Opinion & Commentary
Taxing time when we rely on welfare state
This year, Australians will pay more than $200 billion in tax to the Federal Government. More than half of this will come from taxes on individuals' incomes.
Why does the Government need to take so much money from us? The answer is that it has to fund a hugely expensive welfare state.
Two-thirds of all federal taxes will be spent on the welfare state $88 billion will be handed out in cash transfers, and another $38 billion will go on hospitals, Medicare and the PBS.
The Commonwealth will also spend $16 billion on education, although most schools spending is down to the states.
For most of the 20th century, Australians got by without government social expenditure on anything like this scale. Age pensions were introduced soon after Federation, but for working-age people there were few welfare benefits until widows' pensions, family allowances and unemployment benefits were introduced in World War II.
Government help with medical fees did not start until the 1950s (before that, people relied on insurance, charity or friendly society membership). It is only since the 1970s that welfare-state spending has really taken off.
The escalation of spending over the past 30 years is odd given that the real wealth of the country has doubled in this time. Working people and their families should have less need of a big welfare state now than they did 30 years ago, not more, for they are so much more affluent than they were.
In the past eight years, real incomes (allowing for inflation) have risen by an average of 14 per cent; even those at the bottom have seen their incomes rise by 12 per cent.
Income growth like this should have translated into a declining demand for welfare state services, for more people than ever before earn enough to pay for things like medical insurance, income insurance, retirement savings or even school fees.
Yet the welfare state is still growing rather than shrinking. Prosperity has not translated into greater self-reliance.
Some people do, of course, buy the services they want rather than relying on what the Government provides. Forty per cent of households have private health cover, and more than one-third of parents opt to send their children to fee-paying schools (albeit aided by government subsidies).
All workers also now have superannuation funds, and over time this should reduce reliance on the age pension. But in all three of these examples, people still have to pay taxes to support the government services they are not themselves using.
It is this tax burden that stops more people from moving to self-reliance. Obliged to pay tax to cover the huge cost of the welfare state, many families are left with insufficient money to pay again for the services they might prefer to buy if the money had been left in their own pockets.
This suggests that for increasing numbers of people, the welfare state has evolved from a help into a hindrance.
Years ago it enabled ordinary people to get access to services they might not otherwise have been able to afford. But now that they earn enough to buy these things, they find they cannot afford to do so because they have to pay such high taxes to keep the welfare state in business.
Where it once enhanced our lives, the welfare state is now preventing us from achieving self-reliance.
Some commentators think this is no bad thing. They assume the welfare state is the best and only way of providing economic security, and they are intent on locking as many people as possible into its embrace in order to keep it going.
But we should not allow emotional commitments to an old system to blind us to emerging alternatives.
At least half of the money spent on the welfare state goes back to the same people who coughed it up in taxes in the first place. What if we could find a way of leaving this money in people's pockets, while using the other half of the existing budget to boost the spending power of those on the lowest incomes?
That way, everybody would still get access to the basic services they need, but they would also gain control over key areas of their lives by purchasing the services they want rather than relying on whatever the Government happens to supply.
The mass welfare state was a 20th-century response to a problem of inadequate incomes. With increasing affluence in the 21st century, it should be possible to do a lot better.
A move to self-funding would increase economic efficiency, but more importantly it would also enhance people's autonomy and sense of responsibility for their own lives. Our society would be the stronger for it.
Professor Peter Saunders is social research director at The Centre for Independent Studies. His paper , Six Arguments in Favour of Self-Funding, was released yesterday and is available from www.cis.org.au.
