Social policy for the ‘good society’

Social policy for the ‘good society’

[comments presented at the Australian Social Policy Conference, Sydney 30 September 2015]

The ‘golden triangle’ of a good welfare state consists of:

  1. A labour market that minimises inequality and maximises mobility;
  2.  A social security system that minimises poverty and maximises economic participation;
  3.  Community services that strengthen solidarity and target disadvantage.

To achieve the ‘good society’ we still need to strengthen each of these three foundations and integrate them in response to individual and community needs.

It helps to give an example: I’ve been researching ‘activation’ or employment participation policies for people of working age on income support.

Over the last 25 years, Governments have re-written the welfare contract:

In return for income support, people are now expected to take steps to secure paid work where they can, and Government in turn is expected to invest in supports that improve their capacity to do so.

This brings to the fore three factors that have always shaped well-being for people in a vulnerable position in labour market: adequate income support, access to jobs (keeping in mind that labour market participation was always a benefit requirement), and the services required by people disadvantaged in the labour market (which in the past were rarely offered).

Every country does activation differently: it’s a site for the inevitable political contests over work and welfare. Every country has its policy strengths and weak links.

In Australia, wage inequality is too high but labour mobility is relatively good. We have an unusual combination of high minimum wages, greater reliance on part time employment (so that employers can use low skilled labour more productively) and in-work benefits (people receive income support and family payments when in low paid part-time jobs). This set-up is far from perfect, but it works better than labour markets that underpay people or exclude them completely. For example, a full time worker in the United States receiving the minimum wage has to work five days to earn as much as a minimum wage earner in Australia receives in three.

The weak links in our labour market for low skilled workers are high levels of casual work, decline of union presence in workplaces, and lack of protection for the large number of temporary workers from overseas (backpackers and students), which undercuts minimum wages.

The weakest link in the social security system is the low level of Newstart Allowance for those out of paid work: at $37 a day, which is towards the bottom of unemployment benefits in OECD countries.

In employment services it’s the lack of investment in the 70% of recipients have been on Newstart for more than 12 months. The main public investment here is Work for the Dole (a traditional ‘workfare’ program), which is more about pushing people away from income support than drawing them towards secure employment.

The solution to these problems is not just a matter of more benefits and more investment – the system has to be restructured so that the benefit system, labour market, and employment services are mutually reinforcing.

At least three changes are needed:

  1. We assume unemployed people should come to the labour market, not the other way round.There is much talk of incentives for unemployed people when its employers who need to be incentivized. A tighter labour market, better regulation of pay for low skilled work, wage subsidies for economically excluded workers would do much more to reduce unemployment than adjustments to benefits to improve work incentives. Employment service providers should have better resources and incentives to work more intensively with employers.
  2. We divide social security for people of working age into pensions for those supposedly ‘unable to work’ and the much lower Newstart Allowance for those ‘able to work’. Newstart is over $260 a week less than the pension for a single adult. By implication, those able to work are less ‘deserving’ of income support, even where their financial needs are the same.‘Unable to work’ a very antiquated notion. We should move away from these old distinctions and base rates of payment on need rather than distance from employment.

    This idea owes much to the principles of ‘basic income’ (and Australia comes closer to that ideal that most countries), but I prefer Tony Atkinson’s version in which payments are still linked to workforce participation. If income support is not closely connected with the labour market, then economic exclusion may be entrenched.

    If we move away from outdated notion that some people are ‘unable to work’ participation requirements can be better adjusted to individual circumstances, especially caring roles. This does not imply that the social security system should regulate family care. Rather, caring roles should be taken into account when deciding economic participation requirements.

  3. Governments guarantee people basic income support but not the employment assistance they need.In the name of cost-efficiency and flexibility, employment services in Australia are purchased from non-government providers based on employment outcomes. This sounds like a good idea – given the poor historical performance of public employment services in assisting people with labour market disadvantage. But over time employment services have been reduced to the lowest common denominator: the minimum of job search assistance required to get those who are ‘easiest to place’ over the line, while the rest languish for years on unemployment benefits.

    The present employment services system is all about process rather than content. We’ve lost sight of what it is that employment services should provide: the regular work experience, training and other services that many people need to improve their job prospects. No one is taking clear responsibility to provide them.

    We need to ensure the Government does not repeat that mistake as it experiments with the ‘investment approach’ to social disadvantage which is now under consideration.

These three issues are all connected: we won’t have adequate income support without labour market participation, and participation won’t be effective without a substantial investment in employment supports, and a change in the way the labour market treats low-skilled workers.

Just desserts? Social security and ‘deservingness’

Who ‘deserves’ income  support and why? An important new study on the social legitimacy of benefits sheds light on why some groups and some benefits are more favoured than others. This helps explain why the Newstart Allowance is $160pw less than the pension, why there are periodic ‘moral panics’ over the so-called ‘rorting’ of the DSP, and why people are concerned when millionaires receive Age Pensions. It also helps inform the design of social security payments.

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Does Work for the Dole work?

Work for the Dole was the flagship employment program of the Abbott Government (Abbott reprised his role as the program’s founder as a Minister in the Howard Government). From July 2015, working for benefits for at least 15 hours a week became the ‘default activity’ for 6 months of every year for unemployed people. One fifth of employment services spending is devoted to the program – almost $300 million a year. Aboriginal and Torres Strait Islander peoples in remote communities face continuous Work for the Dole for 25 hours a week.

The Turnbull Government seems less enthusiastic: it has cut the program back: instead of Work for the Dole after 6 month’s unemployment, from April 2017 unemployed young people will be enrolled in the ‘Youth Jobs Path’ program which combines work-readiness training with private sector internships.

Work for the Dole has always been controversial, but does it work? This blog looks at recent evidence of the impact of ‘work for benefits’ schemes on transitions to paid employment in the UK and a 2014 evaluation of Work for the Dole in Australia. Continue reading

Deduct the losses, capitalise the gains: how negative gearing works

Negative gearing arouses passions on both sides: about a third think people are making legitimate deductions, a third think it’s a rort, and a third don’t know. This blog explains how negative gearing works, to help resolve these issues. A more complete analysis of negative gearing can be found in a recent ACOSS report, “Fuel on the fire”.

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Hidden gems in the Tax Discussion Paper (2): we don’t rely a lot more on income tax than other countries.

Reading the press you’d think a key message from the Govt’s Tax Discussion Paper is that Australia relies a lot more on income tax than other wealthy countries. Not so! Read the fine print and we find that 63% of public revenue in Oz comes from income and income-like taxes compared with 61% across the OECD.

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Hidden gems in the Tax Discussion Paper: Shocking news from Treasury – personal income tax as efficient as GST!

Business, Government, and “every pet shop galah” have been saying that we should rely less on personal income taxes and more on the GST because this would be good for the economy. In my blog ‘Who’s the fairest and most efficient of them all?” earlier this year, I challenged this view.

Treasury modelling of the economic impact of different taxes tucked away on p32 of the Government’s Tax Discussion Paper confirms my doubts. It should change the debate.

Now, Treasury has released the details of that modelling.

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How the Budget was mugged (Treasury publishes the photo)

New Treasury Secretary John Fraser’s first speech includes a picture showing how the Federal Budget was mugged during the mining boom:

“The start of the structural deterioration in the Commonwealth’s budget position began
before the global financial crisis.”

The following chart, included in his slides, shows how the windfall revenue gains from the boom between 2002 to 2008 (grey bars, circled by me) were spent (green, blue and red bars).

budget slippage-page0001

Bulging with company tax and capital gains tax revenues, the Federal Budget was mugged on its way to the bank and the proceeds spent equally on eight successive tax cuts (green bars) and spending programs (blue bars) that were often of dubious value  – including the Seniors Supplement and easing of pension asset tests for wealthy older people in 2007, and the Education Tax Refund in 2009.

“The green and blue bars below the line show that these positive revenue surprises were largely handed back through personal income tax cuts or spent.”

By 2009 it was all over. The then Government tried valiantly (and succeeded) to avoid a recession through stimulus spending which was later wound back (the blue bar outside the circle).

Fraser didn’t put much emphasis on the fiscal damage caused by those tax cuts (he’s from Treasury), except to point to another well known story – the waste of revenues in poorly targeted tax breaks for superannuation:

“Generous income testing arrangements for Family Tax Benefits in the early 2000s and access to million dollar contributions to tax-preferred superannuation through 2006-07 were notable examples of middle or higher income welfare that contributed to the problem.”

As the ACOSS submission to the Audit Commission argued, these Budget decisions had huge opportunity costs. Instead of well targeted spending to deal with pressing problems –  poverty, unaffordable housing, and the gaps in community services for people with disabilities and mental illness; people who had no need of more public support were offered  ‘bonus’ payments and fresh opportunities to avoid income tax in old age.

Future generations will pay for all this if the most wasteful and profligate Budget decisions aren’t reversed. We’ll also pay a high economic and social cost if the harshest savings measures in last year’s Budget  aren’t abandoned, starting with the denial of income support for unemployed young people. That Budget did include sensible measures, such as the removal of the Seniors Supplement, which should go ahead.

The bottom line though, is that Australian Government spending is for the most part well targeted (the graph below shows that our cash social security spending is third lowest in the OECD) a major reason Oz Governments spend less than most other wealthy countries. A Budget repair job which is confined to the spending side (as in 2014) will either fail (as in 2014) or cause social harm.

spending on benefits oecd10-page0001

If we are to provide the health and community services needed by an ageing population, Australian (and State) Governments will have to raise more revenue, and learn to do this in a more economically efficient way. [No, I’m not ‘jumping to the GST conclusion’. Let’s open our minds a bit. Take a look, for example, at the reforms being discussed in South Australia].

Not as simple as it sounds: The Welfare Review in pictures

The Welfare Review Report has finally been released. It advocates a  “new flexible social support system that is simpler, sustainable, coherent and outcomes focused”.

tangled web-page0001

The Review proposes to replace the present tangled mess of 20 income support payments paid at various levels (see figure)

welfare review payment structure-page0001

with ‘five main payments’ (see figure):

  • Tiered Working Age Payment
  • Supported Living Pension
  • Child and Youth Payment
  • Carer Payment
  • Age Pension.

Sounds good, and a welcome change of tone from last year’s Budget. But unscrambling this egg is not as simple as it sounds, and nor is the recommended payment structure.

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Long term unemployment: ‘achilles heel’ of the Job Services Australia model

The following is a paper I presented at the long-term unemployment conference in 2014. It argues that the fact that two thirds of people on Newstart Allowances have received it for over a year and half for over two years signals policy failure. Governments have failed to invest in the regular work experience, training and capacity-building, and connections with employers needed by most people who have been out of paid work a long time.

JSA (and before that Job Network) rewards providers for low-level job search assistance. Average caseloads are over 100. This might work when people are close to employment already, but it’s not good enough for those with low skills, weak (or no) employment experience, or a disability. In theory, paying providers according to job outcomes is a good idea, but as in other countries where this has been tried, it hasn’t worked out as the policy makers planned. To begin with, Governments only get the quality of employment services they are prepared to pay for. In Australia they have not been prepared to pay for it.

The previous Government built a program based on short-term low quality training (average spend $300 per course, % employed after course 30%). The present Government is building a new one based on Work for the Dole (average spend $2,000, % employed after program 23%). Neither approach was successful (except in the sense that it kept unemployed people busy).

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Is there a magic pudding? A quick analysis of CPA Australia’s GST proposals

This is a quick off the cuff analysis of CPA Australia’s report: Tax reform in Australia, the facts, a day after its release. In the absence of time to study the report more closely, and critical details of the modelling and presentation of data, I raise as many questions as answers. But they are important questions – including how a revenue neutral change in the tax system leaves all households better off. There are efficiency gains from good tax reform but the magic pudding remains elusive!

The CPA proposals are a welcome change from standard ‘tax mix shift’ reform proposals which trade off a higher GST for lower income taxes. Instead, most of the revenue gained from higher GST would be used to remove some of the most inefficient (and unfair) State taxes such as Stamp Duties on insurance. Aside from the proposed income tax cuts, most of the taxes to be replaced fall mainly on household consumption, so the implications for the distribution of spending power among households are less clear cut  than a straight consumption tax for income tax switch, which is strongly regressive. See my previous blog ‘Who’s the fairest of them all’ and ACOSS analysis ‘Paying our fair share’.

The CPA advances four reform options:

  1. A 10% GST with health, education and fresh food exemptions removed to raise $12B in 2015 to replace stamp duties on insurance & motor vehicles ($8B) and modestly reduce property Stamp duties and other indirect taxes ($2B), with the remaining $2B used for income tax cuts and an increase in income support payments.
  2.  A 15% GST off the existing base to raise $26B to replace stamp duties on insurance & motor vehicles ($8B), substantially reduce property Stamp Duties ($10B) and other indirect taxes ($2B), with the remaining $6B used for income tax cuts and an increase in income support
  3.  A 15% GST with health and education in the base to raise $37B to replace stamp duties on insurance & motor vehicles ($8B), abolish property Stamp Duties ($13B) and other indirect taxes ($2B), with the remaining $14B used for income tax cuts and an increase in income support
  4. 15% GST with health education and fresh food in the existing base to raise $42B to replace stamp duties on insurance & motor vehicles ($8B), abolish property Stamp Duties  ($13B) and other indirect taxes ($2B), with the remaining $19B used for income tax cuts and an increase in income support.

Using a model developed by KPMG, the report estimates the impact of these options on economic growth and on households (divided into groups of 20% by household ‘equivalent’ income). It also  makes a number of claims about the inefficiency of the current tax ‘mix’. This blog is in two parts: ‘what’s clear’ (some obvious points) and ‘what’s not clear’ (questions that need to be clarified).

What’s clear

1. Australia does not rely a lot more on income taxes (broadly defined) and a lot less on consumption taxes, than the OECD average.

The international tax revenue data in the report shows that, when social insurance contributions in other OECD countries are added in, 58% of tax revenue in Australia comes from taxes on income compared with an OECD average of 60% – or 63% compared with 61% if Payroll taxes are included (figure 2-8)

The share of tax revenue raised from consumption taxes is 27% in Australia compared with an OECD average of 33%. There’s much more to consumption taxes than GSTs and VATs, including State taxes such as Stamp Duties that fall on consumption.

2. The increases in the GST modelled for the report by KPMG would reduce economic growth for the first three years after the reform.

It is well known that one of the short term effects of an overall rise in consumption taxes is that the economy slows, due to the impact of higher prices (just ask the Japanese). To be precise, it increases household consumption in the years between announcement of the reform and implementation as people rush to buy good at existing prices, then reduces it).

3. Abolishing inefficient State taxes would boost growth in the long run

It’s not surprising the modelling finds that GDP would grow faster over the long term if these taxes were abolished. Taxes such as Stamp Duties have well known negative impacts on investment and growth. Taxing business ‘inputs’ rather than final income or consumption or assets such as land and mineral wealth is inefficient as it distorts household and business investment decisions (for example by discouraging people who need it from taking out insurance, and penalising decisions to move house).

The $27.5 billion dollar question is: by how much? This is notoriously difficult to estimate. As with all macro-economic modelling, results depend on assumptions. The report appears to take this a step further by assigning the projected economic efficiency gains to households (which no Government would be brave or foolish enough to do).

4. Low income households don’t usually benefit from tax cuts

One quarter of households, including the vast majority of those in the bottom 20%, pay no income tax (but they do pay consumption taxes), so they would be worse of in the absence of social security payment increases if consumption taxes increased.

As the above ACOSS report argues, relying on social security payment increases to sustain spending power is risky in an environment when these payments are under threat (see last year’s Budget)

What’s not clear

1. Why do all households gain from revenue-neutral tax reforms?

All four proposals are revenue neutral. They neither increase nor reduce taxes overall. So in the short term, reform is a zero sum game with winners and losers. Yet all households appear to win in the modelling.

A close look at Appendix ‘C’ shows that his happens because of a line item called ‘increase in income before tax’. Why would income increase before tax (apart from social security payments increases which are accounted for separately)?

One possible reason is the claimed ‘efficiency dividend’ from the reform. That is, the economy grows more quickly because taxes are less distortionary. But that’s a long term impact. As indicated, the model shows that GDP growth slows for the first three years and household consumption is projected to fall for the first five years.

If ‘input taxes’ (such as Stamp Duties) are replaced by a tax on consumption (like the GST) we would expect households to be slightly worse off in the short term, in the absence of compensation. This is because in the short term, some of the gains from abolition of input taxes would ‘leak’ to sectors other than Australian households (especially exports).

2. What happens of we exclude ‘increases in income before tax’ and focus on the impact of the tax changes?

If we separate out the effects of tax and social security changes (higher GST, lower Stamp Duties, and income tax cuts and social security increases) from the projected ‘increases in income before tax’ we find that the first reform option (removal of GST exemptions, abolition of some Stamp Duties, a reduction in the first marginal tax rate from 19% to 18.5%, and modest social security increases) reduces household spending power for the bottom 2 quintiles and raises it for others.

effects of gst change-page0001

This is the pattern of short-term winners and losers we would expect from such a change (red bars), though the average losses at the bottom end are much larger than expected:

  • Low income households are disproportionately affected by the consumption tax changes
  • Since only the lowest marginal income tax rate is cut, middle income households gain the most, but high income earners also gain because the tax cuts flow through to them as well.

When the ‘increases in income before tax’ are added in (blue bars) everyone wins and the reform is distributionally neutral (see Figure 3-4 in the report).

But where do these income increases come from? The report refers to ‘increased incomes as a result of improved efficiency in the economy’ (p14). If this is where they come from (and these look like brave assumptions), how would these efficiency gains flow through to households in the first year of the reform (2015-16)?

3. What is the effect of the consumption tax changes on their own?

It would be worth knowing what the effect of replacing Stamp Duties with a higher GST has on the spending power of households at different income levels, since this kind of reform is rarely modelled. The impacts are not obvious since Stamp Duties themselves largely fall on household consumption – so the reform would replace one set of regressive taxes with another. Its effects would depend on the spending patterns of different households (e.g. on food, home purchases, car purchases, insurance, etc).

It’s good to see more information out there on the impact of different tax reforms, and it would be even better if some of the results in the report were explained more fully.