My oped in today’s AFR is on targeted welfare. This is a topic on which I’ve learned a lot from the blogosophere over the last couple of years, so thanks to those who’ve helped shape my thinking on it. (And for those regular commenters who disagree with parts of it, just think how much worse it would have been if you hadn’t harried me on a particular point…).
Help the Poor, and Cut Taxes, Australian Financial Review, 1 November 2007
This weekâ€™s Treasury tussle featured an unusual moment, in which the debate turned to past reforms, and Peter Costello acknowledged the benefits of the macroeconomic reforms undertaken by previous Labor governments. But missed in the discussion was a chance to also consider another major shift of that era â€“ from universal welfare to a carefully-targeted social safety net.
During the 1980s and early-1990s, means-tested public pensions, childcare benefits, and housing benefits meant that we could be proud of the way we looked after our poorest, while maintaining one of the lowest tax burdens in the developed world.
Unfortunately, the past decade has seen a steady slide away from that philosophy. With a few exceptions (such as the improved targeting of private school funding), much of the increased social spending in Australia has been devoted to universal benefits. The First Home Owner Grant, Private Healthcare Rebate, and Family Tax Benefit Part B are just three examples of policies that have enormous budgetary costs, but minimal social impact. By international standards, Australiaâ€™s welfare system is still reasonably well targeted, but weâ€™re headed in the wrong direction.
Peter Saunders, from the Centre for Independent Studies, calls middle-class benefits the â€œtax/welfare churnâ€. But this implies that the problem is simply one of moving money around. In fact, because taxes have an efficiency cost, each dollar raised in taxes reduces economic output. Estimates of the efficiency cost varies, but the best recent estimate for the â€œdeadweight burdenâ€ in Australia is around 20 cents in the dollar. Perhaps â€œtax, burn and churnâ€ would be a better description.
Since most middle-class welfare benefits would probably fail an economic cost-benefit test, why does a government that touts its economic credentials support it? Because middle-class welfare always passes the political cost-benefit test. The well-hewn median voter theorem has a simple prediction: two parties competing for office will focus most of their energies on winning the support of the voter in the middle of the distribution. Targeted welfare may be good economics, but middle-class welfare is good politics. (As John Howard said last year, â€œPeople like getting a cheque from the government.â€)
For its part, the Labor Party have raised questions in parliament about the wisdom of universal benefits, but have resisted calls to scrap such programs. Part of the explanation lies in the belief that universal programs are likely to be more politically robust than targeted ones: if we can put in place a program that will endure, why not accept a little waste? Yet the evidence for this argument is mixed. When the next recession hits, and the â€˜razor gangâ€™ comes to scrutinise at government spending, will they really preserve all those low-impact universal programs?
Moreover, there is a strong progressive argument in favour of targeted spending over universal benefits: it is more likely to reduce inequality. Rather than giving a flat education credit for two-thirds of families, why not pour more resources into improving the life chances of the neediest children?
Perhaps what we need is a new campaign advertisement, paid for by â€œAustralians for Helping the Poor and Lowering Taxesâ€.Â The commercial could start with a simple visual depiction of how middle class welfare works. A taxpayer hands over five $20 notes. The government representative calmly burns one of them, and hands back the remaining four.
The voiceover could then point out that people enjoy getting the Baby Bonus, but thereâ€™s little evidence that scrapping it would affect fertility rates or the wellbeing of new parents (camera shows new parents installing a plasma television). By contrast, an Indigenous child born today can expect to live as long as a non-Indigenous child born at the time of Federation (camera shows scenes from one of a dozen disadvantaged communities). If we scrapped the $1.1 billion Baby Bonus, we could put half the proceeds into tax cuts, and the other half into a series of randomised policy trials of programs designed to improve Indigenous health. Fade to black.
What is striking about middle-class welfare is that it offends values that both right and left should hold dear. Since our first major tax uprising at Eureka, Australians have resisted oppressive levels of taxation, and demanded that governments take no more from us than they need. At the same time, we have supported the underdog, reaching out a generous helping hand to those who need it most. A targeted welfare state fulfils both these principles. Middle-class welfare offends them both.
Commentators have long derided politicians who â€˜spinâ€™ the truth. But maybe the ones we need to watch for are those who spin our tax dollars out of our wallets and back in again â€“ wasting 20 cents in the dollar along the way.
Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.