Could we abolish poverty if we didn’t spend so much on public servants?

In the Sydney Morning Herald of 1 June, Julie Novak of the Institute of Public Affairs criticised an article by Gavin Mooney and Alex Wodak, writing in the previous day’s Herald, which argued for higher taxes , in part based on arguments developed by Richard Wilkinson and Kate Pickett in The Spirit Level arguing that Wilkinson and Pickett’s analysis should be taken with a grain of salt.

Now being an international comparisons pedant, I also have a lot of problems with aspects of the Spirit Level (mainly related to the fact that Japan is assumed to be a low inequality country and shouldn’t be).

But we’ll put that to one side, because along the way she raises an argument that is even less well founded than anything in “The Spirit Level”.

In particular, she asserts that “the primary beneficiaries of big welfare are the middle-class bureaucrats who administer the welfare state in fine detail. To get a sense of how much welfare-state funding is being misdirected, consider this: based on an upper estimate of 13 per cent of Australians living in poverty, the Commonwealth’s social security and welfare budget of $117 billion could have been evenly shared among the poverty stricken with a $40,817 payment.”
But let us stop for a minute to have a reality check. A payment of more than $40,000 per person means that we could pay a family of four more than $160,000 per year out of the current welfare budget; but only a small minority of families make this much in earnings. Is this possible? Well the answer must be “Sadly, No”.

Now if you divide $117 billion among 13% of the Australian population, it is arithmetically correct that you come up with about $40,000. This calculation is simple, straightforward and completely misleading.

People I have a lot of respect for criticise the estimates that the poverty rate in Australia is 13%, but let’s accept for the moment that Australia’s welfare system is not sufficiently generous to raise everyone out of poverty, and leaves 13% of the population below the poverty line.

But the point overlooked in this calculation is that in the absence of our welfare system a lot more people would be poor. So, the relevant figure is not how many people are in poverty after receiving social security benefits, but how many people are poor before they receive benefits.

OECD figures for around 2005 estimate that 12.4% of Australians were poor after taking account of taxes paid and benefits received, a figure a little lower than Julie Novak’s estimate. But 28.6% of the population would have been poor in the absence of welfare benefits. So if we divided all of the current welfare spending of $117 billion dollars equally among all pre-transfer poor people rather than giving them a payment of more than $40,800, we would only be able to give them a payment of $17,700.

If we completely abolished Centrelink and were somehow able to pay people benefits without actually having anyone to administer the system, then we would have about $3 billion to add in, which would give all poor people an extra $450 a year.

The combined amount is actually less than the current single rate of age and disability pension of around $19,000 (including supplements) – although it would be a big improvement on the rate of payments for the unemployed of around $12,400.

Of course to use up all of the welfare budget in this way would mean that we would no longer be paying for child care support, nursing homes, services for people with disability or support for the homeless.
Julie Novak also argues that “An insidious effect of progressive income taxation is to substitute leisure for work and, combined with a large welfare state, to impose high effective marginal tax rates that punish individuals financially for supplying more labour.”

It is not entirely clear what withdrawal rate she has in mind, but if you only wanted to give welfare payments to the poor, then you would probably be talking about a 100% withdrawal rate, which would make our current effective marginal tax rates look pretty low.

46 thoughts on “Could we abolish poverty if we didn’t spend so much on public servants?

  1. Julie Novak’s article in the SMH was flawed in many respects. She says:

    The experience of modern history shows that the best way to ameliorate poverty is to promote economic growth by freeing up markets.

    She is obliged to explain why the US – which has promoted “economic growth” more than any other country – has 44 million people on food stamps.

    Higher taxes also distort consumption and production decisions, reducing the capacity of the market economy to generate the growth needed to scoop people out of wretched poverty.

    Why did the US grow faster under Clinton with higher taxes?

    The truth is that the primary beneficiaries of big welfare are the middle-class bureaucrats who administer the welfare state in fine detail

    Huh?

    Enough said.

  2. Well it’s not hard to envisage a solution to the competing views here, or perhaps what is an intrinsic bind once you levy taxes on income at all. It taxes sweat, entrepreneurship and ingenuity right at its very heart, not least being usurious on capital formation which ultimately drives all outcomes over the long haul. If you add to that the current elephant in the room, the environment, then an obvious solution presents itself. Ditch income tax for total reliance on resource taxing with a healthy dose of CO2E taxing which seems all the rage nowadays. Not only would that get rid of a lot of unnecessary public servants in the ATO, it would also get rid of the need for an awful lot of private accounting/legalese which is just more deadweight administration via different paymasters.

  3. And when you think about it, while we just made redundant all the xenophobic folk at the FIRB in one fell swoop, we can then similarly rid ourselves of great swathes of those Fair Work folk as we answer Peter Whiteford’s sudden shock to the system among others so set in their ways and going weak at the knees at the loss of so much Gummint hanky.

    Any fit person desirous of some spending power can show up at their local Council for a day’s reward at a the new ‘fair minimum rate’ or take their chances out in the free market. Well not quite free because the new one page Fair Work Act states all work contracts shall be in writing and begin with- ‘We the undersigned hereby agree….’ and end when the parties get tired of writing and be enforceable at Law. The only proviso being the notice in writing for the respective period to cease the contract of employment be the same notice period for both parties.

    I can see some Canberra RE owners getting real twitchy, but no matter, there’s no impediment whatsoever to an interstate move with no stamp duties, capital gains taxes and the like and capital and labour are now infinitely attuned to the new flexibility and complete lack of friction in this vibrant green economy of ours. All hands on deck too as the fossil fuel life blood of capital has been taxed, radically shifting the demand for physical labour. Watermelon graduazzi might like to think of it all as Adam Smith meets Gaia with just a dash of Pol Pot. No nasty lefty stick you understand, just pure unadulterated, high octane carrot juice.

  4. It’s not clear to me that the IPA is doing any good to its own cause publishing stuff like this — apart from the figures being obviously wrong as you’ve shown, I think that deliberately conflating two issues that should be relatively independent (the size of the public service and welfare payments) is not exactly contributing to anything useful apart from political point scoring (do they just want publicity or do they want to do serious policy work?). Why not measure the size of the public service in terms of how much we spend of roads, cornflakes or leisure activities? For example: “If we cut the public service in two by getting rid of over paid bureaucrats, everyone one would be able to buy 3 extra packets of cornflakes and go to the movies twice a week more than they do now!”.

  5. the figures are not obviously wrong – as Peter concedes the calculation is correct. The fact of the matter is that welfare exists to benefit middle classes and bureaucrats, not actually the poor.

  6. “The fact of the matter is that welfare exists to benefit middle classes and bureaucrats, not actually the poor.”

    Sinclair, lots of poor people benefit from welfare. Try being unemployed for a time and having no money or having a serious mental disease. Saying that they don’t is just dishonest. In addition, you have causation in the wrong direction when you say that welfare exists to benefit bureaucrats unless you know some way it can be distributed without them. Incidentally, I know a few people that have worked for Centrelink, and it’s a woefully dull job (ask Daddy Dave at Callaxy how little fun it was if you get the chance).

  7. Sinclair, of course welfare exists to benefit the middle classes. If the poor had nothing at all, they would all immediately go on a rampage breaking into everyone’s homes and stealing our valuables indiscriminately. Not to mention all that dreadful drug dealing to seduce our children away from that nice merchant banking career.

    The rich get no benefit from welfare because they can afford to have walled communities with armed guards to shoot the vermin. So us middle classers have to resort to paying as little welfare as we can to those of them as appear ‘deserving’ to keep the hordes at bay.

    Sinc, I would have thought you would not have fallen for the old – “right calculation, wrong input figures” scam. Or do you have some other reasoning for your assertion?

  8. Some of the government funded ‘arts’ sector is a sort of welfare system, there is an awful lot of very complexly layered management costs -the area is very prone to reverse economies of scale- and there is always a hint of “phantom” employees in the air this area.

  9. If the poor had nothing at all, they would all immediately go on a rampage breaking into everyone’s homes and stealing our valuables indiscriminately.

    Actually the police would arrest them and the courts would send them to jail.

    The scam is the welfare system itself – here is what I wrote at the Conversation.

    McCloskey demonstrates this with a very simple example. She asks if one-quarter of the US government tax take went to poor Americans how much money would they receive. Some back of the envelope calculations show that each poor American would receive US$30,000 – for a family of four that would be $120,000.

    In other words, there would be no poor people if government was really redistributing income to the poor.

    Is there an equivalent Australian number? This coming financial year the federal government plans to raise $342 billion and spend $362 billion. Assuming the Smith Family are correct and about 13 percent of Australians live in poverty, the McCloskey calculation for Australia is about $28,500 per person.

  10. Ah this is familiar!

    For example one federal /states art program is called the Visual Arts and Craft Strategy(VACS), of its roughly 14 million per annual budget at least 12 million is paid to organizations so that they ,in the words of an Australia Council report, can supply “support and appreciation” to artists.

  11. Sinclair

    How do you account for the difference between your/McCloskey’s number and Peter Whiteford’s? All things being equal I think I’d be inclined to accept Peter’s number, not only because this is his core expertise area but because he has set out at least to some extent the basis of his calculations whereas yours appears msotly to be just bald assertion.

  12. I think the bald assertion is that 28.6 percent of the population would be in poverty without welfare. I think if we asked Peter W he’d admit that he is the author of the 28.6 percent number – so it is hardly me making up figures.

    I think the 13 percent figure that is taken from the Smith Family is already a massive overstatement of poverty. Peter Saunders of the CIS had much to say on that number being inflated – I used it simply to avoid the argument of how many poor people there might be.

  13. Sorry not to respond earlier but I’m currently overseas and in a different time zone.

    The 28.6% figure was supplied to the OECD by the ABS, which people with access to the unit record tapes for the income surveys can replicate. I did not calculate this myself.

    Sinclair, now you and Deirdre McCloskey make a related calculation, you for Australia and she for the USA – if you can give a link to where she actually says this I would be grateful for this.

    Now both of you refer to replacing 25% of total spending with transfers to the poor, so I didn’t link to your posts because I gave you the benefit of the doubt – the benefit of the doubt meaning that if you replaced 25% of total spending, but kept existing welfare spending as it is then it would indeed be possible to reduce poverty to zero.

    But this not what Julie Novak said. She said that we could redistribute current social welfare spending and give poor people $40,000 a year. Julie Novak’s figure is arithmetically correct in a narrow sense, but it is meaningless. Well actually it is worse than meaningless, it is misleading.

    If you did what she posits in her example, poverty would actually rise not fall and incentives to work would deteriorate markedly

  14. Peter
    Any Idea what percentage is consumed by delivery/supervision costs?

    When I was young I knew a few people who worked in the dole office, they used to joke about how ending working for the office was often simply a matter of “jumping the counter”.

  15. John

    All the spending by Centrelink, DEEWR and FaHCSIA amounts to less than $6 billion out of $117 billion or about 5% of spending.

  16. Sinclair @ 9 “Actually the police would arrest them and the courts would send them to jail. “

    Well, treating this seriously for a moment, do you know how much it costs to keep someone in jail, plus process them through the courts, plus pay police and catch the varmints? I think that alone would justify welfare at much greater levels than we already have. That’s hard dollars, not any ‘soft’ consideration of social costs associated with having people in the big house.

  17. Peter – fair enough you didn’t do the calculation. No link to McCloskey that I know of, but see her 2006 book pg. 45 – 46.

    Marks – I am sure its very expensive. The cost of the criminal justice system doesn’t worry me in the least. I have zero tolerance for the argument that we should bribe people not to steal our stuff.

  18. Peter Thanks

    There is spending that is not under the entries you mention.

    There a lot of ‘arts and ‘X” welfare type programs. Some examples; -arts and disability , arts and retraining , arts and mental health , arts and disadvantage, arts and urban renewal and so on.
    There are hundreds of semi or totally funded organisations paid for by a complex mix of multiple departmen programs ; Fed , State and local and there are also a lot of not for profit DGR status orgs, running these sort of programs.
    There may be other examples of this sort of thing in sports and other cultural activities that are out side my area of knowledge.

    What about all the spending on running ‘cultural improvement programs’ for un and semi employed people that is entered under other headings? Any Idea?

  19. Sinclair’s comments in this thread are discrediting himself more than his opponents. It would be better for him if addressed Peter’s argument rather than make obvious evidence-free assertions such as “the fact is that welfare exists to benefit middle classes and bureaucrats, not actually the poor”. There simply is no such fact.

    Sinclair did you ever notice that in every country with a welfare state, it was brought in not long after universal suffrage was granted? Do you think that is coincidence? Or is it just possibly because most people are better off under it than under the arrangements their betters made for them when unconstrained by the ballot box (and would certainly make for them again if that constraint was removed)?

    The biggest irony is the complaint about “middle class welfare” on the one hand and “complex and expensive bureaucracies” on the other. The easiest way to reduce those bureaucracies would be to extend welfare to all. The bureaucracies are a direct consequence of targeting welfare to the needy. The more you meddle in peoples’ lives the more meddlers required, and the more nuanced your definition of “need” is the more time you’ll spend seeing if people fit it.

    john – do you really think the few million nationwide spent on this stuff – mostly spent by the states and councils, BTW, not the feds – would fund any sort of welfare system? If so then you have no idea of relative magnitudes in expenditure. It’s like saying everyone could afford a house just by saving a five cent piece a day.

  20. Sinclair: “In other words, there would be no poor people if government was really redistributing income to the poor.”

    All very swimming but the political reality is that the poor NEED the middle class to benefit from the welfare system otherwise their own welfare is always under threat. This is because Governments both left and right no they can slash a welfare net that benefits only the poor without too much blow-back but they find it infinitely harder to wind back a welfare net that also benefits the more well organised, articulate and sophisticated middle classes.

    Sinclair: “The cost of the criminal justice system doesn’t worry me in the least. I have zero tolerance for the argument that we should bribe people not to steal our stuff.”

    People have every right, at times even a responsibility, to steal stuff if the rules of the game are rigged in a way that favours others at their expense.

  21. DD – welfare began in Germany with Bismarck introducing the age pension – not aware that they had universal suffrage at the time.

    But yes I’m well aware of the link you describe – Directors law and the median voter theorem explain the relationship. I allude to this in the Conversation piece I linked to above and discussed it at length when I was in Canberra talking to the LDP conference in January. I understand the meddling argument you propose, but why not just give them the cash?

  22. Peter already explained the problem with that Sinclair. If you just give the poor, and only the poor cash, you end up with EMTRs of 100% for everyone receving the transfers. Is that really what you want?

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  24. Bismark introduced a pension for all those people over 65 years of age. The average age of death at the time was 45 years of age!! Some welfare state.

    One cannot have any sort of welfare without bureaucracy. how to you check out the validity of a person’s claim? how do you know what they are entitled to?, How do people who make claims know what they are entitled to? Simply giving people cash does not remove this problem.

    It is very hard to compare private secotr and public sector bureaucratic costs however the public sector usually comes out reasonably well.

    In this country we can go back to Medibank and compare it with ‘private health funds’ and find its administrative costs were anything form 4 to 6 times less than the private sector.

  25. Ah Sinclair @ 19, so you object to the middle classes and (presumably welfare) bureaucrats getting tax money, but giving it to service companies such as Serco and the prison system bureaucracy, lawyers and judges and the legal bureaucracy, police and the police bureaucracy is OK.

    Is that an outcomes focus, or a lowest cost to society focus?

    I understand that some people do not worry about the cost of government services when it is something that they themselves want – as you have stated @ 19 in your own case. However, given the argument that some have with the size of the deficit, I wonder if there are any decent figures out there about the relative costs of a hard line justice system and the level of social security. (And various mixes thereof, I understand it is not just a one or the other issue)?

  26. Peter Whiteford deduces-
    “So, the relevant figure is not how many people are in poverty after receiving social security benefits, but how many people are poor before they receive benefits.”
    without addressing the very point that to the extent lots more middle class bureaucrats are now living off the sweat and toil of working class Australians, there are concomitantly more working poor. Whilst I can easily demolish EMTRs for such people with some big picture stuff, it is at the margins we are now concerned with, or more’s the point, ‘the marginals’ and those polls. Essentially they represent a scathing judgement of the waste and profligacy of the growth of the ‘evil empire’ and just like NSW Labor they’re now waiting with baseball bats for Federal Labor.

    Carbon taxing is the focus of their anger now and it’s not because of any lack of concern for the environment, but with the recent rises in fuel and utility bills, they can only look back in anger at the cost of the evil empire they’ve worn and know they’ll have to wear in future with a horrendous deficit, carbon taxing or no. Abbott’s mob are essentially playing a dead bat to that with an implicit ‘who do you trust to keep the evil empire at bay?’ and they’re listening in droves. Short of a Tea Party emerging it’s a no brainer for them and we have to ask why so?

    The answer lies in Federal Labor having unleashed the worst excesses of the graduazzi, producer class and their self serving and rent seeking ways. This Govt never managed to get to this position without these powerful allies. It started with lunar Fuelwatch and Grocerywatch empire building and progressed to Pink Batts, Green inspectorates and loans, hybrid handouts and solar feed-in schemes and windmill subsidies, to 1000 more bureaucrats in the Dept of Climate Change. I’d leave out BER stimulus here, sufficeth to say that throwing a lot of money quickly at a very specialised sector of the building industry was begging for trouble. However unleashing the worst excesses of the compassionatte’ graduazzi with relaxing hard won border controls, to degenerate into children on the rocks, 5 for 1 all expenses paid swaps possibly with Malaysia and filling military housing and motels with their collective compassion, in a housing affordability crisis, has just rubbed more salt in the wounds. Is it any wonder now, when their handsomely paid shills like Flannery lecture them and Garnaut recommends another 3 bodies to oversee their shiny new carbon taxing, they’re angry as Hell?

    As they look back in anger there’s a common thread to it all. The belief that well meaning, graduazzi bureacrats are a better friend to struggletown than a carefully considered and well constituted ‘free’ market-place that fundamentally addresses the elephant in the room- the environment. You only have to look at the failure of the former and the back-pedalling on so much of it’s policy prescriptions, to see that way now lies in ruins and who has or will pay for it most?

  27. Derrida Derider comment 21: the system is a lot bigger than a few million dollars, but it is virtually impossible to assess because these costs are spread across so many departments and they definitely do involve federal money. They have such a complexity of duplication and triplication of management. When new programs are announced they generally do not replace the management of a previous program, they are additional. Then there is the matter of the not-for-profit DGR sector. Many of these entities are hardly transparent and have been the subject of fair bit of fighting between the finance department and cultural authorities. It is very easy to underestimate the size of something that is very hard to see and boring.

  28. LO – I’d prefer people worked and didn’t have welfare at all. Charities don’t worry about EMTRs I don’t see why the welfare state should either. Not getting money you’re not entitled to is not a tax.

    Victor – yes. He was devious.

    Marks – I’m going to get myself thrown out of the fascist – right winger club. But I don’t think the private sector should be running prisons. That function is best suited to the public sector. The only legitimate function of the state is the protection of property rights. I expect them to perform that function subject to a cost constraint, not simply minimise costs.

  29. Sinclair: “The only legitimate function of the state is the protection of property rights.”

    The alienation of what would otherwise be common property via privatisation is a privilege granted by your fellow citizens thru the State, not a right. Privileges may be granted, privileges may be taken away. Sinclair, I think you need to spend time in the naughty chair until you learn that good boys share things with the other children.

  30. Charities don’t worry about EMTRs.

    I do believe they do. EMTRs after all is only a way of determining who gets what.

    Charities do that, well they do that in my country where the poor are numerous and charity resources are quite finite. They have to make such determinations all the time.

    Yes I agree he was devious.

    As an aside all ‘welfare states’ before the Post War era were minuscule. We can see that in seeing how easy it was to ‘balance the budget’( Australia, UK ,USA come to mind easily during the Depression.)

    Now compare that to European countries now and remember it isn’t a depression.

  31. On the prisons, the link to the welfare state is fatuous. I don’t think anybody (and especially not Sinclair Davidson!) disputes that the cost of prisons is mainly driven by the failed war on drugs.

    Ironically this is doubtlessly also a neat contributor to the cost of the welfare state…

    On Bismark, all state pensions entitlement ages should be indexed to life expectancy, as a bare minimum!

  32. Actually it was the libs that really expanded the field that I am referring to; regional cultural programs were one of the biggest pork barrels of all time. Two years ago we went to a meting of some regional arts types, they were openly ,very, nostalgic for the days when the deputy prime minister was an NATIONAL.

  33. Patrick – yes. War on drugs has been a disaster. But the authorities never learn, the war on tobacco escalates, the war on alcohol begins, and the war on gambling proceeds.

  34. Yes, Bismarck’s was the first earnings-related welfare system – and Victor he also included unemployment, disability and sickness insurance. Age pensions were the least of it.

    His avowed purpose was to buy off the better off sections of the working class to avert revolution, which rather strengthens my arguments both about the importance of “middle class welfare” to system stability by buffering life risks (many Marxists used to oppose “welfare capitalism” on precisely these grounds), and that the bulk of people saw (and see) the welfare state as in their interest.

    Of course you can argue that the bulk of people were mistaken about their own interests then and have persisted in their mistake ever since. But that’s a strange argument for a proponent of free markets, for which participants judging their own interest better than others is a necessary condition.

    “The only legitimate function of the state is the protection of property rights.” – Sinclair

    What an extraordinary thing to say. As giving the propertyless the vote has naturally led to considerable violation of property rights, then I presume that you are in favour of a property qualification for the vote. Or we could weight votes by assets – let’s have policy determined by the median dollar rather than the median voter. That will surely ensure the state stays focused on its only legitimate function.

    I assume, naturally, that the qualification level would be set such as to exclude those – the majority – who believe they can gain from violating our property rights through redistributive taxation, while including you and I. That position gives a whole new meaning to the term “veil of ignorance”.

  35. “all state pensions entitlement ages should be indexed to life expectancy”

    A common mistake even amongst experts. What matters for the pension age is the ability to self-support by work at various ages – that is, morbidity rather than mortality. The fact that there were many fewer workers living to 65 in 1911 than now is irrelevant – what we need to know is whether those who did make it that far in 1911 were more or less employable than those who make it that far in 2011.

    The answer is probably, on balance, that they were less employable in 1911, which means we should indeed be raising the pension age. Tying it to mortality, though, misses the point.

  36. DD – what do you mean ‘propertyless’? Unless you include only land as being property. A very old fashioned view of the world. A definition of property right is here. The right to earn income from your own labour and keep the proceeds of that income is consistent with property rights but would be independent of owning land. Surely you knew that?

  37. Sorry Sinclair, but you do not ethically, legally or in any other way have an unalienable right to any property, including income. You knew the rules of the game before you came here yet you opted in. But you most certainly do have an unabridged ethical and legal right to sod off if you’re not happy. Such are the joys of a free and open society in the era of globalisation.

  38. One of the best posts I have seen on Troppo for a while. Peter refutes the fallacious claims of Julie Novac. Give up Sinclair – your supposed counterarguments suggest only that you do not follow Peter’s. What on earth does the IPA stand for these days other than climate change delusionism, support for big tobacco and foolish critiques of the welfare state? It once had sensible things to say on such things as labour market reforms.

  39. Mel – please feel free to send me your details so I can lodge a complaint under the Victorian legislation regarding your vilification on the basis of national origin.

    That’s the rules too – you do know that, don’t you?

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