Ideas@TheCentre
Reforming the welfare state
Australia’s federal, state and local governments spent $316 billion on the welfare state in 2010-11 which includes spending on health, education, income support payments and public housing.
Of this spending, about half or $158 billion, can be classified as ‘tax-welfare churn’ – which is the process of levying taxes on people and then returning those taxes to the same people in the form of income support payments and welfare services, simultaneously or over the course of a lifetime.
Compared to other countries, Australia has low levels of churn, however, churn is still a problem as it imposes a number of social and economic costs, including higher taxes, administration and inefficiency costs from a bloated government, rent seeking from lobby groups, government paternalism and increased welfare dependency.
We can do something about the problem of tax-welfare churn in Australia.
In my new report, TARGET30: Tax-welfare churn and the Australian welfare state, I outline the churn problem and provide a number of policy reforms that are not only worthy in their own right, but have the additional benefit of reducing churn.
These reforms target, amongst other things, government support for the aged, family payments and the disability support pension.
Australia’s system of retirement savings needs to be reformed so that more people spend more of their own money for longer on their own retirement, rather than receiving the pension.
Further measures to reduce government expenditure on pensions include: raising and aligning the age pension and preservation ages; including the family home as part of the age pension assets test; and introducing a requirement to use superannuation savings to purchase an annuity.
Family payments like the $4.5 billion a year Family Tax Benefit Part B and the $1.2 billion a year Schoolkids Bonus should be abolished. FTB Part B is a badly targeted payment that goes to families that are clearly not poor and do not need the extra money while the Schoolkids Bonus is of dubious education benefit. Further savings can be found by means testing payments like the Carer Allowance and the Child Care Rebate.
The disability pension needs to be reformed by including activity test and participation requirements for those with a partial capacity to work, in order to maximise the economic benefits of the National Disability Insurance Scheme. The current cohort of Disability Support Pension recipients should also be reassessed under tougher eligibility criteria introduced last year.
These are just some of the many ways we can reform the welfare state, cut spending, cut taxes, and empower more people to look after their own welfare, rather than relying on the welfare state.
Andrew Baker is a Policy Analyst at The Centre for Independent Studies and author of TARGET30: Tax Welfare Churn and the Australian Welfare State, released on 27 March 2013.
