Tax welfare churn and the Australian welfare state

Taxation Social security Economics Australia

In 2010–11, Australia’s welfare state, which includes health, education and income support payments, accounted for approximately $316 billion in government expenditure and 65% of total government expenditure.

By way of comparison, Australia’s three levels of government received $358 billion in tax revenue in 2010–11, of which $138 billion was received through income tax payments. • Of the $316 billion spending on the welfare state, approximately half, or $158 billion, can be attributed to tax-welfare churn.

Tax-welfare churn, the process of levying taxes on people and then returning those taxes to the same people in the form of income support payments and welfare services, simultaneously or over the course of an individual’s lifetime, continues to be a problem in Australia.

Churn imposes a number of social and economic costs such as high taxes, administration costs, inefficiency, rent-seeking, paternalism, and welfare dependency.

While Australia has relatively low levels of churn when compared to other developed countries, this does not mean governments and policymakers should ignore the issue.

ABS data show the Australian welfare state provides a ‘benefit tsunami’ once someone retires because the welfare benefits that elderly individuals receive substantially exceed their tax contributions after they retire.

Governments have recently committed to further expansion of the welfare state via increased pension payments, the National Disability Insurance Scheme (NDIS), and school education reforms—all of which exacerbate the financial crisis we are heading towards.

When combined with the fiscal pressures of an ageing population and expected lower tax revenue growth, it is clear the Australian welfare state is unsustainable on current trends.

There are a number of possible reforms that, in addition to being worthy policy changes in their own right, would have the additional benefit of reducing tax-welfare churn.

For example, Australia’s system of retirement savings is in dire need of reform. Aligning and increasing the preservation and age pension eligibility ages, combined with a requirement to use superannuation savings to purchase an annuity, will go far to reducing lifetime tax-welfare churn, welfare dependence, and future fiscal pressures.

There are numerous possible reforms to income support payments (including Family Tax Benefits and the Disability Support Pension), education and health that can reduce churn. This report outlines a selection of possible reforms.

Finally, this report briefly outlines the concept of a ‘personal savings and loan account,’ a tax-effective savings vehicle that would allow people to receive welfare benefits in the form of income contingent loans and make tax-free contributions to cover income support, health and education expenses.

Publication Details