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May 30, 2014

Australia’s ‘overly generous’ welfare in context

The government and its News Corp cheerleaders have called Australia's welfare system "unsustainable", "overly generous" and "sending Australia broke". Crikey intern Jake Stevens asks: do the numbers stack up?

The government’s plan to cut welfare payments, as outlined in the federal budget, has attracted much gnashing of teeth from the Left. News Corp, on the other hand, says our welfare system is overrun by rorting and the cuts don’t run deep enough. But how does Australia’s social expenditure stack up against overseas examples?

News Corp columnist Simon Benson calls the current system “overly generous, and in need of dramatic reform” in this morning’s Daily Telegraph. In much the same light, Tim Blair also pointed the finger at the record number of Australians on the disability pension, who he says are “sending Australia broke”.

Complex our welfare system may be, but the claims that we are overly generous with our expenditure are a little murkier.

Australia spends 19.5% of our GDP on social welfare, whereas some European countries like France and Belgium spend upwards of 30% of their GDP on the welfare system.

This contrasts with Social Services Minister Kevin Andrews’ claim that Australia’s welfare system is “not sustainable” when he demanded a review of our expenditure in February this year.

The unemployed have come in for a particular shellacking, but Australia ranks 25th of 30 countries in the Organisation for Economic Co-operation and Development with data available in terms of expenditure for unemployment.

bunch of slackers

Jan Libich, senior lecturer at La Trobe University’s School of Economics, says the Australian welfare system does not seem to be overly generous in comparison with that of other countries. “In international comparisons, Australia is doing well, better than most other countries. Our pension and healthcare systems are in a much better financial position than those of other nations.”

But Libich says the real problem with Australia’s welfare spending is the rate of increase. “It’s not so much where we are compared to other countries, it’s more about the trend we have seen over the past three decades,” he said.

If you look at social expenditure as a percentage of our GDP, our 19.5% figure compares favourably, but this is almost double our 1980 figure. And looking at the per person figure, social expenditure (at constant prices and purchasing power parity) has tripled in Australia between 1980 and 2013.

The largest slice of our welfare payments goes towards the age pension. According to OECD Pensions at a Glance 2013, Australia’s public spending on the age pension is much lower than pension spending in Europe.

Australia spends 3.5% of GDP on the age pension, while Italy spends 15%, France spends 14% and the United Kingdom spends 6%. While our figures look good on a global perspective, the nations we are comparing ourselves against are in a pretty bad shape themselves.

ageing generosity

“Yes, we are better off than other countries, mainly because our superannuation system takes the pressure of the public purse, but given past trends, we should not be complacent about for the future. These long-term trends require long-term reforms to be able to ensure the sustainability of the system,” Libich said.

In addition to the reforms, saving could be achieved by eliminating so-called tax-churning, whereby the taxes collected fund the welfare given back to the same individuals. The government is essentially taking money with one hand and giving it back with the other.

“Tax-churning is inefficient, as a non-negligible portion of the collected money is wasted on administration,” Libich said. “There seems to be a lot more redistributive mentality in politics these days — this is something that needs to be looked at if we are to raise the efficiency of the Australian welfare system.”

The rapid rate of increase in the welfare system is something Australian politicians will need to address in the future, but quick cuts and short-term fixes like we’ve seen in Europe are not the answer, says Libich.

“They tend to be counter-productive as they reduce economic growth. Conceptual reforms that take into account the demographic trend towards an ageing population are the way forward.”

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19 comments

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19 thoughts on “Australia’s ‘overly generous’ welfare in context

  1. Saugoof

    I’d love to see some data on how the expenditure on those parts of welfare that are always highlighted as ‘sending us broke’ compares to welfare for the wealthy like negative gearing or super annuation tax breaks, etc.

  2. paddy

    I was happily, albeit a little sceptically, reading this piece. When Bam!

    [“There seems to be a lot more redistributive mentality in politics these days — this is something that needs to be looked at if we are to raise the efficiency of the Australian welfare system.”]

    That sort of hinted at where Libich’s agenda might be headed.

  3. Luke Hellboy

    How much does superannuation and negative gearing welfare cost the budget? Not to mention the extra welfare given to ex-parliamentarians?

  4. burninglog

    I must be going mad.

    I just get the impression, the Abbott government is implementing a form of Thatcherism & News Ltd is cheering them onto to victory.

    No one in the press mentions this, so I must be going mad

  5. CML

    Sorry to ask, Paddy, but does that mean that Libich thinks everyone should keep the money they have, untaxed, and those who don’t have any money, too bad? Or have I got this wrong?

    Serious inquiry. Thanks.

  6. The Old Bill

    It’s the rate of increase apparently, rather than our actual expenditure that is causing problems. Bollocks.
    It is the fact that the latest budget give cuts to business and cheap tax rates on super to drop our national tax income, whilst cutting education and welfare funding. We are fast becoming another USA, where in most states bar New York, the rich get educated and the rest lose any chance of a job. In the next 5 to 10 years the US will lose 47% of unskilled jobs. We will lose 40%. Even the mines are now starting to use robotic equipment including self propelled trucks and equipment. After 6 months without any income under our new dole scheme, will our unemployed miners just lie down and die with their families? No.
    We will just end up with whole families in prison so that they can eat. You can’t send your kids to a privatised education on no income for 6 months.

  7. Bart

    the superannuation system might take the pressure off the public purse at sometime in the future, maybe. At the present time overly generous super contributions tax breaks are one of the biggest pressures on the public purse! This article needed closer scrutiny by Crikey.

  8. AllanW

    How come the first graph depicting the spending on unemployment doesn’t include the countries most “like” Australia’s social welfare system, ie NZ and UK.
    Secondly the second graph depicting spending on age pensions is merely showing the effects of inflation and has nothing to do with a net effect of an increase in actual spending.

  9. Michael Packman

    In other words don’t do what the adults are trying to do now cos you’ll damage the economy, cause unnecessary pain and drive a bigger wedge through our society. Let’s look instead at tax avoidance shall we. Those who can afford to pay a fair share but don’t.

  10. Matthew Willis

    AllanW,

    How come the first graph depicting the spending on unemployment doesn’t include the countries most “like” Australia’s social welfare system, ie NZ and UK.
    Secondly the second graph depicting spending on age pensions is merely showing the effects of inflation and has nothing to do with a net effect of an increase in actual spending.

    After clicking on the links, I found that the UK and NZ also spend 0.5% of their output on unemployment benefits. The OECD average is 1.1%.

    With regards to the aged pension graph, there’s a note to the right of the last bar that reads ‘per head at current prices at PPPs in AUD’ which means that they’re adjusted for inflation.