Ben Phillips a Principal Research Fellow at The National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra.
Q. What do you think of Joe Hockey's proposal to cut welfare and other entitlements to offset lower personal income and business taxes?
A. The Australian welfare system is not something that is necessarily broken and unlike many other countries, especially European, it's already a well targeted system with quite tight means testing.
However, there is already some tightening of the system in place with indexation arrangements frozen for various forms of family payments such as Family Tax Benefit Part A (FTB A) and B and the baby bonus. There may be some scope for further tightening these payments at the higher end of the income distribution especially for FTB B which is predominantly for single income households.
Currently FTB B is accessed by households with incomes up to $150,000. The Henry Tax Review suggested combining FTB A and B. A more targeted system would produce some savings although there can be a trade-off here in that as you reduce payments (as peoples incomes increase), you also reduce the incentive to work through higher effective marginal tax rates. It's a difficult policy dilemma.
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The largest social security payment the Government makes is the Aged Pension. In recent years the entitlement age has been increased to 65 (from 60) for women but over time, with an ageing population, this is where the real pressure points on the budget will be. It will be politically difficult to cut the pension or to further increase the age of entitlement. The best strategy here will be to continue to encourage superannuation and increase the workforce participation of older Australians.
Q. Are there other things that could be targeted?
A. I wouldn't say that we have a particularly generous system. Unemployment benefits are very low and youth allowance is very low. And also rental assistance, disability support payments, and single mother pension are very modest.
The Australian system is already quite tight. It's already a lot tighter than many European countries and I don't see who we could be making large savings without consequences.
Q. Which kinds of consequences are you referring to?
A. If you cut back too much on those we might end up with a higher level of poverty. That means wider social disadvantage, which has flow-on effects on crime and other forms of social and financial disadvantage.
Q. Which changes would you recommend to the current system then?
A. The system is already well targeted. It's not easy to make savings, but there are areas that could be tightened up. For example, family payments were made much more generous last decade and that is one area where some unwinding at the higher incomes is possible. First home buyer grants are not targeted and perhaps serve little purpose. The best policies are those that encourage workforce participation, a strong economy and private superannuation – so we don't need to have as many people on income support.
Also, the federal government has a Family Tax Benefit Part A (FTBA) and a Family Tax Benefit part B. (FTB B). FTB B is a broadly received payment. You could be getting it with a joint income of $100,000, and even of $150,000. That could be lowered. But the government has already frozen the payments, which used to increase every year.
But the biggest concern is not this payment – which is not forecast to increase much. The major concern is around pensions. Age pensions are the largest impost on the budget of all government transfer payments.
Q. On which scale?
A. Many people don't have a large super, so they are entitled to age pension, which on average costs the government $32 billion per year. That outweighs any other government payment system.
On top of that you have an aging population, so more and more people are entitled to age pension, while you have less people working and therefore paying tax.
Encouraging private superannuation and workforce participation and the health of older Australians' is the best way forward to minimise the cost burden of the Aged Pension system into the future.
Q. How could the problem of an aging population be solved?
A. It's a difficult problem. If you increase the pension age, people are working later, and the most important element of that is encouraging super.
The government is already looking at increasing superannuation contribution to 12 per cent, and that's a good way to move people away from government pension to super.
From 65, people who don't have super are entitled to about $700 to $750 per fortnight in age pension – that's about 20,000 per year.
Q. Is there any other change you would recommend? What about Medicare for example?
A. Targeting private health insurance though a means test as the Government is doing makes sense. The income thresholds have been set well beyond average household incomes.
