Racing against time: indexation of social security payments

Indexation of social security payments is a dry subject. Does it really matter if they’re indexed to MTAWE or CPI? You bet! The Government’s budget proposals to index pensions only to the CPI and not to wages would reduce them by $80pw in a decade compared with present indexation, and save a motza. The Rudd Government’s decision in 2009 to index family payments to CPI instead if wages has saved over $1B and has already cost a low income family with 2 children under 13 years $19pw. If Newstart Allowance had been indexed to wages as well as the CPI over the last 20 years, it would now be $115pw higher ($52 instead of $36 a day).

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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].