Get rid of middle-class welfare

THE politics of scaremongering comes in short, exaggerated language – talk of disasters and catastrophes, usually when some small government benefit is being removed or the sacred surplus is threatened. The really scary stuff, though, comes in measured, dispassionate words in a longer discourse of fact and argument.

And so it was this week with the publication of a paper by the University of Canberra’s Ian McAuley – “The Australian Economy. Will our prosperity be short-lived?”

He urges a change of thinking on the role of government in Australia, because without it our prosperity will be short-lived.

You could sum it up by saying the slogan “big government bad, small government good” must be replaced by a slogan “good government good, bad government bad”.

It is not a question of big or small, McAuley argues, but how well government money is spent.

“What counts rather than the ‘size’ of government, are the uses to which public revenues are provided efficiently,” he writes.

He cites research showing that the size of government has very little to do with how a country fares on the league table of productivity and economic growth.

Governments should spend on public goods and services which markets do not provide or do not provide efficiently – health, education, security, environmental protection and physical infrastructure.

He points to a dangerous legacy of the Howard Government – higher middle-class welfare. When this is combined with a mantra of small government, it leaves less government money for worthwhile spending on public goods and services.

McAuley’s attitude to social welfare is not to distort the picture by condemning bludgers on the dole – who if anything need more help if the Australian economy is to gain the benefits of a mobile labour force. Rather he attacks the truly wasteful welfare spending – the spending on people who can look after themselves.

Social assistance payments are now between 12 and 14 per cent of household disposable income, against 5 per cent in 1960.

The Howard Government handed out large amounts of welfare money to middle and high-income people in the form of the health insurance rebate; the Medicare safety net; generous and lightly means-tested family benefits; huge subsidies to private schools; and large superannuation tax concessions for the rich.

This left less money for public health and education and public infrastructure.

McAuley does not blame one side of politics more or less than the other. But he points out another danger of high social transfer payments.

“There is a risk that there will develop a destructive loop of positive feedback,” he says. “As disparities in private incomes widen, and as even the well-off become more accustomed to welfare payments, more public revenue necessarily becomes directed to personal transfer payments at the expense of public investment, which further weakens the economy’s assets of physical, human and environmental capital, and therefore weakens the economy’s capacity to provide well-paid employment (which would reduce the need for personal transfers.

“Eventually this system collapses – a collapse of both public services and of the welfare state – a collapse similar to that which occurred in Argentina in the 20th century (another country which once has a period of extraordinary resource prosperity)” – as Australia has now.

McAuley warns again reliance on immigration to prop up overall GDP (thus technically helping avoid “recession”). GDP per head is what counts.

He also warns against anti-economic-growth mantras of extreme environmentalism. You can have economic growth and greater prosperity without environmental destruction by being smarter, more efficient and more productive.

We should pay heed. Australia looks like a modern successful economy – the envy of the world in escaping from the global financial crisis. But part of that is a façade.

The Gillard Government has made some tiny inroads into the three major challenges facing Australia: getting some permanent public value out of the mining boom; dealing with climate change and its economic fallout; and ending middle-class welfare.

The mining tax was a start, but too little too narrowly spread. Mining makes 20 per cent of company profits but pays 10 per cent of company tax. It will make $50 billion in the next fine years but the new tax will deliver just $3.5 billion.

The carbon tax is a small start, but all economies will ultimately have to move to low-carbon one way or the other. Those to change first will reap big advantages.

The means testing of the health insurance rebate was a tiny attack on middle-class welfare. People on $80,000 can afford to provide insurance for themselves. The reaction to this tiny saving shows how hard it will be to reverse the Howard boost to middle-class welfare. Normal conservative values of self-reliance have been discarded after a decade of middle-class vote-buying.

McAuley urges some political spine. He points out that economic reform should not be too difficult. Most governments which have engaged in it have won respect and re-election.

He points to three impediments to reform, but they are surmountable.

First, groups who have gained economic privilege from past political favours usually have the means and incentive to campaign vigorously against reform. Miners, carbon emitters and the clubs are good recent examples.

Governments come under pressure to yield. But those that do lose respect. Witness Labor since 2007. Further, appeasement encourages others and causes business to devote their efforts to retaining privilege rather than seeking new markets.

Secondly, whole regions can be affected by reform. The Murray-Darling and car-industry areas are good examples. Business fears it will be stuck with the costs of shedding staff and workers fear job loss, so they fight against reform. The solution is for government to make job transition less painful through better retraining benefits and to allow business to hire and shed labour more easily.

The third impediment is the adversarial politics of modern democracies. McAuley says, “The present Opposition is adept at ridiculing economic reform with simple slogans, and with promises of technical and economic conservatism presenting a vision of imagined economic stability and security” – made worse by a media with a partisan political agenda.

This do-nothing Opposition economic agenda is the real danger, especially as it scares government into inaction.

The mindless adherence to the surplus; the refusal to use government borrowing capacity to build productive public infrastructure; the waste of middle-class welfare; the ‘rent-seeking’ privileges of the tax system; the inability to deal with the inevitable economic consequence of climate change are the scary things about Australia’s economy. Not the “great big carbon tax” (which is really too small) or the assertions of “class warfare” when a government wants to remove largesse lavished on the wealthy undeserving.

The things to fear are complacency; fear itself; and failure to change – not vision; courage and reform.
CRISPIN HULL
This article first appeared in The Canberra Times on 17 March 2012
You can find the full paper here: www.australiancollaboration.com.au

One thought on “Get rid of middle-class welfare”

  1. Great article. Now if we could just convince our legislators to make the great leap forward.

    And the highly paid are just going to have to relearn that having a high salary means you can afford to pay your way. If you can’t, you’re obviously living beyond your means. And expecting the low paid and lower middle income groups to pay for your next Porsche is a condition which probably requires EST in the best institution you can afford.

Leave a Reply

Your email address will not be published. Required fields are marked *