Joe Hockey has called for an “end to the age of entitlement”. He added on Lateline that “we need to compare ourselves with our Asian neighbours where the entitlements programs of the state are far less than they are in Australia”. He says that “the age of unlimited and unfunded entitlement to government services and income support is over”. He compares the 16% of GDP that Australia devotes to social spending with Korea’s figure of “around 10%,” which is actually 7.6% on the latest OECD figures.
It’s important to understand exactly what we buy with that 16% of GDP. When a politician talks vaguely about “middle class welfare” and a culture of entitlement, a lot of voters probably nod sagely and think of their least favourite porky perk for other people, like the baby bonus. The problem is that that isn’t where most of the money goes. Most of our social spending, nearly two thirds of it in fact, goes to health and old age assistance (which consists mainly of the aged pension).
Here’s where our public social spending goes:
Public social spending as a proportion of GDP in Australia
Source: OECD Social Expenditure Database
Hockey could eliminate all social spending other than health and old age assistance and we’d still be at 10.1% of GDP, well above Korea, a country he mentions as a benchmark. In other words, even if we scrapped all help for people with disabilities (the support pension as well as in-kind help), got rid of Newstart, stopped spending anything on helping people find work, and eliminated all housing assistance, we’d still be devoting more than our Asian neighbours to social spending. That leaves health care and old age pensions as the only place left to cut to get down to the sort of levels that Hockey identified. The safety net as we know it would be a thing of the past after cuts of that size.
The next question that arises from Hockey’s speech is whether Korea and Hong Kong are really the right countries to which we should compare ourselves. If we compare Australia to the other OECD advanced economies, it’s clear that our social spending is quite low, lower even than the United States (as a proportion of GDP).
Public social spending as a proportion of GDP in the OECD countries
Source: OECD Social Expenditure Database
A lot of people might be surprised by the fact that Australian public social spending is lower than America’s and lower than most advanced economies. Compared to America, we spend less on health (although we have longer life expectancy), and less on aged pensions (because ours is more tightly means tested).
The composition of social spending in Australia and the US
Source: OECD Social Expenditure Database
Means testing is a big part of the reason that our social spending is so low relative to most advanced economies. We means test our payments more than any other OECD country, which means we achieve more poverty alleviation and inequality reduction per dollar spent than anywhere else. As Professor Peter Whiteford has repeatedly pointed out, “Australia actually has the lowest middle or upper class welfare in the OECD”. Professor Whiteford was good enough to send me the chart below, which shows the share of transfer payments received by the richest 50% of the working-age population, ie. middle-to-upper class welfare. The English-speaking OECD countries are in red, with Australia right at the bottom (click the chart if you want to make it bigger).
Middle class welfare in Australia has increased a little bit over the past thirty years, but most of that increase has been for lower-to-middle income families. Relatively little welfare spending (ie. transfer payments) go to families in the top half of the income distribution, and a very small proportion goes to those at the top.
Middle- and upper-class welfare for working-age families in Australia since 1982
Source: Whiteford, Redmond and Adamson 2011, table 1.
This means that there isn’t a lot of ‘low hanging fruit’ if you want to make big cuts to public social spending in Australia. We don’t spend a lot on middle- or upper-class welfare. It would also be hard to make our benefits much stingier, particularly Newstart Allowance. The unemployment benefit is already notoriously low, as pointed out by the OECD and Judith Sloan, among many others. Our payments are so tightly means tested that we claw them back from people at a pretty rapid rate when they start working – this creates the dreaded high “effective marginal tax rates” that make it harder for low-income people to get ahead. Tightening the screws even further wouldn’t achieve much – as Professor Whiteford and his co-authors put it, “difficulties associated with tighter targeting of mean tested payments in an already tightly targeted system would achieve little in terms of increased efficiency and would likely cause considerable pain”.
Hockey’s task, of finding enough cuts in social spending to bring us down to Korean levels, is even harder when you consider that the Coalition has committed to support the National Disability Insurance Scheme. The Productivity Commission’s recommendation is for a scheme that would cost about 1% of GDP. Half of this would come from re-allocation of existing disability funding, but the other half would be new money. If the Coalition wants to increase spending on disability care and support by 0.5% of GDP, while also reducing overall social spending to Korean levels, the cuts in other areas would have to be even deeper.
To achieve the sort of cuts that Hockey has flagged, to bring our social spending into line with Korea and other countries in our region, would involve huge cuts to health spending, pensions, aged care and help for people with disabilities. Quite simply, that’s where the money goes. No amount of fiddling around the edges could come close to bringing our spending in line with our Asian neighbours (other than Japan, which spends more than we do). Instead, doing so would require ending the Australian social safety net as we know it.
I love your blog. Your articles are so well researched and cut through the “sound bites” on tv which overly simplify most political issues. Keep up the great work!
Thanks!
I think Hockey’s claims also suffer in that they overlook that in many Asian societies, the family unit is the main source of welfarfe. Grandparents live in the homes of their children (which the grandparents may well have gifted to the children) and provide basically a nanny type service for their grandchildren. To me there is a clash between the semi communal, cooperative, subsistance type welfare that the Asian family model provides and the individualist, profit orientated (e.g. nursing homes, private childcare) welfare system accepted as “natural” in the west. So to have an Asian style welfare system would require some pretty major changes in how Australians think about the provision of services and the responsibilites of the family. Not sure how well that that’s going to go down in Australia.
Also, wasn’t competing with Asia one of the excuses for WorkChoices? If I were an ALP MP, I’d be belting the Liberals with that comparision every time a microphone was in front of me.
Hi Sean,
Yes, the assumption seems to be that if the government stops providing social protection in the form of health care, pensions and so on then our culture will transfer to mirror that of the Asian countries Hockey refers to. I do not think his assumption is correct.
I was about to leave a comment saying exactly that! (don’t have to bother now). Comparing 2 entirely different social and cultural systems is ridiculous. I also remember reading recently that as Western values and the GFC infiltrate countries such as Japan and other Asian countries, things like the dumping of elders & the disabled, homelessness, property crime etc once relatively unknown, are becoming more commonplace.
[...] Has Joe Hockey promised the end of the Australian safety net? « We are all dead. Middle class welfare in Australia has increased a little bit over the past thirty years, but most of that increase has been for lower-to-middle income families. [...]
Excellent article!
thank you
Thanks for the facts. It is a shame they will ne ignored by the media.
Excellent article. Thank you.
Quipper
Just the facts Ma’am. Well done.
Once again a really useful analysis. Your work gives us ammo to fight the neoliberal agenda, alive and well in Australia.. I’ll be sharing this around and encouraging union educators I know to incorporate it into their work. Hockey is a champion of the “system” and therefore what he is proposing is a sort of “neoliberalism squared”. There is therefore logic to what he is exploring and testing out. We need to discuss that rational logic. Why does the “system” need solutions like this? Look out for who it is that will defend and even encourage him? What is our alternative? The status quo? If so, I think that makes us vulnerable.
How does our middle-class welfare look if we account for things like negative gearing (which, while not explicitly transfer payments, provide a huge tax benefit to the well-off).
Exactly the same question I had, all those subsidies and rebates like negative gearing, private health insurance rebates, solar panel rebates. Also are one-offs like baby bonuses and FHOGs included?
It’s a valid question, and not one that I can answer right now with the data I have to hand.
I would say that a lot of other countries have hidden ‘welfare’ measures in the tax code that skew towards higher income earners, too, so accounting for these things wouldn’t necessarily change the conclusion that we have relatively little social spending. America, for example, allows individuals to deduct mortgage interest payments from income tax. It also allows hedge fund managers to treat returns on their labour as capital gains, and pay the lower rate of tax as a result.
I think generally when people refer to middle class welfare they are referring to tax breaks and other things only available to people in a position that is generally not the lower earners.
Sure, that might well be the case. Hockey specifically referred to social spending as a proportion of GDP as his metric in his Lateline interview. He even mentioned that ours is 16% of GDP, which suggests he’s using the same OECD figures that I quoted.
It’s worth noting in the US that you can only deduct mortgage interest payments for the mortgage on your primary residence (basically, the complete opposite of the Australian system). Thus, it provides a benefit to everyone [who can afford a house], rather than the situation in Australia where only those wealthy enough to be able to afford an “investment” (and I use the term loosely) property get something out of it.
Of course, the whole negative gearing ponzi is built on the assumption of steadily increasing house prices, without which it makes no financial sense whatsoever. Since the *best case* scenario for the next decade or so is completely stagnant house prices, NG might actually fall out of favour enough for the Government to can it without too much backlash.
Hi, while that’s true, and I’m no supporter of negative gearing, you have to also take into account the fact that owner-occupied housing is exempt from capital gains tax in Australia.
I would also be interested in your analysis/opinion of why it is countries like Korea achieve lower spending outcomes.
Are conditions genuinely worse there for those who might need social welfare spending?
Do other factors make up for the lower spending?
If it is all about the family support then I tell Hockey, Hell No! I don’t want us to go back to a time when we had to rely on family, I want to be free as an individual, separate from my family. The social spending we have allows us who don’t have families; don’t like our families; or who simply like being alone most of the time, to live our lives the way we want to.
Sterling work, as usual, Mr Cowhill.
if we remove the welfare system or reduce the payments to a point where they are unsustainable, there will be a new spike in the charts – crime will go up.
Taking welfare away introduces greater stress on low income earners. The poverty line will include far more families. We will return to the slum conditions of the ’80s and the country will suffer. Many people cannot rely on family for support, they will appear on the streets in cardboard boxes and refuges, stretching already overwhelmed resources that the charities that operate these centres are under, and the end result will be unemployment & crime in greater proliferation.
Great post, it’s nice to be able to arm oneself with facts and figures. I too am interested in the questions raised by dr smithy and sardonus. Many of the countries above us in the public social spending chart are are those reputed to have high personal taxes. What happens when you analyse individual tax rates against government social spending? Also, is there any correlation between countries’ social spending and their performance in “quality of life” indicators?
Great article, some really interesting figures here. I was astonished to read that we spend even less than the Americans, though much more effectively. How the likes of Hockey can see this and think that the answer is to slash even further I can’t even begin to imagine.
In terms of the big differences between Australia and places like Europe, is the spending on unemployment benefits etc noticeably different? There’s a lot of commentary about how appalingly low payments like newstart have fallen, I assume that’s fairly unusual by western standards?
[...] Hockey told Lateline’s Tony Jones that: "We need to compare ourselves with our Asian neighbours where the entitlements programs of the state are far less than they are in Australia." Blogger Matt Cowgill did exactly that: [...]
Do you think that perhaps the reason there is much less support for social spending in Australia is because we strongly means test benefits? People don’t want to support something they don’t think they get much benefit from.
That’s a good point and i think it re-enforces a point that someone else mate further up the thread, take away the social safety net and watch crime rates start to spike, education outcomes negatively affected and other negative dysfunction set in as the social fabric is stressed, first in already disadvantaged demographics and then as it spreads. People need to know that the investment of their tax dollars in social spending maintains a social balance which once upset is not easily restored.
It’s not clear to me that less means testing would mean more support for social spending in Australia. It’s true that more people would receive some benefit from social spending, and might be expected to support it on that basis, but it would also mean that it would be more possible to truthfully portray the system of social spending as one in which middle-income households’ money is ‘churned’ back to them.
One important (related) question is whether less means testing would be better for the poorest members of society. There is a theory that suggests that universal benefits will be more politically popular, therefore they will be more generous, therefore the poor will benefit more from universal benefits than from targeted benefits. Lane Kenworthy’s new book Progress for the Poor examines this question in detail and does not find support for the proposition that universal benefits benefit the poorest.
Mate, Hockey delivered that speech to European leaders who needed to hear it. He did however say that Australia can learn from the Europeans so we don’t end up in the same predicament of unsustainable government debt, which was a valid point. Despite the cherry picked sentences you used from his appearance on Lateline, Hockey only made a suggestion that as part of Australia cutting its ‘entitlements’, was to cull the public service – a completely legtimate and sensible idea considering Australia has a very swollen public service presently. Another point he made on Lateline was the need for foreign governments to rein in their public spending and welfare programs, especially while the IMF has the audacity to ask hardworking countries like Australia to pledge money for what could eventually be a Euro bailout. You have misrepresented what Hockey said.
I’m sure by linking directly to Joe Hockey’s speech on his own website as well as the Lateline interview in question, in the first paragraph of this post, Matt’s intention was to totally misrepresent Mr Hockey’s words. Yeah.
Hockey’s ultimate premise is that the welfare state (“entitlements”, as he would call them) is the source and cause of Europe’s problems, which is patently false. The countries that are in crisis in Europe did not spend excessive proportions of their GDPs on welfare, and the strong man of Europe – Germany – has a larger welfare state than any of the PIIGS countries.
It is widely accepted that the failure of the PIIGS is due to excessive government spending and Germany is the largest exporter in the world so it has so far been shielded to some extent, kind of like us with mining. Excessive welfare isn’t the only factor (large cash economies is another) that caused their failure but it definitely made a big contribution.
I responded in brief to that issue in this post: http://mattcowgill.wordpress.com/2011/12/01/the-welfare-state-is-not-to-blame-for-the-euro-crisis/
In short: there are high-spending countries in trouble. There are low-spending countries in trouble. There are high-spending countries that are doing OK. There are low-spending countries that are doing OK.
Excellent article. I suspect the Koreans can “afford” a lower welfare system as there is a tradition of extended families as you allude to above. Typical of the LNP to cherry pick an example and make it “the truth”.
Which begs the question will Abbott (if he lasts that long) or Hockey legislate for parents to live with their children and supply services such as childcare in return for financial support?
I do so love a good graph. Thank-you for putting Hockey’s musing into perspective. It should always be borne in mind that this particular mob of conservative MPs don’t actually mean what they say or for that matter believe it. It’s just a rolling series of sound-bites and headlines. In this case it is most likely Hockey having a dig at Abbott and dog whistling to the haters of dole bludgers and single mums.
[...] Matt Cowgill: Has Joe Hockey promised the end of the Australian safety net? [...]
Matt,
As always, a very well researched post.
Unfortunately (and believe me, I hate to be blunt with this, as I am sure you mean well), all the data you mention are largely irrelevant. It might be useful when arguing with the undecided and rational.
But it won’t work with the Abbott/Hockey mob. Hockey may state that his goal is to cut down deficit and debt. But this is merely rationalization.
This is a quote from a Hockey fan. This supporter understands what Hockey is really after:
“Ahimsa_Fruitarian (19 Apr 2012 5:32:51pm): The welfare parasites are there because the welfare is paid easily and for free. If the gov’t stopped unemployment payment to the long-term unemployed then most of them would get a job fast. Employers can also help to make more jobs if that becomes an issue by being allowed to reduce wages so they can afford to employ more (U think this sounds crazy?) Think about it – it also means more productivity per employer so items become cheaper to make and buy. Farmers would be able to afford to grow fruits that now they say are too expensive in labour (wages) to grow. This means Australian farmers cannot afford to grow the world’s best species of fruit trees, so that proves our present system of wage rises and taxes to pay welfare parasites does not work.”
http://www.abc.net.au/news/2012-04-19/crabb-eye-popping-politics/3960830
Nice post. Well researched. In fact it’s a lot better researched than Joe’s actual speech, which was big on ideology but very poor on evidence. BTW for a satirical account of Joe’s trip to London and a bit of a laugh you might want to have a read of this: http://www.centreblog.com.au/2012/04/22/joe-hockey/
Wow – that was excellent.
[...] The title is a reference to the recent comments by Liberal Shadow Treasurer Joe Hockey as a prelude to predicted cutbacks in the social welfare sector under an Abbott/Hockey Federal Liberal Government – if elected. But is also an analysis of the functioning and sufficiency of our safety net for unemployed Australians. Read another interesting perspective from Matt Cowgill here. [...]
Is the private health insurance rebate contained within your health spending figures? If so I believe this to be middle class welfare. The lower class generally don’t benefit from this. If this was scrapped, how much would it save? And does it improve our health system more than spending that money directly on health services?
I think comparing us to other countries like this is old thinking. World economies are failing everywhere and that, I believe, is what Joe is getting at. In your list, it is many of the high welfare countries that are in deep trouble right now – France, Spain, Portugal, Italy, Greece. And many of the other countries with high welfare look to be on the same path to failure.
Across all levels of government in Australia, they account for 48% of every dollar spent in our country. If we keep following this path we won’t be able to afford the cost of healthcare and age pensions.
I believe we can make big cuts to spending without effecting the safety net and if we don’t eventually we will follow other countries into austerity and that is when our lower class will really suffer.
How about Germany and the Nordic countries ? High tax, high welfare, high productivity, high equality, etc, etc.
Fundamentally, however, your whole position is just wrong. It’s not “the welfare state” that’s causing Europe’s problems.
This “safety net” talk frames the debate in the wrong context. Things like comprehensive and accessible public health and education systems, a livable dole and pension, and NDIS should not be considered a “safety net”, they should be considered a fundamental part of the society we live in, like the defence forces, the courts and the police.
When individuals in some jobs routinely have _annual_ salaries higher than most people’s *lifetime income*, any arguments about it being unaffordable are vacuous, if not simply contemptible.