Getting Coherence into the Equity Debate – Part 2

Oct 22, 2020

In Part 1, I used three desirable attributes (equity, efficiency and simplicity) of a coherent tax and transfer system to assess the 2020-21 personal income tax changes. In Part 2, I examine JobSeeker payments.

JobSeeker payments were almost doubled to about $1,100 per fortnight by the Coronavirus Supplement during the pandemic but have now been reduced by $300 and will revert to pre-pandemic levels at the end of 2020.

Background: What was said in the 1970s Henderson Poverty Inquiry?

While recommending a universal guaranteed minimum income scheme in the longer term, the 1970s Henderson Poverty Inquiry recommended an initial major step in that direction through an Australian pension (for longer-term categories, particularly the aged and people with disability) and an Australian benefit (for the unemployed and sick). Importantly, the rates of the two would be the same, recognising the common objective of protecting people from poverty when unable or not expected to work. But different means tests were recommended given the temporary nature (usually) of unemployment and sickness and the expectation of return to full-time employment. That approach guided governments in the 1970s and 1980s, if not always fully adopted.

With increasing part-time and casual work, however, the benefit income test was steadily relaxed over the 1980s and 1990s to encourage the unemployed to take up some work while still looking for full-time work. And from the late 1990s the direct link between the rate of benefit and that of the pension began to be eroded.

By the time of the first McClure Report (2000) and then the Henry Report (2009), distinct rates had emerged and were endorsed in the form of a lower rate for people in the labour market ‘participation’ category (sole parents as well as the unemployed and sick) than that for people not able or expected to participate (age, disability and carers’ pensioners). There was also increased emphasis on ‘positive’ measures to help people transition from unemployment to full-time, ongoing work.

Henry recommended relativities between the pension rate and the rate of payment for the ‘participation’ group should be fixed

Though not explicitly raised in these reports, the fact that relaxing the income test and maintaining the rate at pension level might lead to subsidising part-time employment and discouraging the search for full-time employment may have contributed to the recommendation for distinct rates. The appropriate relativities between the pension rate and the rate of payment for the ‘participation’ group were never articulated firmly though Henry recommended the participation rate provide a ‘basic level of adequacy’ and the same indexation factor so the relativities would be fixed.

The basic single rate of the Jobseeker payment (previously called the Newstart Allowance), currently $565.70 per fortnight, has fallen steadily relative to the age pension for over 20 years and now stands at 60% of the total age pension ($964.30 per fortnight for a single home-owner). With the Coronavirus Supplement currently payable ($250 per fortnight), the total benefit at present is $815.70 per fortnight or 86% of the pension, requiring $148.60 in casual or part-time work to gain the basic pension level of income.

When the Coronavirus Supplement is phased out at the end of the year, even earning the full $300 per fortnight in part-time or casual work that is allowed before Jobseeker is reduced, will leave the recipient with less than the pension. (The parenting allowance for a single parent with a child under 8 is currently 84% of the pension, not including the Coronavirus Supplement.)

Alternative reform options

My own preference is to return to the Poverty Inquiry rationale of a standard minimum income guarantee for all those unable or not expected to work, hence raising the basic Jobseeker by about another $150 per fortnight above the current Coronavirus Supplement (almost $400 per fortnight in total) to reach parity with the pension.

I recognise that this might justify tightening the income test. The payment for single parents should also be the same as was the case when Margaret Guilfoyle introduced the sole parents pension under the Fraser Government (arguably the pension means test should also apply to sole parents as Henderson recommended and the Fraser Government provided).

Alternatively we could work on the McClure and Henry framework, assuming the unemployed may be able to access some casual or part-time work and ‘tide themselves over’ until finding full-time work. That seems both harsh and unrealistic in the current situation but, should the Government agree to this alternative coherent policy position, it might set the ratio at around 80-90% of the pension, implying that at least $200 per fortnight of the current Coronavirus Supplement should continue beyond the end of the year, and the pension indexation factor apply to Jobseeker (and other social security payments including parenting payments for sole parents).

The Prime Minister has expressed concern that increasing JobSeeker would reduce incentives to work. This concern is not without merit, but a compassionate society must accept that providing an adequate safety net for people to live on risks some people taking advantage. More to the point, there are other important tools available to combat this moral hazard including the work test. This test also has the advantage of flexibility – it can be tightened when jobs are evidently available and loosened at other times or directed primarily towards training.

In Part 3, I will address the policy area of family assistance and child care.

This article was first published by the Tax and Transparency Policy Institute

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