Opinion

John Hewson
The case for welfare reform

In recent weeks our governments have had a strong desire, in response to considerable political pressure, to be able to offer effective income support arrangements to compensate for the impact on workers of various health policy initiatives, such as lockdowns and border closures in response to the Covid-19 pandemic.

In the past there has also been a concern of government about how to effectively respond to the impacts of bushfires, floods, drought, cyclones and other natural disasters. Looking to the future, climate change will increase the frequency of these events – and the continuing hypocrisy, irresponsibility and recklessness of the Morrison government’s response will mean the need for more support to those people affected.

There is an obvious question here as to whether our existing income support arrangements are adequate – and whether there is a need for a more formal and consistent structure, generally tied to lost hours of work rather than what has become a pretty uncertain and disruptive ad hoc response as particular circumstances and events unfold, most recently with the varying state lockdowns. In other words, could the piecemeal welfare measures of the past 18 months be formed into a more comprehensive social security package?

There has been a significant, broad-based public push for the Morrison government to maintain the JobKeeper scheme in response to the current lockdowns. This has been despite the early difficulties in Treasury estimating the likely take-up and therefore cost of that scheme; the failure to extend the coverage of that scheme to key economic sectors, such as universities, tourism and the arts; and the fact the scheme was so easily gamed by large companies and wealthy individuals who still refuse to pay back any of the excess benefit.

So far, the government has resisted reinstituting the scheme, instead offering alternative support arrangements in cooperation with the states, in respect of the current lockdowns in New South Wales and Victoria, ignoring the service delivery difficulties at the state level.

The present income support structure is built on JobSeeker as the unemployment benefit and the recently announced lockdown assistance in both NSW and Victoria. There has been considerable recent criticism of the miserly reset of JobSeeker as an inadequate unemployment benefit in current and prospective circumstances. It is difficult to understand how the government justifies setting the level of JobSeeker below the poverty line. It appears much of the government’s decision was based on the prime minister’s personal prejudice, which he has described in the following terms: “What we have to be worried about now is that we can’t allow the JobSeeker payment to become an impediment to people going out and doing work, getting extra shifts.”

Academics Peter Whiteford and Bruce Bradbury have addressed the issue of whether cutting support to unemployed Australians will really help them get a job, concluding “There is little evidence a lack of job search effort is a significant problem for the economy”. This has been acknowledged by Treasurer Josh Frydenberg.

Recent OECD analysis of what they call short-time work compensation schemes has concluded that these arrangements “Work well when unemployment benefits are generous, because they reduce their take-up. They are also effective when there are strong labour regulations and market institutions which make it difficult to adjust hours and wages at the plant level. However, they need to be designed and used with care, because they can lead to inefficiency. Workers might be retained when they should instead be made redundant, and the schemes hinder the reallocation of workers to more productive jobs.”

Hence layoffs can be reduced by appropriate short-time work compensations and making it easier to adjust workers’ hours to meet work requirements. Clearly less will be paid in unemployment benefits when fewer people lose their jobs. Permanent workers are the big winners as they can continue in steady employment and companies benefit as they are able to retain their key staff during an economic downturn.

Leading labour market expert John Buchanan, from the business school at the University of Sydney, has recently emphasised the merits of the German system, which has operated efficiently for decades and was significant in their response to the Global Financial Crisis. The German system has been built on a situation where “German job protection rights are amongst the most advanced in Europe if not the world”.

The success of the German arrangement is “underpinned by a strong vocational training system and industrial relations system which provided the framework for the efficient skill formation and deployment of workers on a multi-employer basis. Flexibility at workplace and enterprise level is provided by industrial democracy structures that allow change at the lowest level of the economy to be negotiated with workers and their elected representatives.”

While JobKeeper was an innovative income support solution by world standards, it unfortunately fell short in its implementation, and it also pales in comparison with the German system.

The main benefits claimed for JobKeeper were in maintaining the relationship between the employer and employee, and the fact that the funding was temporary. It has been estimated the scheme kept at least 700,000 people attached to their employers, when they might otherwise have lost their jobs.

Unfortunately, the tax office has been reluctant to do a full audit of the effectiveness of the scheme, which would have told us just how many workers were actually retained and on what financial basis. The government has been most unwilling to name and shame those who abused it, or require any repayments.

However, the JobKeeper scheme also fell short on the OECD criteria referred to above, which would require it to be built on top of a generous unemployment benefit with strong labour regulations and market institutions. In the tradition of Work Choices, the Morrison government is seen as soft on the protection of workers’ rights. Workers’ representation at board level is also minimal.

Industry groups, employers, unions and the NSW government united to call on the Morrison government to reinstitute JobKeeper support in the current NSW lockdown. However, the pressure was resisted by Morrison and a disaster payment was installed instead as an ad-hoc initiative.

There are three key differences between how JobKeeper would have operated and how the disaster payment operates, as NSW Treasurer Dominic Perrottet has noted. First, the disaster payment excludes those who are receiving other forms of Commonwealth assistance – notably, those on JobSeeker (77,300), the Youth Allowance (34,000) and Austudy and Abstudy recipients (4000). Unlike other workers, those on these benefits have lost much of their supplementary work and there is no disaster payment to help with their bills. Many are young people who can’t get the vaccine, can’t work and can’t study, and they are now being told their income won’t be topped up.

Second, the disaster payment doesn’t seem to have maintained the relationship between workers and their employers as firmly as JobKeeper did. And third, the disaster payment is for people in Commonwealth-designated “hotspots” only. When a hotspot designation is removed, so too is the payment.

Discussions of income support arrangements inevitably lead to an argument that such arrangements should be built on the basis of a “universal basic income” or “living wage” that ensures workers are compensated adequately to cover the basic costs of living. This is a complicated issue and to have real substance in our system it would need to be made a constitutional right, the debate about which would be most divisive. There would also be considerable debate about the fiscal impact of such a scheme and its impact on incentives to work.

It is important to recognise the significance of these and other shifts in the structure of our labour market when considering the call by the Reserve Bank for wage increases. It is also important to consider that the overarching background to all this has been the sustained and growing significance of “underemployment” in our labour market over recent decades, whereby workers simply can’t get the additional hours they wish to work.

Given the importance of income support arrangements to several aspects of current public policy, and considering the mounting evidence for change, the Morrison government needs to be challenged to rethink and reset its approach. It can be done better.

In coming years our governments and policy authorities will be under considerable pressure to improve income support arrangements. Welfare reform debates tend to be very difficult and divisive in our country. As climate change can be expected to ensure more extreme weather events occurring with greater frequency and greater intensity, it will be important for governments to be ahead of the game, better-prepared, more resilient, better able to address the costs, inconvenience and disruption to workers’ hours and other economic and social impacts.

In many cases the efficient and fair low emissions transition pathways will facilitate these processes. For example, regenerative agriculture will not only reduce emissions by increasing the carbon content of our soils but will also make the soils more drought resistant and provide an additional income from the carbon credits generated.

But in considering reform, it is important to acknowledge Australia is already recognised globally as having an enviable, effective and fair social security and transfers system. The pandemic has shown how that system can be changed to account for lost working hours – a change that should now be built into a broader, more generous suite of reforms.

This article was first published in the print edition of The Saturday Paper on Aug 21, 2021 as "Welfare thin margins".

A free press is one you pay for. In the short term, the economic fallout from coronavirus has taken about a third of our revenue. We will survive this crisis, but we need the support of readers. Now is the time to subscribe.

John Hewson is a professor at the ANU Crawford School of Public Policy and former Liberal opposition leader.