‘Blowout’ in welfare spending is largely a myth

Cross-posted from The Conversation:

For some time, the largest single component of federal government spending has been social security and welfare. In the last federal budget it made up an estimated 35.2% of total expenses and this was projected to rise to 37.5% by 2019-20. Given this, it’s not surprising that it’s also has been a prominent target for expenditure cuts.

However, if you look at past budgets, the proposed cuts in social security programs are disproportionate to the amount the government spends. For example, in the first budget of the Abbott Government in 2014-15, out of total projected expenditure cuts of A$29.4 billion between 2014–15 and 2017–18, A$15.4 billion, or 52%, would have come from programs of the Department of Social Services.

Even more strikingly, around 10% of that budget’s proposed cuts would have come from unemployment benefit recipients under the age of 30 years – who account for less than 1% of total government spending.

Government and commentators alike argue spending is growing in this area at an unsustainable rate. But if you look at inflation and this spending as a percentage of Gross Domestic Product (GDP), these claims seem less convincing.

How much is spent

Spending on social security is forecast to increase from A$153 billion to A$192 billion between 2015-16 and 2019-20. This appears to be attributable to a large growth in spending on the aged – from A$60 billion to A$73 billion. This is coupled with very large increases in spending on people with disability – from A$29 billion to close to A$53 billion.

However, it’s important to note that the spending and revenue figures in the budget papers are in nominal dollars – that is, they do not take account of inflation or the growth of the economy. In this sense, they provide the most dramatic picture of trends that is possible, since adjusting by inflation will generally reduce the apparent rate of growth, potentially significantly.

To understand changes in welfare spending we also need to factor in changes in the context in which welfare dollars are spent. For example, population growth, the impact of an ageing population and changes in government policies and welfare categories, will all influence this.

A better way to look at this is comparing spending over time, expressed as a percentage of GDP.

Author provided

Overall, total social security and welfare spending is projected to increase from just under 9.3% of GDP to just over 9.6% of GDP, an increase of about 2.8% compared to an increase in nominal spending of more than 25%. It’s also apparent that spending on many sub-programs, such as the Age Pension, Veteran Affairs pensions, Disability Support Pension, Family Tax Benefit, Paid Parental Leave and Parenting Payments are all projected to fall as a percentage of GDP.

It’s worth noting that these are estimated from the last federal budget, and many of the proposed changes in spending in this and earlier budgets were blocked in the Senate and have not proceeded. These are the so-called “zombie measures”, estimated to have been worth around A$10.7 billion over four years.

More recently a number of these measures have been passed by the Senate, but the increase in child care spending will not be as substantial as proposed in last year’s budget and the cuts in Family Tax Benefits will not be as significant.

However, in effect all of the increase in spending on social security and welfare is due to the introduction of the National Disability Insurance Scheme (NDIS), spending for which is projected to increase from A$1.1 billion to more than A$21 billion by 2019-20, or by close to 1% of GDP.

Who receives these payments?

With the exception of the year immediately before the global financial crisis, data for 2016 shows we’re currently at the lowest rate of receipt of income support in the last 20 years. Overall, at 30 June 2016 27.5% of the adult population were receiving an income support payment.

In total, there are around 2.7 million people receiving either an Age Pension or a Department of Veterans Affairs Service Pension, and around 2.6 million people receiving other “working age” income support. In addition, there are around 1.54 million families with nearly 3.0 million children receiving either or both Family Tax Benefit Part A or Family Tax Benefit Part B. Although 680,000 of these families are also receiving an income support payment and 855,000 are receiving the Family Tax Benefit only.

This shows number of recipients of the main income support payments at 30 June 2016, derived from administrative data from the Department of Social Services and data from the Department of Veterans Affairs.

Since the 1990s, overall rates of receipt for the adult population have fallen from 34.1 per cent in 1996, while rates for the working age population have fallen from 24.9% to 16% and for the population aged 65 and over from 84.2 % to 76.1%.

Moreover, the number of children for whom Family Tax Benefit Part A are paid has fallen from around 3.5 million in 2006 to just over 2.9 million in 2016. This is while the number of children less than 15 years of age has increased from 4.0 million in 2006 to 4.5 million in 2016. This means that the “coverage rate” of Family Tax Benefit Part A has fallen from around 85% to closer to 65%.

Overall, it is difficult to reach the conclusion that the share of the population receiving social security payments has been increasing significantly, or that spending has been growing at an unsustainable rate relative to the size of the economy. The future ageing of the population will put pressure on social spending and the NDIS will need to be paid for, but these are largely predictable and not the result of a “welfare blow-out”.

Article by Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

Comments

  1. armchair economist

    Welfare spent on children/family is not welfare its societal investment to ensure these children are productive in the future having received a reasonable education. The biggest wastage is the aged pension and its a huge expenditure problem that we can remedy very easily by having a proper assets and means test in place and include the “family home”in it too.

    • “Welfare spent on children/family is not welfare its societal investment to ensure these children are productive in the future having received a reasonable education”

      In the past, this was done by stressing the importance of having a father in the child’s life. We even called this child-centric institute “marriage”.

  2. ceteris paribusMEMBER

    Australia’s welfare transfers are recognised across the developed world as highly targeted, modest, and highly effective in poverty alleviation. It is the $100 plus billion in tax expenditure welfare we need to worry about. This tax expenditure welfare is overwhelmingly targeted at the upper and middle classes for little apparent reason or rationale, beyond vote-buying.

  3. We are importing a massive welfare and health cost burden thru uncontrolled third world low skilled and even lower morality immigration.

    Make no mistake about it – none of what’s coming in is here to work, pay tax, pay for others.

    They are here to work illegally, or never contribute and to take benefit and be the anchor for more like them.
    It’s in the ABS statistics, it’s in the surveys of welfare and health care and it’s in your face.

    Centrelink loaded up with migrant queues of benefit seekers. Old or useless and often both.
    Never paid a dollar of tax, never will.

    Our medical centres loaded up with elderly sick or ‘disability’ non English recent arrivals – Asians, Indians Arabs Africans – brandishing their newly minted Medicare cards like a parliamentarian’s gold pass – which indeed to them it is.

    Even our hospital emergency services stretched to breaking point with tens of thousands including temporary visa & ‘tourists’ presenting with serious chronic conditions like TB or Hep or heart or intestinal flukes or worms, or falsified papers – including no vaccination (measles outbreak is just one of hundreds as example) all kinds of disease is coming in here to get treatment.

    China, India, South East Asia are basically dumping their old, sick, useless into Australia to be our burden.
    Apart from the economic and social impacts even basic bio security controls are being breached.

    We are making huge mistakes.

    Time for a Royal Commission into the entire visa racket and the economic impacts and the bio security risks it’s creating for Australia.

  4. ErmingtonPlumbingMEMBER

    “The future ageing of the population will put pressure on social spending and the NDIS will need to be paid for, but these are largely predictable and not the result of a “welfare blow-out”.

    There is plenty of resources and cash available to run a modern efficient social democratic state,..we just need to stop our corrupt elected representatives and Corporate thieves from colluding with one another and robbing us all blind.

    Best and most important thread of the Day,

    http://www.macrobusiness.com.au/2017/04/nothing-malcolm-prepares-squib-prrt/

    Only got 11 comments by 7 pm,…sigh.

    A few bits that got my hackles up,

    While Qatar will extract $26.6bn (23%) from export sales of natural gas Australia will receive just $300 million from our soon-to-be $60bn gas industry, a tiny fraction of what it takes from Australian mums and dads in beer excise ($2.5bn).

    “The PRRT honours the express intent of Australia’s Constitution, which rules that natural resources are owned by government on behalf of us all.

    A properly functioning PRRT will take many billions of dollars in economic rents from producers’ profits and market capitalisation. Yet much of the current value producers enjoy come from the failure of exactly these tax arrangements.

    Once lifted from the ground, our valuable mineral wealth is gone – which is why resource rent taxes are so fundamentally important. Bad amendments to the PRRT Assessment Act have given ground unnecessarily to oil and gas companies and undermine these lofty constitutional principles”

    And

    “Norway’s institutions successfully resisted the resource rent-seekers. Its petroleum tax regime allowed it to start a sovereign wealth fund in 1990, now worth over a trillion dollars. Yes, a thousand billion dollars between five million Norwegians. They enjoy a higher standard of living because of it – a prize available to resource-rich Australia as well.

    There is a lot of money involved here and we can expect a bare-knuckle response from oil and gas producers offering blood and bruises to anyone wanting to take some of ‘their’ profits as an extraction charge.

    Do Australia’s politicians and bureaucrats have the courage and stamina to stand up to resource rent-seekers and hold them to a quality resource rent regime?”

    And finally my favorite bit,

    “At what point do we assert sovereignty over our affairs, our national well-being?

    If our leaders lack the political courage to insist on resource rent taxes like the PRRT, we must go back to an oil and gas royalty – which means marginal production stays in the ground and the economy underperforms.

    Surely taking less tax from wages and business – taxes that deter enterprise and stifle employment – is a prize worth fighting for no matter who holds government.

    Australia’s PRRT is more than just another grubby tax. The oil and gas down there belongs to you and me. This tax rises and falls with prices and profits, an automatic stabilizer that limits oil and gas producers’ risk.”

    This is the kind of stuff the Labor Party should be fighting to the death on!
    Join up and help make them do Something about it.
    They’ve fought this fight before,…they’ll probably need a little push to start the fight again. https://membership.nswlabor.org.au/Join/form

    Bravo, Dave and “Prosper Australia”, for the best thread and link of the day

    http://www.prosper.org.au/

    • I agree with almost every point you’ve made here. The Henry Review suggested that, if anything, removing royalties and imposing the original RSPT should result in higher output volumes in the resources sector because a production disincentive has been removed. Whichever way you want to cut it, the only argument being made by ‘the other side’ (as distinct from propaganda and lies) was that they were somehow capital constrained and the imposition of a rent tax would cause them to reallocate their limited capital somewhere else. I never felt this argument passed the laugh test, but there it is.

      Moreover, despite the argument’s speciousness, I felt there was and is a very simple way to deal the the short term ‘our short-term cost of capital is higher than the government bond-rate argument’. The original RSPT was a modified Brown tax, where the refund component was delayed until project cessation (or maybe it was all operations, can’t quite remember). This timing difference between collection and refund meant there was a need to account for the time value of money to keep the tax economically neutral.

      I think the better way to go about this would have been for the government to give resource companies an immediate refund, but in the form of long-term Treasury bonds. Given (at the time, and probably still now) bond auctions were heavily over-subscribed, there’s clearly a market for ‘second-hand’ bonds. So, if the poor, barely-scraping-by resource companies are really that strapped for capital, they could always turn around and immediately re-sell the bonds they are given for hard cash. In turn, the government would need to lock away at least enough of the revenues to cover repayments of ‘resource-bonds’ as they fall due. And while we’re at it, why not lock away 120%, just to give financial markets that extra certainty? And perhaps also mandate this ‘repayment fund’ only invest in assets denominated in foreign currencies, to ameliorate the (now ironically named) ‘Dutch Disease’ that economies with high resource exports experience?

      The only point I can’t agree with you on is about Labor’s role in all of this. They utterly botched this play, both times they made it. The uplift rates on the PRRT neuter its effectiveness as a source of government revenue. I think this one is more forgivable, as they were relying on the (incorrect) advice of Ross Garnaut. Garnaut made similar unhelpful public contributions to the RSPT debate. In sticking to what he knows, and he appears to be glued, nailed, and riveted to this particular furphy, he maintained as he did with the PRRT that the long-term Treasury bond rate was insufficient compensation as it did not compensate for potential political instability and therefore likelihood of repayment. Which, frankly, is idiotic since this risk and all others are priced in to the bloody bond rate! He instead recommended the government adopt something similar to his beloved PRRT, stating:

      At the mine development and production stages, a resource rent tax in roughly the form and at the rates of the Petroleum Resource Rent Tax. The special arrangements in the RSPT to cash out past losses with interest and to transfer losses across projects would not be relevant and would not apply.http://insights.unimelb.edu.au/vol8/02_Garnaut.html

      This is indeed what the newly installed Labor Prime Minister (Gillard) did, and we ended up with the utter abortion known as the MRRT. Of course, I’ll concede that Labor are marginally better than the other lot when it comes to resource rent taxation, as the other lot only seem interested in helping their international CEO mates rob their own country blind. But that’s a pretty low hurdle to clear (i.e. they’re not wilful traitors to the national interest).

      We can do much, much better here. Labor can and should as well, but I consider that doubtful. Other than Bowen, I don’t see much intellectual horse-power on the opposition benches. Perhaps they are taking the idea of a ‘shadow cabinet’ a bit too literally.

    • Oh and I very much agree with you and MB on the sovereignty/national interest issue. The sovereign risk argument is a bad joke. I can’t understand what must be going through people’s heads (if anything) when they make this argument. Are they seriously suggesting that a nation does not own the natural resources within its own borders, and that they have and always will belong to the private interests who currently have permission to exploit them? This argument is a good shibboleth for shills.

  5. demografixMEMBER

    I would call this a blowout…
    ‘Spending on social security is forecast to increase from A$153 billion to A$192 billion between 2015-16 and 2019-20. This appears to be attributable to a large growth in spending on the aged – from A$60 billion to A$73 billion. This is coupled with very large increases in spending on people with disability – from A$29 billion to close to A$53 billion.”