Economists’ proposals show responsible welfare reform is possible

Sep 15, 2021
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The next election is likely to continue the grim outlook for welfare beneficiaries regardless of whether the Coalition or Labor wins. A healthy democracy should do a lot better than this. There is no shortage of good ideas.

As discussed below, John Quiggin and group of other Australian economists have devised a socially and fiscally responsible change to Australia’s mean-spirited welfare system. Given the chance, the Whitlam government would’ve probably added this type of change to its enduring reforms such as Medibank/Medicare. So might the Hawke-Keating government. There is little chance Anthony Albanese’s Labor opposition will take it to the next election.

Instead, Labor is likely to agonise over how much, if anything, it can offer welfare recipients after the Morrison government decided earlier this year to end its Covid supplement to welfare beneficiaries. At its peak, the supplement gave a big boost to welfare payments, making life more affordable and less stressed for single parents, job seekers and others. The payments, plus generous subsidies to business, also helped shield the economy from the worst of the potential impact of Covid.

The government increased the JobSeeker rate to $310.40 for a single person a week from April 1. That’s a miserable $4 a day more than the previous figure of around $40 a day. The new amount, which is indexed to inflation, is only 65 per cent of the age pension rate and. still well below the Henderson poverty line of $549.30 a week.

The Quiggin group has proposed a simple way to lift welfare beneficiaries out of poverty — give them more money and deliver it in a much better manner than the existing welfare system. The proposal, outlined in a paper for the ANU’s Crawford School of Public Policy is called a Liveable Income Guarantee (LIG). It is open to people over 16 who are without an adequate market income, but willing to contribute to the society they live in.

The participatory payments would be the same as for the age pension. That’s $476 a week for singles ($24,770 a year) and $359 each a week for couples (a combined $37,341 a year). The existing family tax benefits, rental assistance, and other support would remain available. The payments would be available for such activities as caring for children and others; volunteering for a wide range of organisations and causes; support for starting a small business; ecological care projects; artistic and creative activity; and full-time study.

The proposal envisages using the tax office to administer and pay the benefits. As with the Business Activity Statement, beneficiaries would have to declare their income and activities on a quarterly basis, subject to audit.

In contrast, the existing welfare system starts from the assumption that recipients are cheats and imposes harsh compliance rules The latest rules make JobSeeker recipients apply for 20 jobs a month, amid other conditions. Emma Dawson, executive director of the Per Capita think tank, says, “we make people jump through extraordinary hoops to receive unemployment benefits with programs to punish people for not having a job that isn’t there”.

When LIG recipients earn extra money by working, benefit payments will have to be withdrawn to reduce work disincentives. But the withdrawal rate needs to be much lower than in the existing welfare system where the combination of the tax on extra earnings and the withdrawal rate on benefits can result in effective marginal tax rates well over 70 per cent. The top tax rate for people not on benefits is 45 per cent.

Given Australia’s high rate of under-employment, most people will be keen to do some extra work. Overseas trials of similar schemes show that few drop out of the workforce. Most proposals note that higher benefit payments help the economy by lifting consumption spending. The Quiggin group estimates that its scheme would cost $18 billion to $20 billion a year. This figure will be partly offset once some of the extra consumption spending by participants flows back to the government as higher revenues.

The Parliamentary Budget Office has estimated the government’s stage three tax cuts will cost $184 billion over seven years, with $138 billion going to the top fifth of taxpayers. If Labor and the cross benchers had rejected these cuts, they could’ve saved more than enough to cover the cost of the LIG scheme. Quiggin and others point out there are plenty of alternatives for financing the scheme, including clawing back some of the JobKeeper payments falsely claimed by firms. Increased spending in areas such as health and education is also feasible.

Reform along the lines proposed by the Quiggin and his colleagues would boost incomes by $166 a week for more than 1 million impoverished people. If the next election results in a hung parliament, both sides could come under pressure from the Greens and some independents to commit to lifting welfare beneficiaries out of poverty if they want to form a government.

There is growing interest here and overseas in another scheme, generally called an Universal Basic Income (UBI). Following the outbreak of the Covid virus, a YouGov poll in the UK in April 2020 found that 51 per cent of people supported the introduction of a UBI to let all adults receive a guaranteed monthly wage, whether employed or not. Overall support comes from social democrats as well as libertarians, particularly in Silicon Valley.

A leading Australian economist Ross Garnaut is a prominent supporter of a local UBI that he calls an Australian Income Security scheme. Garnaut argues that the government’s determination to return to budget austerity is the wrong solution to boosting incomes and economic growth. He wants to unemployment to go down to around 3.5 per cent which it was in the 1970s compared 4.6 per cent in July 2021. The average of 2 per cent between 1940 and 1970 would be a bolder target.

Garnaut’s proposal involves paying $15,000 a year into everyone’s bank account, then clawing some back with an income tax of 32.5 per cent or 37 per cent, starting from the first dollar income. He says the scheme would initially cost an annual $40 billion a year.

In an interview earlier this year with Alan Kohler published in Eureka Street, Garnaut said that as unemployment falls and labour force participation rises and to where we are back at full employment, “the cost to the budget would be about half the net cost of the hallowed reforms with the introduction of the GST in 2020”. He said that to compensate low income earners for the impact of the GST, the Howard government gave costly income tax cuts and grants to the states.

The most disappointing aspect of Garnaut’s plan is it would do little to help job seekers or those at the bottom of the income tax scale. There are two main reasons. One is that his $15,000 is no more than the latest annual JobSeeker payment while the LIG scheme would pay participants $24,770 a year. The other is that the tax for low income earners would start at the first dollar received, rather than the current tax free threshold of $18,200.

Many participants in the national debate, including the Business Council of Australia, advocate a higher JobSeeker rate because the current level of around $44 a day is too hard to live on. Labor should stop pretending it can win the next election by rolling itself into a small ball and supporting the Morrison government’s welfare and tax policies.

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