Op-ed: messing with middle class welfare

One of the most hotly debated features of Budget 2011 was the freezing of thresholds for some family payments. This has been described positively as a “war on middle class welfare” and negatively as punishing aspirational families.

The Treasurer argued that while the families affected are not wealthy, the government wanted to target families on “modest incomes”, and pausing indexation will make payments more sustainable.

The Opposition Leader signaled he may oppose these cuts, saying they are a form of “class war” that hammers everyday households.

The government has pointed out that Australia spends much more than the OECD average on cash payments for families with children, and is the third highest spender among rich countries.

These trends should be put in perspective. The much criticised expansion of “middle class welfare” under the Howard Government increased the average real welfare payments for the richest 20% of working age Australians by around $1.60 per week.

Over the same period, the real earnings of this group went up by more than $500 per week. While their real taxes also went up, this was not in proportion to their income.

If the income taxes paid by the richest 20% of working age Australians were the same proportion of income as in 1996 then they would be paying $60 a week more than they currently do.

So the expansion of middle class welfare on average gave the richest 20% less than $2 per week, but changes in tax scales gave them 30 times as much.

A puzzling aspect of this debate is the fact that Australia actually has the lowest middle or upper class welfare in the OECD. Nearly all other OECD countries either provide tax relief or universal payments for all children.

Only 2.2% of Australian welfare spending goes to the richest 20% of the working age population. This has increased from 1.6% since 1996, but even this higher level is but a small fraction of the extent of upper income welfare that is common in most other rich countries.

In the USA, for example, about 16% of their lower welfare spending goes to the richest 20% of the working age population.

While our current system is expensive, it has important strengths. For families in paid work we have one of the lowest rates of child poverty in the OECD: the family benefit system is an essential way in which we help “make work pay”.

The main reason why family payments go to middle income and some higher income families is that we have generous base rates of payment for lower income families and we try to not withdraw them at too high a rate in order to avoid disincentives to work.

Correspondingly, if governments wanted to substantially cut “middle class welfare” they would need to either cut benefits for lower income families or increase effective tax rates on middle income families through a tighter income test (or both).

In restraining spending to reduce the deficit, it seems reasonable that the richest 20% of Australians who have enjoyed the largest real income increases should contribute, although this should include those without children as well as those with children.

At the same time, we should be conscious of the fundamental objectives of the system and make sure that we maintain the strengths of our approach.

The full opinion piece is published in The Conversation.

Media contact: Fran Strachan, UNSW Media Office | 9385 8732| 0429 416 070