Contrary to popular perception, Australia's welfare system is up there with Scandinavian countries in addressing disadvantage, according to Peter Whiteford
AUSTRALIA’s income-support system is under scrutiny. The Commonwealth government used social-welfare payments as a means of delivering part of the first two stages of its economic stimulus package. In this year’s federal budget, it increased age pensions significantly and announced the introduction of paid maternity leave, but also continued to cut back on so-called “middle-class welfare.” The review of Australia’s Future Tax system is due to report at the end of this year and will make recommendations to reform the benefit and tax systems.
In a recent conference paper I looked at how Australia’s social security compares with other rich countries in the Organisation for Economic Co-operation and Development (OECD) and assess how the Australian tax and benefit systems score in effectiveness and efficiency – how much inequality and poverty are reduced for each dollar spent.
Australia is very unusual in the way it pays for and delivers benefits. In most other OECD countries social security is financed with earmarked contributions, with benefits usually related to the past earnings of workers. In contrast, in Australia, government benefits are financed out of general tax revenue; benefits are flat-rate and in most cases are income-tested or assets-tested. So in most European countries, for example, the level of benefits you receive when you retire or if you become unemployed is higher for higher-income workers than for the lowly paid. In Australia the reverse tends to be the case.
In Australia we see social security as being to help those most in need, so that the government acts like Robin Hood and “takes from the rich to give to the poor”. In most other countries, people see social security as insurance against risks, acting more like a piggy bank that everyone contributes to and can expect to draw on. Australia actually pursues both objectives, but on balance, our system emphasises redistribution more strongly. Australia relies more on income-testing and targets a higher share of its benefits to the poor – the poorest 20 per cent of households receives 42 per cent of all benefits, while in the United States the corresponding group receives 25 per cent of benefits and in Japan about 16 per cent.
A range of indicators shows this approach has been extremely successful. For the past 20 years, Australia has had the most progressive benefit system in the OECD. Australia actually has less middle-class welfare than any other OECD country. It also has the most efficient system of benefits in inequality and poverty reduction of any developed country – for each dollar of spending on benefits Australia reduces income inequality by about 50 per cent more than the United States, Denmark or Norway, twice as much as Korea, roughly two and a half times as much as Japan or Italy, and three times as much as France. In addition, Australia has one of the most progressive systems of direct taxes of any OECD country and the tax system is also one of the most “efficient” in reducing inequality of any rich country.
On some measures Australia reduces income inequality by about as much as countries like Denmark and Sweden, usually seen as the epitome of redistributive welfare states. Even though Australia spends less than the OECD average on benefits, the formula for distribution is so progressive that Australia redistributes more in absolute terms to the poorest 20 percent of the population than any other OECD country except Denmark.
If this summing-up sounds too good to be true then it may well be that it is. Or it may be that debates are not pointing us to the more fundamental issues of disadvantage. A reliable and sustainable benefit system is essential, but the solution probably lies in more effective community services that prevent problems from occurring in the first place. •
Peter Whiteford is a professor in the University of NSW’s Social Policy Research Centre, This article first appeared in the university's magazine, Uniken.