road to fiscal disaster … through welfare

The main reason the supporters of Labor/Green hate Abbott and the Coalition parties so much, is obvious. They don’t want the tap turned down, even a little bit: Welfare addiction keeps Australia from reforming its finances.

Economics Correspondent
Illustration: Eric Lobbecke

Illustration: Eric Lobbecke Source: Supplied

AUSTRALIAN historian John Hirst recalls that when he met his future father-in-law, Bernard, in the early 1960s, the 50-something boasted he had saved and ­arranged his financial affairs so as not to receive the age pension.

“It used to be a matter of shame for people to claim public benefits,” Hirst tells Inquirer. “Now I read in The (Australian)Financial Review articles laying out in detail how to obtain a part-age pension. It’s shameless.”

When Bernard was born in 1910, only one-third of Australians over 65 received the age pension, then only one year old. Today 80 per cent receive it, despite unprecedented growth in living standards and real average incomes in the intervening years.

This growing army of pensioners is just part of a welfare ­explosion that risks setting Australia’s public finances on the road to fiscal disaster; it also risks ­sapping political parties’ will to resist the journey with any sense of ­commitment.

The proliferation of different payments — and their reach into Australian households — has fostered a pervasive sense of entitlement that has undermined once powerful arguments in favour of self-reliance. It has created a powerful political constituency for public spending beyond the traditional public service that parliament has proved unable to resist.

In 1930, historian Keith Hancock famously wrote that Australian democracy “looked upon the state as a vast public utility”. It seems an odd comment from the vantage point of the early 21st century; government and welfare in Hancock’s era were remote and meagre.

The fledgling commonwealth, only recently established in Canberra, levied taxes equivalent to 5 per cent of national income in the late 1920s, a small fraction of the 23 per cent levied almost a century later. Apart from the long-­established age pension, the 72 payments and supplements that today make up the federal government’s welfare cat­alogue lay many decades in the future.

Areas that dominated government spending in Hancock’s day — defence, justice, basic public infrastructure — have shrivelled as the federal welfare bill has swollen to about $150 billion ($400 million a day) this year, more than six times the defence budget.

He surely couldn’t have imagined the prescience of his remark. Today, Google-search “what payments can I get” and the first link that appears is the Department of Human Services’ Payment Finder site. Type some basic details and discover immediately the array of payments for which you may be eligible. A 35-year-old working full time with healthy children aged eight to 15 is eligible for nine. If a relative has recently died, it jumps to 13.

Give or take.

Give or take.

It is not only older Australians whose dependence on welfare has ballooned. The share of the working age (15-64) population receiving disability, unemployment or parenting payments has exploded from 2 per cent in 1969 to 12 per cent in 2013. Including the over-65s, about a quarter of the population over 15 receives cash income-support payments.

Snowballing support for families with children has further boosted numbers. The share of families receiving income-support payments has surged from 10 per cent in the mid-60s to more than 40 per cent today. A crucial change came in 1976 when the Fraser government substituted cash payments for tax deductions per child, severing the link between support and work.

All up, conservatively about 60 per cent of Australia’s nine million-odd households receive some sort of federal government cash handout, according to various surveys. Peter Whiteford, a social security specialist at the Australian National University, points to evidence suggesting about two-thirds of Australian households received income support within a nine-year period. “I had to ring up and check when I first read that,” he says.

This welfare web has serious implications for the outcome of elections. The share of households considered net taxpayers — those whose income tax payments outweigh what they receive in social security — is poised to drop below 50 per cent. According to the National Centre for Social and Economic Modelling, this share has fallen from 56 per cent to 51 per cent across the decade to last year. That is, almost half of all households get back more from the government in welfare payments than they give up in income tax.

It is little wonder most voters have no appetite for welfare reform, or at least any reform that may mean lower benefits.

The drop in net taxpayers is explained mainly by a fall in the share of over-65s (a rapidly growing group) who pay net tax from 13 per cent to 8 per cent. “The removal of superannuation taxation for those aged over 60 and the generous nature of the senior Australians tax offset means that older Australians typically pay no or very little tax,” NATSEM researcher Ben Phillips says.

Compulsory voting compels Australia’s politicians to focus particularly on the interests of the “median voter”. They reason their core supporters will vote for them anyway, so the interests of politically uninterested, younger voters, typically with children, become paramount.

It may seem reassuring that the share of working-age couples with children who are net contributors is still 75 per cent (down from 80 per cent in 2004), but their net contributions would be dwarfed by other government benefits received in kind.

Perhaps the best evidence for the electorate’s aversion to any weaning off the welfare teat — in the face of an ominous fiscal outlook — is the failure of the Abbott government’s first budget. Apart from a cut to foreign aid and a few tweaks here and there, none of the proposed big structural savings in social security, health or education has been passed.

Tony Abbott is able to claim the government’s debt burden is no longer hurtling towards 120 per cent of gross domestic product only because the rate of growth of payments to the states for schools and hospitals is assumed to slow dramatically after 2017, a move Labor trenchantly opposes.

Now a wounded Coalition ­government appears to be giving up, and promises a “dull and routine” second budget attempt in six weeks. The broader pace of reform has ground to a halt, too, despite an expanding library of sensible ­proposals in tax, childcare, welfare, federation, banking and competition.

Hirst is perplexed why politicians aren’t making greater use of grandfathering to prise unneces­sary payments and concessions off Australians. “They could blow the whistle on many of these things without upsetting the current beneficiaries,” he says.

John Daley, head of the Grattan Institute, concedes growth in the scope of welfare has made reform more difficult but puts more of the blame on the ineptitude of the political class. “Of course it’s much harder to take something away from someone than simply to not give it out in the first place. But we are seeing policies go live without sufficient analysis, leading to poor design, and social media ensures the flaws are found and broadcast very quickly,” he says, pointing to the unravelling of the Coalition’s higher education reforms and GP co-payments.

It is becoming conventional wisdom to point to Australia’s political paralysis. The skill or lack thereof of our political leaders is typically blamed. But deep-seated structural changes in society, including the growing share of the population with a vested interest in no cuts to government spending, must also figure.

“Obviously when a larger share of the population is on welfare the constituency for spending will be larger, and it will be harder to cut it,” says Peter Saunders, a senior fellow at the Centre for Independent Studies. “But the shift in mentality is the more damaging — government becomes a dispensing machine and elections never a battle over ideas or principles but rather simply over who is going to get what.”

Demographer Hugh Mackay points out that Australia, like other advanced countries, has become more fragmented and less cohesive, making political leadership inherently more difficult.

“We’ve been ethnically and culturally diverse for a long time, but there are other factors now fragmenting us, such as divorce, population mobility (we move house on average once every six years), smaller households (the single-person household is now the largest and fastest growing category) — and the rise of the two-income household means less time for nurturing local communities,” he says.

“The explosion of information technology and especially social media has created the illusion of greater connectedness but it has made it easier than ever for us to stay apart from each other.”

This is a trend Mackay expands on in his latest book, The Art of ­Belonging.

Social media also has made trimming welfare harder. The technology has slashed the price of personal sanctimony, making it far easier to broadcast one’s righteousness and concern for others to many thousands.

Once, one would have to go to the trouble of writing a grammatically correct letter to the editor. Facebook and Twitter have given life to countless “online campaigns” driven by campaigners not especially informed about the underlying policy issue.

“None of this makes us ungovernable, but it does make us less predictable, less trusting,” Mackay concludes.

Hirst is also relatively optimistic. “In a genuine crisis we would see one of the major parties win control of both houses of parliament again,” he says. “But the seemingly entrenched demand that politicians must signal all tax increases and all funding cuts before they are elected has raised the standard to a ridiculous level.”

John Maynard Keynes might have changed his mind when the facts changed, but our politicians are no longer afforded this luxury. Julia Gillard imposed a carbon tax. Abbott trimmed the ABC’s budget. John Howard was dogged relentlessly during his 1998 GST campaign for a “never, ever” remark he had made in 1995.

This heightened focus on promises perhaps stems from the greater share of the population that stands to be affected by the variety of levers a governing party may choose to pull.

The point is the policy outcomes we are observing are a result of the political system that we have chosen, and in particular the voting franchise. It is too simplistic to blame individuals or political parties. Politicians respond rationally to the incentive structure laid before them. The incentive is to win favour with most voters. Under Australia’s compulsory voting regime, that means the “median voter” in particular. As a much larger share of the voting public contributes little, if anything, to the state and extracts significant benefits from it, policy and promises are fashioned ­accordingly.

Yet all adults have the same right to determine the allocation of taxpayers’ funds. Regardless of whether this is right or wrong, it certainly has an effect on political outcomes and in particular the current parliament’s inability to curb spending. The constituency for more spending would be empowered further if the Greens succeeded in extending the franchise to 16 and 17-year-olds.

The impact of compulsory voting on policy outcomes is little discussed, but it must be huge. Today a sacrosanct tenet of Australian political life, it was smuggled through federal parliament on the back of a private member’s bill during the Bruce government in 1924. Far from an enlightened response to voter apathy, it was ­inspired by a conservative government in Queensland that decided in 1915 to compel the electorate to vote on the assumption its supporters were lazier than those of its Labor opponents.

“It is demeaning of citizenship; the state shouldn’t be forcing people to vote if they have no interest,” Hirst says. One could also object on pragmatic grounds: having lots of uninterested and uninformed people voting forces politicians to dumb down their arguments. Saunders argues most people vote from “emotional wellsprings” rather than rational analysis, referring to a 2011 survey in Britain that showed only 14 per cent of people understood the relationship between the deficit and the public debt.

The unrelenting growth of welfare and the resulting political gridlock would not surprise 19th-century democrats. British political economist John Stuart Mill — an ardent advocate for extending the vote and ending slavery, and a champion of women’s rights and free speech — thought voting should be restricted to taxpayers.

“The assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed,” he cautioned in 1861, when voters in Britain still had to meet property and income tests. “Those who pay no taxes, disposing by their votes of other people’s money, have every ­motive to be lavish and none to economise.”

Mill’s progressive, liberal argument would be howled down today as “right-wing” extremism. His other restriction might be more appealing — that voters should demonstrate basic numeracy and literacy before they can vote. “You can’t drive on the roads without passing a basic competence test,” says Saunders, suggesting governance of a country may be equally important.

But today’s politicians must work within the system that exists. Without the abolition of compulsory voting or the introduction of a modest competency test for voters, they must continue to appeal to the median voter. And as more and more households find themselves net beneficiaries of government payments, the chances of convincing the median voter of the need for hard but necessary budget choices grow dimmer.

Behind a pay-wall, so copied in full.

About Tom Harley

Amateur ecologist and horticulturalist and CEO of Kimberley Environmental Horticulture Inc. (Tom Harley)
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