Shaping 2015: Social Services Need More Than Short-Term Fixes

Getting the right balance between short and medium-term ‘fixes’ may well be the most significant challenge for Social Services Minister Scott Morrison, writes  Professor Peter Whiteford from the Crawford School of Public Policy at ANU in this article published in The Conversation.

Scott Morrison’s appointment as minister for social services in late December 2014 has been seen as an important step for the Abbott government as it moves towards its second budget. The tasks he faces have been variously characterised in the media as “stopping the welfare” and “stopping the bludgers”.

Social Services is the largest spending federal government department. The 2014?15 budget included A$146 billion of welfare spending, or 35% of total budget expenditure. In addition to responsibility for welfare, family support, seniors, aged care and the National Disability Insurance Scheme (NDIS), child care has been added to the portfolio.

Dealing with reports and reviews

Morrison will be a member of cabinet’s Expenditure Review Committee. He is:

… responsible for driving the Abbott government’s welfare reform strategy that is designed to increase the economic participation of Australians and to ensure the long-term sustainability of Australia’s welfare safety net.

Following Prime Minister Tony Abbott’s announcement that he would scrap his expanded paid parental leave (PPL) scheme, Morrison will also be responsible for developing proposals for a family package. This will take account of the Productivity Commission’s as-yet-unpublished final report on child-care arrangements.

Morrison will also have to reconcile the recommendations of a number of competing blueprints for the future of welfare in Australia. The final report of the McClure review of Australia’s welfare system was submitted to the previous minister, Kevin Andrews, in late 2014. While not yet publicly available, its main recommendations are likely to be close to those in the interim report released in June 2014.

The interim report proposed “four pillars of reform”: a simpler and sustainable income support system, strengthening individual and family capability, engaging with employers, and building community capacity.

Turning these desirable principles into practical reforms will not be straightforward. For example, one can “simplify up” – with the implication that the costs of the system rise – or one can “simplify down”, with the result that some people get less support than currently.

While not reporting to him, the Forrest Review of Indigenous Jobs and Training also has major implications for the challenges facing Morrison. It effectively recommends the extension of income management to all social security recipients of working age. This is despite the official evaluation of income management in the Northern Territory having found that income management has made people more dependent on the welfare system, rather than building independence and self-reliance.

The National Commission of Audit report, which was released just before the 2014-15 budget, also includes a wide range of recommendations relating to the Social Services portfolio. It is unclear how many of these recommendations remain of interest to the government.

It is also anticipated that the government will soon release the next Intergenerational Report, setting the scene for further proposed changes to social services in the 2015-16 budget.

While not reporting directly to Scott Morrison, Andrew Forrest’s (left) review will have significant implications for his portfolio. AAP/Nikki Short

The budget challenge

But looming over all is that many of the changes to social security proposed in last year’s budget have failed to pass the Senate.

Given the size of federal government spending on social security and welfare, it is likely – as argued by Treasurer Joe Hockey – that Social Services would bear a significant part of any budget adjustments. However, last year’s Budget Paper No. 2 shows that out of the total projected expenditure cuts of $29.4 billion between 2014–15 and 2017–18, $15.4 billion – or 52% – would have come from Social Services programs.

While recent public attention has focused on proposed changes to Medicare and to higher education funding, some of the potential reforms to social security seem just as unlikely to pass the Senate and are widely perceived as unfair.

This reflects that Australia has the most targeted social security system in the developed world. Australia directs the highest share of its social security spending to the poor and the lowest proportion to the rich. As such, a recent OECD study of the equity implications of fiscal consolidation concludes that across-the-board cuts in social security would increase inequality in Australia more than any other country.

The budget challenge has been exacerbated by economic trends since May last year. The Parliamentary Budget Office chart pack on the Mid-Year Economic and Fiscal Outlook (MYEFO) shows further deterioration in the budget balance due to lower tax collections, mainly resulting from “parameter and other variations” – that is, factors over which governments have limited control.

For example, slower economic growth increases spending on the Family Tax Benefit – relative to the budget forecast – by more than five times as much as is saved by the policy decision to pause the indexation of thresholds for family payments. On the other hand, cancelling the expansion of PPL will give the government more latitude.

This does not take into account that some of the proposed budget spending cuts are still included in MYEFO forecasts because legislation has not been put to the Senate. This includes changes to unemployment payments for people under 30 – which, by themselves, would have provided close to 10% of total budget spending cuts out of less than 1% of total spending. These changes appear unlikely to pass the Senate.

Joe Hockey’s first budget was widely perceived as unfair. AAP/Dan Himbrechts

Is there a welfare crisis?

It is clear that the challenges Morrison faces are significant. These include promoting economic participation in an uncertain labour market, managing the largest public spending portfolio in Australia and responding to official reports with divergent agendas. These challenges are all within the context of budget choices constrained by an unaccommodating Senate and public views that the 2014-15 budget was unfair, with much of this presumably to be resolved in the next four months.

However, while preparation for this year’s budget is likely to occupy most of Morrison’s time, there is a case to be made for focusing on the medium term rather than the short term. The budget is an essential part of any longer-term plan. When budget proposals are aimed at the short-term needs of the electoral cycle, they can create more challenges than they resolve.

It is generally accepted that the budget challenges are not an immediate crisis. However, the Grattan Institute argues that without policy changes, the combined federal-state budget deficit could be around 4.5% of GDP per year by the middle of the next decade.

Moving towards a balanced budget over this time frame is likely to require both tax and spending changes. It is important to make these adjustments within a framework of principles.

Just as Australia does not have an immediate budget crisis, it also does not have a welfare crisis. The proportion of GDP spent on social security cash payments peaked at around 9% of GDP in 1996. It also attained this level in 2000 when compensation for the GST was provided. According to the most recent OECD figures, it was around 8.7% of GDP in 2013.

Similarly, as the McClure review interim report pointed out, the percentage of the working-age population receiving income support peaked in 1997 at 24.9%, before falling to 16.6% in the 2008, rising to 17.6% in 2010 following the global financial crisis and then easing back to 16.7% in 2013.

Despite a good deal of comment on the growth in numbers of people receiving the Disability Support Pension, the proportion of the working-age population receiving this payment has been stable for the last decade. The number of people on unemployment payments has been rising. But as Morrison points out, a major part of this is due to shifting people from other payments to Newstart.

A significant increase in unemployment could raise serious concerns about the cost of the system, not to mention its human dimensions given the inadequate level of Newstart. But going forward, the main cost pressures are the result of population ageing – as the next Intergenerational Report is likely to show.

The 2014-15 budget proposed an increase in the pension age to 70 and changing the indexation of pensions from the higher of earnings or prices to the Consumer Price Index alone. The proposed change in the pension eligibility age would not be fully phased in until 2035, but the proposed change in indexation arrangements – unlikely to be implemented – would have had a large impact on the forward estimates just before a 2016 election, enhancing the opportunity for income tax cuts.

Over the longer term, changed indexation provisions would have a very large impact on expenditure. However, it would do so at a cost to the adequacy of payments. If we were only to index the Age Pension to prices, by the middle of the century it would be a lower proportion of wages than it was before the election of the Whitlam government. International evidence suggests that relying only on price indexation is unsustainable in the long term. What is particularly needed in pension policy is predictability.

It is also important to avoid short-term “fixes” that make the system less coherent. The previous Labor government introduced a “sudden death” income test on Family Tax Benefit Part B at incomes of $150,000, which the 2014-15 budget lowered to $100,000.

Such “notches” are generally regarded by economists as among the worst form of policy design. In this case, it is ameliorated by few families being affected – it only applies at relatively high incomes.

A sustainable welfare system requires more than just constraining costs to meet short-term budgetary policy. A sustainable system also requires that recipients and current taxpayers view the system as fair and that payments are adequate to meet social objectives, particularly those relating to adequacy of payments.

Getting the right balance between the short term and the medium term may well be the most significant challenge facing Morrison in the Social Services portfolio.