Cracking down on welfare?

Why a ‘takers versus makers’ approach isn’t entirely helpful.

Last week, federal social services minister Kevin Andrews announced he would review commonwealth government welfare payments (see the Fairfax article here and the Daily Telegraph article here). The stated reason for the review is the belief that too many people rely on public benefits for income. The focus, it appears, will be unemployment and disability allowances. Arguably this would be repeating the ‘takers versus makers’ view of welfare and social services.

Now, there is nothing wrong with having this discussion. Politics is the process of deciding how society is structured and how finite resources (including income and wealth) are distributed. It should come as no surprise a Coalition government is talking about cutting transfer payments for the disabled and unemployed. This is not to say that the Coalition and their voters are less compassionate than those on the left, or that they do not believe the needy should be assisted. People’s political attitudes are formed by their experiences, their situation in life and their personal philosophies. Coalition voters (and their elected representatives) will on average have different experiences and philosophies than voters and politicians from the Labor Party. One of the defining features between the Coalition and Labor is class and economics policies (including those relating to redistribution). For generations Australian politics has largely been structured around class conflict, and Coalition voters are more likely to have higher incomes, be in managerial positions, or self-employed in the private sector.*

What I find interesting (although perhaps not surprising) is the focus on two very small parts of the welfare budget. As a chart run in the Australian shows, barely more than a quarter of those receiving some kind of welfare payment are on either unemployment or disability payments. Now, this still equals more than a million people, and perhaps this is too many. There’s nothing wrong with having that debate.

What is odd about the current discussion, though, is that the majority of welfare payments appear to be off limits. Nearly half of all payments go to aged pensioners. Understandably, it may be difficult to reduce the number of people on the age pension without real political pain (particularly for the Coalition, which is disproportionately supported by older voters). However, as Greg Jericho points out in the Guardian, if you were serious about getting welfare spending under control, this would surely need to be one part of the solution. This is not just a Coalition blind spot, either. The Labor Party has ruled out touching the age pension.

Viewed in a certain way there may be some logic behind the limited scope of the Coalition’s benefits review, though.  Reducing spending on programs that are largely involved in the redistribution of wealth from the rich to the poor may be seen in a number of ways. It could be a way to limit the impact of budget deficit reduction on supportive groups by having voters less likely to vote Coalition take the hit; or alternatively that it is a way to redirect resources away from  less supportive  voters and towards those more likely to vote for the Coalition.It can also be looked at in moral or ideological terms. Some Coalition MPs may see those on various forms of welfare as undeserving of public money. This could be seen as the ‘takers versus makers’ view: some people create all the wealth, others just take it through hand-outs. Reducing the ‘bad benefits’ going to these people so it can be given to the more deserving in tax cuts or ‘approved benefits’ may be seen as a public good.

The problem with the ‘takers versus makers’ rhetoric is that it isn’t entirely accurate or helpful. A large number of people, including many who work, receive substantial benefits from government. The dollar value Australian households receive in governments transfers and services at different points in the income scale is shown in the chart below. The vertical axis is the dollar value of government cash benefits (pensions and allowances, the Family Tax Benefit, Baby Bonus and Carers Allowance) paid to each household in dark grey, and social transfers in-kind (this includes services like education and healthcare, and subsidies such as the private health insurance rebate, electricity concessions etc) in light grey; and the horizontal axis is household income, split into quintiles (groups that each make up 20% of the population), from the lowest income to highest.

Government cash and in-kind benefits received, by household income. Data sourced from ABS Government Benefits, Taxes and Household Income, Australia, 2009-10. The area shaded dark grey is the value of government benefits paid in cash. The light grey area is the value of benefits-in-kind, such as government provided or subsidised healthcare and education.

This information, taken from the Australian Bureau of Statistic and collected in 2009-10, indicates that at that time the poorest 20% of households in Australia received less than twice as much money in cash benefits from government than the richest 20% households ($177 on average compared to $87 per week), despite earning around on tenth as much from in private income from salaries and investments ($374 for the poorest compared with $3,851 for the richest).

Non-cash benefits are even less progressive. They’re actually regressive, with the value of non-cash benefits increasing on average as household incomes do. Those with the top incomes received an average of $476 in non-cash benefits each week. This was two-and-a-half times as much as the $197 received by the poorest fifth of households and reflects the greater likelihood the wealthiest will use a number of government provided or subsidised services, such as education and healthcare.

In total households with the lowest 20% of incomes received the lowest level of total benefits, worth $374 per week. Those in the second highest quintile receiving the greatest value in benefits, worth an average of $610 per week. Those with the highest household incomes received an average of $563 in government benefits each week. Now, this is not to say there is necessarily a problem with higher income households receiving benefits, and in particular non-cash benefits such as educational and health services. However, it does complicate the clean-cut idea that there are a group of citizens who are takers, and a group of makers. A response to this may be that higher income households pay tax, so they are just getting some of this back. It’s true that due to their larger incomes, higher income households pay more tax. However, lower income households pay tax too.

The chart below shows the taxes paid by households in each income quintile. The area shaded dark grey is taxes paid on income, and the light grey is taxes on production (such as GST and those charged to businesses which are likely to be passed on to consumers). Taxes on income are highly progressive in Australia. On average those in the top 20% paid $748 each week in income tax, around 19% of their private incomes. Those in the bottom 20% paid $28, worth approximately 7% of their income. Taxes on production are regressive, however. Low income households pay an average of $105 each week in these taxes. This is worth 28% of their private incomes. Households in the highest quintile paid an average of $298 in taxes on production, or 8% of their income. The regressive nature of these taxes is difficult to avoid. A 10% tax on sales and services is going to cost the rich and poor alike 10% on their purchases. A tax on alcohol is going to hit the rich and poor equally (assuming they spend the same proportion of their income on drinks). In practice indirect taxes are likely to hit the poor harder, as they are less likely (or able) to save and invest a portion of their income. The GST exemption on certain goods and services, such as fresh food and education, tends to make it even more regressive. The progressive nature of the income tax system and cash benefits partially makes up for this (as it is designed to do).

Government cash and in-kind benefits received, by household income. Data sourced from ABS Government Benefits, Taxes and Household Income, Australia, 2009-10.
Income and production taxes paid, by household income. Data sourced from ABS Government Benefits, Taxes and Household Income, Australia, 2009-10. The area shaded dark grey represents taxes on income, the light grey area taxes on production (such as the Goods and Services Tax).

As a result of the progressive nature of taxes on income and cash benefits, the households with the highest income on average pay $484 more into the system than they receive. However, if this defines them as makers, then on average all other households, including those in the second highest quintiles, are takers. All but those with the 20% highest incomes receive benefits of greater value than the taxes they pay. Those that receive the greatest net benefit are households in the second lowest quintile, who receive $322 more in benefits than they pay in tax.

Effect of benefits received and taxes paid on household income. Data sourced from ABS Government Benefits, Taxes and Household Income, Australia, 2009-10.
Effect of benefits received and taxes paid on household income. Data sourced from ABS Government Benefits, Taxes and Household Income, Australia, 2009-10. Household quintiles above the line running through zero receive more in benefits and services than they pay in tax. Below the line less.

The idea we can split society into ‘makers’, who do all the work and pay all the tax, and ‘takers’, who largely live of the work of others, is too simple. Most households make a little and take a little, with different mixes between households and over time. Even though the highest income households are net ‘makers’, they still take $563 from the system. This also provides another way to find budget savings — one the Coalition refused to support when in opposition — which would be to more finely target welfare spending. Despite Australia having a relatively well targeted welfare system compared to other developed countries, a quick look at where government cash benefits go (an average of $87 to each household in the highest quintile in 2009-10**) indicates there may be some savings to be found in this area. That is, if the Coalition was willing to do something that would annoy a demographic that tends to support them. This could be asking a little too much of any party. It is quite possible the Coalition are doing exactly what their voters want. And in a democracy, isn’t this (generally) a good thing? If that is the case, and certain groups don’t like it, they should then focus on changing the minds of Coalition voters, so that  either the Coalition government will change course, or won’t stay in office long. 

That is, of course, assuming this is what Coalition voters want. Next I’ll look at what Australian voters think about redistribution, and how the level of welfare spending has changed over time.

*According to Australian Election Study data, in the four elections between 2001 and 2010 approximately 40% of voters in the lowest household income quintile (the poorest 20%) voted for the Coalition compared with around 50% of those in the highest quintile. During the same period around  60% of those in managerial roles voted for the Coalition while just 40% in manual jobs, 45% in service occupations (sales, restaurants etc) and 50% in clerical occupations. Around 60% of voters who were self-employed also voted Coalition in these four elections, compared with around 35% of public servants and 45% of private sector employees.

**The last Labor government did tighten the means testing for some of these benefits, so this figure could be a little lower now.

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