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.