The health of our welfare system is something of a hot political issue, as the debate surrounding Howard’s proposals in this year’s budget demonstrated. The debate is characterised by stock talking points and emotion-fueled claims on both sides of the fence so it's interesting when someone injects some statistics into the mix. That's exactly what Peter Whiteford has done recently in a paper entitled The welfare expenditure debate: economic myths of the left and the right revisited.* Whiteford is a career bureaucrat and researcher who has worked for both Liberal and Labor governments and now lives outside Australia doing OECD research.
The main message I'd draw from his paper is that Australia's welfare system is extremely generous, efficient and well targeted. This graph illustrates the point nicely:
In case you didn't read the sub-heading, the graph shows the ratio of welfare payments going to the richest and poorest 20% of the population. By this measure, Australia rates exceptionally well. In contrast to a number of Europe's social-democratic states which give almost equal amounts of welfare to the two groups, Australia gives to the poorest 20% 13 times what is given to the richest 20%. That's an exceptionally good measure of the well targeted nature of the system, it does a great job of getting the money to where it's needed.
Last year ACOSS released a comparative report (.doc) labeling our welfare system as 'mean and lean' in comparison with other OECD nations. This was primarily because our raw level of benefits (as % GDP) is lower than most other OECD countries, and about 80% of the average. Whiteford explains this by pointing to demographics (many of the comparison countries are further along in the aging population trend than we are), poor targeting of other systems and the fact that Australia doesn't have the same level of early retirement as many European countries. A better measure of how generous the system is, if you think the primary goal of a welfare system should be alleviating poverty and hardship, is the percentage of GDP which is spent on the poorest 20%. By this measure Australia, which spends about 4% of GDP on this group in the form of welfare payments, is close to the most generous in the OECD – more so than Sweden or Norway.
Whiteford addresses two "myths of the right". The first is the oft-repeated claim that everyone could be made better off if we tackled "churning" – the situation where a taxpayer gets much of their tax back in the form of welfare payments. Whiteford notes that we have close to the lowest rate of churning in the OECD, due to the fact that the system is so well targeted. Further he notes that measures to tackle the problem inevitably have associated administrative costs, negating the administrative savings from fixing the problem. He concludes that the relatively low costs associated with churning in Australia do not justify drastic measures to tackle the issue.
He also addresses the claim that the cost of our system is spiraling out of control. This argument is based on the fact that our welfare payments have gone from about 65% of the OECD average in 1980 to 80% today. Whiteford analyses the myriad of changes in statistical methodology which have contributed to this apparent rise as well as changes in other country's systems over the period. He concludes that, relatively, we spend no more on welfare today than we did in 1980.
He does, however, note some problem areas. Due to the fact that payments are so well targeted there are a number of welfare/poverty traps created by the system. This is particularly stark with respect to single parents. It should be noted that the effect of these welfare traps upon single parents isn't as drastic as in other countries, as the payments are by and large above the poverty line. This group gets comparatively generous payments (which contributes to the effectiveness of the system as this group is generally poor), but as a result has the second highest level of unemployment in the OECD – 55% of single parents are unemployed. Welfare creates incentives, as I think the American experience aptly demonstrates, and the welfare system in Australia creates strong incentives for single parents to remain unemployed.
Whiteford notes that the effective MTR for single parents looking to go into full time employment is around 80%, something which is exacerbated by any associated costs of child care. On this note, I think the moderate changes made by Howard in the last budget to place single parents into a lower category of benefits once their children reach school age is a sensible step. However, I agree that more drastic US-style changes (where benefits cut off after a defined period of unemployment) have severe problems attached. There is only so far you can incentivise (that's not a word) single parents towards work by using a stick before they run into some fundamental barriers to their employment. Skills, flexibility, geography, lack of relevant job information, poor social-networks and substance abuse issues all mean that while strongly punishing single parents for remaining unemployed may drastically increase their employment levels (as happened in America), you will almost certainly create a sub-underclass of people who were once poor and unemployed but at least receiving welfare but are now just poor and unemployed.
Ultimately there are three things that can be done in an attempt to break the welfare traps. First is negative incentives, which I think is an entirely appropriate policy so long as it doesn't go so far as to undermine the whole point of having a welfare system in the first place. Second is positive incentives, ie. raising the rewards from work. This could be usefully done through income tax credits, service benefits (such as child care), increasing the minimum wage or working with employers and job network agencies to match people with better opportunities. The final option is to address the social and personal barriers to employment - obviously the hardest to effectively do.
Welfare traps can drain the public purse, trap sections of the population in welfare traps leading to intergenerational poverty and a lack of self-esteem and give fodder for reactionary commentators to beat up on single mums. Statistics, such as the useful ones provided by Whiteford, can shed light on the issues but can't proscribe the complicated policy responses necessary to fix them. Unfortunately, despite the rhetoric of welfare reform, given its narrow fixation on small-scale "stick" policies I'm not convinced the government is serious about attempting to do so either.
* I was alerted to the paper by this piece and reach many of the same conclusions, but have done so from an independent reading.
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