Peter Martin has an interesting piece regarding the Commission of Audit in today’s Fairfax papers. He looks back at the 1996 Commission of Audit to draw some lessons for the current Commission. He notes that the 1996 Commission recommended scaling back tax expenditures to businesses and high-income households, reducing politicians’ entitlements, and changing the model of school funding.

He also notes that the 1996 Commission wasn’t too keen on increasing the unemployment benefit, Newstart Allowance. It argued that payment rates for the unemployment benefit and pensions should be “de-coupled,” so that the latter rise more rapidly over time. The Howard Government implemented this change, by ensuring that Newstart is indexed in line with the CPI, while pensions are tied to a measure of average wages. This remains the case.

The point I’d like to make is that you can accept, for the sake of argument, the 1996 Commission’s view that the unemployment benefit at that time was high enough (they did not recommend it be cut in either nominal or real terms), and still be of the view that the payment in 2013 is not high enough. In 1996, Newstart was equal to 45.8% of the minimum full-time wage and 23.6% of the average wage. In 2013, those ratios are 41.7% and 17.8%. The unemployment benefit was worth 90.7% of the disability pension – now it’s 62.7%.

When you take income taxes into account, the dole is worth a slightly higher proportion of the minimum or average wage, but this was true in 1996 as well. The net replacement rates have fallen just as the gross rates have fallen. The chart below shows the real disposable income of a single adult Newstart recipient, compared to a disability pension recipient and a worker on minimum or average wages.

real incomes

Newstart as a proportion of minimum and average full-time wages

newstart ratios

Source: author’s calculations  using tax-transfer parameters and wage rates as at September of each year. AWOTE from ABS 6302. Minimum wage rates from FWC. Historical Newstart rates are from FaHCSIA.

The unemployment benefit has been ‘decoupled’ from wages and pensions, with the predictable result that these gaps have grown. Newstart is now so low that even the Business Council of Australia believes that it “no longer meets a reasonable community standard of adequacy and may now be so low as to represent a barrier to employment.” You can accept that without rejecting the notion that the replacement rate in 1996 was high enough.

Another point that struck me on reading the 1996 Commission’s findings and recommendations was that they are a little more equivocal on the question of the effect of unemployment benefits on work incentives than was the joint submission of various public departments to the allowances review in 2012. The 1996 Commission found that “empirical studies of any link between benefit rates and the level of unemployment have produced mixed results,” whereas the public service agencies argued unequivocally that a higher dole would undermine work re-engagement. The 1996 Commission did ultimately come down on the side of finding that a higher replacement rate would increase average unemployment duration, but it seemed a little more hesitant than the public service departments. The public service departments seemed to be of the view that a higher replacement rate reduces the amount of effective job search, always and everywhere. My view is that this relationship might not be linear, as I explained here.

If the 2013 Commission looks at the adequacy of Newstart and other allowances, I hope it takes a fresh look rather than just glancing over its predecessor’s views.