.” Clinton turned Reagan’s deficit into a surplus, but Bush reversed this by paying for two wars on the national credit card and mounting a program of corporate welfare, with tax cuts for the rich. This was offset by welfare cutbacks for the poor, a fall in the median income level, increased job insecurity, reduced healthcare access and soaring levels of credit card debt.

The global financial crisis of 2008 happened on his watch. As Stiglitz sums it up, the GFC showed how “a combination of powerful wrong ideas can combine to produce calamitous results.” Post-GFC, the wealth distribution indicator has gone into the red zone. According to an Oxfam presentation at Davos in 2014, nearly half of the world’s wealth is now in the hands of just 1 per cent of the population. To put the picture another way, while those at the top of the rich list would fit into an eighty-five-seat bus, it would take some three billion people from the bottom end of the economic spectrum to equal their wealth. The six heirs to the Walmart empire have an aggregate worth of some US$90 billion, which is roughly the sum of the wealth owned by the poorest 30 per cent of Americans.

Stiglitz offers a good balance of information, analysis and rhetorical verve, but questions remain about where this kind of critique is actually getting us. He claims that there is a growing sense in America that the current disparity in income and prosperity is unfair, and makes a persuasive case that neoliberal economics has done everything to promote the disparity. So how do we explain the fact that the American people voted the Republicans back into a majority in Congress during Obama’s presidency? Do they really not know who their enemies are?

Like Nader, Stiglitz argues that ultimately the great divide is about more than economics, it’s about democracy. But if only around 3 per cent of the electorate are sufficiently convinced of that to cast their vote accordingly, we have hit a serious impasse. In the minds of the general public, not much has changed in fifteen years, even with the impact of the GFC. This is not just about economics and not just about democracy. It is about public understanding.

Norman Mailer once said that Karl Rove goes to bed every night and prays, “Please God, keep 51 per cent of the American people stupid.” Certainly large sections of the media are committed to making them so, but collective stupidity, however assiduously fed by misinformation and rabid slogans, is not a satisfactory explanation. There are real issues about what is evident to the average citizen in daily life, and what is not.

The bankable worth of the six Walmart heirs does not mean much to workers filling the shelves and swabbing the aisles in the stores. When peasants rose up against aristocrats in pre-industrial society, they were venting their hatred at people they saw riding through the village in fine clothes while they were in rags, or who horse-whipped them when they did not respond to commands. The super-rich of today are simply not visible to ordinary people. Their penthouses, helicopters, limousines, yachts, art collections and Hermès bags belong in a zone of unreality too remote to provoke resentment. The average supermarket worker is far more likely to flare up about the guy working the next aisle who keeps taking a smoko when the supervisor isn’t around. Ordinary people respond most angrily to other ordinary people who are getting something they are not entitled to, and the right’s propaganda is typically focused on providing targets for popular resentment: fellow citizens on welfare, refugees on boats, artists on grants.

Perhaps the strangest anomaly in all this is the growth of popular prejudice against government spending. Governomics, a new Australian study edited by Miriam Lyons of the Centre for Policy Development and public policy specialist Ian McAuley. They have their own take on yachts and rising tides. The book opens with a discussion of the Sydney–Hobart Yacht Race, which they present as a case of government services quite literally coming to the rescue. Corporate financiers fund the yachts (well, most of them), but government-funded agencies, including the Bureau of Meteorology and the Rescue Coordination Centre in Canberra, provide critical monitoring of the race conditions. In 1998, when a major storm developed on the second day of the race, fifty-five people were saved in acutely dangerous search and rescue operations, also funded by government. “We are inclined to forget about the public sector,” say McAuley and Lyons, “until we find we need it.”

But a great deal of political rhetoric is directed towards ensuring that the public sector and its costs are constantly on people’s minds. A few years ago I was approached outside a Toowoomba polling station by an LNP supporter who was running a line about government wastage. “Name me one thing,” he said, “that the government’s ever done that actually did any good.” “Schools?” I suggested. “Hospitals?” Without missing a beat, he launched into an invective about the state of both. If only I had had Noel Pearson’s gift for oratory at that moment:

What did these Romans ever do for us? Apart from Medibank and the Trade Practices Act. Cutting tariff protections and no fault divorce and the family law act. The Australia Council. The Federal Court. The Order of Australia. Federal Legal Aid. The Racial Discrimination Act. Needs based schools funding.

Pearson was speaking at Gough Whitlam’s funeral, and that was only the half of it. Much of Whitlam’s legacy of public policy and infrastructure is already under threat.

Concerned as they are about this, McAuley and Lyons don’t have Pearson’s gift either, and theirs is at times a somewhat pedestrian account of the benefits of government-funded programs. For those with an economy-first mindset, they argue, it is just good economic sense. An OECD report issued in May this year corroborates their case. Major infrastructure projects produce employment and enhance the environment for small business and tourism. A strong public education system prepares citizens for employment in higher-end jobs in a continually evolving job market. Good healthcare helps to keep us off the sick list and maximises the number of people fit for work.

Stiglitz makes similar arguments. Essentially, the more money circulating in the real economies of everyday life, the better. The 1 per cent problem means that disproportionate amounts of capital are circulating up in the stratosphere of the financial markets, or are attached to assets in land and property whose value increases without contributing anything to the dynamic economy. There are signs that increasing property values in Sydney have a directly adverse effect on local economies. House prices in the suburb of Leichhardt have been at a premium because the inner-city hub of Norton Street was a lure to buyers who love the cafes and cinemas and local shops. On my most recent visit, Norton Street was a sad shadow of its former self. With all those sky-high mortgages, it seems, the disposable income has dried up. No amount of inventive free-marketeering can revive an economy in which no one has anything left to spend.

The authors of Governomics believe there is “a pent-up desire for a return to a more pragmatic and inclusive approach to economic policy.” At the same time, though, they are concerned with an equal and opposite tendency to be persuaded by the convictions of small government ideologues, with their talk of nanny states and bloated welfare systems. In Australia, this debate reached a crescendo with Joe Hockey’s proclamation of a national budget emergency and the suite of radical cuts to government-funded services in his 2014 annual budget. Hockey’s approach threatened to widen the equality gap that had been reduced during the Rudd government’s term of office after the stimulus package helped increase the income of the poorest 10 per cent of households by 2 per cent.

McAuley and Lyons are persuasive about the necessity of “paying for civilisation” and offer a forceful conclusion about the urgency of “reclaiming the public good.” This means getting beyond dogma, and they quote French economist Thomas Picketty’s view that the “democratisation of economic knowledge” is of the essence in breaking down the culture of the great divide.

But when it comes to forming opinions, a little knowledge goes a long way for the average citizen. The comment lines following any major article on economic policy are riddled with furious convictions. Few of us are immune to the delusion that our opinions are “informed,” and a good hard look at where they actually came from may reveal nothing more than a legacy of assumed knowledge from assorted media commentators whose accounts offer a shallow and biased grasp of so-called “facts.”

A few weeks ago, shortly after Governomics came out, Miriam Lyons was asked by an audience member on the ABC’s Q&A which “socialist paradise” she wanted us to copy. “Singapore has shown the world how undeveloped nations can climb out of poverty by having small, honest and efficient government,” said the questioner. Lyons responded that she was not advocating any extreme model of government control, but rather contesting “an equally extreme and dangerous idea” that we can solve every problem by putting it into the domain of private corporations and free markets. She didn’t get time to say much more than that before the question was thrown to another panel member. Q&A aims to provide a high-quality forum for public debate on major issues, but its treatment is necessarily summary, brief and oppositional (“putting both sides” being a survival imperative for the national broadcaster). This may do much to stir up public opinion, but it rarely contributes to any kind of substantive public understanding.

Views on the health or otherwise of Singapore’s economy, and the government’s role in this, differ widely. At one end of the spectrum, Richard Rahn of the Cato Institute (a foundation funded by the Koch brothers, joint sixth on the Forbes world ranking of billionaires) launches a polemic against big-spending governments, and cites economic growth in Singapore as a triumph for small government. “The next time politicians tell you they are going to spend more of your tax dollars to create jobs and increase your income,” he concludes, “ask them whether they are ignorant of the facts or they think you are.” Rahn’s “facts” are some broadbrush figures in a short article: enough to appeal to a reader who wants to feel informed and immune to being taken for a ride by opposing arguments. At the other end of the ideological spectrum, Stiglitz credits Singapore with “having prioritised social and economic equity” through quite high levels of government intervention, including a compulsory savings scheme for young workers, welfare programs that are “universal but progressive,” strong environmental controls, housing programs for the aged, and heavy investments in science and education.

Attempts to extrapolate a one-line message from Singapore’s experience do nothing to clarify Australian perspectives on small government, but if one-line messages are dominating the market in public opinion, how can those who write books expect to have any effective influence? Nader, for all his warning cries about how democracy was on the line, could not lock in even 3 per cent of the vote. Bernie Sanders has an estimated 3 per cent of support in the ranks of Democrats. During the current controversy over the Greek debt crisis, Stiglitz and his European counterpart Thomas Picketty are also running the democracy-at-stake line. Both are mounting cogent attacks on the narrative of Greek profligacy, identifying pathologies of EU financial management as the appropriate target for moral outrage. Their commentaries are going viral, some generating comment lines with over 8000 entries (many of them hostile), but in electoral terms this, too, may be quite insignificant.

If the future of democracy depends on the majority of voters actually wanting to contest the great divide, an entirely different approach to public communication and public persuasion is called for. The strangest paradox in the blogosphere’s responses to the Greek bailout is the readiness to condemn the crimes of big government and national profligacy, set against a lack of apparent concern for analogous behaviour among the banks and financial institutions requiring the same level of bailout.

The parallels between the charges laid against Greece and those levelled against the German banks are striking: mismanagement, corruption, cronyism, fraudulently concealing their real financial status, and dangerously overextending their commitments. In a New York Times article published in August 2013, Jack Ewing speculated about why there was so little appetite in Germany for changing the banking system. The German bank bailout following the GFC was one of the biggest in Europe, amounting to over €640 billion, and five years on it remained “a dead weight on the eurozone economy.” Ewing quotes Jörg Rocholl, president of the European School of Management and Technology in Berlin, who finds debate on this problem “alarmingly non-intense.”

Why is it that the average citizen is so readily angered by stories of Greek hairdressers retiring at fifty on public pensions, while there is barely a shrug of the shoulders at the thought of German bankers being chauffeur-driven around town when they have yet to repay massive loans from the public purse? Why are Greeks who have defaulted on their taxes so much more infuriating than financiers who have always avoided them? Ordinary people who have been plunged into the direst financial states are regarded as deserving of whatever further privations are coming (and they are surely coming), while most corporate defaulters are not suffering at all.

Before we can get any traction for the logic of a democratic economy, we have to address the bizarre asymmetries in public opinion. As the Greek debt crisis rolls on, it seems increasingly clear that the European Union would rather see a nation broken than a sophisticated banking system forced to reassess its modes of operation. Austerity by public demand is a phenomenon of our times. Perhaps those who are its advocates fail to see how easily they, too, could come under its reign. •

The post The rising tide that lifts some yachts appeared first on Inside Story.

Modelling for the Labor Party by the National Centre for Social and Economic Modelling, or NATSEM, found low-income families could lose up to $3700 per year in 2015–16, and an increasing amount in subsequent years, under new measures in the budget and cuts still pending from last year. Using its “microsimulation” model, which both the Howard and Rudd–Gillard governments used as a policy tool, NATSEM estimated that by 2018–19 the lowest “quintile” (or 20 per cent) of couples would be 7 per cent worse off and the lowest quintile of lone parents would be 8 per cent worse off.

Within quintiles of couples with children, reports NATSEM, only 11 per cent of the poorest quintile and 22 per cent of the second-poorest quintile would be better off. Yet a little over 90 per cent of the richest quintile would gain from the package. Couples without children would be less well off to a smaller degree, while most single person households would be slightly better off.

The government counter-argues that the NATSEM calculations don’t include any “second-round” effects of the budget changes. Asked about NATSEM’s modelling during question time, the prime minister said that this omission meant it was “a fraudulent misrepresentation” of the budget. Returning people to work, he said, was “the whole point of the policy measures.”

But the government hasn’t released any of its own modelling of the budget’s impacts. Last year it also chose not to include tables showing the impact of the budget on different family types, despite the fact that these tables have appeared in all budget papers since 2005. Our attempt last year to reproduce that table showed why: the budget burden fell most heavily on low-income households.

This year the household table has returned. But rather than show the impact of budget changes, it reports how many single full-time average wage earners it takes to raise the tax revenue required to fund the benefits paid to other household types, particularly families with children and age pensioners. So, for example, a “welfare rich” sole parent with two children under six who earns $30,000 a year is said to have a higher disposable income than a single person earning $80,000 a year. The final column of the table shows that it takes 1.9 average workers to pay for the benefits received by the low-paid lone parent.

This variation on the “lifters” and “leaners” theme is at odds with what we know about the “piggy bank” function of the welfare system. Over the period 2001–09 nearly two-thirds of working-age Australian households included somebody who received an income support payment – and this does not include people receiving family payments or age pensions. There’s no mystery about the reason: over time, the majority of Australian households experience periods of unemployment, illness or disability, or family break-up. As the latest ABS Labour Force Experience Survey shows, during 2011, when the average number of people unemployed was around 600,000, nearly 1.7 million people – or 10 per cent of the adult population – had at least one spell of unemployment.

Put another way, the individuals implicitly labelled “lifters” in the budget table might have appeared in a different column last year, if they had needed welfare support, or might appear there next year, courtesy of Australia’s flexible labour market and the life risks that everyone faces.

As Eva Cox and Greg Jericho have pointed out, the table also adds childcare payments to disposable income without deducting the cost of childcare. On the basis of that misleading presentatation of the figures, the Daily Telegraph asserted, under the headline “Joe Blasts ‘Welfare Rich,’” that these families “have more money to spend than workers” but didn’t acknowledge that after childcare costs are deducted these families have less money to spend than workers without children (and are also workers themselves).

It’s important to remember that families only receive childcare assistance because they have already paid childcare fees, and they can still have large out-of-pocket expenses. One of the aims of the government’s childcare package is to reduce those expenses. Its decision to include childcare benefits in the calculation of disposable income is all the more surprising given that the new arrangements would see this assistance paid directly to childcare centres.

New spending versus last year’s savings

For families with children, the package of childcare reforms, expected to cost $4.4 billion over four years, is the budget’s centrepiece. Looked at purely in money terms, the proposed changes appear progressive: they increase assistance for low- and middle-income families more than for high-income families. As family incomes rise, the subsidy for childcare costs reduces from 85 to 50 per cent. But parents will have to work at least eight hours a fortnight to qualify for up to thirty-six hours of childcare subsidy every two weeks, and they will have to work at least forty-nine hours over the same period to get the full hundred hours per fortnight subsidy. These changes will have distributional effects that are not easy to capture in money values.

The government proposes to finance the package by pushing ahead with some of the 2014 budget measures still blocked in the Senate. These include the plan to freeze the rates of family tax benefit, or FTB, for two years, reduce the value of FTB supplements, and freeze eligibility thresholds so that more people lose payments as their income increases. A fourth measure would see families no longer receive FTB Part B when their youngest child turns six. At present, FTB-B is paid to eligible households until the child leaves high school. According to the Parliamentary Budget Office, these 2014 budget initiatives would save around $9.4 billion between 2015–16 and 2018–19.

The government also expects to recoup spending over the forward estimates through a number of initiatives targeting family payments. Savings of $177 million are expected to flow from the complete abolition of the large-family supplement, $500 million from ceasing payments to families that refuse to immunise their children, and $967 million from ending paid parental leave “double dipping” (a characterisation that has been strongly criticised).

Last year’s unpassed savings and the new savings proposal add up to much more than the cost of the proposed childcare package. In other words, the total volume of assistance for families is decreasing, which means either more losers than winners, or that the losers on average will go backwards by more than the winners gain.

To assess the overall impact of the budget on households, then, we need to look in more detail at who wins from the childcare assistance proposals and who loses from last year’s cuts and the new savings proposals.

Winners and losers

Who wins? The Department of Social Services, or DSS, reports that in 2013 around 930,000 families with 1.4 million children benefited from childcare assistance. These families will be the main winners from the government’s childcare reforms – together with those who enter the workforce as a result of second-round effects. It should also be noted that among the families that do benefit, not all will move off welfare. In many instances the father will already have a job, and the mother will move into paid employment or will increase hours of paid work.

Who loses? Many families receiving childcare assistance also receive FTB Part A. For these families, any gains from childcare reforms will be reduced by FTB-A changes. They may still come out as “winners” overall, but their gains will be lower. The DSS data also reveal that in 2013 there were 570,000 families with close to 1.1 million children receiving the maximum rate of FTB-A, and these will be the largest proportionate losers from the proposed freezing of FTB-A for two years. A further 328,000 families with incomes above the first threshold face the double effect of a freeze on rates and on thresholds.

There are also 722,000 families receiving FTB-B whose youngest child is aged five years or over, most of whom would lose from the lowering of the eligibility age for FTB-B. According to the Parliamentary Library’s analysis of the 2014 budget, around 85,000 single parents with children aged six and over who receive Newstart Allowance will find their benefits cut by up to $2,300 per year. The subset of these who successfully move into paid work may be overall winners. But it seems clear that the number of losers will be much larger than the number of winners, which is what we would expect when the savings are significantly more than the new spending.

Figure 1: Distribution of spending on family tax benefits and childcare assistance by quintiles of equivalised disposable income, Australia, 2009–10
Share (per cent) of spending received by income quintile

Source: Calculated from Table 5, datacubes, ABS, Government Benefits, Taxes and Household Income, Australia, 2009–10.

It is no surprise that the government’s childcare reforms will favour middle- and higher-income families over lower-income families. Most families receiving childcare assistance have higher average incomes than the lone parent families or single earner couples who will be the biggest losers from the cuts to family payments. For example, the ABS Income Distribution Survey for 2009–10 reports that the poorest 40 per cent of households receive around 73 per cent of FTB funds but only 35 per cent of childcare assistance. Correspondingly, the richest 40 per cent of households receive around 40 per cent of current childcare spending but only 6 per cent of family tax benefits.

The fact that the published DSS and ABS data suggest that the government’s overall package is regressive, but can’t definitively establish it, is precisely why NATSEM’s microsimulation modelling is so valuable. By applying the policy changes to around 45,000 real families from two years of the ABS Survey of Income and Housing, the model provides a more comprehensive analysis of the overall impact of budget changes.

Second-round effects: will they make a difference?

As noted earlier, the government has emphasised that NATSEM’s calculations don’t include any second-round effects of the budget changes, and that returning people to work was “the whole point of the policy measures.” In essence, they are arguing that the policy package makes work more attractive both by reducing the cost of childcare and by cutting benefits to families.

On one level this sounds reasonable. But, as Ross Gittins has pointed out, the government doesn’t appear to have taken behavioural changes into account in estimating the savings flowing from its “no jab, no pay” policy. And treasurer Joe Hockey has conceded that “as a rule” – in any federal budget, that is – “second-round effects are not taken into account.” This is largely because the size of any behavioural response is unclear, regardless of the likelihood that there will be one. A 2007 Treasury working paper points out that estimates of how many people will move back into the labour force as a result of tax and benefit changes can vary widely, while the Productivity Commission opts for a range of estimates of the effect of increases in childcare costs on hours of work.

In its report on childcare, which fed into the government’s package, the Productivity Commission was cautious about the impact of its recommendations on the labour market. It estimated that the supply of potential employees might increase by roughly 165,000 on a full-time equivalent basis if childcare shortages and affordability could be dealt with. But it also estimated that increases in workforce participation would be “small” – that its recommended approach would increase the number of working mothers (primarily in low- and middle-income families) by 1.2 per cent (an additional 16,400 mothers), about 10 per cent of the total potential gains if childcare affordability and accessibility were no barrier at all.

The Guardian reported that the government had calculated 240,000 families could increase the hours they worked because of the proposed changes to childcare assistance. This figure – derived from an online survey said to be representative of the population – seems similar to the Productivity Commission’s estimate of the total potential gains given no barriers to childcare, although this is not entirely clear. Clearly, there is a very large difference between 16,400 and 240,000.

It is worth emphasising that this estimate appears to combine the effect of increased hours among families already in paid work and the effect of people moving into work for the first time. In terms of offsetting the regressive impact of changes to family payments, it is the impact of people moving from welfare into work that is most relevant. Increases in hours of work among those who already participate in the labour market will help offset any loss of family tax benefits, but will tend not to be as progressive as moving families from welfare to work.

It is also worth mentioning that the budget’s economic parameters suggest that the impact on employment is not likely to be substantial. Although the labour force participation rate is projected to rise marginally from 64.6 to around 64.75 per cent over the forward estimates, the unemployment rate is projected to increase from 5.9 per cent to between 6.25 and 6.5 per cent, which implies a small fall in the proportion of the adult population who are employed.

Other effects of the overall package also need to be considered. Deborah Brennan and Elizabeth Adamson of the Social Policy Research Centre at the University of NSW conclude that the new scheme will benefit low- and middle-income families who have secure, predictable employment and use services that charge the benchmark fee (or lower). It will disadvantage Indigenous children, they say, as well as children in the poorest families and children whose parents have casual work, variable hours or insecure jobs. This reflects the increase in the number of hours that must be worked in order to receive the maximum subsidy. Other criticisms of the childcare package focus on the fact that it neglects care for the most disadvantaged children and plays down the important child-development aspects of early childhood education.

Our colleague in the Crawford School, Bob Breunig, agrees that “positive labour supply effects should ensue from tilting subsidies towards those who are less well off,” but goes on to point out that failing to index benchmark childcare fees, or indexing them only to a broad measure of inflation, could result in substantial real decreases in support to families over time.

Towards a social investment strategy?

It is possible to present other arguments in favour of the government’s approach to shifting spending towards childcare and away from cash benefits to families.

For some time the European Commission has been interested in a social investment strategy, which is defined by the Policy Network as “the set of policy measures and instruments that promote investments in human capital and enhancement of people’s capacity to participate in social and economic life as well as in the labour market.” Shifting social spending away from “passive” social policies such as family tax benefits towards “active” spending such as childcare and active labour market programs could be seen as a means of ensuring the sustainability of social programs and promoting economic growth.

What is the balance between “active” and “passive” spending on families in Australia? Figure 2 shows that public spending on families in 2011 was the fourteenth-highest in the OECD, at 2.79 per cent of GDP, just above the OECD average of 2.55 per cent of GDP. Spending on cash benefits, at 1.89 per cent of GDP, was the eighth highest, but Australia ranked sixteenth for spending on services, at 0.86 per cent of GDP, below the OECD average of 0.99 per cent. The Nordic countries, where the social investment approach is regarded as most developed, spend two to three times as much as Australia as a percentage of GDP on services for families. Around a third of children under three years are enrolled in formal childcare services in Australia – just above the OECD average – but enrolment is over 50 per cent in Norway, Iceland and the Netherlands and approaches two-thirds in Denmark.

Figure 2: Public spending on family benefits in cash, services and tax measures, OECD countries, per cent of GDP, 2011

Source: OECD, 2015, Family database.

Figure 3 shows trends in family assistance expenditure in Australia from 1980 to 2012. Spending grew from 0.9 per cent of GDP in 1980 to 2.7 per cent of GDP in 2012, initially peaking at 3.1 per cent of GDP in 2003 and peaking again at 3.2 per cent of GDP at the time of the stimulus package in 2008.

Figure 3: Public spending on family assistance, Australia, per cent of GDP, 1980 to 2012

Source: OECD, 2015, Social Expenditure database. ECEC refers to early childhood education and care.

Over the long run, the rise in spending is mainly accounted for by increased spending on family allowances (FTB Parts A and B). Most of this increase occurred in the late 1980s and the first half of the 1990s following the Hawke government’s child poverty pledge, rather than as a result of the assumed increase in “middle-class welfare” during the Howard government. Since the mid 1990s, the increase has largely reflected higher spending on early childhood education and care, which grew from 0.2 to 0.6 per cent of GDP and from less than 10 per cent of total family spending to over 20 per cent.

In this sense, Australia has already started on a shift from cash benefits to spending on childcare services, a shift partly explained by the increase in female labour force participation during the period.

While there is an extensive body of literature arguing for the social investment approach, it is not without its critics. Chiara Saraceno has argued that the “ideal adult worker model” that underlies this approach

hides, and to some degree even takes for granted, gender inequalities in both the household and the labour market. [It] also undervalues the subjective and relational meaning of caring within households, while attributing to families a mainly functional role regarding societies and labour markets.

In addition, the Policy Network has highlighted possible tensions between the principles of social investment and social protection. Doubts have also been raised about whether this approach has the capacity to support those most at risk of poverty or social exclusion, a point particularly relevant to the government’s proposed shift from cash benefits favouring the poorest households to childcare support favouring those already in the labour market.

While the government’s childcare package, in combination with cuts in family payments, could be defended as a shift towards a social investment approach, it would be a stretch in current circumstances to see it as such. Neither the government nor the opposition has articulated a clear vision for moving towards this goal. Australia is a long way from the levels of social investment in childcare and labour market support that are characteristic of such a strategy. The fact that the expenditure savings from the proposed changes in assistance for families are more than double the extra outlays for childcare suggests that this package is motivated more by budgetary than social outcomes.

Calculating who wins and who loses from the budget, or from other policy changes, is an essential component of sensible analysis of public policies. It is normal practice of governments throughout the world to identify winners and losers from this kind of change. Since its 2010 Spending Review, for instance, the UK Treasury has published analyses of the impact of the budget on households, with the most recent analysis being for 2015.

Governments should welcome the type of evidence-based policy analysis exemplified by NATSEM’s analysis, and ideally provide it themselves. In a period where politicians complain about the poor quality of the conversation, analysis like this focuses the debate on how real people will be affected. •

The post Budget 2015: the winners and losers appeared first on Inside Story.

In his new book, Good Times, Bad Times: The Welfare Myth of Them and Us, British social policy researcher John Hills points out that one of the starkest ways in which inequality manifests itself is through differences in mortality. One study that followed a group of mature-aged British women over a six-year period found that the poor were four times as likely to die as the rich. Similarly, economist Philip Clarke and I found that high-income Australians live, on average, six years longer than those on lower incomes. As on the Titanic, class and mortality are intertwined.

Over the past generation, both Britain and Australia have experienced a significant rise in inequality, which means that many of the findings in John Hills’s book will be familiar to Australian readers. The gap between the best-paid and worst-paid is larger now than in the 1970s, with technology, globalisation and deunionisation among the key drivers. As Hills points out, even the increase in house prices has significant implications for intergenerational mobility, with parental bequests most likely to go to those who already own property.

Volatility

A key theme of Good Times, Bad Times is the volatility of poverty. Hills describes the week-to-week income received by a high-income family as fairly dull: regular pay cheques, and occasional blips from investment income. By contrast, the same graph for a low-income family “would look more like the hospital heart monitor of someone in trouble, with big jumps and falls from week to week.” This highly erratic pattern is partly due to life events (such as losing a job or finding a partner) but also a result of means-tested government payments starting or stopping. Since there is a delay in means testing, the result can be to add to the volatility of incomes, rather than smooth it out.

Income volatility – over weeks, years or even generations – isn’t surprising when you think about it. But the puzzle is that many seem not to have thought about it. In Britain, the secretary of state for work and pensions, Iain Duncan Smith, claims that his country has council estates “where often three generations of the same family have never worked.” Yet as Hills points out, the data show that less than 1 per cent of adult men have never worked, and researchers have been unable to find even a single example of multigenerational joblessness. As one researcher puts it, verifying Duncan Smith’s claim is like “hunting the Yeti.”

What about in Australia? Here, too, a quick search turned up a number of conservative politicians making Duncan Smith’s claim. Kevin Andrews frets about “jobless households, in which many generations of Australians do not know what it is like to have a job.” Peter Dutton bemoans “households in which there is now a third generation of people who have never worked.” Ewen Jones worries about “generations of people out there who have never had a job.” The Australian editorialises about “the evidence of Australian families where three generations have never worked.”

What does the evidence say? Looking at the Household, Income and Labour Dynamics in Australia survey, I found that among men thirty or older, only one in 500 had never worked (see chart). And among this tiny sample, all the respondents reported that their father was working when they were a child. Like the British social researchers, I was unable to find a single example of a family in which both the father and son had never held down a job. The rhetoric of Andrews, Dutton and Jones seems adrift from Australian reality.

Another mistake that arises from the static view of poverty is the tendency to divide the population into “us” and “them.” In Britain, prime minister David Cameron talks about “strivers” and “skivers.” In the United States, Republican presidential candidate Mitt Romney split America into the 47 per cent “who are dependent on government” and the 53 per cent who pluckily make their own way in life. In Australia, treasurer Joe Hockey (invoking long-serving Liberal prime minister Robert Menzies) divided the nation into “leaners” and “lifters.”

The problem with this approach is that most of us move between the categories at different points in our lives. The “skivers,” the “47 per cent” and the “leaners” include retirees, students, people with disabilities, the newly jobless, and single parents whose partners have just left them. To stamp a permanent label on the forehead of any of these people makes no sense.

In Britain, Hills points out, the experience of child poverty is surprisingly widespread. Using the definition of poverty as families with less than three-fifths of the median income, he finds that only one in eight children are poor in a given year. But over the course of a decade, half of all British children will experience at least a year in poverty. Being in poverty is abnormal; being touched by poverty during childhood is not.

Taking a dynamic approach to poverty reminds us of the role the welfare state can play in managing risk. Until the late nineteenth century, individuals effectively had to self-insure against risks such as sickness, job loss, and poverty in old age. With the advent of the welfare state, the job of managing many of these risks was moved away from individuals and towards government. Taxes became like an insurance premium, to be paid out in the event of illness, unemployment or retirement.

Like Cameron, Romney and Hockey, Prussian leader Otto von Bismarck was a conservative. But Bismarck created the world’s first welfare state because he realised that we can’t split society into “us” and “them.” Speaking in the Reichstag, Bismarck argued that it is the responsibility of the state “to protect the worker from accidents and need when he is injured or becomes old.” By creating programs such as old age pensions, accident insurance, medical care and unemployment insurance, we give people greater confidence to live their lives – to have children, invest in their businesses, and try new jobs.

Complexity

Another theme that Hills explores is the impact of complexity. As he notes, many people in poverty struggle to navigate Britain’s social safety net. The system provides recipients with multiple payments, including earned income tax credits, which seek to encourage low-wage workers to increase their hours. To make matters more complicated, housing benefits are paid by local councils, and their means tests can sometimes overlap with other payments – which are mostly paid for by the national government.

To some extent, complexity is an inevitable result of a well-targeted social safety net. Indeed, this is an even bigger issue in Australia than Britain, since ours is the best-targeted social safety net in the advanced world. The average advanced country gives twice as much welfare to the bottom fifth of the population as to the top fifth; Australia gives twelve times as much to the poor as to the rich.

An inevitable result of targeting is that payments must reduce as incomes rise, and cut out entirely beyond a certain point. This helps explain why the Australian form to apply for Austudy is twenty-one pages, the form to apply for a Disability Support Pension is twenty-nine pages, and the form to apply for paid parental leave is thirty-six pages.

Ideally, governments would simplify these systems, but this isn’t as easy as it might seem. Since 2013, Britain has been attempting to combine six means-tested payments into a single universal credit. Pilot programs have been unsuccessful, problems have emerged with the software, and only a tiny fraction of British recipients are currently receiving the new payment. A system that was designed to simplify life for the poor risks making it more complicated.

Austerity

If complexity weren’t enough, low-income Britons have also found themselves grappling with a series of changes that have left them with less disposable income. These have included freezing the child benefit, raising the rate of the value-added tax (Britain’s equivalent of the GST) from 17.5 to 20 per cent, capping total household benefits, and cutting public services. Overall, the changes have been regressive, with jobless single parents losing 10 per cent of their incomes. Hills also points out that the adverse impact of the cuts has been disproportionately felt by women.

Such a story will be familiar to observers of Australian politics. The National Centre for Social and Economic Modelling’s analysis of the Abbott government’s first two budgets showed that the poorest single parents would lose 8 per cent of their disposable incomes, while affluent individuals without children would be slightly better off. Those budgets proposed reducing family payments, removing the Schoolkids Bonus, and cutting pensions.

And yet there are alternatives. One of the most fascinating charts in Good Times, Bad Times shows how various European countries chose to make budget savings during 2008–13. The sharpest contrast is between Germany, where the spending and taxation changes helped the top and hurt the bottom, and France, where the reverse was true. Spain, Italy, Ireland and Britain sit somewhere between. As Hills notes, savings measures can be progressive or regressive: “there is nothing inevitable that means that [budget changes] have to bear more heavily on those with lower… incomes.”

An anti-poverty agenda will never be sufficient to win an election. Progressive parties such as the US Democrats, British Labour and the Australian Labor Party must craft a set of “big tent” policies that will appeal to voters across the political spectrum. But part of the answer lies in making politics more inclusive. Social democrats should push back against the notion of “us” and “them” – what Barack Obama once called “slicing and dicing” the electorate. Progressives need to talk about the ways in which bad luck can strike any of us, and the fact that a good social safety net is there for all of us.

After the Titanic disaster, both Britain and America instituted inquiries. These led to the formation of an International Ice Patrol in the North Atlantic, reinforced hulls on ocean liners, and a requirement that rockets at sea be treated as distress signs by passing ships. Most importantly, the inquiries noted that the Titanic had lifeboat spaces for fewer than half its passengers. After the tragedy, all ocean liners were required to carry boats that could accommodate everyone aboard. Whether you’re travelling in first class or third class, you’re entitled to a spot in the lifeboat. •

The post Welfare myths and the luck of life appeared first on Inside Story.

Family history is also a splendid excuse for travel in search of distant relatives or to sites connected with family origins. It provides an absorbing puzzle, or quest, for those so minded, superior to and more rewarding in many ways than the endless consumption of mystery or detective stories. The research has never been easier, nor the records more accessible, and you can join a family history society to share knowledge and enthusiasm. The past few decades have seen fantastic developments, not only in the state’s ability to keep track of the lives of individual citizens but also in the technology that now enables us to access and correlate multiple sets of records. Another of its attractions, as Tanya Evans points out in Fractured Families, is that research can be done at home and disturbing discoveries assimilated in private.

Australia is richly endowed with historical records of the kind compiled by the modern bureaucracy. Before the notion of privacy became a matter for general concern, early bureaucratic record-keeping could be wonderfully revealing about hundreds of thousands of individuals who would otherwise have left no trace on history. You need only think of the huge body of records left by the convict system, both of the convicts as individuals with details of their physical appearance, distinguishing marks, levels of literacy and employment records, and how, when, and why they were transported, and of the massive archive of their progress through the legal and employment systems in the colonies. It is now more than sixty years since historians like Lloyd Robson began to realise what could be done by statistically analysing these records using what were then primitive computers.

Two generations of historians have since made careers and reputations out of manipulating those records using the latest developments in digital technology, some of them cross-matching data on an international scale. By the late twentieth century it was not uncommon to receive an offer from a company that produced family histories to order, based mainly on one’s surname. Mostly they were a waste of money. The day may come, however, when the would-be family historian can type a name into a keyboard and instantly retrieve every known reference from archives all over the world. Those currently concerned about the possible future uses of preserved metadata might well ponder this history of official record-keeping and the unintended uses to which it has already been put.

When the Australian colonies mandated the collection of birth, death, and marriage records in the 1860s, the reach and value of the convict records were greatly extended, though as Tanya Evans shows, people didn’t always necessarily know the truth, or reveal it, when they were asked for information. Australian historians have long bemoaned the compulsory destruction of our census records, instituted by the new Commonwealth partially in the hope that we would be more inclined to be honest if we knew the census forms would not be preserved. But the great bonanza of first world war records has partly compensated for that gap, at least for the male population. As the current commemorations of those grim events show, today’s Australians in their thousands have been discovering or rediscovering their ancestors through both the records of that war and the subsequent business of repatriation.

For Fractured Families, the core collection of records is the archive of the Benevolent Society of New South Wales. Founded in 1813, part of the organisation’s function was to deal with problems created by the special nature of the society evolving in the colony. Because Sydney was only twenty-five years old, there were not a great many families with more than one generation, nor were there many extended families able to take responsibility for their old, feeble or frail members. And because of the shortage of women in the population, increasing numbers of ageing men lived alone, many of them becoming the poor and the homeless of that time.

Over time these structural imbalances resolved themselves, and the Benevolent Society increasingly began to care for the women and children who were now the main victims of what was coming to be known as the “working man’s paradise.” A steady demand for male labour did not necessarily flow through to women, and life could be extremely difficult for pregnant women and women with small children who had no male protector. And so, from the later part of the nineteenth century, the records of the Benevolent Society are increasingly the records of the poorest and most disadvantaged members of the female population. It is largely this group of records that has been singled out for special consideration here.

As a collection of family histories illustrating various kinds of families in nineteenth-century New South Wales, Fractured Families is a mixed bag. Some are little more than fleshed out genealogies, others so intricate that one wishes for a family tree. It is not clear what purpose the book is meant to serve – to promote family history, to encourage more informed thinking about the use of sources or the ways of interpreting them? The family historians and genealogists whose work is discussed and admired are not likely to be interested in the kinds of comparative lives it reviews or the generalisations in which it deals; they are probably still in pursuit of an annoyingly elusive ancestor. No more likely to be impressed are the often-unnamed or disparaged “historians” and “scholars,” who are said to have studied various troublesome questions of meaning or interpretation only to disagree about their significance.

The book’s approach to chronology is carefree. It has texts not published until the late nineteenth century described as influential fifty years earlier, and it moves back and forth between British and Australian conditions in ways that are bewildering. So it must be read with care and cannot be regarded as authoritative on the changing economic and social conditions in nineteenth-century New South Wales or the legal and administrative framework in which ideas of family functioned during this period.

It is informative, however, in unexpected ways. The motives and approaches of some of the family historians are described in detail. Jeff White, for example, a business analyst in Sydney, is one of the numerous descendants of Weeks White, a Baptist baker who migrated to New South Wales in 1874. He has worked extensively on the life of William, one of Weeks’s sons who took over and developed the bakery. Evans writes:

Jeff takes pride in the tracing of sources and the organisation of data; I can attest to the efficiency of his system. He uses Ancestry.com to construct his family tree and Google Cloud Storage to store his family history data. He undertakes more research now than he did in the past, because his work commitments have lessened as his career has become more established and because the internet has made his work much easier than it once was.

Jeff White eventually made contact with Anne Coote, another family historian, who had been pursuing William White’s youngest sister Sarah through the records of the Benevolent Society. Sarah was the baby of the family. Her mother had died when she was about three, and she was sixteen when the whole family migrated to Australia. During the next eight years she gave birth three times in the Benevolent Asylum. Maybe she just fled the strict atmosphere of her Baptist family; no one knows. Her brother became a significant supporter of the Benevolent Society, but it is not known what his relations with his sister were or how the Whites really functioned as a family. Like many of the stories in this book, without other kinds of evidence, the family history is skeletal.

Fractured Families concludes with a discussion of family history as shown on two television programs, SBS’s Who Do You Think You Are?, on which the author has worked as a consultant, and Call the Midwife, which she describes as “a feminist political project,” asserting that this is how most people now become interested in history. Unfortunately, this may be true, and as the most recent preoccupation with the first world war shows, subtlety has generally been the loser. •

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You don’t have to go far to find it – just across the Tasman. Taking on disadvantage is rarely a priority for conservative governments, but it has become an increasingly important theme of the second and third terms of the National Party government under prime minister John Key.

Last week finance minister Bill English took it further, bringing down a budget in which generally tight control of government spending contrasted sharply with increased welfare payments aimed at reducing the number of children growing up in hardship, especially among the least well-off New Zealanders (largely Maori), who are dependent on welfare, and often in and out of jail.

Why? John Key himself grew up on welfare, in public housing in Christchurch with his sisters and widowed mother Ruth, a Jewish refugee from Austria. While he rose to become head of global foreign exchange trading for Merrill Lynch before entering politics, he has never forgotten where he came from. In his first speech as National Party leader, in 2006, he declared, “You can measure a society by how it looks after its most vulnerable… It is in the interests of no one, and to the shame of us all, that an underclass has been allowed to develop in New Zealand.”

Bill English, whom close observers see as the main generator of the government’s ideas, came to politics as a young conservative Catholic who had been a Treasury economist, then a farmer in the remote Southland. He has grown into a formidable independent thinker, committed to balanced budgets, small government, rebuilding earthquake-damaged Christchurch, and increasing business opportunities – but also to creating a society that intervenes to help its most vulnerable back into the mainstream.

Key, English and other ministers have combined humanitarian instincts with actuarial logic to create a world-leading experiment: investing heavily to reduce the risk of children inheriting their parents’ welfare dependency, and to offer incentives and intensive help for the parents themselves to get off welfare and into work, and then stay in work.

What is most remarkable is that Key and English have made this “social investment” a top priority, in part, as a business decision to reduce the long-term cost of government. Moreover, they have invested in trying to lift up those at the bottom at the short-term cost of another of their top priorities: to get the budget back in surplus.

Some right-thinking Australian newspapers told us last year that New Zealand’s budget was back in surplus; no it isn’t, not the way they measure it. But although the shortfall embarrassed Key’s government at budget time, it has little or no economic significance. On the Australian government’s definition of a surplus, English’s budget for 2014–15 will certainly end up in surplus. On the definition used by most Australian states, he was already in surplus in 2013–14.

For four years, Key and English had promised to deliver a surplus in 2014–15. But it tells you something about them and their government that when New Zealand’s dairy prices crashed last year, and near-zero inflation slashed the expected tax growth, English flatly rejected the temptation to make sudden spending cuts, raise taxes or fiddle the figures just to get over the line. At the budget launch last Thursday, he declared, “Knee-jerk responses are not a hallmark of this government, and we will maintain spending that is supporting families, driving better public services and helping economic growth. Those matter more than the actual date we reach surplus.”

To Australian eyes, this is an unusual government. It has its faults, certainly, but even political foes concede privately that in seven years in office, Key, English and other ministers have chalked up an impressive record of competence, confidence and consistency, and exhibited a progressive streak that differentiates them from their Australian cousins. They have legalised gay marriage, set up an emissions trading scheme (albeit a tokenistic one), and initiated this new scheme to identify where best to target programs and spending to lift people out of welfare and poverty.

English described it to Inside Story as “using an insurance approach to crack welfare dependency… A lot of government spending is trained on a relatively small part of the population whose lives are…” he paused, “complex for them, and expensive for us.” Targeted interventions aimed at lifting them out of dependency and into productive working lives not only improve their lives, he said, but also dramatically reduce government spending in the long term. “What works for the community works for the government’s books.”

To get the budget back in surplus, departments and agencies receive no increase for inflation, forcing them to find their own savings, and then bid for the small amount of new spending dubbed “operational allowances” – in 2015–16, just over NZ$1 billion a year. English argues that this discipline has forced departments to stop measuring their success in terms of getting more money out of government. “They’ve realised that the changes they need are to understand how they can make a difference to the lives of the families they’re there to serve.”

He told Key’s biographer, John Roughan:

The fundamental driver of the government’s budgetary costs is social dysfunction… If we stop a prisoner reoffending, we save $90,000. If we have a group of seven- to nine-year-olds who are going to cost $750 million by the time they turn thirty, we need more health checks, healthy homes, social workers in schools. John [Key] has created permission for a centre-right government to talk about public services positively.

Key has set his government specific targets: to reduce long-term unemployment, achieve near-universal infant immunisation and early childhood education, reverse the rise in child abuse, and sharply reduce the rates of school dropouts and prisoners reoffending. The government issues regular progress reports, and they are surprisingly blunt about where it is falling short.

In earlier budgets, English shut down tax breaks to free up funds to achieve these goals, and froze childcare subsidies to pay for new childcare services in disadvantaged areas. Last year, with an election to win, the new spending was less targeted, but it included free doctors’ visits and prescriptions for children under thirteen, and a revamp of the country’s minimalist paid parental leave scheme to more closely match Australia’s.

Last week’s budget continued English’s trademark austerity to grind down real spending in order to get back in surplus in 2015–16. Spending is forecast to rise just 2.5 per cent next year, making 8.5 per cent in four years. Yet it also included a sizeable “child hardship package” of heavily targeted new spending. In one hit, it increased the benefit for families on welfare with dependent children by NZ$25 a week – inflation adjustments aside, the first such rise for forty years. It raised tax credits for the working poor by up to NZ$24.50 a week, and upped childcare subsidies for low-income families from NZ$4 to NZ$5 an hour.

The hardship package was focused particularly on “children at risk”: those kids whose parents are long-term welfare dependents and have family problems and criminal records. At the budget launch, English said actuarial assessments based on longitudinal studies have found that among children growing up in such families:

• 75 per cent will not complete school;
• 40 per cent will themselves become long-term welfare dependents by the time they’re twenty-one; and
• 24 per cent will have been jailed by the time they’re thirty-five.

Children growing up in this group, English said, cost taxpayers an average of NZ$320,000 by the time they turn thirty-five; some cost taxpayers more than NZ$1 million. These are stunning figures, which he uses to persuade fellow conservatives that it is in society’s interests to give these children and their parents a priority on spending that they have never had before.

The new spending came with a bite: people on benefits will be expected to look for part-time work once their youngest child is three. Perhaps it is more bark than bite: officials assured us that no parent would be thrown off benefits if they cannot find suitable work. It was met with silence from the government’s friends, vociferous opposition from its enemies.

It is not only the most disadvantaged that the Key government is trying to lift up, but also low-income groups more broadly: sole parents, the working poor, and low-income families on benefits – again, with the goal of getting them out of social and economic exclusion and into the workforce. English says their monitoring is already showing lower rates of child abuse, sharply improved workforce participation by the target groups, a 38 per cent reduction in youth crime, a 40 per cent fall in teenagers on sole parent benefits, and a closing of the gap between immunisation rates of Maori and Pakeha (whites).

The policy grew partly out of a pair of reports written four years ago that emphasised the importance of early intervention to prevent at-risk children and young adults from falling into failure that would cost themselves and society dearly in the long term. As critics point out, New Zealand has a long way to go. Its six-year whirlwind of free market reforms from 1985 to 1991, including a 20 per cent cut in welfare benefits, redesigned all the rules to favour those at the top. The New Zealand Council of Christian Social Services quotes data showing that over thirty years, real per capita incomes almost doubled for the top 1 per cent, but rose only 14 per cent for those at the bottom. New Zealand has fewer than a million children, but it is estimated that 260,000 of them are living in poverty.

The council’s executive officer, Trevor McClinchey, warily supports the government’s approach. “It’s a sensible model,” he told Inside Story. “From our perspective, it makes a great deal of sense to invest in people, and to prioritise spending according to need. If people are unwell, to invest in them to make them well, and train them to work, it’s a good process.” But he warns that the needs are many, and the increasing delivery of services by for-profit providers is seeing welfare services become another commodity. “It should be more about how you provide a more equitable environment for families to live successfully – employment, wages, making this a better place.”

McClinchey also warns that New Zealand’s robust job growth – 80,000 new jobs in the last year, with unemployment tipped to fall below 5 per cent next year – may be driving some of the gains the government attributes to its policy changes. The real test will come if and when the economy starts going backwards. Unemployment among the Maori and Pacific Islanders is now down to a relatively low 12.5 per cent (among whites, it is 4.5 per cent). The government is forecasting four years of solid, if slower, growth.

Labor’s finance spokesperson, Grant Robertson, is also cautiously supportive of the social investment push. “There are elements in it that I think might be useful – particularly early intervention,” he says. “Creating children’s teams from different agencies is a very good idea, as is the evidence-based approach. But the implementation of it has been under-resourced. A true investment approach would invest in developing people’s abilities and skills more broadly.”

Others are harder to please. On the day after the budget, a group of protesters tried to storm the Auckland Convention Centre, where Key was speaking to a post-budget lunch, complaining that the new money was not enough, that it was all going to families, that the individual jobless were left out. A representative of one group called it “a mean trick” designed to fool New Zealanders into thinking that their government is really trying to tackle child poverty.

No one I spoke to shared those doubts. These guys are serious about getting people back into the mainstream. Whether or not they can do it, they have started down a path that will show future governments around the world how to start closing the poverty gaps that years of ideology and indifference have opened up. •

The post New Zealand’s conservatives take on disadvantage appeared first on Inside Story.

This is one source of the savings intended to fund an overhaul of childcare payments and the introduction of a new and simpler Child Care Subsidy. Other funds would come from changes to family tax benefits, or FTB. Labor expects the government to tie its Jobs for Families package, of which childcare reforms represent an important component, to benefit cuts introduced last year but blocked by the Senate. Those measures would have reset the value of end-of-year supplements for all FTB families and paused the indexation of rates and thresholds for two years.

As the fairness of these and other FTB changes come under scrutiny in the coming weeks, it’s worth remembering that the Rudd government’s 2009 pension reforms saved money by limiting indexation of FTB Part A maximum rates to CPI. Prior to this, FTB-A maximum rates had, like pensions, increased in line with prices or wages growth, whichever was higher.

Last year the government proposed to index pension rates by CPI only. This measure proved one of the most controversial of the budget, and to illustrate its compound effect Inside Story published an analysis showing that if the Rudd government had abolished wage indexation when it introduced its pension reforms in 2009, single pensioners – including age and disability support pensioners and people receiving the carer payment – would have forgone an increase of $64.20 per fortnight. The figure for pensioner couples was $96.80 per fortnight. Social services minister Scott Morrison has now confirmed that the government no longer plans to change pension indexation.

That hypothetical scenario for pensioners corresponds to what has actually occurred for families who receive FTB-A maximum rates of payment. The figures mirror those for pensions. If the pre-2009 indexation arrangements were still in force, families on FTB-A maximum rates would today be receiving $20.50 per fortnight more for each child aged twelve or younger and $26.67 more for each child thirteen or older.

Many FTB-A families are nonetheless better off despite less generous FTB-A indexation. Changes introduced by the Gillard government to lift secondary school completion rates mean that families with children aged sixteen or older who are still at school receive the more generous “thirteen or older” maximum rate. This puts them up to $86.90 per fortnight ahead of the current FTB-A base rate.

With so many moving parts, the fairness of this budget will only be clear after detailed analysis of how real families will be affected by all of the proposed changes, not just by comparing the basic rates. None of the post-budget analysis will take into account losses due to FTB indexation, however, because those measures are now considered part of the status quo. Since 2009, families most in need of government support have been doing some heavy lifting to help the budget bottom line as a result of an indexation change which, when it came to pensions, proved too controversial. •

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Launching it on Thursday in avuncular mode, treasurer Joe Hockey declared the report “a call to arms in relation to reform… We need a conversation with the Australian people, and this is a conversation that the nation wants to have.”

Well, maybe; I for one hope we do have it. But, Joe, if you put a politically partisan message and an economically responsible message in the same document, you know which is going to get more airplay.

We would have a more fruitful conversation had the report stuck solely to its serious message, because it raises real issues that the partisan side of the report will swamp in the usual bickering. Instead of getting unity behind a common purpose of reform, we will get nowhere.

That’s a shame. Hockey promised us that some of the numbers here would make us fall off our chairs, and to my mind, some really are stunning. Here are three:

• On assumptions that seem to me reasonable, the report projects that the average baby boy born in 2055 will live to be ninety-five, and the average girl will live to be ninety-seven. That would mean that future generations will still have a third of their lives ahead when they turn sixty-five – our current retirement age.

• On equally reasonable assumptions, it projects that by 2055 almost two million Australians, or 5 per cent of the population, will be aged eighty-five and over – with 40,000 of them over one hundred.

• Healthcare data shows that Australian men aged eighty-five and over account for thirteen times more hospital spending per person than those in their twenties, twenty times more spending on pharmaceuticals, and eight times more medical benefits.

Can you see what all that implies for the budget? I hope so.

The report is subtitled “Australia in 2055,” but that’s a misnomer. It is really a modelling exercise to try to estimate the future course of the Commonwealth budget over the next forty years to 2055, on assumptions supplied by the government.

Its real focus, like that of the previous three IGRs (2002, 2007 and 2010) is on the budget costs of an ageing population. It ignores many other issues Australians care about: home ownership is not mentioned, global warming gets perfunctory treatment. The revenue side of the budget is ignored, apart from a crucial assumption that Commonwealth taxes will not rise above 23.9 per cent of GDP – their average level between 2000 and 2008, before the global financial crisis.

Remember that assumption when you see or hear the scary headlines produced by Treasury’s modelling: that under what the report coyly calls the “previous policy,” net debt by 2055 would be 122 per cent of GDP – $5.6 trillion in today’s money; or that even after the spending cuts the Coalition has so far got through the Senate, the debt would be 60 per cent of GDP, or $2.6 trillion.

The annual deficits in 2054–55 would be $533 billion in the first scenario, and $267 billion in the second. Yet the IGR assumes that every government in the next forty years will take no action to address them, but on the contrary, will keep cutting taxes so tax revenues do not top 23.9 per cent of GDP!

There are serious issues in the report, but this modelling is not serious analysis. It is based on a false assumption, and hence comes up with false answers.

In truth, none of us, including Treasury, has any idea what the budget will look like in 2055. The report contains valuable information and analysis that makes it worth reading. But any forecast is only as good as the assumptions on which it is based, and the key features of the future are unknown.

Suppose Treasury had set out in 1975 to model the budget in 2015. It would have had no idea what lay ahead: the internet, the rise of China, the rise of India and Indonesia, Australia’s free-market reforms, the slow death of Australian manufacturing, the spread of middle-class welfare. Any numbers it came up with would have been worthless.

With great respect to the Treasury team, the numbers in this IGR are likewise worthless. Their central assumption of fixed tax revenues is nonsense. And the dynamics mean that deficits add to debt, which then adds to deficits, so the nonsense then infects all its bottom-line numbers.

If the budget is stuck in deficit, why wouldn’t taxes rise, as they have in the past? In 1974–75, Commonwealth taxes made up 19.9 per cent of GDP. This report’s goal is for them to raise about 23.9 per cent of GDP. In 2055, as an ageing population increases demands on the budget, it is plausible that voters would rather have taxes at 27.9 per cent of GDP than to do without the health, pensions and aged care services that older people need.

One more point to remember about the scary numbers: that “previous policy” scenario is not based on the budget as Labor left it, although Hockey would like you to think so. It is based on the budget position after the Coalition delivered its 2013–14 Mid-year Economic and Fiscal Outlook, or MYEFO, in which it scrapped the carbon tax, scrapped the mining tax, and gave $9 billion to the Reserve Bank. As I have shown earlier, that added a net $14 billion to the budget deficits over the next four years.

So forget the politics, including the implicit message that the Coalition’s blocked budget measures (dubbed here the “proposed policy”) are the only way to get the budget back in surplus. As the report concedes in passing, any other measures delivering equivalent savings, such as tackling tax loopholes, would do the same, and might do it more fairly.

It is traditional for the IGR to be used to play politics, but in this case the politics drowns out the two real issues Treasury is trying to raise.

First, every government over the past decade has contributed to weakening Australia’s fiscal position by cutting taxes while raising or promising to raise spending. There is no budget crisis, but believe me, it is just a statement of reality to say that we have got ourselves into an unsustainable budget position. There is too much spending in the pipeline, and too little revenue. Something’s gotta give.

In just seven years, the Commonwealth has run up cumulative deficits of $240 billion. That is equivalent to every Australian acquiring a debt of $10,000. In that time, one budget document after another has announced a shift into surplus, which has then vanished into smoke.

And the worst is ahead: we have barely begun delivering the Gonski report’s promise of tackling educational disadvantage, and the National Disability Insurance Scheme is just limbering up. Labor promised these big-spending schemes, and the Coalition mostly supported them, without either coming up with a plan to pay for them.

The Coalition’s 2014–15 budget promised to set things right, but did it in a highly partisan way that put most of the burden on the poor and those in the middle: ordinary families, the unemployed, and manufacturing and its workforce. It blew its chance to come up with a program that could unite Australians behind it, and so the Senate has blocked much of it.

Treasury now hopes that we might be back in surplus within a decade. Its graphs here imply that the biggest savings blocked by the Senate are the Coalition’s axing of the Gonski reforms, its plan to index pensions to rises in prices, and its oh-so-gradual extension of the pension age from sixty-seven to seventy. The higher pension age is inevitable, but the first two could remain stuck.

For now, the economy’s weakness and crashing mineral prices are doing more damage to the budget than the Senate has. Since mid 2012, domestic demand has grown by just 0.75 per cent on average; real spending per head has fallen at the same pace. Employment has risen at the rate of little more than one new job for every three new adults.

But the second, and biggest, issue is our ageing society. In itself, an ageing society is a great thing to have: we are living much longer and, for most of that time, in good health. But the more of us live on into our eighties and nineties, the more time we spend on the pension, and the more hospital, medical, pharmaceutical and aged care bills taxpayers have to pay for. Something’s gotta give, and it is the task of government to negotiate politically acceptable reforms that can reduce those bills, and find ways to pay for them.

The biggest budget savings the Abbott government has achieved so far have been to slash the future foreign aid budget by more than half, and to shift more of the public hospital bill to the states. The first makes the world’s poor bear the cost of our savings, by scrapping projects that save lives and lift people out of poverty. The second caps growth in the Commonwealth’s contribution to public hospital costs at 3.5 per cent a year from 2017–18. This improves its own budget bottom line, but puts the states in an impossible position, from which their only way out will be to increase and widen the GST.

Cost shifting is not genuine budget reform. But the Fraser and Hawke governments both got away with it, so it’s no surprise that Abbott and Hockey chose it.

We need a better approach. In Sweden, they headed off the ageing crisis by setting up an all-party committee to come up with reforms that all sides could accept, and would back in public. To Hockey’s credit, in opposition he ensured that the Coalition backed Labor in raising the pension age to sixty-seven, yet now Labor and the Greens, for populist reasons, are blocking its inevitable further extension to seventy.

Reducing the budgetary burden of an ageing Australia is a tough political ask. It would be handled best if the parties accepted joint responsibility for solving it. This report is a lost opportunity to start that conversation. •

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With the Senate threatening to block a majority of the government’s proposed savings measures, the 2014 federal budget is undoubtedly the most controversial for many years. Even though the fiscal contraction expected from this year’s budget is about two-thirds that of the Howard government’s first budget in 1996, the reaction of voters has been very different.

An Essential Vision poll found that 61 per cent of respondents felt the budget would hurt the most vulnerable people in Australia, with qualitative research by IPSOS finding that voters’ hostility to the budget is largely driven by concerns it will promote a less equal and less caring society. Rather than directing their anger at measures that hit their own hip pockets, many of those surveyed repeatedly express concern about the impact on others, especially their children and the poor. According to the Conversation’s Michelle Grattan, the much-criticised budget is feeding into a wider debate about inequality in Australia.

Measuring the budget’s impacts

In the days following the budget two quantitative analyses attempted to identify the winners and losers. The first of these, which I undertook with Daniel Nethery, a colleague at the Crawford School of Public Policy at the Australian National University, was a fairly simple analysis of the impact of selected budget changes. Using an approach usually described as the “cameo” or “hypothetical family” method, we calculated how the changes would affect the disposable incomes of a small range of family types.

A similar calculation has appeared each year since 2005 in an appendix to the Budget Overview showing what different types of households gain from policy changes announced in the budget or over the course of the current government. This year, the table was absent from the budget papers, probably because showing losses in disposable income is not as politically attractive as showing increases, which previous papers have typically done.

Using the projections set out in the budget, we essentially replicated the methodology used in earlier budget papers to compare the impact on disposable incomes in 2016–17, the year in which all of the measures we assessed would have come into effect. We found that working-age people on social security payments will be affected most by the budget. An unemployed twenty-three-year-old will lose $47 per week or 18 per cent. An unemployed lone parent with one eight-year-old child loses $54 per week or 12 per cent. Lone parents earning around two-thirds of the average wage lose between 5.6 and 7 per cent. A single-income couple with two school-age children and average earnings loses $82 per week or 6 per cent. By comparison, an individual on three times the average wage – close to $250,000 by 2016–17 – would lose just $24 per week, or less than 1 per cent of disposable income, through the deficit levy.

These calculations were conservative. They did not take account of the proposed abolition of the Schoolkids Bonus, which was not a new budget initiative; nor did they include the increased cost of healthcare and fuel or the changes to higher education.

The most comprehensive analysis of the distributional effects of the budget was undertaken by the National Centre for Social and Economic Modelling, or NATSEM, at the University of Canberra. Using Australian Bureau of Statistics data on the distribution of household incomes, NATSEM divided the community into five segments or “quintiles,” each made up of a little over 2.5 million households. It found that the poorest 20 per cent – those with $35,000 or less in disposable annual income – would forgo $2.9 billion over four years thanks to changes to family benefits, pensions and other payments. More than one-third of the budget cuts, or $6 billion worth, would fall on the middle quintile of households, those earning between $45,000 and $63,000. The wealthiest 20 per cent of households, meanwhile – those earning $88,000 or more after tax and benefits – would lose $1.78 billion, some 40 per cent less than the lowest-income families.

Given that the most recent figures from the Australian Bureau of Statistics, or ABS, show that the poorest 20 per cent of households receive about 7.5 per cent of disposable income while the richest 20 per cent receive 39.5 per cent, it is clear that the impact of the budget in relative terms is much greater on low-income households than it is on high-income households. The poorest 20 per cent of households, which receive less than 8 per cent of total income, are the source of at least 16 per cent of the expenditure savings.

The impact on different income groups can also be gauged by considering which sectors the budget savings are coming from. In a speech to the Sydney Institute after the budget, Joe Hockey emphasised the fact the government will spend $146 billion – “35 per cent of the federal budget” – on welfare in 2014–15. That might be true, but this sector provides a larger share of the proposed cuts. Budget Paper No. 2 shows that out of total projected expenditure cuts of $29.4 billion between 2014–15 and 2017–18, $15.4 billion, or 52 per cent, comes from programs of the Department of Social Services. (This compares with revenue measures estimated to raise an extra $8.7 billion over the period, not including fiscal drag.)

Even more striking is the budget’s impact on spending on the unemployed. Support for the unemployed costs around $10 billion annually, or less than 2.5 per cent of the budget. Of people receiving the two benefits – Newstart and Youth Allowance (Other) – around 37 per cent are under the age of thirty; given that Youth Allowance recipients are paid less than Newstart recipients, we can conservatively estimate that payments for this group account for around 0.9 per cent of the budget. From next year, unemployed people under twenty-five will get Youth Allowance rather than Newstart, and people under thirty will wait up to six months before getting unemployment benefits, and will then have to participate in Work for the Dole to be eligible for income support. The projected savings from these changes amount to about $2.8 billion over the period 2014–15 to 2017–18, or about 9.5 per cent of the total budget spending cuts. In other words, unemployed people under thirty receive less than 1 per cent of total budget spending but are the source of close to 10 per cent of total expenditure savings.

Are criticisms of the budget “class warfare”?

In a subsequent speech to the Sydney Institute, the treasurer defended the budget against claims of unfairness, arguing that the criticisms have been political in nature and have “drifted to 1970s class warfare lines, claiming the budget is ‘unfair’ or that the ‘rich don’t contribute enough.’” He described this criticism as a “misguided cry” and outlined a range of contrary arguments for the fairness of the budget strategy.

His first argument in defence of the fairness of the budget arose from twenty years or more of “uninterrupted economic growth”:

The average Australian household is almost $290 per week better off today in real terms than they were around two decades ago. And this growth has been broadly based across society. Household wellbeing across the community has grown significantly in the last two decades. And while much focus has been on the “rich getting richer,” the more accurate story is the fact that everyone is getting richer as a result of economic development.

Superficially, this story has some force. As Chart 1 below shows, real disposable incomes have grown very significantly across the income distribution since 1994–95. The two groups enjoying the largest real increases are those at the fortieth percentile (the group whose incomes exceed those of the bottom 40 per cent of the population) and those at the ninetieth percentile. While the poorest 40 per cent have also enjoyed significant growth, this is lower than for any other group. Those above the ninetieth percentile – the richest 10 per cent – have experienced the highest real income growth in the OECD.

Chart 1: Change in real equivalent household disposable income, Australia, 1994–95 to 2011–12

Source: Calculated from ABS, Household Income and Income Distribution, Australia, 2011-12, Catalogue No. 6523.0.

But the conclusion that everyone is better off now than two decades ago glosses over the complexities of analysing income trends. The rising tide of prosperity hasn’t lifted all boats because people at different income levels in 2011–12 are not the same people at each level in previous years.

Because allowances for the unemployed and the sick have been indexed to prices rather than community-wide incomes, the people in these groups, for instance, have been slipping down the income ladder for the last two decades. In the mid 1990s a single person receiving Newstart would have been about $10 per week (in current terms) below the tenth percentile of the income distribution, but by 2011–12 he or she would have been close to $160 below that percentile. Unemployed people on youth allowance would be even lower – if somehow they could afford to live by themselves.

Another group that hasn’t enjoyed the general rise in prosperity is made up of lone parents whose youngest child is aged eight years or more, who now receive Newstart rather than the more generous parenting payment. Their real incomes have already been cut, first by the Howard government and then by the Gillard government, by around $160 per fortnight. The proposed change to family tax benefit part B would reduce their benefit incomes by a further $100 per fortnight.

It is striking that the young unemployed and this group of lone parents would have their incomes cut by a further 12 to 18 per cent under the budget proposals. Those who have not benefited from Australia’s growing prosperity are those most adversely affected by the budget.

Is the Australian social security system poorly targeted? Are poor Australians overly reliant on welfare?

In defending the proposed budget cuts, Joe Hockey also argued that “our welfare system is unsustainable in its current form” and “is not well targeted to those who really need our assistance.” He went on:

Payments are too broadly available to too many people. As a result, less is available for those most in need. At the moment over half of Australian households receive a taxpayer-funded payment from the government.

This is a variation on the treasurer’s much–debated argument that the “Age of Entitlement” is over, a theme he first articulated in 2012.

The treasurer also noted, however, that “according to the OECD Household Income Survey, Australians in the lowest 20 per cent of income had the highest reliance on government for income of any country in the world.” Low-income Australians have less private income and more government benefits, he said, than similar groups in Germany, France, the Netherlands, Finland, Norway or many other countries where government is much larger and the private sector is smaller as a percentage of the economy. On this basis, he concluded that “this OECD survey illustrates that our income redistribution from taxpayers to tax receivers is more comprehensive and broader than any other country in the world.”

Table 5 of that OECD report shows that social security payments accounted for around 72 per cent of household disposable income for the poorest income group in Australia, but this share was higher in Denmark (87 per cent), Finland (78 per cent) and Sweden (84 per cent). This is illustrated in Chart 2.

Chart 2: Social security benefits as percentage of disposable income of poorest 20 per cent of households, 2009–10

Source: Calculated from Table 5, OECD, 2014

Interpreting these figures is not straightforward. One of the reasons why Australians on the lowest incomes rely strongly on social security payments is that Australian age pensioners are much more likely to be in the lowest income group than are pensioners in other countries, as other OECD studies show. Social security is a more important source of income than work because many of them are retired.

Another way of expressing this is to say that if the lowest income group in Australia is more reliant on welfare, this means that more of the poor in other countries are working – and that means those countries have more working poor, which presumably is not a desirable outcome.

But the main reason why social security is more important for low-income groups in Australia is that we have the most targeted social security system in the OECD, as shown in Chart 3. The lowest-income Australians rely mainly on social security because we apply income tests to payments more than any other country. Rather than being surprising, this simply reflects a system doing exactly what it is designed to do.

Chart 3: Ratio of transfers received by poorest 20 per cent to those received by richest 20 per cent, 2009–10

Source: Calculated from Tables 3 and 5, OECD, 2014

Table 5 of the OECD Report also shows that total social security payments in Australia, at 12 per cent of average household income, are the third-lowest in the OECD. For the OECD as a whole, the figure is around 22 per cent; for Denmark, Finland and Norway it is between 24 and 32 per cent. The only countries where social security payments are lower as a share of average household incomes are Korea and Mexico, where welfare provisions are much less developed – although Korea is rapidly moving up the OECD spending ladder.

For the richest income group in Australia, Chart 4 shows that social security benefits provide only 1 per cent of household disposable income – a share that has halved since the mid 1990s – and by far the lowest in the OECD. On average for OECD countries, social security provides 10 per cent of the income of the richest quintile, with the share being as much as 20 per cent in Austria and close to 30 per cent in Italy and France.

Chart 4: Social security benefits as percentage of household disposable income for richest 20 per cent, 2009–10

Source: Calculated from Table 5, OECD, 2014

Because Australia directs the highest share of its social security spending to the poor and the lowest proportion to the rich, another recent OECD study of the equity implications of fiscal consolidation concludes that across-the-board cuts in social security would increase inequality in Australia more than any other country. So it is difficult to understand why the treasurer argues that the system is not well-targeted, particularly when using OECD comparisons that show the opposite of the conclusions drawn in the speech (a point made by David Uren in the Australian).

Some of the budget proposals do involve greater targeting – for example, a lowering to $100,000 per year of the threshold for receipt of family tax benefit part B for families with children under six years of age. But other proposals involve reducing benefits for the poorest welfare recipients, a form of reverse targeting.

Is fairness in the eye of the beholder?

Griffith University economist Ross Guest has argued that government budgets are “a hotchpotch of ad hoc tweaks here and there with no rhyme or reason.” This needs fixing, he argues:

First, governments should set a target for the distribution of household income and wealth using a standard measure such as the Gini coefficient… Once we’ve set the fairness target, we need an independent organisation like NATSEM to do a pre-budget assessment for the government, against our fairness target, of proposed budgetary changes. Then at least we will be able to make an overall assessment of the fairness of the budget, in the same way as we assess the budget against a range of fiscal targets such as the budget deficit, growth of government spending and government debt.

From this perspective, the impact of federal budgets on the distribution of income is an important piece of information to be used in evaluating policy proposals. But Guest also points out that what constitutes a “fair” distribution of national income ultimately comes down to social value judgements.

Here we come to another of Joe Hockey’s arguments. “Whilst income tax is by far our largest form of revenue, just ten per cent of the population pays nearly two-thirds of all income tax,” he told the Sydney Institute. “In fact, just 2 per cent of taxpayers pay more than a quarter of all income tax. Maybe these taxpayers would argue that the tax system is already unfair.”

The Australian’s Adam Creighton had made a similar argument under the headline “No, the Rich Don’t Pay a ‘Fair Share’ of Tax. They Pay All of It.” According to ABS figures, he wrote, “only the top fifth of households ranked by their income – those with incomes of more than $200,000 a year in the financial year ending June 2012 – pay anything into the system net of the value of social security in cash and kind received.” In a similar vein, the Institute of Public Affairs has argued that “NATSEM’s figures might be right, but it’s quite wrong to, therefore, claim they prove the budget is inequitable. There’s a world of difference between the government giving you less of something that isn’t yours to begin with, and the government taking something from you that is yours in the first place.”

In his budget speech the treasurer expressed this argument in a different fashion: “We must always remember that when one person receives an entitlement from the government, it comes out of the pocket of another Australian.” In his speech to the Sydney Institute, he used the same “lifters and leaners” analogy as in the budget speech, asking whether it was fair that “the average working Australian, be they a cleaner, a plumber or a teacher, is working over one month full-time each year just to pay for the welfare of another Australian.”

In his Sydney Institute speech, the treasurer went on to say that “in striving to achieve equality, it is not the role of government to use the taxation and welfare system as a tool to ‘level the playing field.’” This statement is puzzling, since the main objective of a progressive tax system is indeed to “level the playing field.” Our social security system has long been the most progressive in the OECD, and targeting benefits to the poor is another way of levelling up. The real meaning of these statements appears to be that we have been unfair to the rich and the budget is a way of correcting this – though none of the budget’s defenders would put it so directly.

But while the richest do pay a higher share of taxes under a progressive tax system, the richest 10 per cent of Australians have actually enjoyed the largest increase in disposable incomes of any OECD country. Moreover, the rise in income inequality in Australia in the period up to the global financial crisis was largely due to a reduction in redistribution between rich and poor. Nicolas Herault and Francisco Azpitarte of the University of Melbourne have found that inequality of market incomes in Australia actually fell after 2000, but disposable incomes became more unequal because the redistributive impact of taxes and transfers also fell.

As the OECD has commented:

The tax-benefit system in Australia has offset just over half of the rise that occurred in market income inequality during the past two decades, a percentage that is higher than in many other OECD countries. Nonetheless, since the mid 1980s, taxes have become less redistributive. Both progressivity and average tax rates have declined. And since the mid 1990s the overall redistributive effect also weakened. In most cases, out-of-work income as a proportion of in-work income has fallen, in part due to allowance rates failing to keep pace with wage growth. The flattening of the personal income tax system in the mid 2000s (e.g. through increases to the top threshold) also contributed to a reduced capacity of redistribution.

Fundamentally, however, views about the fairness or otherwise of the budget reflect different values. As Fairfax journalist Jock Cheetham has pointed out, different concepts of fairness are being used by the different sides of this debate. On the one hand, he observes, fairness is being interpreted as equality; on the other hand, it is interpreted as proportionality – that “people should be rewarded in proportion to what they contribute, even if that guarantees unequal outcomes.”

In a similar vein, Jackie Brady from Catholic Social Services Australia argues that:

an assumption lurking behind these arguments is that a person’s market income is a reflection of their contribution to the community. The idea is that people who create the greatest value for others earn the highest incomes and those who contribute the least, should earn the least. Together with the claim that people are only morally entitled to what they can earn it suggests that family tax benefits and income support payments are actually a gift that productive people make to those unable or unwilling to pull their own weight. So far from complaining about budget cuts, low-income families should be grateful they get anything at all.

In a somewhat different context, US economist Brad DeLong argues against this “just deserts” theory of income distribution, referring to arguments by Amartya Sen that it is not only ambiguous but also “richer in powerful rhetoric than in substance.” According to DeLong:

our moral-philosophical discussion of who deserves what has gotten tangled up with the economics of the marginal productivity theory of distribution in a fundamentally unhelpful way… We would have a much clearer discussion of issues of inequality and distribution if we simply stuck to considerations of human well-being and useful incentives.

The opposing sides in this debate may not reach agreement on these different value positions, but it can be shown that some of the factual basis for the “lifters and leaners” dichotomy is not as robust as it appears.

The combination of a progressive direct tax system with a highly targeted income support system means that the tax-transfer system, as a whole, redistributes to low-income groups. Chart 5 shows estimates from an ABS study of the impact of government benefits and taxes on household income, which found that in 2009–10 the bottom 60 per cent of Australian households were, on average, net beneficiaries of the welfare state, with the top 40 per cent, on average, being net contributors.

Chart 5: Weekly benefits received and taxes paid, by quintiles of equivalised private income, 2009–10

Source: Estimated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009–10, Catalogue No. 6537.0

Unlike the figures cited by Adam Creighton and the treasurer, these figures take account of indirect taxes. Because they are averages for income groups, they mask a small number of zero net taxpayers in the highest income groups and larger numbers of positive taxpayers in lower income groups. These anomalies reflect the fact that the distinction between people who are net contributors and net recipients reflects not only income but also age and household circumstances.

As shown in Chart 6, households are net contributors, on average, when the household reference person is aged between twenty-five and thirty-four years or between forty-five and sixty-four years, and are net recipients when the household reference person is aged fifteen to twenty-four years (likely to be in tertiary education), when the household reference person is aged thirty-five to forty-four years (because dependent children are part of the household), or when the household reference person is sixty-five years or over.

Chart 6: Benefits received and taxes paid (2009–10, dollars per week) by age of household reference person, Australia, 2009–10

Source: Estimated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009–10, Catalogue No. 6537.0

Households with a head aged sixty-five years or more receive by far the greatest net benefits. A high proportion of them receive at least part of the age pension; they are heavy users of the healthcare system; and they pay very low levels of direct tax. Their low tax payments reflect their low overall incomes, together with special tax offsets and the concessional tax treatment of superannuation.

It’s important to remember that most people aged over sixty-five were net taxpayers when they were of working age, so classifying them as “leaners” fails to take account of any contributions they made earlier in life. Similarly, many low-income families with children may currently receive more in family benefits and education than they pay in taxes, but they will pay more in taxes after their children have left home, and in future years their children will pay taxes too. As in most other rich countries, public spending is an important instrument for redistributing resources across the life course.

In addition, women are more likely than men to be receiving social security payments. Although they tend to live longer, their lower lifetime earnings mean they will have paid lower taxes during their working years and have fewer private resources in retirement. These circumstances are primarily a consequence of their greater role in caring for children and, later in life, for the frail elderly. On average, their net financial contributions may not be as great as men, but would it be reasonable to characterise them as “leaners”?

Even the distinction between low- and high-income earners is not hard and fast. The Household Income and Labour Dynamics in Australia study, or HILDA, shows that people both ascend and descend the income ladder. Between 2001 and 2010, only 2.2 per cent of the Australian population stayed at the same percentile of the income distribution; around 21 per cent went up more than two deciles (through two bands made up of 10 per cent of income earners, that is), close to 30 per cent went up by less than two deciles, 27 per cent went down by less than two deciles and 21 per cent went down by more than two deciles. People rise up the income distribution because they leave study and get jobs or because they are promoted at work or because they marry or because their children leave home, and they fall down the income distribution because they retire or become unemployed, become sick or disabled or separate from partners, or because they start to have children.

In fact, only around 47 per cent of those who were among the poorest 20 per cent of the population in 2001 were still there in 2010, with the same percentage of those in the richest 20 per cent in 2001 still there in 2010. Mobility is greater in middle income groups because there it is possible to experience both rises or falls in income, whereas if you start at the top you can only go down, and if you start at the bottom you can only go up. As a result, only a quarter of those in the middle 20 per cent of the population in 2001 were still in the same income group in 2010, with a third being in a lower income group and close to 40 per cent being in a higher income group.

Partly as a consequence, 65.7 per cent of working-age Australians lived in a household where someone received welfare at some time between 2001 and 2009. In any one year during that decade, between 5 and 7 per cent of working-age Australians received 90 per cent or more of their income from welfare payments (not including family payments); and at some stage in the period, fully 15 per cent of the population was in that position (although only 1.2 per cent were reliant for all nine years).

The position for young people is even more striking. The most recent HILDA report found that 80 per cent of people who were aged eighteen to twenty-four in 2001 received a welfare payment at some time between 2001 and 2011, but only 0.3 per cent of these people received 90 per cent of their income from welfare for all eleven years.

In other words, people of working age who are “welfare dependent” for long periods are only a tiny percentage of the population, while many highly or very highly paid individuals face substantial risks of large income drops, associated particularly with health changes but also with changes in employment and family status. The welfare state – defined broadly to include health and education as well as social security payments – touches the lives of many more Australians than is commonly thought. Nearly everyone may be a “lifter” or a “leaner” at different stages in their life.

Perhaps the very fact that a majority of working Australians have needed to use welfare payments, or know family members who have needed to use welfare, has contributed to the unpopularity of the budget. It is easier to put yourself into the shoes of the unemployed, the sick or people with disability if you or your family members have experienced the impact of these risks.

While the opposing sides may not reach agreement on these different value positions, the challenge the government faces is that a majority of Australians appear to have adopted a different value position from that which underlies the budget and is used by its defenders. •

The post The budget, fairness and class warfare appeared first on Inside Story.

AT AN ANNUAL cost of around $40 billion, the age pension is the federal government’s largest single social security program, and age pensioners account for around half of all Australians receiving social security benefits. So it’s not surprising that the speculation about cuts in welfare spending has focused on this payment, and specifically on the possibility that the qualifying age could age rise to seventy and that future increases in pension rates might be linked to prices rather than wages.

The treasurer, Joe Hockey, has argued that the pension age “was set at that level in Australia in 1908 when life expectancy was fifty-five… Now life expectancy is eighty-five and as of today, it’s still pension age sixty-five.” But would raising the pension age be fair – and, just as importantly, would it be a practical and effective means of meeting current and future budget challenges?

The budget challenge

A common way of looking at the budget implications of an ageing population is to consider changes in the “age support ratio” - the ratio of potential workers to people of pension age. According to Treasury’s most recent Intergenerational Report, the age support ratio is projected to fall over the next three or four decades. In 2010, there were five people of working age for every person aged sixty-five and over; by 2050, says Treasury, that figure will have fallen to 2.7.

Everything else being equal, this means that the cost of financing any given level of pension payment will be greater. A halving of the support ratio, for instance, implies that the taxes required to fund age pensions would roughly double for each person of working age at that point in the future. (For the moment, we’ll ignore the fact that these future workers are likely to be better-paid than current workers.)

If the government wishes to achieve and maintain a budget surplus, total taxes would need to increase (the cost of age pensions is already more than 10 per cent of total Commonwealth tax revenue), spending on other budget items would need to fall or the level of age pension per recipient would need to be cut.

Population ageing also has implications for other parts of the federal budget. Older people are likelier to use the healthcare system, and if they are eighty-five or older they are much more likely to need long-term care. On that basis, the Intergenerational Report estimates that spending on health is projected to rise from 4 per cent to 7.1 per cent of GDP by 2049–50 and aged care is projected to rise from 0.8 per cent of GDP to 1.8 per cent.

Would increasing the pension age be fair?

The attraction of increasing the pension age is that it has the potential to adjust both sides of the support ratio simultaneously. If people stay in paid work rather than claiming the age pension, then the numerator (people in work) rises, while the denominator (people on pensions) falls, achieving a double whammy. If people spend more time in paid work they are also likely to save more through the superannuation system, raising their living standards in retirement.

It is for these and related reasons that bodies like the OECD and the European Commission have been arguing for increased labour force participation for older workers for a number of years.

Any assessment of the fairness of a policy proposal, however, should take into account how a specific reform proposal compares with other options. As Daniel Nethery has pointed out, the changes to the indexation of pensions canvassed by the treasurer would cause pensions to fall relative to community incomes. Over a thirty-five- to forty-year period the difference in future retirement incomes would be very large, eventually approaching a 50 per cent cut in payment levels relative to current indexation, with significant implications for poverty in retirement. Australia would then face the same problem with pensions that we currently face with Newstart – people reliant on pensions for their main income source would become increasingly impoverished compared to those in work.

Increases in the pension age need not have a direct impact on pension incomes. But they may reduce the period over which age pensioners receive the payment, and thus reduce what the OECD calls “future pension wealth,” which it defines as the ratio of the “lifetime flow of retirement incomes” to average earnings. In these circumstances, pension wealth is cut even if the amount received per year is unchanged.

Would this reduction in pension wealth be fair? In this context, one of the most important factors to remember is that life expectancy varies across the population and the majority of people don’t actually live as long as “average” life expectancy would suggest.

In the case of the United States, Barry Bosworth has estimated that there is a gap of roughly ten years in life expectancy at age fifty-five between rich and poor for both men and women born in 1940. In other words, men and women born in 1940 who were in the richest 10 per cent of the population in the middle of their working career could expect to live to just over ninety years, while life expectancy for men and women who had been in the poorest 10 per cent of workers would be around eighty years. This would mean that if the retirement age was increased to seventy then rich Americans could expect to collect social security pensions for twice as long as the poor.

Astonishingly, Bosworth’s study finds that life expectancy for the bottom 40 per cent of women in the United States actually declined between those born in 1920 and those born in 1940.

Research by the Office of National Statistics in England and Wales concluded that inequalities in male life expectancy caused by socioeconomic circumstances increased during the past twenty-five years despite improvements over time for all classes. At age sixty-five, the life expectancy of males classified by occupation as “higher managerial and professional” was 18.8 years, compared with 15.3 years for those assigned to occupations classified as “routine.” At the same age, the life expectancy of females classified by occupation as “higher managerial and professional” was 21.7 years, compared with 18.5 years for those assigned to occupations classified as “routine.” While the gap increased more rapidly for women, there were improvements in life expectancy for all income groups.

In Australia, the most striking discrepancy is between Indigenous and non-Indigenous life expectancies. In 2005–07, according to the Australian Bureau of Statistics, life expectancy at birth for Aboriginal and Torres Strait Islander males was 67.2 years, 11.5 years less than that for non-Indigenous males (78.7 years). For Aboriginal and Torres Strait Islander females, life expectancy at birth was 9.7 years less than for non-Indigenous females (72.9 years and 82.6 years respectively).

On average, in other words, Indigenous men couldn’t expect to reach a new pension age of seventy and Indigenous women would receive the age pension for less than a quarter of the time that non-Indigenous women would. (A good deal of the difference in life expectancies is due to the fact that Indigenous men and women aged sixty-five or less have much higher mortality rates, so that even now a significant number don’t live long enough to claim an age pension.)

Across the population as a whole, the Australian Institute of Health and Welfare found differences in life expectancy between major cities and very remote regions in Australia of nearly seven years for men and six years for women – although most of this is due to differences in the share of people who are Indigenous.

A recent Australian study by Philip Clarke and Andrew Leigh found that at age sixty the difference between life expectancy for those in the highest income quintile and the lowest income quintile was five years for men and 5.4 years for women, with men in the lowest quintile expected to live to just over seventy-eight years and women in the same income group to eighty-three years.

These differences are significantly less than the figures for the United States, although this is at least partly because the American estimates are broken down into smaller groups (deciles) and thus pick up more of the disparities at the top and bottom of the income distribution. Comparing the second and eight deciles (rather than the poorest and richest) would reduce the US disparities to about seven years for both men and women, still greater than in Australia.

On the surface, this suggests that higher-income groups in Australia could get a pension for about half as many years again as would lower-income groups if the pension age was increased to seventy. But there is one factor – unique to Australia among rich countries – that would offset this: we are the only OECD country where the public pension is income-tested and excludes most of the highest-earning 20 per cent of people over sixty-five.

The effects are also likely to be less severe in Australia than in the United States in particular because differences in life expectancy do not appear to have as steep a gradient with income, and because Australia’s income-tested pension system distributes public spending on pensions more progressively than many other countries’. The relative disparities in pension wealth are much more significant in the case of Indigenous people, however, although possibly the better way to think about this is to ensure that we become much more effective in reducing the life-expectancy gap between Indigenous and non-Indigenous Australians.

To sum up, increasing the pension age potentially has an adverse effect in equity terms. An increase in the pension age reduces the pension wealth of lower-income groups proportionately more than it reduces the pension wealth of higher-income groups.

Would increasing the pension age be effective?

Apart from the equity problems, it is equally important to ask whether increasing the pension age is an effective way of addressing current and future budget challenges.

In terms of immediate fiscal concerns, it would have no effect on the current budget deficit because the rise is unlikely to commence during the next eight years. As part of the 2009 pension reforms, the Rudd government announced an increase in the pension age from sixty-five to sixty-seven, starting in 2017 and fully phased in by 2023. If the pension age were raised to seventy at the same rate, the change would not be fully effective until 2032. It’s possible to increase the pension age at a faster rate – say by six months every year – but this would still not see the pension age reaching seventy until 2029; this means that most of the baby boomers born before 1959 or 1962 (depending on the speed of increase) would not be affected. Increasing the pension age is not a solution to current problems; it is a contribution to meeting challenges in the 2020s and 2030s.

It has been argued that if Australia lifts the pension age to seventy, Australians will have some of the oldest workers in the world. According to the most recent edition of the OECD’s Pensions at a Glance, seventeen out of the thirty-four OECD countries have legislated for increases in pension ages above sixty-five. Only Iceland and Norway are currently at sixty-seven, but Australia, Denmark, Germany and the United States have plans to match them, and Britain has announced an increase to sixty-eight.

Most OECD countries have provision for early retirement, however, including Australia, which allows access to superannuation from sixty years of age. So it would be important to consider increasing the superannuation preservation age, which allows those with sufficient super to retire at sixty and potentially avoid the effects of an increase in the pension age. And to the extent that higher-income people are able to run down their super during this period of early retirement and then claim some or all of the age pension, concerns about fairness become more salient.

In considering the effects of pension rules, however, a better measure is what the OECD calls the “effective age of labour market exit” – the average age at which workers are no longer participating in the labour market. (This is estimated over a five-year period for workers initially aged forty or over.) Australia currently has the twelfth-highest effective exit age for men, at 64.9 years, while for women Australia ranks sixteenth-highest, at 62.9 years.

Many of the OECD members with higher effective exit ages are lower-income countries, including Mexico, Chile, Korea, Portugal and Israel, though in Japan the average exit age for men is over sixty-nine years and for women it is close to sixty-seven years. This suggests considerable scope for Australia to increase effective ages of labour force exit, if it aimed to match Japan.

Would increasing pension ages be effective in increasing employment at older ages?

Part of the objective is to have an indirect effect earlier in people’s working lives. If people now in their forties or early fifties know that they won’t be able to claim an age pension until they are seventy, they may adjust their retirement planning and savings behaviour and extend their working lives. For any such effect to occur, however, it would be necessary to have complementary policies that support people in balancing their work and caring responsibilities, in particular.

But it’s important to recognise that there appears to be little correlation between official and effective ages of retirement. Norway, for example, already has a higher official pension age than Australia but a slightly lower effective age of labour force exit. The vast majority of countries with low effective ages of labour force exit have the same official pension age as Australia currently has; at the extreme, Luxembourg has a pension age of sixty-five but an effective exit age for men of 57.6 years.

Specific national experiences do suggest, however, that increasing the pension age can have a significant effect on employment at older ages and also on how many people receive social security payments. New Zealand increased its age of eligibility for its public pension scheme, National Superannuation, from sixty to sixty-five years between 1992 and 2001. Research by the Melbourne Institute found that there was clear increase in employment rates in this age group due to the policy change. But it also noted that only 40 per cent of middle-aged couples in New Zealand had private or employer-sponsored superannuation at the time, with a low median value of $30,000 – meaning that there were limited alternatives for many people approaching pension age. Earlier research also suggested that the effect was due to the fact that older workers who already had jobs stayed in employment.

Closer to home, Australia increased the age pension age for women from sixty to sixty-five years between 1995 and 2013. According to the ABS, the labour force participation rate of women in this age group increased from 16.6 per cent to 45.6 per cent in this period. Research at the University of Sydney found that an increase in the pension eligibility age of one year for women induced a decline in the probability of retirement of approximately 10 per cent, but also increased enrolment in other welfare programs, especially disability pension, or DSP.

While the number of women aged sixty to sixty-four who received the DSP increased very significantly over the period, the net effect was a very large fall in receipt of social security payments, from around 60 per cent of women in the age group in the mid 1990s to around 20 per cent currently.

This experience might suggest that raising the pension age could potentially have a major impact in restraining welfare costs, but there are reasons to be cautious about whether past trends are necessarily likely to have the same effect in the future.

As shown in the chart below, disability is strongly related to age. Although it remains around 10 per cent of the population up to the age of forty-five years, it increases rapidly to more 40 per cent by the age of seventy. Overall DSP rates fall between the two prevalence rates shown here, being closer to the rates of profound or severe core limitation than to overall disability rates. Nevertheless, it is clear that a higher proportion of those aged sixty-five to sixty-nine years could be expected to have a disability than among those aged sixty to sixty-four years, suggesting that future increases in the pension age are likely to have diminishing returns compared to past reforms.

Chart 1: Prevalence of disability by age, Australia, 2012

Source: ABS, Disability, Ageing and Carers, Australia: Summary of Findings, 2012.

Which crisis?

Increasing the pension age is likely to be just one part of any set of reforms to address the challenges of population ageing. While it could be expected to have a positive impact on the budget balance it is implausible that it could fill the gap by itself. Many complementary policies will need to be considered, including a requirement that superannuation be taken in the form of lifetime annuities to ease the pressure on age pensions. New ways of financing long-term care would also appear to be essential in preparing for population ageing.

Moreover, as recently pointed out by Veronica Sheen, obtaining and maintaining employment in later life is not straightforward. The loss of a job, and difficulties finding another, tend to precipitate a decision to retire. Age discrimination barriers are significant and need to be addressed. Work-life balance issues become more sharply defined with age.

Increased workforce participation among older people also has potential costs in other important areas of social life. Women’s lower participation in the labour force partly reflects their greater family responsibilities (looking after elderly parents, for example). Workforce practices that allow these responsibilities to be more effectively shared between men and women will need to be developed.

More fundamentally, it isn’t clear that the federal government’s budget challenge is primarily caused by the level of spending on age pensions. Australia currently has the fourth-lowest level of public pension spending of any OECD country and is projected by 2050 to have the third-lowest level of pension spending.

Where Australia is unusual is that it has by far the highest level of tax concessions for private pensions in the OECD, at four times the OECD average, and people of pension age pay much lower taxes than workers at the same level of gross income.

A fair and effective approach to the challenges of population ageing would involve much more than increasing the pension age. •

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WITH THE federal budget looming, Joe Hockey has flagged two possible changes to pensions. The first, raising the age at which individuals become eligible for the age pension to seventy years, has attracted widespread media coverage, in part because its impact is easy to grasp. The second, modifying the indexation of pensions, has received relatively little scrutiny, yet represents a profound structural reform. It would affect not only senior citizens, but also those receiving a disability support pension or the carer payment.

In the 2012–13 financial year, there were 2.36 million age pensioners, 822,000 disability support pensioners and 220,000 people receiving the carer payment; taken together, these pensions account for around half of all government expenditure on benefits. But the complicated rules governing indexation make it very difficult for recipients to work out what the changes would mean for them.

Pension base rates are currently indexed on two indexation days in March and September. The pension increases in line with prices or wages, whichever have increased the most over the preceding period. Two measures of prices are used. In addition to the usual Consumer Price Index, or CPI, the Rudd government’s pension reforms, which came into effect in September 2009, established the Pensioner and Beneficiary Cost of Living Index, or PBLCI. The two indices are related, but the PBLCI more closely reflects the spending patterns of individuals on government benefits. Whereas the basket of goods used to calculate the CPI includes house purchases, the PBLCI instead considers mortgage repayments – age pensioners may still be paying off their home, but are unlikely to buy a new one.

Since its introduction, the PBLCI has resulted in a better outcome for pensioners on three out of ten indexation days, reflecting that the cost of living for those on government benefits has been increasing in real terms. Indeed, it has outstripped the CPI on five of the ten indexation days, so its effect on current pension rates of payment would be even more pronounced were it not usually masked by wage indexation.

Because wages tend to grow faster than prices, wage indexation has determined six of the last ten pension increases. Under current arrangements, single pensioners cannot receive less than 27.70 per cent of what the Australian Bureau of Statistics refers to as male total average weekly earnings; the corresponding benchmark for pensioner couples stands at 41.76 per cent. This is the mechanism of pension indexation which Hockey has suggested may need to go.

Making sense of all the moving parts becomes simpler with a few numbers. In September 2009, the single pension basic rate stood at $615.80 per fortnight. Since then, it has increased to $766.00 per fortnight. Now suppose that as part of its 2009 pension reforms, the Rudd government had abolished wage indexation. Under this scenario, the pension would have only increased to $701.80. After four and a half years, a single pensioner would have forgone indexation increases of $64.20 per fortnight; pensioner couples would be $96.80 per fortnight worse off. The chart shows that wage indexation has contributed 43 per cent of the increase in the single pension basic rate since September 2009.

Indexation of the single basic pension rate (per fortnight)

Abolishing wage indexation of pensions would constrain them to increase in line with other government benefits like Newstart Allowance, the basic unemployment benefit. Pensions would no longer keep pace with wages for those who provide care or who cannot participate in the workforce due to age or disability; the pension would instead provide for a fixed standard of living based on what the government, at one point in time, considered to be an adequate level of consumption for these groups of people.

In 2009, the Rudd government offset part of the cost of providing more generous pensions by tightening the income test and increasing the age pension age from sixty-five to sixty-seven years. This time around, the Abbott government is preparing voters for a rise in the eligibility age and lower indexation increases. And while it seems highly unlikely that any government would risk alienating pensioner voters with such a harsh reform – even if the full effect of abolishing wage indexation would not be felt for some years – the complexity of the pension and its indexation rules leaves plenty of opportunities for governments to leave their stamp. That same complexity also makes it very difficult for those who depend on the pension for their livelihood, rather than for their legacy as responsible fiscal managers, to interpret rumours in the lead-up to the budget. •

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DURING the last two federal election campaigns the Coalition promised new measures to tackle long-term unemployment. That pledge has found its way into legislation that would create two new payments to encourage people to rejoin the workforce. Labor has largely supported the bill, which is currently before parliament, but the precedent it sets for New Zealanders living in Australia has inflamed opinion across the Tasman.

The first of the new payments is a Job Commitment Bonus. Job seekers aged eighteen to thirty who’ve been on benefits for twelve months or more will receive a tax-free payment of $2500 if they remain in “gainful work” (and off welfare) for at least a year. After two years, they’ll receive an additional bonus of $4000. The second – with its less catchy title, Relocation Assistance to Take Up a Job – replaces the existing Move 2 Work program and offers unemployed people payments of up to $6000 (more if they have dependent children) if they need to move house to find work.

Although Labor MPs supported the bill in the House of Representatives, they argued that, by failing to create jobs or increase skills, it doesn’t go to the heart of the youth unemployment problem. They were also concerned about the expanded penalties in the relocation scheme: anyone who quits a job “without a reasonable excuse” within six months of receiving a payment will be barred from receiving any benefits for twenty-six weeks. (Under the previous scheme the non-payment period was twelve weeks.) Overall, however, this is not a particularly contentious piece of law-making.

Why, then, is the prime minister of New Zealand being questioned about the bill in parliament in Wellington, and why has he directed diplomats at the New Zealand high commission in Canberra to register his government’s concerns with the Australian government?

At issue is the fact that the bill redefines what it means to be an “Australian resident” in an unprecedented and highly specific manner. As a result, New Zealanders are excluded from the new job commitment bonus, regardless of how long they have lived in Australia.

Here, a bit of history is required. New Zealanders enjoy the right to live and work indefinitely in Australia – a right that was formalised under the 1973 Trans-Tasman Travel Agreement – and for a long time they were essentially treated as permanent residents. That changed when the Howard government amended the definition of “Australian resident” in social security laws to exclude New Zealanders. The Howard changes were prospective – they only applied to those who crossed the Tasman after 26 February 2001. So while newcomers couldn’t receive many government welfare payments (including unemployment, youth and supporting parent benefits), Kiwis already settled in Australia still could.

This division – between pre- and post-2001 New Zealanders – is expressed in the arcane bureaucratic language of visa categories. New Zealanders who arrived before the changes are deemed to hold a “protected special category visa”; their compatriots who arrived after the changes hold a “non-protected special category visa.” Of the half a million or so New Zealanders settled in Australia, about 200,000 are estimated to fall in the unprotected category, and their numbers are continuing to rise.

Regardless of the inequities involved – and there are many – the distinction between these two categories has, until now, remained completely clear. The new bill, however, qualifies “Australian resident” to exclude anyone who holds a special category visa – protected or unprotected – from eligibility for the job commitment bonus. As the bills digest prepared by the Parliamentary Library comments, this is “an exception to the usual practice in Australian social security law” and “a change without precedent in the entitlements offered to this group.”

Since the job commitment bonus is only payable to long-term job seekers aged between eighteen and thirty who find gainful employment for at least twelve months, the changes will not affect a large number of New Zealanders. Those who arrived after 2001 would be excluded anyway, as would many who arrived earlier (because they would be too old to be eligible). No doubt there will be some individuals who will be denied the payment – a New Zealander who arrived in 1990 at age two and is now twenty-six, for example, despite being an Australian resident under any common sense understanding of that term.

Given the focus on one very specific payment, it is hard to understand why the provision has been included at all. The cost savings are likely to be tiny. Given the intention of the bill – to encourage the long-term unemployed to become independent of government payments – it would make sense to include “protected” New Zealander welfare recipients in its scope.

This has led New Zealanders on both sides of the Tasman to interpret the provision as a signal that further changes are on the way – that, far from acceding to persistent and growing demands for fairer treatment of Kiwis who arrived in Australia after 2001, the Abbott government may be preparing to head in the other direction. On this reading, the entitlements of all New Zealanders – including those who settled before the 2001 changes introduced by John Howard – would be at risk.

This seems a reasonable interpretation of the explanatory memorandum to the bill. Under its statement of compatibility with Australia’s human rights obligations, the memorandum says that protected visa holders “will be treated like other New Zealand citizens” for the purposes of the Job Commitment Bonus.

This sets a “very dangerous precedent,” says advocacy group Oz Kiwi. It suggests that the entitlements of “protected” special category visa holders are not protected at all, and can be diminished “however and whenever” the government wishes. Oz Kiwi says the Australian government is “using its poor treatment of post-2001 arrivals to justify stripping rights from pre-2001 arrivals in the name of equality.”

Whether or not this is the intention will only become clear in future legislation. If it does, there may not be much that New Zealanders in Australia or the New Zealand government can do about it.

Of the thirty-one speeches during the second reading debate over the bill only two – by Labor MPs Jim Chalmers and Julie Collins – raised concerns about its treatment of New Zealanders. After scrutinising the bill, the Parliamentary Joint Committee on Human Rights resolved to seek clarification from the employment minister “as to why it is considered necessary to exclude protected SCV holders from accessing the Job Commitment Bonus, and the basis for considering that their inclusion may jeopardise the goals of the measure.” The reality, however, is that New Zealanders resident in Australia don’t vote and don’t carry much clout.

Official protests from New Zealand may not have much impact either, even with the marked change of tone. In his answer to the question put to him in parliament, prime minister John Key used the terms “discriminate” and “discrimination” to refer to Australia’s treatment of New Zealanders – stronger language than he has been known to use previously. Existing restrictions on New Zealanders’ entitlements in Australia are, however, evidence of diplomatic battles fought and lost in the past. •

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ACCORDING to social services minister Kevin Andrews, the latest figures from his department show that one-in-five Australians received some form of government income support in 2012, at a cost of over $70 billion. The minister described the level of welfare as “unsustainable” and “relentless” and said that more must be done to reduce the burden on the federal budget. He highlighted two areas for attention – the disability support pension, or DSP, and Newstart, the payment for the unemployed – and announced that the review of the welfare system will now report at the end of February.

The number of people receiving those two payments certainly seems to have grown significantly over the past five years: from 714,000 in 2007 to 827,000 in 2012 in the case of the DSP, and from 486,000 to 634,000 for Newstart and unemployed recipients of the youth allowance. Even more strikingly, recent labour-force figures show another large jump in the number of people receiving unemployment payments to just over 800,000 in mid 2013.

What explains these trends? Are they likely to continue “relentlessly” and do they mean that the system has become “unsustainable”?

Where to start?

To understand the changes in welfare numbers, we need to consider a range of factors, including Australia’s growing population and evolving demographic composition, trends in the labour market, and the impact of government policy changes in other parts of the welfare system. Part of the explanation is also likely to involve the way individuals respond to changing incentives within the welfare system. We also need to take a longer-term perspective, using Department of Social Services statistical reports going back to 1991 and data collected by its predecessor departments since the 1960s.

Because the Australian population has grown quite significantly over time, the best way to track the trends is to look at the number of people receiving payments as a percentage of the working-age population – people aged between sixteen and sixty-four years.

Chart 1 shows the proportion of people in this group receiving income-support payments between 1976 and 2012. After rising steadily in the late 1970s, the figure jumped significantly in the early 1980s, declined in the second half of the 1980s, then jumped again in the early 1990s. From 1996 onwards there was a long steady decline, with a more modest rise and fall since 2008.

Chart 1: Trends in per cent of working age population receiving income support payments, Australia, 1976–2012

Note: Working age is defined as the population aged 16 to 64 years. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

What explains these fluctuations? The number of working-age people receiving welfare payments at any one time is strongly related to the state of the labour market. Not surprisingly, it increases significantly in periods of recession. Unemployment was generally below 2 per cent of the labour force up until the 1970s, but doubled to 4.6 per cent between 1974 and 1975, and then rose to over 6 per cent in 1978. The recession of the 1980s saw a peak unemployment rate of 9.9 per cent in 1983, followed by a decline through to 1989. In the midst of another recession, it increased to 11 per cent in 1993. Unemployment declined after 1993, falling to 4 per cent, the lowest level since 1974, in February 2008.

But other factors are at work as well, including the dynamics of different categories of payments. Changes in the number of lone parents receiving benefits, for example, partly reflect shifts in family formation. People who are unemployed for lengthy periods and experience a disability may drop out of the labour market and end up on the DSP, for example, and unemployment can lead to family breakdown and growing lone parenthood.

Nor does the number of people receiving welfare payments necessarily fall as rapidly as the unemployment rate. The most commonly cited reason is that long-term unemployment leads to a deterioration in skill levels and morale, which reduces the intensity of an individual’s search for a job. This can lead to higher wage pressures at a given rate of unemployment, lifting the rate of unemployment towards which the economy tends. Between the 1970s and the 1990s, unemployment in Australia “ratcheted-up” after recessions but didn’t return to its pre-recession levels afterwards – and the people who gained jobs during those recoveries were not necessarily the people who had lost jobs during the recessions.

Policy changes are also a major cause of changes in the number of welfare recipients. In periods when benefits are more generous or easier to access, the number of recipients tends to grow, while periods of tighter eligibility or entitlement conditions have the opposite impact.

Reflecting these and other factors, the proportion of people receiving welfare payments peaked at nearly one in four of the working-age population in 1996, before falling to one in six in 2008, just before the global financial crisis. After the GFC, the proportion of working-age people receiving benefits rose to 17.4 per cent in 2010, then started to fall again, reaching 16.9 per cent in 2012 – not quite back to the 2008 level, but the second lowest level in the past two decades.

Chart 2 breaks down trends since the late 1980s, showing what has happened to the share of the working-age population receiving the DSP, the share receiving unemployment-related payments, and the percentage receiving any other form of working-age income support, including lone parents, the sick, carers and recipients of student assistance.

Chart 2: Trends in per cent of working age population receiving income-support payments, Australia, 1989–2013

Note: Working age is defined as the population aged 16 to 64 years. Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years; Department of Social Services, Labour Market and Related Payments, and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

A fairly steady rise in the number of people on the DSP is apparent, as is an initial rise in the number of unemployed, followed by a decline until the GFC, and a sharp increase in 2008–09 and 2012–13. What is most striking, however, is the trend in the number receiving other payments; this peaked at 12.3 per cent of the population in 1996 but continued to fall to 7.1 per cent by 2012.

Chart 3 shows changes in the number of people receiving specific payments between the 1996 peak and 2012. It highlights the fact that the reduction of approximately 250,000 in the total number of working-age people receiving payments is the product of an increase of around 330,000 people receiving the DSP and 180,000 receiving the carer payment and a small number of widow allowances, figures that are more than completely offset by declines in all other forms of income support.

Chart 3: Changes in numbers of people receiving income support payments, Australia, 1996–2012

PPP: Parenting allowance (partnered); PPS: Parenting payment (single)
Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years.

While the decline in the number of people receiving unemployment payments (180,000) is the largest single component of these declines, the cumulative effect of the declines in other payments is much larger (465,000). While the improvement in labour market conditions after 1996 certainly contributed to the decline in numbers on these other payments, policy changes – discussed below – appear to be the most important factor behind these falls in welfare receipt.

1996 and all that

With fewer people receiving assistance from just about all income support programs after 1996, why are DSP and carer payment numbers rising?

The state of the labour market is part of the answer, and so are two other factors that have had a major impact among people of working age: the ageing of the baby boom generation and the major social security policy reforms introduced by Australian governments over the past two-and-a-half decades.

It’s well known that the Australian welfare system – like those in other welfare states – will face pressures from the ageing of the “baby boom generation” in coming decades. But the boomers’ impact on DSP numbers started to be significant nearly twenty years ago. Receipt of the DSP is strongly age-related, mainly because the incidence of disability rises with age. In 2012, for example, about 1.7 per cent of people aged sixteen to twenty received the DSP, but this rose to 2.2 per cent among people in their twenties, 3.1 per cent in their thirties, 5.4 per cent in their forties, 9.0 per cent in their fifties and close to 15 per cent of those aged sixty to sixty-four.

This is important because the age structure of the Australian population has changed significantly over the past two decades as a result of the ageing of the baby boom generation, conventionally dated to those born between 1946 and the early 1960s. Up until 1996, demographer Natalie Jackson has shown, changes in the age structure of the Australian population acted to slow the growth of the DSP. But people born in 1946 started to turn fifty in 1996, reversing that slowdown.

Chart 4: Change in number of persons sixteen and over by age, Australia, 1996–2013

Source: Calculated from ABS, Australian Demographic Statistics, June 2013.

The effect of the ageing of the baby boom generation is illustrated in Chart 4, which shows the change in the number of persons by years of age between 1996 and 2013 (after taking account of deaths and migration). The largest population increase is among fifty- to sixty-six-year-olds, with each year group around 100,000 larger than the comparable group in 1996. Cumulatively, there were 1.7 million more people aged fifty to sixty-four years – the age at which rates of receipt of the DSP start to rise significantly – in 2013 than in 1996.

Between 1996 and 2012 the proportion of people of working age receiving the DSP rose from 4.3 per cent to 5.6 per cent. If the age structure of the population were held constant at 1996 shares, then the figure would be 5.0 per cent – in other words, nearly half of the total increase is unrelated to any changes in the labour market, the incidence of disability or individual behaviour.

More importantly, a series of policy changes from the mid 1990s also had a major impact on the number of people receiving the DSP and other payments. One of the most important of these was the increase in the age pension qualifying age for women from sixty to sixty-five in 1995. Previously, women receiving the DSP were required to shift to the age pension once they turned sixty, and women who became disabled after turning sixty weren’t able to claim the DSP unless they had lived in Australia for less than the ten years needed to qualify for an age pension. As the cut-off age started to increase, women with disabilities in this age group increasingly claimed the DSP. As Chart 5 shows, the proportion rose from close to zero to about 13 per cent by 2013.

Chart 5: Change in percentage of women aged 60–64 years receiving DSP, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and Australian Bureau of Statistics, Australian Demographic Statistics, June 2013.

But as the number of women receiving the DSP went up, the number receiving the age pension went down – and, as Chart 6 shows, it went down by much more.

In 1995, only about 650 women aged sixty to sixty-four received the DSP and 211,000 received the age pension. By 2012, 86,000 female DSP recipients were in that age group, but only 28,000 age pensioners. So the total number receiving one or other of these pensions has nearly halved, and now the majority receive the DSP. Where once 60 per cent of women of that age received a pension, now the figure is 13 per cent.

Chart 6: Percentage of women aged 60–64 years receiving DSP and Age Pension, Australia, 1995–2013

Source: Calculated from Department of Social Services, Income Support Customers, A Statistical Overview, various years and ABS, Australian Demographic Statistics, June 2013.

Starting around the same time, the government began phasing out a number of other payments, including mature age allowances, the partner allowance, the wife pension, the widow B pension and the widow allowance. These payments had effectively been based on the assumption that women were “dependents” of men, or in the case of widows that they had been dependent and should not be expected to look for work. In addition to the phasing out of these payments, the income test for unemployment payments was changed to require both individuals in a couple to claim benefit in their own right, and part of their individual earnings did not affect their partner’s benefit entitlements.

These changes had a profound impact not only on the total number of people receiving welfare payments but also on which payments they received. In the mid 1990s, the “closed payments” – mainly for women – were received by around 4 per cent of the working-age population; now, only 1 per cent of the population receive their successor payments. As with the age pension/DSP trade-off for older women, the rise in the number of people on the carer payment is more than offset by the decline in the number of people on these “dependency” payments.

In future, these two major pressures on DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – won’t operate to the same extent. Because the last of the baby boom generation turned fifty in 2013, the pressure on DSP numbers should start to lessen. As was shown in Chart 4, there were close to 100,000 more fifty-year-olds in 2013 than in 1996, but only 50,000 more forty-nine-year-olds. The younger part of the baby boom generation will not turn sixty-five until 2028, but the rate of increase will slow because the size of the age group is not increasing as rapidly. Moreover, the increase in the pension age for women was also fully phased in by 2013, so this pressure will also decline.

It is worth noting, however, that the previous government announced an increase in the pension age for both men and women from sixty-five to sixty-seven years, to phase in between 2017 and 2023. It is likely that some of the people affected by this change will be entitled to the DSP, leading to an increase in numbers on the DSP after 2017, but past experience suggests that the overall number of people in this age group receiving payments will be significantly reduced.

In addition, the most recent figures for numbers on the DSP show a fall from around 827,000 in 2012 to 821,000 in 2013; excluding people over sixty-five who receive the DSP this is a fall to around 5.2 per cent of the working-age population, about the level it has been since 2004.

What about the unemployed?

Two main factors have driven the growth in Newstart numbers. The number of people receiving unemployment benefits tracks broader labour-market trends fairly closely, and so the increase in the unemployment rate from around 5.0 per cent to 5.5 per cent since June 2012 could be expected to result in around 64,000 more people on benefits. Changes to the DSP under the previous government that appear to have slowed its growth may have increased numbers on Newstart, while policies designed to shift people from parenting payments to the lower level of Newstart payments at the beginning of 2013 have added to the total. The government forecast that around 10,000 people would lose all entitlement to benefits as a result of that decision, and that around 75,000 would transfer onto Newstart. (This effect is the same as the substitution between the age pension and the DSP and carer payment and other closed benefits, as described above.)

The monthly statistics on labour force payments show that between December 2012 and February 2013 the number of people on unemployment payments jumped from around 700,000 to 796,000, an increase around four times as great as the corresponding periods for the previous two years. Moreover, around 83 per cent of the increase in the number of recipients was made up of women, reinforcing the impression that this very large jump is mainly explained by parents transferring from parenting payments.

The monthly figures don’t identify whether beneficiaries have children or not, and the annual statistics won’t show the effect of this policy change on the number of people receiving the parenting payment until next year. Nevertheless, it seems very likely that much of this recent increase will be offset by reductions in numbers on other payments.

Together, the increase in the unemployment rate and the transfers from the parenting payment potentially nearly fully explain the growth in numbers on Newstart.

Where to from here?

To sum up, the data on trends in the number of welfare recipients show a prolonged fall since 1996 due to a long period of economic growth, a strong labour market, and the positive impacts of policy changes since the early 1990s. While trends have not been as positive since 2008, they are far less worrying than in North America or Europe, and they are also mild by the standards of earlier economic downturns in Australia.

This analysis also shows that past trends are not necessarily a reliable guide to the future. The two main pressures on DSP numbers – the ageing of the baby boomers and the increase in women’s pension age – won’t continue to have such a significant impact.

While concerns about relentless growth are difficult to substantiate – particularly when the total number of welfare recipients is close to its lowest level in the past twenty years – we should not be complacent and there are still strong arguments for a comprehensive review of the welfare system. But then there are always strong arguments for reviewing its effectiveness.

The evidence shows that our main concern should be to avoid any significant blow-out in unemployment. The fact that unemployment didn’t rise to levels predicted after the global financial crisis set in means that – so far – we are much better placed to meet the challenges of an ageing population than are countries in Europe or North America. Previous increases in unemployment in the recessions of the 1980s and 1990s had very long-term consequences, particularly for jobless families with children.

Nor should we be complacent because welfare numbers are at their second-lowest level in the past two decades. The minister’s argument that the “best form of welfare is work” has force, and is in accord with the previous government’s rationale for moving people from the parenting payment to Newstart.

The problems that some people on welfare face in moving into work require a comprehensive analysis, however. Not all these problems are caused by the welfare system: other barriers to work include labour-market programs that are not equally effective for all, a lack of job opportunities in the regions in which people live, poor public transport, inadequate and expensive child care, mismatched skills, and negative employer attitudes to people disadvantaged in the labour market. Incentives in the welfare system are only part of an effective response to these barriers.

While most of the aggregate growth in DSP numbers is related to population ageing and transfers of older women from the age pensions, it remains the case that age-specific rates of receipt have risen quite significantly for people under thirty years of age, and this appears to be related to a growing incidence of mental health problems among young people. This problem should also be addressed by the welfare review – but it is difficult see how changes in entitlement to the DSP – compared to more effective mental health services – would be an important part of the solution.

Finally, the wide and growing gap between the level of Newstart benefits and the level of the DSP needs to be reviewed urgently. In fact, those looking for the “unsustainable” and “relentless” elements of the welfare system would do well to start there. •

The post Is Australia’s welfare system unsustainable? appeared first on Inside Story.

THE recent Grattan Institute report, Budget Pressures on Australian Governments, argues that the federal government and the states and territories could face a combined annual deficit of around 4 per cent of GDP by 2023, of which around 2.5 per cent of GDP would be at the federal level. The scale of the federal government’s fiscal challenge was also a theme of the debate about the Federal Budget last month and will undoubtedly feature in the election campaign later this year.

In a speech at Per Capita in late April the prime minister, Julia Gillard, foreshadowed a reduction in projected tax revenues of around $12 billion by the end of this financial year, which would demand “urgent and grave Budget decisions.” In a speech to the Institute of Public Affairs in early May, the shadow treasurer, Joe Hockey stressed the urgency of “attacking spending” and “looking for structural saves” and referred to a speech he gave last year to the Institute of Economic Affairs in London in which he argued that “all developed countries are now facing the end of the era of universal entitlement.” According to Hockey, “Addressing the ongoing fiscal crises will involve the winding back of universal access to payments and entitlements from the state.”

To a significant extent, the media reacted to these developments by calling for cuts in public spending, and particularly cuts to “middle-class welfare.” The Business Spectator’s Alan Kohler has argued that Australia’s means-testing regime is unduly loose. “Too many people are getting too many benefits they don’t need because successive governments have tried to buy their votes,” he wrote. “The health and welfare systems have been used as political tools, not safety nets” and poor means testing means that “the health budget is out of control and ‘middle-class welfare’ is blowing a huge hole in the budget.” The Sydney Morning Herald referred to the family assistance system as a “hotch potch… ripe for an overhaul,” and former Labor Minister Gary Johns argued in the Australian that too many households are on the receiving end of middle-class welfare, and that for those on low incomes “there is no dignity in not paying tax… [W]here is the dignity in not making a contribution?”

The criticisms aren’t confined to Labor’s spending. The Australian Financial Review has labelled the opposition’s plan for substantially more generous paid parental leave as “costly middle-class welfare.” In the Australian, business writer Adam Creighton described the Family Tax Benefit Part B, a relic of the Howard era, as “a superfluous $4.5 billion-a-year cherry on a welfare cake that is choking economic growth and operating contrary to other government policies.” Surely, added Creighton, “it is not unfair to rein in a benefit that is paid to families in the top 10 per cent of the income distribution, with household incomes up to $175,600?”

This preoccupation with middle-class welfare is partly motivated by the view that the budget gap shouldn’t be bridged by increasing taxes. In the Financial Review, Fleur Anderson suggested that “the middle class and the professions are staging a revolt as they find their growing share of the tax burden too hard to bear, after over a million people were made exempt from the tax system over the past ten years.” In that newspaper and elsewhere, commentators have pointed to the Australian Tax Office’s tax statistics for the 2010–11 financial year, which show that the top 5 per cent of income earners pay 34.1 per cent of net income tax and the top 25 per cent of income earners pay just over two-thirds of net income tax. Correspondingly, about 45 per cent of Australians pay no income tax at all.

Interestingly, that figure of 45 per cent is very close to the one used by Mitt Romney in the 2012 US presidential election campaign when he argued that 47 per cent of Americans pay no income tax and were therefore “moochers.” The economist Nicholas Eberstadt subsequently argued that the United States is now “on the verge of a symbolic threshold – the point at which more than half of all American households receive, and accept, transfer benefits from the government” – and suggested that there was now a divide between the “takers” and the “makers.”

Should we deal with the growing budget gap by cutting spending or increasing taxes – or by some combination of the two? Before we try to answer that question we need a clear understanding of the current distribution of welfare spending (who gets what?) and how spending is financed (who pays for it?). Are higher income groups already overburdened with taxes or are they actually benefiting too much from profligate spending?

Fortunately for those interested in accurate answers to these questions, the Australian Bureau of Statistics has published studies of government benefits and taxes and their impact on household incomes since the 1980s, with the most recent results being for 2009–10. These studies provide the most comprehensive accounting of government spending and taxation in Australia, taking into account not only the impact of social security cash benefits and direct taxes but also the effects of government spending on healthcare, education and community services, and the impact of indirect taxes, such as the GST. The ATO statistics used by the Financial Review and others are certainly useful, but they only identify who pays income taxes and don’t include the GST or other indirect taxes. Nor do they tell us what benefits households receive from governments.

Chart 1 shows the distribution of benefits and taxes in 2009–10 across households divided into five equal groups, or quintiles, ranked from the poorest to the richest in terms of their private income. (In these figures, household incomes are “equivalised,” or adjusted for the number of people in the household. Tax expenditures such as superannuation and capital gains concessions are not separately identified, but are included in the measured distribution of taxes or, in the case of the health insurance rebate, in non-cash benefits.)

Chart 1: Benefits received and taxes paid (dollars per week) by quintiles of equivalised private income, Australia, 2009–10

Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

The poorest 20 per cent of households received about $435 per week in cash benefits and received services worth about $446 per week (mainly public healthcare); they paid negligible amounts of income tax but around $105 per week in indirect taxes (excises, rates and the GST). In contrast, the richest 20 per cent of households received only $15 per week in cash benefits (or about one-thirtieth as much as the lowest income group), received $234 per week in government services (mainly education and healthcare), and paid $756 per week in income taxes and $273 per week in indirect taxes.

Not surprisingly, government spending on health and education is far more important than social security for the richest households. The richest quintile received only 1.7 per cent of social security benefits, but benefited from $83 per week in education benefits, or around 14 per cent of total government education spending, and $140 per week in health benefits, or 15.5 per cent of health spending. Overall, the non-cash benefits received by the richest were worth nearly sixteen times as much as the cash benefits they received ($234 per week compared to $15 per week).

Of the cash benefits received by the richest 20 per cent of households, only $1 per week came in the form of family payments, the most common target of the criticism of middle-class welfare and the main target for reduced spending in the 2013–14 Budget. Most of the social security benefits received by the richest 20 per cent were age and disability pensions, veterans’ pensions and unemployment benefits. This is not because the income-testing of these payments is lax; income tests in the social security system are based on the nuclear family, so this “leakage” to high-income households is mainly the result of aged or disabled people or the unemployed sharing a house with their parents or their children.

On the tax side, the richest quintile of households paid around 58 per cent of income taxes and 30 per cent of indirect taxes, although they had 45 per cent of private income. Direct and indirect taxes paid by the richest households amounted to 46.5 per cent of all taxes paid; so while indirect taxes offset some of the progressivity of income taxes, the overall tax take is still progressive, as shown in Chart 2. Most importantly, of course, these taxes pay for the benefits received by lower-income households.

Chart 2: Direct and indirect taxes as percentage of income by quintiles of equivalised disposable income, Australia, 2009–10

Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

The overall scale of redistribution in Australia can be gauged from the fact that while private incomes among the richest 20 per cent were more than twenty-one times higher than the private incomes of the poorest 20 per cent, that disparity was reduced to about three-to-one, or by 86 per cent, after benefits and services were received and taxes paid. In terms of improving the incomes of the poor, social security and government services are roughly equally important, with the social security system increasing its share from 2 per cent of private income to nearly 7 per cent of gross income. Because the poorest income group pay a small fraction of 1 per cent of income taxes, their share of disposable income was increased to 8 per cent, with government services increasing this further to 11 per cent of final income. Although indirect taxes are regressive, in this case taking 12.7 per cent of the income of the poorest households compared to 9.5 per cent of the income of the richest, they did not materially alter these disparities.

THESE ABS figures provide a snapshot of the distribution of benefits and taxes at a point in time, but in assessing proposals for reform it is important to keep in mind the longer-term impact and objectives of taxing and spending.

Overall, the Australian welfare state performs two main functions – redistribution between rich and poor (the Robin Hood function) and insurance and consumption smoothing (the “piggy‐bank” function). In Australia we tend to focus on the idea that the welfare state should mainly be about redistribution to the poor, which is why we focus so much on concerns about middle-class welfare. But as I have argued previously, Australia actually has the lowest level of middle-class welfare in the developed world and targets its spending to the poor more than any other OECD country.

As well as redistributing between rich and poor, however, Australia redistributes considerable resources to older people (as do all other developed welfare states). For example, households with a head aged seventy-five years and over have by far the lowest average private incomes, but in 2009–10 they received 43 per cent of all age pensions and 21 per cent of all health spending, and they paid less than 1 per cent of income taxes and 5 per cent of indirect taxes. In combination, this pattern of spending and taxing boosted their incomes from about one-third of the population average to three-quarters. Similarly, households with a head aged between sixty-five and seventy-four years got 46 per cent of age pensions and 16 per cent of health spending and paid 2.5 per cent of income taxes and 9 per cent of indirect taxes; this boosted their incomes from just over half the population average to just over three-quarters.

The welfare state also provides insurance against the kinds of risks faced by working-aged Australians enumerated in the latest report of HILDA (the Household, Income and Labour Dynamics in Australia survey):

• Around 3 per cent are fired or made redundant each year, and 10 per cent over four years.

• Around 8 to 9 per cent experience a serious personal injury or illness each year and 26 per cent over four years. Between 15 and 17 per cent experience serious injury or illness to a close relative or family member each year and nearly 50 per cent over a four year period. Around 10 per cent experience the same each year for a close friend.

• Around 1 per cent experience the death of a spouse or child each year, and 3 per cent over four years. Around 11 per cent experience the death of another close relative or family member per year, and 40 per cent over four years.

• Around 3 to 4 per cent separate each year and more than 10 per cent separated from a spouse or long-term partner between 2004 and 2008. Separation or divorce is by far the most important cause of lone parenthood. Between 1 and 1.5 per cent change each year from being a couple with children to being a lone parent and 4.1 per cent over nine years.

As a result of these and other risks, many Australians experience significant changes in their economic circumstances both in any given year and cumulatively over time. Commentators who praise Australia’s performance on measures of income mobility tend to focus on upward movement – low-income young people finishing their studies and then moving into jobs and people moving up the occupational ladder. But the HILDA report shows that in each year between 2001 and 2008 between 40 and 50 per cent of Australians experienced a drop in income and roughly 10 per cent fell more than 20 percentiles in the income distribution. Over the whole period, 44 per cent of the population moved more than 20 percentiles. Around half of those in the richest income quintile in 2001 were still in that income group in 2008, but the other half were in lower-income groups; only 30 per cent of those in the middle-income group in 2001 were in the same group in 2008, with 30 per cent being worse off and around 36 per cent being better off.

THIS mobility is also important in thinking about who benefits from and who pays for the welfare state. There is a tendency to think of welfare recipients as people permanently dependent on payments – the “takers” as described above, with the corollary that other people are the “makers,” permanently “independent” of welfare. But the impact of unforeseen events and consequent changes in incomes mean that over time many people change their status as recipients of welfare payments on the one hand or as taxpayers on the other.

In 2001, for instance, fully 37 per cent of working-age people received income support at some time in the year, although in 2008 – after a period of strong economic growth – this had fallen to 29.5 per cent. But 65.7 per cent of working-age Australians lived in a household where someone received welfare at some time between 2001 and 2009. In any one year in this decade between 5 and 7 per cent of working-age Australians received 90 per cent or more of their income from welfare payments (not including family payments) and fully 15 per cent of the population was in this position at some stage in the period (although only 1.2 per cent were reliant for all nine years).

In other words, people of working age who are “welfare dependent” for long periods are only a tiny percentage of the population, while many highly and very highly paid individuals face substantial risks of large income drops, associated particularly with health changes but also with changes in employment and family status. In summary, the welfare state – defined broadly to include health and education as well as social security payments – touches the lives of many more Australians than is commonly thought. Nearly everyone may be a “maker” or a “taker” at different stages in life.

It is certainly important to review government spending regularly to assess whether it is meeting its objectives. But the idea that there are vast amounts of wasteful social security spending that can easily be cut back simply does not accord with the reality that the Australian benefit system is the most targeted to low-income groups of any developed country. A further tightening of this targeting will unavoidably mean higher withdrawal rates for benefits and higher effective marginal tax rates over the range of incomes where benefits are withdrawn. For large savings to be achieved it is necessary either to cut social security spending well down the income distribution and shift the consequences of adverse risks and contingencies onto households, or cut spending in the politically popular areas of health and education.

It is also worth noting that there is an inconsistency in some of the arguments of those who favour cutting spending but not increasing taxes. On the one hand, there are those who argue that we should not increase taxes on higher-income groups since they already pay a disproportionate share of the tax burden; on the other hand there are those (including sometimes the same people) who argue that we should cut government benefits going to higher-income groups, when cutting benefits can obviously have a similar effect on disposable income as increasing taxes.

Given the projected size of the Budget gap in coming years, it seems sensible to consider all options on both the spending side and the revenue side. Reforms that encourage labour-force participation can also help by maximising the number of taxpayers relative to the number of people requiring support. Most importantly, it will be necessary to have a well-informed debate about who wins and who loses from welfare and tax reform. •

The post Who gets what? Who pays for it? The welfare state debate revisited appeared first on Inside Story.

THE scene is the foyer of a little cinema in the north London village of Hampstead. The characters are a handsome young couple who emerge from a screening of the latest French romantic comedy. As they pass by, the girl says gaily to the boy: “Why does every film we see these days seem to be about us?!”

A year on, I recalled this moment after a Friday night viewing — this time in the northern English city of Leeds — of a new, hundred-minute documentary by the renowned director Ken Loach, best known for his piercing TV dramas of the 1960s and, more recently, many humane films of suffering, survival and struggle among Britain’s downtrodden. So recognisable is the world of The Spirit of ’45, so familiar its characters and narrative arc, that anyone engaged with Britain’s post-1945 history can be forgiven for thinking: “the story of my life!” All the more so with the news, on the following Monday morning, that the central villain of the piece — Margaret Thatcher — had died.

The deluge of fervent responses that followed, including Loach’s own (“the most divisive and destructive prime minister of modern times… It is because of policies begun by her that we are in this mess today”), gives his film an even greater political charge: a reminder that The Spirit of ’45 depicts a world we in Britain (presumptuous as the phrase sounds for this multinational and ever more diverse land) continue to live inside. About us, indeed.

WHAT, exactly, is The Spirit of ’45? As the film’s subject, it is the popular euphoria that greeted the end of a gruelling conflict, mixing survivors’ relief, a “never again” determination to banish the prewar ills of unemployment and poverty, and the conviction that the collectivist impulses enabling victory in war should be harnessed to build a socialist commonwealth. (“Generosity, mutual support and cooperation were the watchwords of the age,” says Loach.) This celebratory moment reached its apogee in the Labour Party’s electoral landslide in July 1945, and then merged seamlessly into its achievements in government: state ownership of industries and utilities, the creation of the National Health Service, or NHS, and new towns and housing estates.

Loach and his team uncover fascinating and often moving archive footage from before and after 1945, as well as from the year itself — the verminous slums of the 1930s and the marches of the unemployed, the jagged ruins left by Nazi air raids (“I only washed my windows yesterday!” a neighbour says), soldiers discussing the postwar prospects, women protesting at a lack of housing, then a quickening pace as reconstruction swings into action in the later 1940s. The accompanying mood music enhances the visual effect, with much use of the melancholic brass-band sound associated with northern England’s industrial working class.

The people’s voices and the drama of the 1945 election campaign are skilfully interwoven, with two influential documents — William Beveridge’s 1942 report on a new system of social insurance, and Labour’s manifesto, Let Us Face the Future — setting the scene. A florid Winston Churchill is shown being heckled by a bunch of cheerful youngsters (whose successors today might have organised the notorious street parties rejoicing at Thatcher’s demise), while Labour’s terse, modest Clement Attlee tells a smoky victory rally at Westminster Hall, “I ask your support to carry us through difficult years to the great era that is opening before us.”

All this is interspersed with the recollections of those who were there: retired dock workers in Liverpool on a childhood of poverty, old coalminers in Wales on the advent of “nationalisation,” former nurses on the birth of the new health system (treatment “cost you nothing — an unforgettable moment”). The dominant tone of these dignified elders is quiet pride, laced with anger at prewar conditions and a sense that history, then, was at last on their side. Everything — the archival film, the modern testimony — is in monochrome, conveying the seamlessness of past and present.

It’s lovely if treacly stuff, leavened by subtle warning notes from the veterans (on the NHS as a “model for socialism,” on public ownership as merely a change of managers). Then, a dark screen — and after fifty minutes, the film jumps thirty-four years, and there is Margaret Thatcher, basking in victory on the steps of 10 Downing Street (to a strange low sound from the cinema audience, combining growl and hiss). After the dawn, the fall.

Images and tone darken. A great regression is under way: industries privatised, the rich glorified, trade unions vilified, the workless multiplied, society polarised. The witnesses lament the erosion of public institutions (“the NHS is nearly the last”), the council-house sell-off, the triumph of the cash ledger (“if there’s need and no profit in it, need goes”) and the crushing of the great miners’ strike of 1984–85.

Now, a further generation on, the film comes to David Cameron’s Tories, intent on completing the job Thatcher started. Where, though, is the opposition? The answer is that working-class organisations have been hijacked by the middle class. The radical medic Julian Tudor Hart says that the “socially responsible, caring capitalism” which current Labour leader Ed Miliband talks about resembles the Arabian Phoenix: “everyone has heard about it, but no one has ever seen it” (which brings a release of laughter from the audience).

But the generation of 1945 remains defiant. In the end, there is hope amid the bitterness, and it lies in retrieving the spirit of that time. The carriers today include the Occupy movement, student protesters, and striking workers (here, a soaring brass rendition of William Blake’s “Jerusalem,” that most resonant of English radical hymns). They, however, can still benefit from the indelible experience of their elders. At the last, a double reprise: Attlee at that post-election rally welcoming the election of “a Labour movement with a socialist policy,” and the joyous scenes in Trafalgar Square on “VE Day” two months earlier — when, for the first time, in a stunning visual flourish, the screen erupts into colour.

THE third audience reaction of the night is the most sustained: warm applause as the words “Directed by Ken Loach” appear. It’s deserved, for the craft, the care, and the passionate devotion that informs the work. But a goodly share of the gesture may lean towards the man himself and the integrity of a fifty-year path whose many highlights include the memorable TV plays Up the Junction, Cathy Come Home, Days of Hope and The Price of Coal, and the feature films Kes, Raining Stones, Land and Freedom, The Wind That Shakes the Barley, and (most recently) The Angels’ Share. The vagaries of an insecure industry have left undimmed an artistic credo that combines “independent voice, social realism, and uncompromising political commitment” (as Anthony Hayward says in his very useful compendium, Which Side Are You On? Ken Loach and His Films).

Indeed, this pervasive commitment is Loach’s artistic driving force, present even in those of his films that resist overt didacticism. But there, the political impulse is realised in the sympathetic interplay of character and situation. In The Spirit of ’45, as more often in Loach’s documentaries than in his feature films, the impulse is at the forefront. This makes it a most revealing film, for it’s also a manifesto. He may seem, in the first half especially, to be indulging viewers, but by the end it is clear he is inviting them: to join a party, to become an us.

This is made explicit after the screening, when an hour-long discussion held at the London launch of the film weeks earlier is shown, with Loach — alongside the comedian Jeremy Hardy, the ubiquitous polemicist Owen Jones, and the pensioners’ champion Dot Gibson — proposing “a new movement on the left”: “There is a possibility for a new spirit so let’s see if we can do it!” Those gathered at Brixton’s Ritzy cinema cheer, though their Leeds counterparts are silent; by this time — almost 11 pm — they are ready for home (or the pub), and begin to shuffle out. It’s an odd anticlimax.

But also instructive. The London event is a bores’ gallery, a reminder of the far left’s talent for draining the life from everything it touches. True, the genial crowd at the century-old “picture house” in the Hyde Park area of Leeds — median age around forty-five — embraces a few paper-selling comrades in its empathetic aura. There are, though, few signs of willingness to be conscripted.

On the way out, I speak to a couple in their fifties who agree that The Spirit of ’45 is not nostalgic, but relevant to the present. The man, good-looking with a donnish air and a soft west Yorkshire accent, says, “We are Labour Party members, so we still think that’s the best way forward.” One of a pair of bright women friends in their sixties tells me that “it was good to be reminded of the history you’ve lived through,” but that the filmed discussion was too much. Then in the crowded entrance to the foyer I tune into a quiet conversation between two smart women in their forties; one of them, wearing a fetching tartan scarf, says, “As you get older you understand the resilience of power,” and that it’s “easy to despair.”

We talk for several minutes: about whether The Spirit of ’45’s politics are naive, about whether only a cross-class alliance can bring change in this country, about how you have to be clever as well as angry. They say the postscript made the evening too long, and we concur that the film itself, its truth as social document and political argument, should be the focus of public discussion.

We part into the night on good terms. All these companions, after all, I reflect on the long walk back to Leeds railway station, are also my “us.” I recall George Orwell’s phrase, one I have always loved for the reluctance of its embrace: “I belong to the left and must work inside it.” But also Tony Harrison’s — son of Leeds turned England’s finest living poet — about “memory strangled by oblivion.”

FOR I’m also — only the Scots word will do — scunnered by The Spirit of ’45. First, for the sheer falsity of its depiction of the 1940s, whose true emotional–political textures are so much more complicated and interesting than Loach’s fairy story allows. (The rich evidence is in David Kynaston’s mind-blowing Austerity Britain, 1945–51). From the intellectual roots of Labour’s program, which the historian Gareth Stedman Jones once called the last flowering of Edwardian liberalism, to the variations in public experience and mood in the hard-pressed postwar years, this period is traduced by Loach’s comforting fantasy. This matters, because historical understanding — and any change-making democratic project — can only be built on truth.

Second, for the annihilation of the almost three decades between 1951 and 1979, as if the unwinding of the post-1945 settlement by Margaret Thatcher and her “ism” came out of nowhere. The film’s Manicheanism is a crime against history. Again this matters, for by portraying Britain’s modern era without complexity and contingency, Loach is promulgating a delusive view of how her change happened — or of how any new change can happen. This makes The Spirit of ’45 an engine of miseducation and, in the end, disempowerment.

Third, for the subterfuge of its anodyne description of witnesses who in many cases are veteran cadres in various far-left cults. John Rees, Alan Thornett, Tony Richardson, Dot Gibson, Tony Mulhearn — for years dedicated habitués of the Socialist Workers Party–Workers Revolutionary Party–Revolutionary Socialist League underworld — are depicted as “writer,” “shop steward,” “carworker” or “former councillor,” as if their revolutionist fantasies are incidental rather than central to their world view. Again this matters, because it is deceives the viewer and is an act of complicity with the manipulative politics they espouse.

Fourth, for the distorting political lens. Ken Loach has spent a lifetime pouring acid on the Labour Party. He regards all its leaders as sell-outs and traitors. (In an autobiographical statement in 1997, he declared that a “recurring theme” of his collaborative work “has been to explore the two curses of the labour movement: Stalinism and Social Democracy, the latter exemplified by the Blairite project of trying to give a radical gloss to hard-line capitalist politics.”) Now, The Spirit of ’45 seeks in effect to annex the achievements of post-1945 social democracy to a sectarian agenda in the present. (“A sort of compromise was possible after the war, but not now,” says Loach. “Capitalism is out to destroy the welfare state.”) Again this matters, because it fuels the self-damaging anti-political nostalgia that is already widespread on the left.

This “spirit of 2013,” where rhetorical excess and attitudinising colonise the political space, is visible most recently in the playpen anti-Thatcher “death protests” that continued right up to the former prime minister’s funeral on 17 April. (The case is well made by Eilis O’Hanlon in Ireland’s Sunday Independent and Sam Leith in London’s Evening Standard.) Just as Thatcher gave conservatism a radical energy, these events reflect the process in reverse: invoking the past, when consoling Thatcher-hatred made life meaningful, as a defence against a feared future.

In the 1990s the much-missed critic Gilbert Adair (who died in 2011), reviewing one of Ken Loach’s dramas of deprived youth in bleak post-industrial western Scotland, called him “the most conservative film-maker in Britain.” Adair’s point — and this sophisticated Francophone, though he kept it quiet, was himself born in Kilmarnock — was that Loach’s artistic focus became a deterministic entrapment of its world and characters, a romanticising of marginality, and a denial of the reality of change and of moral agency. All of them deeply reactionary. That acute judgement, impossibly shocking and radical at the time, encapsulates The Spirit of ’45. For this very reason, the film should be seen and discussed as widely as possible. •

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A MAJOR component of the government’s clean energy plan is a package of assistance measures to compensate households for higher prices. The government will provide assistance through increases in pensions, allowances and family payments, as well as through income tax cuts. From a political and social perspective, the adequacy of this compensation will be of crucial importance.

On average, household expenditure is expected to increase by $3.30 per week due to higher electricity prices and by $1.50 per week due to higher gas prices. Most items in consumer budgets will increase by less than 1 per cent; the average household is expected to spend only an additional $0.80 per week on food, for example.

In total, average household spending is expected to increase by a bit less than $10 per week under a $23 carbon price, which means an overall increase in consumer prices of 0.7 per cent in 2012–13. By 2015–16, carbon pricing will have raised consumer prices by an estimated additional 0.2 per cent, for a total effect of 0.9 per cent.

These effects are small compared with the effect when the GST was introduced in July 2000, increasing consumer prices by 2.5 per cent. They are also small compared to historical movements in consumer prices from year to year.

In assessing the compensation package it’s important to go beyond these averages and look at the distribution of impacts and the pattern of expenditure within different households. While lower-income households spend less in dollar terms than higher-income households on energy costs, for example, this is a higher proportion of their overall budget.

For a single pensioner household in the poorest 20 per cent of the population the average price impact is estimated to be 1.0 per cent in 2012–13, but for a one-income household with no children in the richest 20 per cent of the population, the average price impact is estimated to be 0.6 per cent. In relative terms, costs will also vary with the composition of households – higher for those with children, lower for those without. At any income level, some households will also have higher needs for energy, because of medical conditions, for example.

The government plans two rounds of income tax cuts as well as increases in pensions, allowances and benefits. The centrepiece is an increase in the income tax threshold from $6000 a year to $18,200 next financial year and $19,400 in 2015–16. Broadly, increasing the tax threshold potentially gives all taxpayers with incomes above $18,200 a tax cut of $1830 a year; instead of paying a tax rate of 15 per cent on income between $6000 and $18,200 they will pay zero over this income range in future.

The situation is a bit more complicated, however, because currently low-income taxpayers benefit from a targeted low-income tax offset, which raises their effective tax threshold to $16,000 a year. The offset is income-tested and currently reduces by 4 cents in the dollar starting at taxable incomes of $30,000 a year, so that it is completely extinguished at incomes of $67,500. Raising the basic tax threshold means that part of the offset will be unnecessary, so it will be reduced to $445 next financial year and $300 in 2015–16. The higher basic threshold plus the $445 offset means that, in effect, the tax threshold for lower-income earners will rise from $16,000 to $20,542. An increase in the tax threshold is very expensive, however, since the vast majority of taxpayers – including those with very high incomes – potentially get the same tax cut as low-income earners. The government considers that higher income earners can deal with the impact of higher energy prices without compensation, and plans to increase the first tax rate above the threshold from 15 per cent to 19 per cent and the second rate, on incomes over $37,000 a year from 30 per cent to 32.5 per cent and then to 33 per cent. Overall, single people with taxable incomes under $80,000 a year get an income tax cut, while those above this income level will have no real change in their tax bills.

Apart from compensating individuals below $80,000 a year, the increase in the tax threshold will mean that more than a million people will no longer need to file a tax return. Someone on the minimum wage can now work for about 25 hours per week before being liable for income tax. The government argues that this will simplify life for low-income earners and boost incentives to work.

To compensate people in the social security system, who generally don’t pay income tax, it is necessary to increase rates of pensions, allowances and family payments. These people will be paid a lump sum by June 2012, just before the introduction of the carbon price, to make sure they’re not out of pocket when prices start to rise. Compensation will then be provided as a separate regular indexed payment, and people with exceptional expenses will be entitled to an extra $140 assistance under the Essential Medical Equipment Payment.

This compensation will be more than sufficient to offset the projected increase in prices. For single pensioners with no other income, the price impact is expected to be $204 in 2012–13, and they will receive a pension increase of $338. Because there will be some variability around these average price impacts, this over-compensation is intended to guarantee that no pensioners will be disadvantaged.

Pensioners and self-funded retirees will get up to $338 extra per year if they are single, with a combined $510 per year for couples. Families receiving Family Tax Benefit Part A will get up to an extra $110 per child and single-income families with children will get up to $69 extra in Family Tax Benefit Part B. And allowance recipients (the unemployed and young people) will get up to $218 per year for singles, and $390 per year for couples.

ONE of the criticisms of the compensation package is that it will reduce the impact of the carbon price and undermine incentives to reduce energy consumption. But economic incentives can act in two ways – through the income effect and the substitution effect. Full compensation means that the income effect is not relevant – if households have enough additional money to offset the increase in prices then if they so choose they can spend this additional income on electricity, for example, and not reduce their carbon consumption. But the substitution effect will undoubtedly operate. Households will face changes in relative prices, with goods made with fewer emissions becoming relatively cheaper. By choosing less carbon-intensive goods and services, and taking simple actions to improve energy efficiency in their daily lives, households will be able to save money. Higher-income households who don’t receive compensation will have stronger incentives to economise, as both the income and substitution effects will operate.

It is also worth noting that Treasury’s analysis of impacts on households overstates the effect of carbon pricing on consumer prices because it assumes emissions costs to households are passed on fully, based on fixed consumption patterns. The true change in the average cost of living is likely to be lower than this, as households shift to lower-emissions goods and services. For example, Treasury also projects that around half of the increase in prices of emissions-intensive goods and services will be offset by lower consumption of those products. The effect on average consumer prices is also likely to be overstated because the model assumes production technology is not adjusted. The degree of overstatement is likely to be greatest for higher-income households, which are more able to shift consumption towards less emissions-intensive goods through product substitution. Because households that can change their consumption patterns will face lower price impacts than households that cannot, some households that appear to be “losers” under the package will not necessarily be as strongly affected as the calculations suggest.

Overall, the household compensation package seems well designed and is likely to achieve its aims. But its reception could still be rocky. If other factors increase prices – electricity prices, for example, have risen by over 40 per cent over the past five years without any kind of carbon tax – then households might blame what they perceive to be inadequate compensation, and the government will face the difficult job of persuading them to the contrary. •

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IN ITS 28 May edition the Economist carried a long feature about Australia, praising our resilient economy, criticising the quality of our political discourse, and highlighting our social egalitarianism. “The Evolving Platypus: A Distinct Society, Perhaps Becoming Less So,” was the magazine’s summary of how we do things here.

The feature referred to an article in Policy, the journal of the Centre for Independent Studies, by David Alexander, a former senior adviser to Peter Costello. Under the title “Free and Fair: How Australia’s Low-Tax Egalitarianism Confounds the World,” Alexander argues that Australia offers a genuine alternative to both the low-spending but high-inequality United States and the high-taxing but egalitarian countries of Northern Europe. This “unique form of low-taxing egalitarianism,” he concludes, “is both more successful and more sustainable than other models.”

Is this characterisation of Australia’s social protection system accurate? Alexander presents a wide range of evidence to support these arguments, and it is not surprising that I agree with much of it, since one of his sources is a paper I wrote for a conference during the Henry Review of Australia’s tax system.

The most recent data on social spending in OECD countries shows that in 2007, the year before the global financial crisis, Australia spent 16 per cent of GDP on cash benefits (including pensions and unemployment payments, healthcare and community services) compared to an OECD average of just over 19 per cent. We actually spent a little less than the United States and Japan, and the only countries that spent substantially less than we did were lower-income countries like Mexico, Chile, Turkey and Korea.

In most rich countries, the welfare state is the largest single component of public spending and therefore the main determinant of how much tax income needs to be collected. About half of all the taxes collected in Australia are directed to social spending, but because we spend less than average we also have lower taxes than average. With taxes at about 27 per cent of GDP in 2008 compared to an OECD average of close to 35 per cent, Australia is the sixth lowest-taxing country in the OECD.

So it’s fair to say that we are a relatively low-taxing country compared to other rich nations, and to a significant extent this is because we have lower levels of welfare spending. But is this spending particularly egalitarian and are our taxes progressive?

To answer these questions, we need to look at how social spending and taxation is distributed across income groups. And to do that, the most up-to-date comparisons, using 2005 data, are in a 2008 OECD study, Growing Unequal? Income Distribution and Poverty in OECD Countries. (Although the data is six years old, the ways in which benefits and taxes are distributed tends not to change significantly over short periods of time, as was confirmed by an analysis prepared for the OECD Ministerial Meeting on Social Policy in May this year.)

It’s important to remember that the Australian social security system differs markedly from those in other OECD countries. In Europe, the United States and Japan, social security is financed by contributions from employers and employees, with benefits related to past earnings; this means that higher-income workers receive more generous benefits if they become unemployed or disabled or when they retire. By contrast, Australia’s flat-rate payments are financed from general taxation revenue, and there are no separate social security contributions; benefits are also income-tested or asset-tested, so payments reduce as other resources increase. The rationale for this approach is that it reduces poverty more efficiently by concentrating the available resources on the poor (“helping those most in need”) and minimises adverse incentives by limiting the overall level of spending and taxes.

Economist Nicholas Barr from the London School of Economics has pointed out that the main objective of social security systems in most countries is to provide insurance against risks like unemployment, disability and sickness, and to redistribute income across the life cycle, either to periods when individuals have greater needs (for example, when there are children in the household) or to periods when they would otherwise have lower incomes (such as in retirement). Barr describes this as the “piggy-bank objective.”

A second objective of the welfare state can be described as “taking from the rich to give to the poor” – or what Barr calls the “Robin Hood” motive – and Australia is the strongest example of a country emphasising this approach. Our system relies more heavily on income-testing and directs a higher share of benefits to lower-income groups than any other country in the OECD (and probably in the world). The poorest 20 per cent of the population receives nearly 42 per cent of all the money spent on social security; the richest 20 per cent receives only around 3 per cent. As a result, the poorest fifth receives twelve times as much in social benefits as the richest fifth, while in the United States the poorest get about one and a half times as much as the richest. At the furthest extreme are countries like Greece, where the rich are paid twice as much in benefits as the poorest 20 per cent, and Mexico and Turkey, where the rich receive five to ten times as much as the poor.

Because of these design features, Australia has the most “target efficient” system of social security benefits of any OECD country. For each dollar of spending on benefits our system reduces income inequality by about 50 per cent more than the United States, Denmark or Norway, twice as much as Korea, two and a half times as much as Japan or Italy, and three times as much as France.

Other countries that are similar to Australia in this regard include New Zealand, the United Kingdom and Ireland, and also Denmark and Finland. In fact, nearly all of the high-spending Scandinavian welfare states target to the poor more than does the United States.

Australia also has one of the most progressive systems of income taxes of any OECD country and, like our social benefit system, our income taxes are the most “efficient” at reducing inequality of any rich country. It is important to note that the progressivity of taxes in Australia is not a result of high taxes on the rich; rather, it’s due to the fact that lower-income groups in Australia pay much lower taxes than similar income groups in other countries (with the exception of the United States and Ireland).

The extent to which the Australian welfare state redistributes to the poor is determined by the interactions between the tax and social security systems, both in terms of the size of taxes collected and benefits paid and the distribution of these taxes and benefits. The chart shows an estimate of “net redistribution” to the poorest 20 per cent of the population in 2005. This is calculated by estimating the level of spending on social security benefits as a percentage of household disposable income and then taking account of how much of this goes to the poorest fifth. The same procedure is used to calculate how much tax is paid by people in that group, which is then subtracted from the benefits received to give “net redistribution to the poor.”

Net redistribution to the poor, 2005

Benefits after taxes received by poorest 20 per cent of households as a percentage of household disposable income

The chart shows that there are large differences in how countries redistribute income to low-income households, ranging from more than 5 per cent of household disposable income in Australia, Belgium, Denmark and Sweden, to around 2 per cent in Japan, Poland and the United States and less than 0.5 per cent in Switzerland and Korea. Nordic countries transfer large amounts of gross benefits to low-income people but also levy a significant amount in taxes from them; conversely, most English-speaking countries pay less generous benefits to the lowest-income households but partly offset this by levying lower taxes on them.

As a result, even though Australia spends below the OECD average on social security benefits, the distribution of benefits is so progressive, and the level of taxes paid by the poor is so low, that Australia redistributes more to the poorest 20 per cent of the population than any other OECD country except Denmark (which spends about 80 per cent more than Australia).

These figures suggest that in important respects the debate over Australia’s welfare state is misconceived. Following the federal budget earlier this year, for example, the issue of “middle-class welfare” attracted considerable media attention. But the OECD data shows that Australia actually has the lowest level of middle-class welfare of any OECD country, a position it has consistently held for at least the past thirty years. Organisations such as the Centre for Independent Studies have also argued that the Australian welfare state is marked by a high level of inefficient and wasteful “churning,” meaning that many people who use welfare state benefits and services finance most or all of what they receive through the taxes they pay themselves. But the OECD data shows that Australia has the lowest level of churning of any OECD country except Korea – and Korea only has lower churning because it has very little at all in the way of welfare payments. Claims by the Institute of Public Affairs that the main beneficiaries of the welfare state are the middle-class bureaucrats who administer the system are equally misleading.

While our social security system has a lot of strengths, this certainly does not mean that there are not real shortcomings to deal with, including the inadequacy of unemployment benefits and rental assistance. The fact that poor Australians get higher benefits than many poor people in European countries or the United States doesn’t actually help them pay their bills. It is always possible to be more efficient, and every year governments go through the laborious process of incrementally adjusting our benefit system to try to produce better outcomes. These changes often look like tedious fine-tuning, but the evidence suggests that it is changes of this sort that produce real improvements, rather than grandiose plans for completely replacing our welfare arrangements. •

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THIS week’s federal budget included a package of reforms designed to help people receiving a disability support pension, or DSP, get into work. Disability support pensioners under the age of thirty-five who have some capacity to work will now need to meet new participation requirements. New rules will require new applicants to use employment assistance to try to get back to work before they can apply for the DSP. More generous rules will be used to encourage existing disability pensioners to work more hours. And employers will be given new financial incentives to take on more disability pensioners. According to the treasurer, Wayne Swan, these initiatives are partly intended “to slow the growth” in DSP numbers.

Concern about the number of people receiving the DSP has been voiced increasingly in recent months. In a series of speeches – at a CEDA Luncheon in February, in the inaugural Gough Whitlam Oration in March, and in an address on “The Dignity of Work” at the Sydney Institute in April – the prime minister, Julia Gillard, has argued that “we have moved beyond the days of big government and big welfare, to opportunity through education and inclusion through participation.” In addition to the unemployed and discouraged job-seekers, she said, “there are many thousands of individuals on the Disability Support Pension who may have some capacity to work.”

In an address to the Queensland Chamber of Commerce and Industry, opposition leader Tony Abbott suggested introducing a more targeted payment for people whose disabilities might not be permanent. He pointed out that Australian disability pension numbers are set to pass 800,000, with more working-age people on the disability pension than on unemployment benefits.

Figure 1 shows the trends underlying these concerns. Over time, the number of people receiving unemployment payments has varied dramatically depending on labour market trends, with a large increase in the early 1980s, a further and larger increase in the early 1990s, a sustained decline until 2007, and a substantial increase (though much lower than in the recessions of the 1980s and 1990s) following the global financial crisis.

The contrast with the number of people receiving the Disability Support Pension is striking. Indeed, a Parliamentary Library briefing note on last year’s budget pointed to an “inexorable” growth in numbers over the past twenty years, adding: “No other income support program has seen this level of sustained increase.”

Figure 1: Trends in the number (thousands) of recipients of Disability Support Pension and Unemployment payments, 1981–2011

Note: Figures are at June each year, except unemployment payments in 2011, which are for March. DSP numbers for 2010 are preliminary.
Source: FaHCSIA, Income Support Customers: A Statistical Overview 2009

Is the DSP out of control? Is disability really rising in the Australian community or are people who are really unemployed being “parked” on the DSP? Are individuals manipulating the system to get more from these benefits? These concerns might appear justified because there are clear incentives for long-term welfare recipients to qualify for the DSP, as the gap between the DSP and Newstart payments is nearly $260 per fortnight, and widening.

To fully understand these trends in DSP numbers, though, we need to consider a range of factors, including population size and the age profile of disability in Australia, the effects of income-support policy changes, and the state of the labour market.

The boomer effect

Over the past fifteen years the population of Australia has been growing relatively rapidly, and the growth in numbers of DSP recipients is partly a consequence of that. What is important from a policy perspective is the rate of DSP support – the number of recipients as a percentage of the working-age population. And that rate has basically been stable since 2002, although it fell a little just before the global financial crisis and has risen a little since then.

Disability and receipt of the DSP are strongly age-related. In 2009, for example, less than 2 per cent of people aged sixteen to twenty-nine received the DSP, but this rose with age to 5 per cent of people in their forties, 9 per cent of people in their fifties and over 14 per cent of people aged sixty to sixty-four years. Disability rises further as people age beyond sixty-five years, but after sixty-five most people are entitled to an age pension and the DSP is no longer relevant.

This age profile is important, because the age structure of the Australian population has also changed significantly over the past fifteen years. This is an effect of the ageing of the baby boom generation, conventionally dated to those born between 1946 and the early to mid 1960s. Analysis by demographer Natalie Jackson shows that up until 1996, changes in the age structure of the Australian population had a slightly negative effect on the trend in DSP numbers.

The first of the baby boomers started to turn fifty in 1996, so from that point changes in the age structure of the population became likely to increase levels of receipt of the DSP.

Overall, between 1996 and 2009 the proportion of people of working age receiving the DSP rose from 4.3 per cent to 5.1 per cent. If the age structure of the population was held constant at 1996 shares, then rather than there being 5.1 per cent of the population receiving the DSP there would be 4.7 per cent. This means that about half of the total increase in numbers was the result of population ageing unrelated to any changes in the labour market, to the incidence of disability or to individual behaviour.

Declining dependency

A series of policy changes from the mid 1990s onwards also had a major impact on the number of people receiving the DSP. The most important of these was the increase in the age at which women qualified for the age pension from sixty to sixty-five, which started in 1995.

In 1996 only 3400 women aged sixty to sixty-four years received the DSP, but 194,000 received the age pension. In 2009, there were 68,000 women aged sixty to sixty-four receiving the DSP, but 81,000 female age pensioners. Women in that age range are the fastest growing group of DSP recipients, with the DSP now accounting for close to 30 per cent of social security benefits claimed in this age group. In 1996, by contrast, it accounted for just 1.4 per cent of welfare received in this age group.

At around the same time as the lift in pension age, the government began to phase out a number of other payments, including mature age allowances, the partner allowance, the wife and widow B pensions and the widow allowance. These changes had a big impact on how many people received welfare payments as well as which payments they received. For example, in the mid 1990s around 4 per cent of the working-age population, mainly women, received these “closed payments” but now that figure is only 1 per cent.

While the combined impact of these changes means that the number of DSP recipients in this group has “skyrocketed,” the total number claiming welfare has plummeted. In 1996 68 per cent of women aged sixty to sixty-four years received a social welfare payment; by 2009 it was 39 per cent.

So “welfare dependency” for this group has actually fallen significantly – it’s just that more of this (smaller) group are now on the DSP. And this reduction among older women is matched by a reduction among older men: in 1996 26 per cent of men aged sixty to sixty-four years were receiving the DSP; by 2009 it was 16 per cent.

The pension age for women has not yet reached sixty-five years, so the number of women in this age group receiving the DSP might continue to rise. Moreover, the announced increase in the age pension age to sixty-seven years for both men and women, to be phased in between 2017 and 2023, will undoubtedly mean that the number of DSP recipients will increase. But given the recent experience among women aged sixty to sixty-four years it could be expected that the total proportion of sixty-five and sixty-six-year-olds reliant on social welfare payments will fall.

Rather than a welfare spiral, what has actually happened over that decade and a half is a significant decline in the proportion of the working-age population receiving social security benefits; and the decline would have been even greater if not for the structural ageing of the population. This decline is the result of reforms introduced in the 1990s and reinforced by very strong labour market growth between 2002 and 2007.

Figure 2 shows that the declines in welfare reliance among people of working age between 1996 and the period just before the global financial crisis were significant for all age groups, but the largest declines were among those where the household reference person was aged fifty-five to sixty-four years.

Figure 2: Per cent of households with a household head of working age whose principal source of income is government cash benefits, by age of household head, 1996–97 and 2007–08

Note: Principal source of income is 50 per cent or more of total income.
Source: ABS, Household Income and Income Distribution Survey, 2007–08

Welfare reliance in this group more than halved from 38 per cent to 17 per cent, and the overall proportion of working-age households who derive 50 per cent or more of their income from benefits fell from 21 per cent to 12 per cent. If a more stringent definition of welfare dependence is used – households who receive more than 90 per cent of their income from government cash benefits – then the decline in welfare dependence among people of working age is even greater – from close to 17 per cent to 7.2 per cent. Adjusting for changes in the age structure of the working-age population further reduces this to 6.7 per cent.

The other arguments for reform

There are very strong arguments in favour of further welfare reforms, but these are arguments based on improving equity, not constraining growth in numbers. The key equity argument, mentioned by the prime minister in her speeches this year, is simple: the main path to improvements in social inclusion is through increases in employment and participation.

In Australia, about 40 per cent of working-age people with a disability are employed, which is below the OECD average of 44 per cent. The OECD finds, however, that the relative incomes of people with a disability are lower in Australia than in any other OECD country and poverty rates are the second highest. Most of the explanation for this lies in the fact that those who are not in paid work receive lower incomes. To improve equity, we therefore need both to increase employment and to improve benefit rates. The government has already lifted benefit levels for people on the DSP (and age and carer pensions), and the budget package announced this week has been welcomed by welfare groups such as the Brotherhood of St Laurence as balancing increased obligations with improved support services.

Nevertheless, population growth, continuing population ageing, the ongoing effect of past policy changes and the future increase in the age pension age to sixty-seven years are likely to mean that the numbers on the DSP will continue to grow for some years. This doesn’t mean that these reforms will necessarily fail. To judge the success or otherwise of the budget, we need to take account of age and gender-specific rates of DSP receipt, and we also need to look at the total rate of welfare receipt. •

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ONE of the more surprising newspaper stories of recent times was Peter Martin’s article of 15 November, OECD Takes Aim at Labor Policies, which reported that the latest OECD Economic Survey of Australia had declared that Australia’s unemployment benefits are too low. I can’t recall the OECD ever before saying that a country’s unemployment benefits weren’t generous enough – and I worked there for eight years.

According to the OECD, the current level of the Newstart Allowance has “raised concerns about its adequacy” as an income-support payment. “Unlike most OECD countries,” says the report, “Australia provides a flat (non-earnings related) means-tested allowance to meet social risks such as unemployment, which may be paid for an unlimited period... The resulting net replacement rate is below the OECD average for the initial stage of unemployment.” In fact, for single people on the average wage losing their job, Australian benefits are about the lowest in the OECD.

Currently, single unemployed adults receive about $470 per fortnight, or $33.55 per day. If they’re renting privately, they’re entitled to up to $115 per fortnight in rent assistance, but to get that amount their rent has to be more than $256 per fortnight, leaving them with just $23.50 per day for everything else; and that assumes you can find somewhere to rent for $256 a fortnight. Earlier this year the NSW government’s Rent and Sales Report found that in early 2010 the cheapest one-bedroom homes in Sydney’s outer ring were in Wyong and Gosford and cost “just” $170 a week. If you were on Newstart and paying that rent you would have just $17.50 a day left over for your food, clothing, transport and other bills.

In September 2009, the federal government increased the single rate of age pension by more than $30 per week – one of the largest pension increases in Australian history. The decision was based on the recommendations of the Harmer Review, which argued that “the relativity of the rate of pension for single people living by themselves to that of couples is too low… [and] there is strong evidence that many pensioners in private rental housing face particularly high costs and have poor outcomes.”

In making its recommendations the Harmer Review cited research by Peter Saunders and Melissa Wong of the Social Policy Research Centre, or SPRC, who looked at the relative well-being of pensioners using measures of deprivation and social exclusion to complement measures of cash incomes. But Harmer was not asked to look at the adequacy of benefits for the unemployed. Earlier research at the SPRC found that the unemployed were even more likely than age pensioners to face deprivation and exclusion and have difficulties managing on their incomes.

The Henry Review of the tax system also pointed out that Australia could benefit from a more principles-based approach to setting payment levels. “Establishing adequacy benchmarks for transfer payments not considered in the Pension Review would make the system more robust, particularly if the benchmarks were preserved through a common but sustainable indexation arrangement.” This “would mean an increase to base rates for single income support recipients” on Newstart. The review also recommended that the maximum rate of rent assistance should be increased and the rent maximum should be indexed by movements in national rents.

So, both the OECD and the official inquiry into Australia’s tax and benefit system think that unemployment benefits are too low. Part of this concern is actually about incentives, particularly those that arise from the gap between Newstart and the more generous Disability Support Pension. “The large gap between the benefits in the current system can reduce incentives to work,” the OECD argues. “The unemployed may have an incentive to apply for the Disability Support Pension (DSP), which has a higher risk of long-term welfare dependency... the majority of those leaving DSP do so either because they took up Age Pension or died. At the same time, more than a third of those entering DSP in 2008 had previously had Newstart Allowances.”

The 2009 increases in pensions widened the gap between payments for the unemployed and payments for lone parents with children eight years and over, for people with disabilities and for carers, to the point where the Newstart shortfall is nearly $250 per fortnight. A lone parent who moves from Parenting Payment to Newstart when his or her youngest child turns eight can lose up to $100 each fortnight. As the system is currently configured these gaps will grow over time.

The 2010 Intergenerational Report helps us gauge the scale of the future problem. Under current indexation policies, age, carers and disability pensions are indexed to wages, while most other payments for people of working age and families are indexed to prices. If continued, these provisions will produce a remarkable change in levels of support: pensions would rise by 4 per cent a year on average while benefits and allowances would rise by 2.6 per cent a year. The result – if the indexation provisions actually continued for forty years – would be that in 2050 a single unemployed person would be receiving a payment little more than 11 per cent of the average male wage, compared to about 20 per cent now.

The gap between pensions and allowances would widen enormously, and an unemployed person would be receiving a payment that was less than 40 per cent of the amount received by a disability pensioner (not including the extra concessions and bonuses received by pensioners). Relative poverty among working age allowance recipients would increase significantly.

It is certainly true that the best way to help the unemployed is to get them into jobs. Australia has been very fortunate in having one of the lowest increases in unemployment of any OECD country since 2008, but we shouldn’t overlook the fact that unemployment has still risen significantly. In June 2008 the number of people receiving Newstart Allowance was just under 430,000, its lowest level since the 1980s; this rose to 602,000 in February 2010 and has come down to 557,000 in October this year (the most recent available figure). The number of people on Newstart for twelve months or more rose from 250,000 in late 2008 to around 340,000 in recent months, although this also appears to be now coming down.

Would raising benefits to a more adequate level keep the unemployed out of jobs or even cause low paid workers to give up jobs? Since 1996 the level of Newstart for a single person has fallen from around 54 per cent to 45 per cent of the after-tax minimum wage. If it were still 54 per cent of the net minimum wage, then benefits would be around 19 per cent higher. It is difficult to see that going back to the 1996 relativities between Newstart and the minimum wage would pose serious disincentives to work.

This problem is not going to go away. Current policies are simply going to make the problem more difficult to deal with if decisions are postponed. It is worthwhile remembering that one of the first initiatives of the Hawke government was to increase the rate of unemployment benefits, recognising that lack of consistent indexation had made these payments inadequate. It’s time the current government recognised that unemployment payments need to be increased. •

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WHEN Kevin Rudd announced the Education Tax Refund back in 2007 he held a laptop in his hand and proclaimed it to be the “toolbox of the 21st century.” It was one of the lasting images of the election campaign that brought Labor to power. The branding was simple and effective, and the policy above reproach: a Rudd government would reward working families who invest in education by providing them with a tax refund.

It also made for an irresistible political football, and this time around both Labor and Liberal were only too keen to play. Labor got in first, proposing to make school uniforms an eligible expense for the ETR. Attempting to stay true to the egalitarian image of the toolbox, Julia Gillard suggested that a school uniform “helps undercut the kind of unhealthy competition we can see at schools to have the latest, most expensive, fashionable gear.” She avoided the obvious point that only a school uniform complete with expensive blazer could cost anything like the ETR spending cap (set at $780 for primary and $1558 for secondary school children in the 2009–10 tax year). When Tony Abbott replied, he did away with the dog whistle and appealed directly to parents of private school students. His longer list of eligible expenses included not only uniforms but school fees as well, with spending caps of $1000 and $2000 for primary and secondary students respectively.

Because the ETR rewards families who spend more, these changes add to the benefit for families whose children attend a private school. Consider, for example, the purchase of a computer for a secondary school student at the start of the school year. Family A buys an expensive laptop worth $1500 and claims 50 per cent, or $750, back. Family B can only afford a $600 desktop and claims an ETR of $300. The gap between the two refunds: $450. The inequity could be reduced very simply by reimbursing 100 per cent of expenses up to $779 so that Family A would receive $779 and Family B $600, a difference of only $179.

The argument for reimbursing only 50 per cent of expenses is that it encourages families to spend more on education. But the incentive can only operate if the spending cap is set at a realistic level for all eligible families. Otherwise, the policy simply provides an incentive for the better-off to spend more, leaving the rest behind.

For most families, eligibility for the ETR is determined by entitlement to Family Tax Benefit Part A. FTB-A is paid to families on unemployment or parenting payments, but can also include, for example, a family with two children and an income of almost $112,000. This considerable difference in spending power means that Gillard and Abbott can use the ETR to lure middle-class votes while claiming to be looking after the real battlers. The proposal to include school uniforms and fees as eligible expenses must be seen for what it is: middle-class welfare.

It is interesting to compare the ETR to the Teen Dental Plan, another payment introduced by the Rudd government. Under normal circumstances, both are available to families entitled to FTB-A. Both target children in a particular age group. But the Teen Dental Plan has a specific, well-defined goal, whereas the ETR has the potential to be transformed into a payment without any clear purpose.

The Henry Tax Review discussed family payments at length. It put forward the guiding principle that family payments should address “the direct costs of children in low-income families” – something the Teen Dental Plan is clearly designed to do. Using this principle, it could be argued that the ETR should include school uniforms, provided the spending cap was reasonable. But no sensible argument can be made for extending the ETR to private school fees. And that an iPad could qualify as a direct cost of a child in a low-income family is troubling.

If Julia Gillard is to reconsider some of her election promises in the light of a “new political paradigm,” perhaps the scope of the Education Tax Refund could be added to the list. •

The post Incremental inequity appeared first on Inside Story.

FOLLOWING the brief excitement of the global financial crisis, Australian politics is back in a familiar groove. A Labor government is trying to demonstrate its commitment to fiscal discipline by imposing yet another “efficiency dividend” on the public service. The latest example to attract the public limelight was a plan to close the National Archives offices in Adelaide, Hobart and Darwin, saving $1.4 million a year out of annual government spending of around $345 billion. Faced with public opposition, the government last week decided to retain an archival presence in each city, but co-locate them with the offices of similar bodies such as state public records. It isn’t clear how much, if anything, will now be saved.

Meanwhile, the Coalition is lambasting Labor for its alleged addiction to “big spending” and “spiralling debt,” while blocking its attempt to save money by means testing the rebate on private (or, more accurately, semi-private) health insurance. Never mind that John Howard’s Coalition government was no slouch on the spending front (see Treasury’s Economic Round Up, Summer 2008). Likewise, since becoming Coalition leader in December, Tony Abbott has announced over $6 billion in spending initiatives without accompanying funding measures.

Kevin Rudd’s government undoubtedly shovelled money out the door in an effort to stop Australia suffering a deep recession during the global financial crisis. And there are grounds for disagreeing with the size and composition of this spending: the $16.2 billion for school buildings was partly wasted by spending too much too quickly, at least half the $2.5 billion allocated on home insulation could have been more fruitfully diverted to renewable energy projects, and so on. But without some sort of stimulus program there is little doubt that many more businesses would have gone broke and unemployment would have been much worse.

In any event, the Rudd government is committed to returning the budget to surplus, as it should be. But politicians on all sides seem far more comfortable trotting out well-worn lines about government debt and deficits than addressing what should be done to prevent a repeat of the wild financial excesses that almost triggered a collapse as bad as the Great Depression of the 1930s. The debate is little better in the northern hemisphere, where investment banks kept afloat by hundreds of billions of taxpayer funds now denounce any attempt to curtail their future behaviour. Instead, they demand that governments cut the spending that helps the victims of their excesses. Even more brazenly, some banks that made money by helping the Greek government hide its debt are now trying to profit from speculating on the chances that it will default.

International comparisons suggest that there is no clear relationship between government spending and good economic and social outcomes. Some northern European countries do relatively well, for example, by spending more than Australia. The Treasury head, Ken Henry, acknowledged this point in a speech to the Whitlam Institute in November when he said, “Based on the numerous efforts to estimate, for developed countries, an empirical relationship between size of government and aggregate measures of things relevant to wellbeing, including rates of economic growth, it would be sensible to conclude that the optimal size of government is not a question that can be answered by a technical economic analysis.”

In Australia, the expected peak in government spending of about 28 per cent in 2009–10 is driven mainly by the temporary stimulus package. Subject to some crucial provisos, there is no reason why Australians can’t enjoy good outcomes if the government then re-tunes spending at around the average level since the dismissal of the Whitlam government in 1975 – roughly 25 per cent of gross domestic product.

One proviso is that unswerving attention has to be paid to the quality of the spending. Another is that outlays might have to increase after a few years for the nation to enjoy better health outcomes, unless people are willing to pay a higher proportion of their individual costs. There is also a strong case for enhancing budget transparency by delivering various benefits as direct payments rather than as tax concessions. Because this would shift the fiscal impact of these measures from the revenue side of the budget to the direct expenditure side, outlays and receipts would rise.

ALTHOUGH doable, there should be no mistaking the difficulties and potential pitfalls involved in meeting the constraints the Rudd government has imposed for returning the budget to surplus. One of the government’s key conditions is that the real growth in government spending will be capped at 2 per cent once economic growth returns to 3 per cent; another is that revenue should not exceed its 2007–08 level of 26.1 per cent of GDP. Even if the government doesn’t succumb to Coalition taunts to stick rigidly to the 2 per cent cap, the task will extremely demanding.

The finance minister, Lindsay Tanner, will slog away to produce lots of little cuts like the closing of the National Archives offices. Often the savings will be trivial. Other cuts – like those to the CSIRO, the Australian Bureau of Statistics and the Meteorological Bureau in the 2008–09 budget – will be positively harmful. Because large slabs of the budget are exempt from the cap, the axe will almost certainly fall with disproportionate force on remaining areas, such as spending on education, payments to the states, and investment in productive areas such as transport infrastructure.

Rudd should be reluctant to cut payments to the states, having warned in January that their spending on health had grown by around 11 per cent over each of the last five years compared to increases in their revenues of around 3 to 4 per cent a year. Whether these words are reflected in the 2010–11 budget that Wayne Swan delivers in May is another matter. After all, Rudd has boasted about delivering an “education revolution” but the current budget projections show spending on education will be lucky to increase by more than 1 per cent a year in real terms to 2012–13. Although spending is not the only thing that matters, there is no way this will be enough to fund Rudd’s promise of greatly expanded student places in universities and pre-schools, increased high school retention rates and more resources for disadvantaged schools.

Education minister Julia Gillard’s recent release of the My School website, comparing the results of literacy and numeracy tests, suggests a possible government answer to criticism about funding levels. For well over a hundred years, Australian governments were expected to provide a quality education in a school within reasonable travelling distance of most families. Now Rudd and Gillard are urging parents to choose a school further away by providing the comparative data needed for parents to shift their children to better performing schools (as measured by extraordinarily limited criteria). As Rudd put it with less than felicitous regard for English usage, the data will give parents the option to “walk with their feet” (or tell their children to do so). But choice will offer no remedy when there is only one public school in a regional town, while switching schools within a city can involve additional travelling time and more parental worries about safety.

Many commentators have noted that My School’s comparative information is based on literacy and numeracy tests that don’t measure broader educational standards. The headmaster of St Andrew’s Cathedral School in Sydney, Dr John Collier, has said that the emphasis on partial measures “will encourage schools to teach to the test with endless drills to improve their score… with less time spent teaching the sciences, humanities, or the creative arts.” Although Gillard sometimes acknowledges that there is more to a good education than testing literacy and numeracy, she still insists the results will allow parents to judge how well particular schools are performing in an era in which analytical and creative skills are at a premium.

Others note that class results vary from year to year, partly as a result of changes in students’ intellectual ability, personality traits and home environment. Simply demanding that teachers lift their game can do little to alter these factors. (Nor will it alter the stubborn reality that 20 per cent of schools will always rank in the bottom 20 per cent of tests.) Specialised help for children with learning difficulties usually improves outcomes, but it is a labour-intensive process. Gillard has promised extra funding for disadvantaged schools, but its adequacy is yet to be demonstrated at a time when overall spending on education is being heavily squeezed. On present indications, it looks like a lot of weight will be placed on encouraging parents to berate “bad” teachers, or change schools, as a key part of the “revolution” wrought by the My School site.

The spending cap will also squeeze much-needed investment in infrastructure. The last budget allocated only an extra $8.4 billion for roads, rail, and ports over five, or more, years. Many studies conclude that $50 billion to $100 billion could be justified in the near future. Apparently, nothing more will be made available. The main reason is the government has let itself be intimidated by the opposition’s scare-mongering about public debt.

Many countries have a problem with government debt. Australia is not one of them. Despite large deficits in the wake of the global financial crisis, net government debt in Australia is now expected to peak at just under 10 per cent of GDP compared to an average of 90 per cent for most economically advanced countries. So long as borrowing is used for productive investment in areas such as transport, a responsible economic policy would keep net debt at between 5 and 10 per cent of GDP after the budget is restored to surplus. Instead, the government has tried to negate the opposition’s claims that it mightn’t be able to repay debt by repeating that it will reduce net debt to zero. As the Reserve Bank governor, Glenn Stevens, recently told a parliamentary committee, “There are few things less likely than Australia defaulting on its sovereign debt.”

Having no debt is a bad public policy. Debt is a good way to spread the costs of infrastructure spending on transport facilities, schools, police stations, parks and so on across the generations that will benefit. Debt allowed the NSW government to build the Sydney Harbour Bridge by 1932 rather than wait until well after the second world war when it might have accumulated enough cash. Provided they can handle the repayments, there is nothing wrong with people borrowing to buy a home instead of saving enough to pay entirely in cash. The same applies to well-run businesses, and governments, that borrow for productive investment.

Once the economy is growing at a normal pace, however, the deficit should be reduced to zero. There is ample scope to do so without underfunding areas such as education, scientific research, health, productive infrastructure and a generous social safety net. Not all spending that involves the word “infrastructure,” however, is justified. The Productivity Commission makes a good case that most of the $6 billion allocated to upgrading irrigation infrastructure will be wasted.

Clamping down on upper- and middle-class welfare offers the biggest opportunity to cut the deficit and fund worthwhile spending. There is no excuse, for example, for letting multimillionaire retirees pay only $5.30 for prescription drugs that cost a low-paid member of the workforce $32.90. At least $3 billion could be saved, without hurting the poor, by cutting the cost of the Pharmaceutical Benefits Scheme. The means test for the age pension is extraordinarily loose, letting many people enjoy the benefits of a part pension even though they are much better off financially than a large proportion of the workforce.

And the budgetary costs of tax concessions often tip the whole concept of means testing on its head, with the maximum benefits going to high-income earners. The concessions for superannuation — estimated by Treasury to cost $32 billion by 2012–13 — are a notorious example. The overall cost of what Treasury calls tax expenditures, mainly tax concessions, is expected to rise to over $116 billion by 2012–13. Trimming this figure to under $100 billion would improve equity and the budget bottom line, without the need to savage vital areas of spending. •

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