Middle Class Welfare And Other Furphies

For once, Julia Gillard today received some positive media coverage. 

In an obviously tactical exercise in press gallery backgrounding, Michelle Grattan at The Age and Matthew Franklin at The Australian both wrote prominent stories today about the Prime Minister’s pledge to extend family payments.

Labor’s spin doctors must have been pleased with the The Australian’s headline in particular. It doesn’t get much better than "Battling parents to get extra cash", especially for a government trailing in the polls in the lead-up to what is widely expected to be an unpopular budget.

Wayne Swan’s challenge in framing his fourth budget as Treasurer is his toughest since taking office. There is a disconnect between the rude health of Australia’s economy and the sombre mood around the kitchen table in many Australian households.

The big picture numbers paint a picture the envy of the rest of the industrialised world. Unemployment is below 5 per cent, inflation below 3 per cent and mortgage interest rates are at manageable, if rising, levels. Record commodity prices are pumping giant profits into the coffers of Australian mining and resources companies, in the process pushing the Australian dollar above $US1.10. And the second resources boom party is just getting started: there are hundreds of billions of dollars of investments in the pipeline for huge resources projects in Queensland and Western Australia

But drill down from the big picture view and there are many pockets of weakness in the Australian economy.

Consumers have responded to the "new normal" post-GFC by choosing to put away their credit cards and pay down their debts instead. As a result there is considerable weakness across Australia’s retail sector, as well as in areas like restaurants and other small businesses that rely on discretionary spending. The high dollar is hammering exporters, particularly manufactures with low profit margins. Rising utility bills and food and grocery prices haven’t helped matters either, although the "cost of living pressures" that politicians routinely bleat about are in reality fairly mild.

And while the economy is growing, Australia’s public finances still haven’t returned to where they were before the collapse of Lehman Brothers. Although Labor’s courageous and correct decision to embark on large Keynesian stimulus in 2008 kept the country out of recession, the combination of falling tax revenues and increased public spending left a medium-sized hole in the nation’s finances. We have nothing like the problems faced by the US, UK or continental European economies, of course. Even so, a deficit is still a deficit, and that allows the Coalition to make specious but effective political arguments about the perils of public debt.

As a result, Swan starts his calculations for this year’s budget in the red. The likely shortfall is anywhere between $35 and $50 billion, and the budget most likely won’t get back into the black until 2012-13, when a rapidly growing economy starts to deliver increased tax revenues.

Some of Swan’s difficulties are of his own making. Labor’s obsession with holding government spending growth at 2 per cent and getting the budget back to surplus means some tough decisions will have to be made. It’s a fairly simple equation: either taxes will have to rise — or cuts will have to be made. Labor is likely to come up with a little bit of both.

As we’ve seen in the carbon tax debate, increasing taxes is seldom popular, especially with a government as poor at communication as this one. But cutting government spending runs the risk of provoking a coordinated public backlash, as shown by the uproar over mooted cuts — cuts that were never even formally announced — to federal funding for medical research. In whichever direction Swan wields the scalpel, pain will be felt somewhere. Hence, Treasurers often resort to camouflage and sweeteners in form of small-scale but easily digestible announcements, such as a new hospital in a marginal seat or a cash bonus to pensioners. Julia Gillard’s extension of family payments fits the pattern well.

The announcement regarding family payments plays into a developing controversy about the size and scale of Australia’s so-called "middle class welfare" provisions.

Open the Australian Financial Review on any given day recently, and you’re likely to see an article attacking government payments such as Family Tax Benefit A and B, which provide cash payments to families raising children. Running at more than $17 billion in annual expenditure, Family Tax Benefits are undoubtedly a drain on the budget. And because families can earn up to $150,000 and still receive payments, Family Tax Benefit is often seen as giving money to those who don’t deserve it.

In fact, like everything in politics, the phrase "middle class welfare" is itself misleading. The Australian welfare state is among the most targeted in the western world, with steep cut-offs for many entitlements. It’s a measure of the "downward envy" of voters that the issue is even a live one.

If you’re on the dole, for instance, your allowance starts cutting out after you earn only $62 extra in a fortnight. By the time you earn more than $250 in a fortnight, your dole gets reduced at a rate of 60 per cent. That’s a marginal tax rate 15 cents in the dollar higher than the rate paid by millionaires, who pay the top rate of 45 per cent on annual income over $180,000.

Just who is the middle class, anyway? Class in Australia can be judged in many ways, including what school you went to, where you live and what job you work in (or don’t work in). But if we limit our discussion to income data, we can make some educated guesses at quantifying a middle-class income.

The gold standard data here comes from Australian Bureau of Statistics’ Survey of Income and Housing, which gathers detailed information about the income distribution of Australians. In 2007-08, the 90th percentile for gross income in 2007-08 was about $166,000, or $3192 a week. That means you can be earning more than 90 per cent of the population and still not paying the top marginal tax rate in this country.

A better measure of the middle class would be the median gross income figure, which in 2007-08 was $1285 a week or $66,820. And this is indeed the sort of wage that many people considered middle-class actually make: teachers, nurses, emergency service workers and mid-level office workers.

How much "welfare" do people like this receive? The answer is: not very much. According to this Parliamentary Library research paper by Luke Buckmaster, the truth is that Australia’s welfare payment are extremely well targeted and quite stingy. "The highly selective nature of Australia‘s income support arrangements means that it traditionally has less middle class welfare than virtually all other developed countries, including other low-spending countries such as the USA and Japan" Buckmaster writes.

In all probability, Swan’s budget next Tuesday night will contain a lot of "shaving". This is where the government tightens the eligibility of payments or reduces cut-off thresholds in order to save billions in small increments. We shouldn’t expect too many big picture attacks on government spending.

That’s not to say there aren’t cuts to make. There certainly is plenty of fat in the federal budget, if Wayne Swan rally wants to swing the axe. Defence spending, for instance, continues to outpace inflation, driven by the inexorable rise in expensive military hardware and the cost of fighting a war in far-off Afghanistan.

Australia’s so-called tax expenditures are another growing problem. The value of tax breaks and direct expenditures related to fuel excise and the use of a work car for business is around $10 billion a year, according to Treasury’s tax expenditures statement, despite the obvious conflict between these tax exemptions and the government’s stated target of reducing greenhouse gas emissions.

But the real biggies are related to housing and superannuation. The Treasury estimates the cost of the capital gains tax exemption for the family house will cost the government a whopping $23.5 billion next year. That’s more than the total outlay for Newstart and the disability pension combined.

The cost of superannuation tax concessions will be $30 billion next year. Superannuation tax breaks are among the most regressive of any in the government’s tax and transfer system. This is because they overwhelming benefit the rich and super rich. The way the concession works is to ensure that super contributions are taxed at 15 per cent. For a low-income earner earning less than $37,000, this means that they receive no concession at all. In contrast, a multi-millionaire like Macquarie Bank’s Nicholas Moore gets taxed at 45 per cent. This means that the government is effectively giving him a tax break of 30 cents in the dollar on his undoubtedly generous superannuation earnings. Because of this, most of the value of superannuation tax breaks will go to high earners — in particular, the super-rich.

Forget middle-class welfare. It’s the upper-class welfare that really costs taxpayers. If Wayne Swan really wants to save some money, he should attack upper-class welfare instead.

 

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