This morning’s Australian reports on OECD figures showing that:
Over the past 10 years of John Howard’s Government, the personal income tax burden in Australia had risen from 11.7 per cent to 12.6 per cent of GDP.
It does note that these figures are for 2004, before the 2005 and 2006 tax cuts. These cuts should bring the percentage of GDP take back to around the earlier figure, though because of rising GDP spending per person will continue to grow.
Many people have criticised the Howard government’s taxing and spending record – Des Moore’s latest critique should be on the Policy website in the next few days. I’ve been writing another for the Summer issue, focusing on the expenditure side to see just what went wrong.
What’s particularly interesting is the biggest spending area, welfare payments. Though the long economic boom should, in theory, have lessened demands on the welfare system, in fact real per capita spending in the three years ending 30 June 2005 (the latest from the ABS) increased by more than in the last three years of the Keating Labor government.
Partly, this is due to the ageing of the population. We are supporting 20% more aged pension beneficiaries now than when Howard came to office. No government can do much about these trends in the short term (though there have been fiddling at the margins policies designed to encourage people to stay in work longer).
But what really struck me was that large amounts of money are being spent because the Prime Minister, despite being a hate-figure on the left, is actually something of a social democrat, albeit of a conservative kind.
Consider this statement, from a speech in 2000:
Our social cohesion, flowing directly from a quite unique form of egalitarianism, is arguably the crowning achievement of the Australian experience over the past century. Yet this cohesion will be tested if wealth and opportunity can
Andrew Norton 
Andrew,
I just received my copy of Policy and read Des’s article on the size of government.
Do you realise that the switch to a consumption tax artificially reduced the traditional measure of the size of government (government spending as a proportion of GDP at market prices).
To quote from a recent paper by Ted Sieper (in the NZ context).
“Lest any be misled by this conventional budget number, I must note that it understates the extent of the core crown sector
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I thought the traditional ‘left’ view of a welfare state was redistribution to those on the margins, such as unemployed, elderly etc. Not churning and redistributing into the middle class which is effectively the mainstream majority.
I think this is electoral welfare rather than the stereotypical left/right style.
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Mark – This all involves more knowledge of how the ABS constructs its accounts than I have; not sure if Des is on top of this aspect or not. It would not affect his overall argument, but worth noting if applicable.
Cam – Though there is a base payment in the family tax benefit scheme, overall it is favourable to low-income households, and deliberately so, making it social democratic in my mind.
While Howard has no doubt picked up some general electoral benefit from good economic times, this policy in itself wasn’t really showing on the Morgan Poll most important issues (which I like, because it does not prompt people), and has not affected Labor’s lead on the Newspoll surveys on who is best to handle family issues or welfare and social issues.
He might have received more credit for simply cutting taxes, but instead he spent rising tax revenues from well-off people on less well-off people.
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It strengthens Des’s overall argument, that there has been no movement to small government, and the Coalition has been using misleading statistics to pretend they have cut spending. The true ratio of outlays and taxes to GDP has risen much faster than Des thinks.
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Andrew, if there was no electoral benefit for pursuing this policy, why do you think the government has pursued it? Do you believe it is simply because Howard, once all the politics and rhetoric are removed, is a social democrat and it is his true values coming to the fore. Or has the government been caught in bureaucratic momentum, or influenced by the welfare lobby, or something else?
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James – I think Howard genuinely believes families need financial assistance; this is a theme that recurs in his speeches. And because of the way things turned out during his Prime Ministership, the tax revenues were there to fund it without the political pain of formally increasing tax rates. So I think the family part is crucial to explaining his policies.
However the egalitarian aspect is also there, so this is more than just accidental social democracy (ie lower income inequality achieved as the unintended byproduct of another policy). I think this needs a little more unpacking. I believe that for Howard social cohesion is the ultimate goal, and egalitarianism a means. For other social democrats, equality is a goal in itself and social cohesion is just another of the ad hoc arguments (happiness, health etc) that they use to justify something they intuitively believe to be important.
Of course Howard does not self-describe as a social democrat, but like the people who label me a ‘libertarian’ I am pointing to the similarities of substance.
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Yes, I appreciate Howard would not self-diagnose his social democratic tendencies – but I am interested as to why this government has gone down this route, when my understanding was that Howard (and Costello, Minchin, Downer, etc, for that matter) was meant to be from the dry, “economic rationalist”, less welfare oriented persuasion. I seem to remember reading somewhere (End of Certainty?) that perhaps he just adopted the rhetoric in the eighties to win the support of genuine classical liberals, like Hyde and his supporters, away from Peacock. I don’t know – I don’t read as profusely as you do Andrew.
I wonder, assuming it is a belief in the importance of families that is driving these policies, couldn’t the government have adopted a more liberal approach in trying to achieve the same policy outcomes – like, instead of targeting welfare payments, targeting tax cuts? (I don’t accept Howard’s argument that family benefits are equivalent to tax cuts.) Perhaps targeting tax cuts is legally more difficult, i.e. need to treat everyone equally, whereas welfare payments are much easier to hand out arbitrarily. If it is the importance of families that is driving these policies, doesn’t Good Peter Saunder’s work establish the negative effect welfare has on families?
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to paraphrase Gerry Henderson when it was a match between Peacock and Howard, Peacock had a personality so Howard had to go the ‘policies’ route.
Howard has always shown he is a big government man so why is anybody astonished.
no such thing as a big government conservative Andrew
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Yes, Andrew, and we childless people are supporting this largesse. But despite it, the calls for more spending (or cost-shifting) on childcare, schooling, healthcare, paternity/maternity leave, parental flexible working hours etc are never ending. It drive me nuts whenever I hear parents whingeing that the baby bonus barely makes a dent in their child-rearing expenses. Parental hormones obviously do something to people’s senses of rationality and entitlement.
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Rajat Sood: all the childless people supporting largesse? Please – what about all the unfortunate young people keeping the welfare codgers and broke baby boomers in pay tv subscriptions? It bears repeating that we pay taxes and support social democracy because it stops these people starving on the streets or breaking into your house. The liberal party version is more like a strange government teat proferred to those who borrowed too much and can’t pay their huge mortgages (or pay for fuel for their taxpayer subsidised trips around Australia via Winnebago). The real, underlying problem is a fake full employment figure that hides a bunch of issues around the casual and easily sackable workforce. I’m sure the government was trying hard to create a mobile workforce, but I bet they didn’t envisage that workforce living in imported, diesel powered caravans and patting dolphins for a living, or one so mobile that it needs to find a new job every week.
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James – I don’ t think we know much about the effects of these payments on families. They are spreading high EMTRS much further into the income distribution, which will probably have the effect of encouraging some women to lessen their workforce participation. Whether that’s a good thing or not I cannot say.
The main danger, I suspect, is that in combination with the baby bonus and other family-related welfare they will encourage girls who should not have babies to do so. I haven’t had time to drill down to this level of detail – I was mainly looking at total spending.
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Some of the figures cited in the Australian about trends in the tax take are a bit misleading. This is because they leave out social security contributions and also do not take account of the fact that some governments – like Australia – are running Budget surpluses – while most others – including the US, Japan, and virtually all of Europe except the Nordic countries – have budget deficits.
Between 1996 and 2004 general government indebtedness in Australia fell from 39 to about 18% of GDP, while in Japan, for example it increased from 95 to 160% of GDP. The US has fallen, although since 2001 it has been rising again. The overall average for the OECD has gone from 74 to 76% of GDP.
While Australia’s income tax take is about the 10th highest in the OECD, other countries have signifiant social security contributions, which average around 9-10% of GDP. I think that the Superannuation Guarantee if it was included would add about 3-4% of GDP, but there are also a number of other countries that have extensive private pension arrangements.
In fact OECD figures show general government total outlays actually fell from 37% of GDP in 1996 to 35.1% in 2004.
Social security outlays have gone up and a large part of this is due to higher family payments, but also there is a large effect following the introduction of the GST in 2000, which is simply the compensation effect for the higher price level.
To refer to myself, there is a paper on how Australia’s social security arrangements compare with other OECD countries at http://www.sprc1.sprc.unsw.edu.au/aspc2005/abstract.asp?PaperID=7
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Andrew, and has not affected Labor
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Mark is right. The relevant adjutment to make is to add the difference between FAGS (financial assistence grants) estimtes and the BBC (budget balancing contribution).
Andrew, you should leave those commies and join the party of classical liberalism. We need more good candidates.
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Andrew – it is hard to know – is it tactic or choice to spend so much. I mean everytime the Libs get behind for many months on end – the cheque book comes out: see early 2001 and mid 2004.
I think I would like to believe Howard was doing it for a motive – but power may be his only goal on tax and spend issues. i.e. give Labor no ground to invest or argue for more spending at the election.
Social Democrat – that is kind. Apparatchik and operator seems more likely.
Howard could on one reading be scarilly morphing into one of those Menzies/Fraser Libs – mmm let’s tax and spend again without any real vision or long term pattern!
BTW – really good piece of writing – indeed I really enjoy most of your stuff.
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Cam, Corin – I think you are right that Howard does spend his way out of electoral trouble. Indeed, when I started writing this article I was planning to use my public opinion research to illuminate spending trends. But this explanation did not seem to cover all the Howard government’s record, and indeed there things Howard has done (Iraq, industrial relations reform, Telstra privatisation) that he knew would be actively unpopular, rather than things for which there was no great pressure to provide (eg extravagant family payments). I don’t think you can explain Howard’s government without referring to his personal convictions.
Peter – Thanks for the comments on the complexity of GDP-based measures. Indeed, it was because there are so many issues surrounding these that in my own article that I used year-by-year real per capita increases.
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The thing that intrigues me in all of this is that I’m not sure how deliberately the Government set out on this course. To some extent, I think it was pushed down the route of increasing the generosity of family assistance by the Labor party continually banging on about what a disgrace it is that ordinary working families have such high EMTRs (Wayne Swan has just come out with the latest annual instalment in this ongoing saga).
At the time that the Coalition came to power, family payments were withdrawn at the rate of 50 cents for each additional dollar of private income, resulting in EMTRs that could be higher than 80%. (According to Labor, the 51.5% that an average earner now faces is way too high!)
In 2000, the Government revamped the system (largely as a political offset to the introduction of the GST), increasing the rates of payment and substantially liberalising the income test by increasing the income limit for maximum assistance and cutting the rate of withdrawal to 30 cents in the dollar. This cut EMTRs by 20 percentage points but pushed the coverage of family tax benefit quite a long way up the income range.
Later increases in rates were through the invention of the end-of-year lump sum, which was a political fix to the problem of lots of people ending up with end-of-year debts, and that seems to have worked albeit at considerable expense.
It’s not entirely clear to me, though, why we needed any further income test liberalisations except that I think John Howard prefers to spend any left-over money at the end of the budget process on family assistance rather than on anything else. And while I know that most people see cash payments as welfare, not a tax offset, I think that John Howard (and possibly also Peter Costello) do genuinely conceptualise FTB as a part of the tax system that, for political and also practical reasons, is better delivered as a fortnightly cash payment.
The other thing that interests me is how difficult it is likely to be for any future government to be able to roll any of this back now that such a large proportion of the middle classes are getting part of this family payment expenditure. Wayne Swan has intimated in recent days that the ALP has a plan to fix the high EMTRs but he hasn’t come right out and said that they will do this by getting rid of middle class welfare.
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It is true that Howard has been madly redistributing to households with kids and in the process reducing childhood poverty. Full marks for that. But that’s not the full story.
We all forget that until 2005, the Howard Government was constrained by the lack of a Senate majority. Remember his first GST proposal was much more regressive than the one which was ultimately forced on him by the Democrats. And now that he has Senate control he has introduced a set of workplace/welfare measures which (at least in the short term) will churn out some absolute (not just relative) losers and they will all be from the low end of the income spectrum. Howard has still to be tested.
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But Fred – whether you view the recent changes to welfare as creating losers depends entirely on how long a view you take. Single parents who lose pension status and therefore receive less in income support are losers relative to what they (or a similar single parent) were getting in June 2006. But if you compare their financial position now to what it was in June 1996, taking account of the massive increases in family assistance (that, by the way, have benefited single parents even more than couple families), they are still well in front financially compared with the position when this government came to office. From that perspective, you could regard the recent welfare changes as simply rolling back a little bit of the previous decade’s relative largesse.
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Gee, backroom girl, you seem to have stopped things in their tracks with that one.
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yes spog – I seem to have a talent for that
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Ahem. Realise this thread is apparently dead, but a relevant point was in the Oz today.
Ann Harding has apparently said that single parents are in fact one of the groups that has benefitted least under Howard. Part-pensioners are much bigger winners. Doesn’t comment on the effects of his wide-ranging subsidies for ‘self-funded’ retirees.
Maybe we should take a cold shower about how ‘generous’ this government is to poor people with children.
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Leo – Sole parents generally have done well, but there is one group that has been switched from the sole parent benefit to the less generous unemployment benefit once their youngest kid reaches a certain age (sorry, I cannot recall what the age actually is).
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Trackback.
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Taking a point in your original comment about the political viability of future welfare cuts, Andrew.
It does make me curious that most people on the ‘left’ (I would count myself as being mildly in that direction – full disclosure 😉 ) don’t seem to recognise that the tough means-testing of the Hawke/Keating (maybe I should say Walsh/Howe) welfare state bred hostility to social transfers, while Howard’s generous FTB programs have entrenched support for them.
He has handed us a great political victory… but many people on the left prefer to squawk about how FTB reflects his efforts to re-engineer Australian society and keep women in the home. That may be so, but I reckon it is a small price to pay for the greater victory the policy represents.
I suppose admitting that such a victory has been achieved would mean accepting Howard is not really an evil ideological ogre, which is probably pathologically impossible for Phil Adams and his readers.
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