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.

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