John Murphy’s An Unlikely Survival: The politics of welfare in Australia since 1950 continues an historical analysis of welfare policy in Australia he began with A Decent Provision: Australian Welfare Policy, 1870 to 1949, which I reviewed on the GoodReads site.
While I do not always completely agree with Murphy’s analysis, his latest book is a very readable narrative history of the Australian welfare state, supplemented with impressive data research and reporting.
The text below is my notes on points of particular interest to me rather than a comprehensive review.
Why did centre-right parties abandon a social insurance welfare model?
An Unlikely Survival attempts some explanation of an intriguing path not taken by centre-right politics in Australia. Up to the early 1950s – although never unaminously – centre-right parties supported a contributory social insurance model of the welfare state. Contributory social insurance is common in other countries.
Under these models, employers and employees pay into funds that later deliver benefits. Benefits can be linked to past contributions. A key reason for centre-right support of contributory social insurance was dislike of tax financed and means-tested benefits, especially for the elderly. This dislike flowed from a belief that means tests penalise people who save to meet their own needs, and rewards those who had not with a pension. It is a moral argument with a prudential angle.
The Lyons United Australia Party (a Liberal predecessor party) government legislated a contributory social insurance scheme in 1938, covering old age, health benefits, disability, and widowhood. But it was abandoned before it began, causing Robert Menzies to resign from the Cabinet in protest. As Liberal leader at the 1946 and 1949 elections Menzies promised to bring in such a scheme. But despite Menzies being prime minister from 1949 until 1966 it never happened.
Initially the Menzies government explored such a system, but by 1952 the issue was reduced to the old age pension means test. One obstacle was the high cost of abolishing the means test for current pensioners. Murphy also points to the path dependency problem created by Labor’s 1940s expansion of the welfare state on a means-tested basis. Reforming existing welfare benefits and introducing new benefits were different political tasks. On the other hand, Labor had already made one vital step towards a contributory welfare system, bringing working class people into the income tax system. As Paul Tilley’s history of Australian tax shows, before WW2 the tax-free threshold for Commonwealth income tax was well above average weekly earnings.
This choice of a contributory versus a tax-financed welfare system intrigues me, as centre-right politics at the time were centrally concerned with preventing Australia from becoming socialist. Intrusive means testing requires the kind of bureaucratic intervention that the centre-right opposed in the economy. In 1952 Athol Townley, the minister for social services, criticised the means test, which he said ‘involves an obnoxious investigation into the affairs of individuals’. While whether or not there should be an age pension means test was an issue up until the 1980s, generally centre-right politicians have strongly supported these ‘obnoxious investigations’ into benefits eligibility.
The tax deduction welfare state
Murphy suggests that one reason support for a contributory social insurance scheme faded in the early 1950s was that the Menzies government financed similar things via tax deductions.
Deductions were available for health insurance, dependent spouses and children, superannuation. and university and private school educational expenses (elsewhere I have written about how the Menzies government fiannced universities but missed this aspect – up to £50 could be deducted for fees, board and other expenses for each dependent child up to the age of 21).
Murphy dislikes these deductions. Under a progressive income tax system deductions are more valuable to high than low income earners. He provides charts showing these deductions were more commonly taken up by taxpayers in higher rather than lower income deciles.
While Murphy is right about the financial consequences of tax deductions, from a centre-right perspective deductions are not so obviously a bad idea. Welfare states redistribute resources around the life cycle as much as between rich and poor at any given moment. What upsets Murphy’s egalitarian sensibilities is that a tax deduction system helps high income earners maintain their relative position. Many would share his objection but centre-right parties typically don’t emphasise income equality.
Also from a centre-right perspective, subsidising privately-delivered services directly or via tax deductions can be preferable to fully publicly-funded services provided by government monopolies.
This second goal, however, can be achieved via rebates – the government refunding a percentage of certain types of expenditure. In the final Budget of Gough Whitlam’s 1972 to 1975 Labor government, deductions for superannuation, private school fees (university deductions having become irrelevant due to the abolition of fees), and private health insurance were converted to rebates (which still apply for some private health insurance payments).
Unusually Murphy is a little unclear on the exact sequence of events on rebates. The Liberal Opposition criticised Labor’s rebate policy and (in)famously blocked the 1975 Budget in the Senate to force the Whitlam government out. I think the rebate legislation was among those passed during the chaos of 11 November 1975.
Calculating the cost of tax deductions
Tax-deduction welfare goes by many names: tax benefits, fiscal welfare, or more commonly in government documents ‘tax expenditure’.
In line with common practice, Murphy calculates the cost of these deductions by looking at the income tax rates that would otherwise have applied. That is a sensible way of estimating the cost of any proposed new tax deduction. But for significant and longstanding tax expenditures it hits problems. In the counter-factual world in which the tax deductions did not exist the same amount of income tax revenue could be collected with lower tax rates. This means that the benchmark tax rates used to calculate tax expenditures are too high. As Tilley’s book shows, the top marginal income tax rate in the Menzies era exceeded 60%. For taxpayers in the top tax bracket the ‘tax expenditures’ look costly, but their practical effect is to make the effective tax rate something more reasonable, conditional on the circumstances or choices of the taxpayer.
Circling back to the thinking of centre-right parties, however, high tax rates are seen as deterrents to work and obstacles to wealth accumulation.
The tax surcharge welfare state
At the opposite fiscal end of the tax deduction approach to encouraging use of private services is the tax surcharge – higher tax rates on taxpayers who do not purchase the service. This is first mentioned in the context of the Coalition’s 1991 manifesto, Fightback! , as a penalty for those who do not take out private health insurance. It was later introduced by the Howard government.
The compulsory contribution welfare state
Since 1992 employer-funded superannuation has been compulsory – the closest Australia has come to the social insurance model abandoned by the Coalition in the early 1950s. Under superannuation, however, the beneficiary owns their contributions plus or minus investment earnings or losses. There is debate about who really pays superannuation contributions. Economists generally believe that is the employee via lower non-super wages. But technically the employer makes the payment, and this has helped make superannuation popular (social insurance schemes also have employer contributions).
Compulsory superannuation was a Labor policy and is an example of how the major parties changed sides on major issues between the 1940s and 1990s. In the 1940s Labor tried to nationalise the banks but in the 1990s it gave private investment funds an enormous guaranteed cash flow (albeit private organisations with unionists on their boards in the case of industry superannation funds). As Murphy observes, compared to an aged pension system superannuation carries the income inequalities of labour markets into retirement – something that fits more naturally with a centre-right ideology. As low income workers will be eligible for an age pension it is not clear that they benefit from superannuation. As was pointed out in the early 1990s and since, they would be better off with higher incomes during the working lives.
The end of the wage earner’s welfare state
An influential theory about the origins of Australia’s welfare state, most commonly associated with Frank Castles, is that the wage system served some functions delivered by welfare states in other countries. Minimum wages were determined by reference to what a male breadwinner would need to support his wife and children. This led to a welfare state focused on households without male breadwinners, rather than providing more general benefits.
Union and Labor support for this model led to policy positions that seem counter-intuitive. They saw child endowment policies (such as the scheme introduced by Robert Menzies in 1941) as attempts to undermine the wage system. As a result, these schemes initially applied only to second and subsequent children. The emphasis on male breadwinners justified paying women less for the same jobs, on the assumption that their husbands’ wages supported the family.
By the late 1960s the idea that women should officially be paid less was no longer tenable. A series of Arbitration Commission cases unwound it, and by 1974 wage setting no longer assumed a male breadwinner. This created more space for tax-financed benefits to families, especially in support of the working poor.
The return of unemployment in the 1970s also undermined a welfare model that assumed most men of working age earned wage income. Murphy discusses debates about the level of support for unemployed people and policies that push them to find work. The lack of unemployment insurance, as opposed to a benefit for unemployed people in poverty, is a notable aspect of Australia’s welfare state.
How unlikely was the welfare state’s survival?
The book’s title is a little odd. Its introduction explains that Murphy is responding to common beliefs (in his left-wing milieu) that the welfare state has been significantly cut back. For all the controversies over the decades about particular welfare-state progams I don’t think the survival of a large-scale welfare state was ever in doubt. ‘Cuts’ slow the welfare state’s growth more than fundamentally retrench it. The Parliamentary Budget Office’s figures show that nominal-dollar year-on-year reductions are rare and never last.
While every post-WW2 government, with the partial exception of the Whitlam government, worried about how to finance the welfare state, none were fundamentally opposed to it. The most radical political agenda for reducing the welfare state, the Coalition’s Fightback! policy, would have retained the major programs with stronger pressures to get people of working age into employment. The Coalition, of course, lost the 1993 election.
The political reality is that the welfare state is deeply entrenched in the lives of Australia’s voters. Its major expansions – by policy, circumstance and demographics – have expanded its constituency over the decades. As Murphy points out, it has organised and vocal supporters. Australia’s welfare state has evolved and will continue doing so, but the political conditions required for its abolition have never existed and will not exist in the foreesable future.
Andrew Norton 