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The truth about claims of a faulty welfare system
In this story
Even by the tendentious standards of the Murdoch press, The Australian excelled on Friday last week.
“Parental welfare pays more than work,” read the headline over the story, puffing the need for the welfare “overhaul” being proposed by the Turnbull government’s minister for social services, Christian Porter.
Citing new data “obtained by” the paper – read: selectively given to – the story claimed thousands of parents getting government benefits were financially better off not getting a job.
It focused on one highly selective case study, a single parent who did not work and received no other income support, with four children aged four to 13, who paid $400 a week in rent and received rent assistance, and who also received $18.20 a fortnight in energy supplement and pharmaceutical allowance. In total, this parent received $52,523 a year.
The piece compared this with the median wage of $61,300 a year for full-time workers and $46,500 if part-time workers were included – which amounted to after-tax income of $49,831 and $39,841 respectively.
Thus the conclusion that this hypothetical parent – we can pretty safely assume a woman – was better off not working.
Except it wasn’t true. About 5pm on Friday – that is 17 hours after The Australian’s story went up online – the peak welfare body, the Australian Council of Social Service, released detailed calculations showing the real picture.
The crucial mistake in the story was that it included more than $32,000 in family tax benefits when calculating the income of the unemployed parent, but failed to note that a working family on median income also would receive those family tax benefits.
As the ACOSS analysis noted, by ignoring “the important $30,000 in Family Tax Benefits the modest income earning family would receive while on the median wage … [t]he article compares ‘apples with oranges’.”
The analysis continued: “This is a glaring omission in an article about who is financially worse off, because family payments are designed in this way precisely to ensure that parents are not worse off financially if they take on a full-time paid job: as a result this parent won’t lose a cent in Family Tax Benefits by taking up full-time employment.”
ACOSS concluded “a sole parent with four children is over $20,000 better off when in paid work on a wage earning [the part-time median wage of] $46,500 and over $25,000 better off when earning [the full-time median wage] of $61,300”.
In due course, analysts elsewhere called out the story for the rubbish that it was. Greg Jericho in The Guardian said it was “patently absurd” and took it apart forensically. So did Fairfax’s Peter Martin. The doyen of economics commentators, The Sydney Morning Herald’s Ross Gittins, called the piece a “cock and bull story” and suggested the government planted it because it “wants us to believe the federal budget is close to bankruptcy but, in truth, it’s this government that’s nearer to being morally, politically and economically bankrupt”.
By the time the truth came out, though, The Australian’s untruth had long been out there in the public domain. Radio talkback hosts, whose stock in trade is the promotion of downward envy, were all over it.
As Jonathan Swift noted 300 years ago, falsehood flies and the truth comes limping after it.
The Abbott–Turnbull government, aided and abetted by right-wing media, has set a lot of falsehoods to wing on the subject of welfare during its time in office. High time to limp after some of them.
Let’s start with a little historical context, though. The previous Coalition government was, according to the International Monetary Fund, the most profligate in Australia in at least 50 years. With vast revenues coming in courtesy of the mining boom and its wholesale privatisation of assets, the Howard–Costello government close to gave away most of the money, largely to high-income earners.
According to the tabulation of the progressive think tank, The Australia Institute, the cost to the budget of those reductions – in personal income tax, the discount on capital gains tax, tax cuts on superannuation and the abandonment of the indexation of fuel excise – was some $55 billion last year, or about $44 billion if one accounted for so-called bracket creep, the process by which increasing wages push people into higher tax brackets.
Had those decisions not been taken, Australia would now have a healthy budget surplus, not a deficit. Not to mention the fact that economic and social inequality would not have grown as fast as they have.
We should note also that Labor was not blameless here. On its way to winning the 2007 election, it promised to match the last and largest of the income tax cuts, and did.
Subsequently, though, we had the global financial crisis and the end of the mining boom, and dire talk from the Coalition in opposition about a “budget emergency” and “debt and deficit disaster”. To the extent that it was such – and most economists would say the rhetoric was wildly overblown – it was substantially the result of government giving permanent tax breaks on the back of a temporary windfall.
Now back in government, the Coalition stresses the need to “take action to strengthen our economic resilience … by returning the budget to balance through disciplined expenditure restraint”.
Those are the words of Treasurer Scott Morrison. One hardly needs to spell out what he means by this euphemistic language, but for the absence of doubt, let us again quote Gittins, who translates it thus: “penny-pinching cost cuts aimed mainly at the socially disadvantaged and politically defenceless … [an] attack to bottom-of-the-pile Aussies”.
Richard Denniss, chief economist at The Australia Institute, has coined his own term for the conservative strategy by which money is directed to wealthy people during good economic times, and then, when the economic climate turns bad, is clawed back from those further down the economic scale. He calls it the “right-wing ratchet”.
And the right of politics and the media, the advocates of greater inequality, have been ratcheting up the rhetoric of late as they strive to create a sense of crisis around welfare.
Take, for example, Morrison’s speech at a Bloomberg function in Sydney on August 25 – text of which was given to the media in advance – in which he warned of a “new divide” in Australia, between the “taxed and the taxed-nots”.
Unless the government succeeded in “reining in the growth” in welfare spending, he said, ever more Australians would go through their entire lives never paying more in tax than they received in benefits.
Morrison invoked the spectre of recession, mass unemployment and national decline. He warned of a “terrible risk” of complacency and complained of “a generation [that] has grown up in an environment where receiving payments from the government is not seen as the reserve of those who unfortunately will be forever dependent on support or in need of a hand up, but a common and expected component of their income over their entire life cycle”.
His words were apocalyptic but also non-specific and unsupported by data, probably because the data would inconveniently show (a) the welfare problem is not really so big and (b) because such problems as there are do not relate to working-age people bludging off the system.
Of Morrison’s warning about a looming tide of people with lifelong welfare dependency, Professor Peter Whiteford of the ANU Crawford school and expert in social policy says: “I don’t know a data source which you could use to justify that statement. I don’t think there is one.”
The real story, Whiteford says, is that most of the people getting more in government benefits than they pay in tax are over 65, and retired.
“Only about 10 per cent of those people pay more in taxes than they get in benefits, but they paid taxes during their working lives, most of them. The great majority of people under 65, about two-thirds to 70 per cent, are net contributors.
“There is an issue in the sense that people over 65 are an increasing proportion of the population. But when you look at the statistics, the proportion of households that is completely independent of the welfare system has gone up quite substantially, from about 40 per cent in the mid-90s to about 49 per cent. It’s a lot lower than it was 20 years ago.”
Still, that leaves a substantial proportion of the population that receives government money. These are Morrison’s “taxed-nots”, otherwise described as zero net taxpayers. Critics of the welfare system, particularly in The Australian, regularly suggest half the population is on the take from the other half, via the government.
Associate professor Ben Phillips, of the ANU, who spent a decade crunching numbers on the Australian tax and transfer system for the National Centre for Social and Economic Modelling, confesses he may have “accidentally helped” provide ammunition for their anti-welfare campaign.
He explains that he responded to a request from the paper’s Adam Creighton – an alumnus of the small government, free market right-wing think tank, the Centre for Independent Studies – to run some numbers on the proportion of people who received more from government than they paid in tax.
“I came up with the figure that about 50 per cent pay net tax and 50 per cent don’t pay,” he says.
He provided the data to Creighton, along with various caveats. He says what subsequently appeared in print was a selective and very dubious use of the statistics.
“It ignored a lot of information we’d given them that explained what was going on,” Phillips says. “They didn’t choose to provide the whole picture.”
So what is the whole picture?
For one thing, there really is no cohort of “taxed-nots”. Even those who do not pay income tax pay other indirect taxes such as the GST and excises.
“The other thing they consistently suggest is that welfare is out of control,” Phillips says. But when you look at the numbers, welfare is going up pretty much in line with incomes across the country.
“And a lot of the groups the government is looking to target are those where … the numbers have been coming down over time, like unemployment benefits and family payment benefits and single parent benefits. It’s the age pension where most of the growth is, for fairly obvious reasons. We’ve got 2.5 million age pensioners and about 750,000 unemployed. And, of course, the unemployed don’t receive anywhere near as much as an age pensioner.”
Nor are they likely to get any more under this government. In response to persistent calls from a number of quarters, including ACOSS and the Business Council, to increase the unemployment benefit Newstart from the current rate of just $38 a day, Porter recently said he wanted it to remain punitively low.
“I would actually put to you that the fact that people who find it challenging to subsist off Newstart … might actually speak to the fact that that’s one of the design points of the system that’s working okay because the encouragement is there to move off those payments quickly,” he said on September 21.
Apparently it’s a good thing that 55 per cent of those receiving Newstart are living below the poverty line, along with 51.5 per cent of those receiving the Parenting Payment, 36.2 per cent of those receiving the Disability Support Pension, and 24.3 per cent receiving the Carer’s Payment. It’s motivational.
Compare this with the statement from Scott Morrison exactly a month later, when the government got through the parliament its latest round of personal tax cuts, which benefit only the top 30 per cent of income earners.
The cuts, he said, were intended to “reward and encourage hardworking Australians for doing overtime, picking up extra shifts, earning a promotion or getting a higher-paying job, instead of penalising them with a higher tax rate”.
The contrast between the statements speaks of the assumption of the government and the assumption they tirelessly try to foster in the community, that one lot are indolent and the other lot are diligent. The wealthy are encouraged to greater effort with carrots, the poor are encouraged with sticks not to be poor.
In reality, though, there is enormous movement over time between the ranks of the taxed and the taxed-nots.
“Taking a snapshot is not the best way of looking at it,” says Phillips.
“As a young student you might receive more in benefits than you pay in tax. And when you have young kids you probably receive more in benefits. Then when you are a bit older you pay more in tax. And then you retire.
“Overall it balances out, or it should. There should be no surprise that on average it’s about a 50-50 split. Of course the most needy get more. The government redistributes income, that’s an important part of what it does.”
In a just-published journal article, Professor Whiteford details statistics showing just how mobile – both up and down – people are economically. He compared numbers from the Household Income and Labour Dynamics in Australia (HILDA) surveys – which track the fortunes of 10,000 households and all the individuals in them – between 2001 and 2010. He found that over that time only 2.2 per cent of the Australian population remained at the same point of the income distribution. Some 21 per cent went up the income scale by more than two deciles – that’s 20 per cent – while 21 per cent went down more than two deciles.
“In fact, HILDA shows that only around 47 per cent of those in the poorest 20 per cent of the population in 2001 were still there in 2010. Similarly, only around 47 per cent of those in the richest 20 per cent of the population in 2001 were still there in 2010,” he wrote.
Most pertinently, he noted: “Nearly half the net taxpayers at the beginning of one decade will not be in that position at the end of the period”.
The churn is affected by all sorts of things, including economic cycles and simple personal luck. Getting a job or a promotion or having the kids leave home can propel you up the scale. Conversely, retirement or becoming unemployed, sick or disabled, separating from your partner or, particularly in the case of women, having a child, can propel you down just as fast. So sneer not at the taxed-not. Statistically it’s close to an even-money bet it could be you, some time in the next decade.
The government and its media surrogates would have you think the worst, which is why they publicise the most extreme cases they can find. The hypothetical single mother featured in The Australian was in no way typical. Bureau of Statistics figures show only about 4 per cent of single parent families have four or more children. We don’t know her circumstances, but we are invited to imagine them. We might suppose her to be a slatternly rorter who will be on benefits forever. Equally, she might be a recently separated highly skilled woman who will soon be back in the workforce and paying tax. But the presentation of the story and its factual omissions encourage resentful assumptions.
Of course, there are some people on welfare who are working the system, just as there are some rich people who are working the system. Indeed, there is a significant body of research suggesting the rich are more likely to cheat, because wealth encourages the psychology of entitlement. But that is a story for another day.
The reality is that Australia has probably the most tightly targeted welfare system in the world. A 2014 international comparison by the OECD showed nearly 80 per cent of Australian cash benefits were income-tested. In New Zealand it’s 37 per cent; in Britain and the United States, 26 per cent; and less than 10 per cent in most of Europe.
As a result, benefits go to people who really need them. The poorest 20 per cent of the Australian population receives nearly 42 per cent of all social security spending, more than 12 times as much as the richest 20 per cent. In the US, the poorest get about one-and-a-half times as much as the richest. Nonetheless, there is a concerted effort going on to present the welfare system as overgenerous and ultimately unaffordable.
Hence the government’s release in mid-September of research based on past patterns of spending, and projecting from them the lifetime welfare costs of Australians more than four decades hence.
“It was a silly exercise,” Whiteford says. “A methodology designed to come up with a very large number.”
It certainly did that: $4.8 trillion.
The rationale was that by taking an actuarial approach to the issue, government could identify groups at particular risk of becoming long-term welfare dependent, such as carers, students who graduate university and vocational courses and go straight on to the dole, and parents under the age of 18.
Under this “investment approach”, specific, innovative policies could then be developed through the $96.1 million Try, Test and Learn Fund, which was announced in the 2016-17 budget.
Says Ben Phillips: “I’m a numbers person, so I’m in favour of having more numbers to analyse the situation, if it’s used to target certain groups for assistance, to make savings and perhaps improve their lives. But I’m sceptical about it being used for the right purposes. I suspect it will be more used to bash certain groups.”
And that other numbers guy, Greg Jericho, was scathing about the $4.8 trillion headline number.
“It is a dumb figure that should be shown absolutely no respect,” he wrote. “It is there for one reason alone – because it is big and thus it sounds like we are about to drown in … welfare payments.”
There is good reason for suspicion about the government’s true intent. As ACOSS notes, the government has a number of so-called “zombie” measures it is still trying to push through the reluctant senate, which would cut the incomes of those with the least. Like making young unemployed wait five weeks for the dole.
The evidence suggests the major problem with the welfare system is actually the labour market.
On Monday, Anglicare Australia released a report on the matter, titled “Positions Vacant? When the Jobs Aren’t There”. It showed that 732,000 Australians were registered as unemployed in May, or roughly four times the number of available jobs. If the underemployed were included, there were about nine people competing for every job.
And it was much harder for low-skilled people. There were only about 21,800 entry-level jobs advertised for the month.
“Given the generally grim labour market conditions, it is little wonder that the Coalition government is targeting welfare programs, especially those aimed at working-age Australians,” says Dr Jim Stanford, director of the Centre for Future Work.
“Work is scarce, and wages are stagnant. Politically, the government wants to shift blame for this depressing state of affairs away from their own policies, instead blaming people who can’t find work.”
He reels off the statistics. Over the past year full-time employment has been falling. Since January, 128,000 part-time jobs have been created, while 68,000 full-time jobs have been lost.
Thus while the headline unemployment figure of 5.6 per cent does not look too bad, the number of hours worked has stalled, because the available work is being shared by more part-timers. The part-time share of total employment reached 32.2 per cent in September.
“Australia now has the third-highest reliance on part-time work of any industrialised country,” he says. “There are other ways in which the total employment numbers overstate the true condition of the labour market. One is the significant share of workers who are not entitled to paid leave provisions. This ratio is generally interpreted as an indicator of people working in casual or temporary jobs. About one in four paid employees have no leave entitlements. Among women it is higher.”
Another standout statistic is the rapid growth of self-employment, something often portrayed as a sign of entrepreneurial flair. And in some cases it is, but it can also be a last resort of those who can’t find steady work.
The second-biggest source of new jobs in the year to August was one categorised by the Bureau of Statistics as “personal services”, which Stanford calls “a grab-bag of marginal one-on-one services, gigs, and short-term contracts – everything from pedicures to dog-walking”.
In summary, work is becoming more precarious, part-time and poorly paid for many Australians. And people are coming to realise this – some more acutely than others.
A recent Essential poll found 55 per cent of people earning more than $2000 a week thought the Australian labour market was fair, while just 31 per cent of those earning less than $1000 a week thought likewise.
But then, the whole society is becoming less equitable. As economics professor turned Labor politician Andrew Leigh tells us, since the mid-1970s, real earnings for the top 10th of us have risen by 59 per cent, while for the bottom 10th they have risen by just 15 per cent.
Peter Whiteford points out the irony of this growing inequality.
“The more unequal you are,” he says, “the more money you will get from high-income people.”
And the more excuses the greedy ones will have to whinge about the “taxed-nots”. Unless, that is, you keep cutting taxes for the rich and welfare for the poor.
This article was first published in the print edition of The Saturday Paper on Nov 5, 2016 as "Welfare checks".
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