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Report

Analysis of the impact of raising benefit rates

4 Sep 2018
Description

Executive Summary

Australia’s aims

Key aims for Australia’s economy and society can be summarised as ‘prosperity and fairness’. These represent ‘the size of the pie’ and ‘how the pie is sliced up’.

This report, commissioned by the Australian Council of Social Service (ACOSS), considers the impact on both prosperity and fairness of boosting a range of allowance payments.

The proposed policy change is a ‘catch up increase’ of $75 a week – an extra $10.71 a day for more than 770,000 people: the least well off in Australian society.

Australia’s challenge

The gap between the living standards of average Australians and those who are on these allowances has widened sharply over the past quarter of a century. And it continues to widen.

That wasn’t an accident: it was what policy has been geared to do.

A key driver of average living standards is wages. But these allowances examined in this analysis are indexed to prices rather than wages. And that’s a problem because, over time, wages grow faster than prices. Accordingly, the nation’s policy settings ensure that those Australians who are on allowances have seen their living standards squeezed relative to average living standards.

The impact on Australia’s economy

Lifting these allowances would have both prosperity and fairness impacts.

The fairness impacts dominate, but there are prosperity points to consider too. Deloitte Access Economics used our Horizon macroeconometric model of the Australian economy to model a lift in allowances that is effective immediately. The direct cost of the Federal budget is about $3.3 billion a year:

  • In nominal dollars, the size of the Australian economy (“the prosperity dividend”) would lift by some $4.0 billion as a result of that extra spending, meaning that the size of the economy initially increases broadly in line with the initial income injection of $3.3 billion.
  • That’s because several factors offset. Among the negatives:
    • Most notably, some of the extra spending by beneficiaries would be on imports.
    • And a modest increase in the value of the Australian dollar would weigh on exports.
    • While, similarly, interest rates would also be a little higher than otherwise. Among other
    • things, that would see fewer new homes being built (as well as less done by way of renovating old homes).
  • Among the positives:
    • That money goes as extra income to a group that, on average, is the poorest of the poor in Australia. Other things equal, most of it is therefore spent. So it’s no surprise that the bulk of the dollars - some $3.3 billion a year – show up as extra spending by consumers.
    • And while imports would go up, the bulk of the extra spending by beneficiaries would be spent at home. That extra spending would create some 12,000 extra jobs. And the accompanying strength in the market for workers would lift wages. (Prices would also be a little higher, but the increase in wages would outweigh that in prices.)
    • Total wages being paid to Australians would therefore lift by around 0.2%. Similarly, the stronger economy would boost corporate profits, with that latter boost also running at close to 0.2%.
    • Finally, the stronger economy (more jobs, higher wages, stronger profits) would mean that the Federal Government would raise an extra $1.0 billion in taxes, while State and Territory Government revenues would increase by some $0.25 billion.
  • But the boost to the economy would tend to fade over time. That’s because the impact of the increases to interest rates and exchange rates would gradually rise over time. More importantly still, this policy change comes at a cost to the Federal Budget, and the modelling assumes that – over time – taxes lift so that the debt levels of the Australian government return to where they’d otherwise be.
  • The combination of those factors – very slight increases in taxes, interest rates and exchange rates that occur over time – thereby gradually return the Australian economy back closer towards the path it was otherwise on (the baseline scenario).
  • As a simple example of the impact of that, the net number of additional jobs created by this change in policy – which stood at 12,000 extra jobs in 2020-21 – is estimated to slip back to around 4,400 by 2024-25, and to be less than 500 extra workers by 2029-30.

That fading strength in the “prosperity positives” is no surprise. Some of the gains to the “size of the pie” are generated by dipping into the Federal Budget to pay for higher allowances. The net cost of that to Australian taxpayers is gradually clawed back via higher taxes and, as noted, the stronger economy also shows up in higher interest and exchange rates.

Or, to put that another way, the prosperity benefits fade over time, but the most compelling reasons to adopt this reform revolve more around fairness than they do around prosperity.

And it is important to note that it is possible that the modelling understates the extent of the prosperity benefits.

Most notably, it is important that these dollars would flow to the poorest of the poor in Australia.

There is a significant body of evidence that higher incomes for the unemployed and other groups who are disadvantaged may lead to better national outcomes on indicators such as health. That is, there are many additional social costs involved with entrenched disadvantage, and those costs are alleviated as the cycle of disadvantage is broken. It is beyond the scope of this exercise to account for the reduction in those broader social costs, but there is a growing body of research in this area.

Finally, the economic literature has increasingly identified inequality as a factor that can directly weigh on prosperity. For example, research by the IMF indicates that:

  • Nations with greater levels of inequality tend to have lower economic growth over time (in the language used in this report, failures on fairness can limit success on prosperity); while
  • The worse is inequality in a nation, then the shorter are its spells of high economic growth. The upshot is that the results in this report are likely to be conservative: the “prosperity dividend” could be both larger and longer-lived than these results have it.

The impact on fairness

The two largest fairness levers in Australia are (1) cash benefits and (2) the operation of the education and health systems. This report considers the impact of potential increases focussed on the ‘unemployment and study payments’ category of cash benefits.

Our analysis shows that the bulk of the dollars go to the lowest income quintile of households. Measured in dollar terms, the lowest quintile receives six times the dollars going to the highest income quintile.

That said, dollars aren’t necessarily the best way to assess the impact on fairness. What matters is the relative impact of those extra dollars on disposable incomes.

And, on that measure, the proportionate impact becomes fully evident. As the chart below shows, the lowest quintile would receive twenty-eight times the relative boost to its disposable incomes than does the highest income quintile – an increase in income of 1.6% for the lowest quintile, versus 0.06% for the highest quintile.

Accordingly, any given dollar spent on this policy proposal would have a very tightly targeted fairness impact, with the overwhelming bulk of relative improvements in disposable incomes going to Australia’s lowest income families.

That illustrates the fairness strengths of the current proposal.

Regional impacts

The different types of allowances that would be raised have different regional profiles. That said, the bulk of the impact would be through increased Newstart allowance, and the regional distribution of those allowances would boost both the prosperity and fairness impacts discussed above.

From a prosperity viewpoint, unemployment in Australia is relatively higher outside our largest cities and towns. Other things equal, this means that relatively more of the increased spending flowing from higher allowances would tend to stay in Australia, being spent on locally produced products and local labour.

From a fairness viewpoint, there is a tight correlation between the least well-off districts across Australia (measured using the Socio-Economic Indexes for Areas (SEIFA) index) and the boost to regional income from this proposal, meaning that the regional communities most in need of help would receive it were this proposal to be enacted.

Deloitte Access Economics

1 Deloitte Access Economics has also separately noted the strong case for raising Newstart and Youth Allowance in the latest (May 2018) issue of our Budget Monitor publication, though the specifics of what we proposed differ from those examined here.

2 The results quoted here are the difference in financial year 2020-21 outcomes between two different scenarios: one in which these benefits are raised, and a ‘baseline’ scenario in which the benefits aren’t increased by $75 a week.

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