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Reform With A Social Conscience: Tony Abbott Speech To Young Liberals

This is the text of the keynote speech given by the Minister for Employment and Workplace Relations, Tony Abbott, to the Young Liberals Annual Conference in Adelaide.

Transcript of speech by Tony Abbott to the Young Liberals Annual Conference.

AbbottThe Bali atrocity, the threat of terror, and the possibility of war in Iraq have cast a pall over the past year despite the stellar performance of the Australian economy, a largely successful war in Afghanistan, the cessation of unauthorised boat arrivals and, for Coalition supporters, the remarkable political ascendancy of the Howard Government. The big issues of 2003, like 2002, are likely to revolve around national security: possible terrorist strikes; Australia’s military alliance with America and Britain; relations with our Muslim neighbours; and maintaining the right balance between national unity and cultural diversity. Preserving national security is the first and most important duty of any government but it’s not the only one and democratic governments run the risk, like Churchill in 1945 and Bush (senior) in 1992 of winning wars but losing elections.

The current focus on foreign and defence policy does not mean the suspension of domestic policy development. In any event, it’s impossible to be a force for good in the wider world without a strong and secure domestic base. International crises cast domestic issues into different perspective but don’t make them go away. Issues of war and peace inevitably distract people from bread and butter concerns but they can also suspend “safety first” politics and give national leaders renewed determination to amend what’s within their power to fix.

In their New Year wish lists, Australia’s various stakeholder groups acknowledge the threatening international environment but continue to focus on the need for domestic reform. Mostly, they conveyed a sense that it’s more necessary than ever to put our own house in order “at a time like this”. There’s less special pleading than usual and, it seems, an underlying yearning to be our best selves. Across the usual divides, there’s a desire to focus on the decencies and aspirations Australians have in common. All those issues where winning the political argument has been more important than fixing the problem, this year, seem especially tawdry and embarrassing.

As a counterpoint to the problems of the wider world, providing a fair go for struggling Australian families is more urgent than ever. In particular, how do we give Australian families the best possible chance to make a better life for themselves and tackle the sense that many people are still running faster without advancing on an economic treadmill?

ACOSS wants the Government to create more jobs. ACCI wants the Government to create new regulatory structures that will allow business to create more jobs. For its part, the Government is determined not to rest on its laurels despite the credit it could claim for a million new jobs since March 1996, a 12 per cent real increase in full time average weekly earnings and job-destroying strikes at their lowest level since records were first kept in 1913. The welfare reform roadmap just released and the commitment to new policies on work and family are marks of a government which has always looked for fresh ways to tackle the most intractable social and economic problem of the past quarter century. Unlike its predecessors, this Government has not ignored the impact of the social security system on unemployment and is determined to ensure that paid work is consistently more attractive than the alternative.

“Perhaps it is a weakness of democracies,” wrote the Adelaide University historian, Sir Keith Hancock, “that, having willed an end, they try to shuffle out of willing the means. The Australians” he continued, in a celebrated essay first published in 1930, “certainly, constantly confuse end and means and they do this because their easy-going good nature and intellectual laziness make them reluctant to refuse favours, to count the cost, to discipline the policies they have launched. These policies, therefore, yield diminishing returns until, at last, they may become a positive danger to the national purpose which has called them into existence”.

Hancock was writing about “protection all round” and analysing the foreseeable but unplanned outcomes of policy based on wishful thinking. Policies to boost employment are especially prone to the magic pudding syndrome or to the counterproductive influence of unintended consequences and easily degenerate into attempts to buck markets rather than address the structural factors which drive them. The former Labor Government’s Accord, for instance, had worthy objectives: to boost employment and to provide a better life for people doing it tough. Unfortunately, lower wages and higher welfare payments created more potential jobs but fewer workers prepared to fill them. During the Accord years, unemployment became entrenched as more and more struggling families found that work could be more trouble than it was worth. The orthodox “cure” for unemployment became ineffective because of new work patterns and a welfare system which undermined the appeal of entry-level jobs.

Comprehensive social security is part and parcel of modern civil society but has a range of harmful side-effects. Failure to acknowledge the way universal, more-or-less unconditional welfare changes people’s behaviour has seriously compromised Australian governments’ efforts to deal with unemployment. The Hawke Government cut basic award earnings by 7 per cent in real terms between 1983 and 1990 (while increasing unemployment benefits by nearly 20 per cent). Unemployment averaged more than 7 per cent over the period and at its end the Minister for Social Security told Cabinet that his department had just identified the first Australian family with three generations simultaneously on welfare.

Unemployment is a much more complex social and human phenomenon than is apparent from the average press release. Unemployment happens to people, not economies. Behind the statistics are hundreds of thousands of quite different human situations. People’s finding, losing or failing to find work is a function of personal factors such as the motivation of job seekers and the goodwill of employers as well as “impersonal” ones such as the state of the economy and condition of particular industries. Even so, some systemic issues can make a big difference to how people organise their lives. If, for instance, people can receive almost as much money through the welfare system as through paid employment they can hardly be blamed for concluding that work does not pay .

It is generally believed that a 48.5 per cent top marginal tax rate (with Medicare levy included) cutting in at just $60,000 a year constitutes a significant disincentive to earn and achieve and places Australia at competitive disadvantage in seeking to hold and attract the best talent. Unfortunately, the interaction of the tax system and the welfare system means that people moving from unemployment to work generally face effective marginal tax rates of nearly 70 per cent and sometimes over 100 per cent. Adults on Newstart who earn an additional dollar pay 17 cents income tax. On top of the 17 cents lost through tax, they lose an additional 50 cents through benefit clawback once they’ve earned $31 a week producing a 67 per cent effective marginal tax rate for part-time work in excess of about three hours a week. If 48.5 per cent tax discourages people with responsible jobs, what about the impact of 67 per cent on unemployed people? What is thought to be a significant disincentive to well-qualified people doing interesting jobs can hardly fail to discourage less well-motivated people working for about $10 an hour.

Progressive income tax is supposed to mean higher tax rates at higher incomes but that’s not how it works in practice for people who are also receiving social security benefits. As appendix four to the first report of the McClure Committee shows, single people on unemployment benefits with rent assistance have to earn about $400 a week before their effective marginal tax rate drops below 50 per cent. Couples with two children on unemployment benefits with rent assistance can earn up $1000 a week without ever experiencing an effective marginal tax rate below 50 per cent. Couples with two children on the federal minimum wage with rent assistance have to earn about $600 a week more before their effective marginal rate of tax drops below 50 per cent. As the McClure Report pointed out, financial incentives are certainly not the only determinant of labour market behaviour but they are an important one. “There is a very large body of empirical work,” said the Report, confirming that “many people will seek work…even if it does not pay but even more will if financial returns are adequate”.

These high effective marginal tax rates mean that moving from welfare to work can make depressingly little difference to people’s disposable income. For instance, a single person on Newstart renting privately whose earned income increases from $75 to $375 a week, after tax and social security clawback, is just $53 a week better off.

The interaction of a needs-based, highly targeted welfare system with a progressive tax system becomes even more complex for low to middle income families receiving multiple benefits (with cumulative and often different thresholds and withdrawal rates). For families, the worst poverty traps can occur when moving from low to middle levels of earned income. For instance, a couple renting privately whose earned income increases from $285 to $585 a week is just $29 a week better off after paying tax and losing benefits. A couple renting privately with three teenage children whose earned income increases from $610 to $860 a week is actually $28 a week worse off after paying tax and losing part or all of their rent assistance, family payments and Austudy.

Single people whose earned income increases from $20,000 to $30,000 a year keep $6700 of their extra $10,000. By contrast, couples with two children whose earned income increases from $20,000 to $30,000 a year only keep $2542. Single people whose earned income increases from $30,000 to $40,000 a year keep $6850 of their extra $10,000. Couples with two children enjoying the same income boost only keep $3834. The way the system works, families of four earning $30,000 a year are only $8959 a year better off than families with no earned income at all. The social consequence of 850,000 children living in 435,000 jobless families is not so much a dramatic increase in poverty (thanks to a tightly targeted welfare system) but a significantly greater incidence of early school leaving, unemployment and teenage parenting in the next generation.

In a 2001 paper, Centre for Independent Studies researcher Barry Maley claimed that a one income couple with three dependent children earning 150 per cent of average weekly earnings paid no tax in 1960 and had a final disposable income 3 per cent above earned income. By contrast, he said, the same family today loses about 20 per cent of its earned income after tax and family payments leading Maley to conclude that such families are 23 per cent worse off than a generation ago. Because of tax and welfare clawback, Maley thinks families on average weekly earnings with two or three children are hardly better off than similar families on welfare. Yet to maintain parity of living standards, insisted the CIS’ Lucy Sullivan in a 2001 paper, a couple with three children requires more than two and a half times the income of a child-free individual – hence the perception that middle income families with children are Australia’s new poor.

Under these circumstances, the wonder is not that Australia has a persistent sub-culture of unemployment but that more people do not opt out of participation in the workforce. The fact that so many people persevere in modestly paid jobs when they could take unofficial early retirement testifies to the resilience of the work ethic and people’s appreciation that there’s much more to work than pay alone. Most people, most of the time, work for the satisfaction and companionship of a job well done as much as for money but incentives do matter and sooner or later perverse incentives start to warp people’s best instincts.

Because there is no lobby group to assert this inconvenient truth, it’s not sufficiently understood that Australia has a progressive tax system but a regressive personal income system through the interaction of tax and welfare for people with low and middle incomes. Until recently, business leaders were generally astounded to learn that comparatively poor people faced higher effective tax rates than they did. Too many welfare activists have still not learned that doing the best for their clients generally means losing them. And policy professionals have been slow to recognise how tackling one problem can end up causing another (although, where “poverty traps” are concerned, that’s now starting to change with Treasury Secretary Ken Henry telling a conference last April that “further attention needs to be given to the interaction of the social security and taxation systems to ensure that there are appropriate incentives for participation in the labour market”).

The way two generations of well-intentioned but ad-hoc policy-making has turned a theoretically progressive into a practically regressive tax transfer system is a classic illustration of that democratic reluctance to discipline policies detected by Hancock 70 years ago. There are lobbies for every interest except the national interest which is why governments find it so hard to discriminate between the ceaseless cries for help. Who could deny the rigours of life on social security or fail to want to help people in need? But benefits for some always mean burdens for others. Heavier burdens on those who are net contributors to the social security system are the inevitable result of larger payments to those who are net beneficiaries – with consequent pressures on the social fabric. To limit the burden on the general community, it makes sense to target benefits strictly to those in need – but it’s in the nature of targeted systems to subsidize problems rather than solutions. Higher taxes to pay higher social security bills make it difficult for average families to make ends meet. Many try harder (often by finding second and third incomes), some give up (often unintentionally) and pass into the unemployment subculture and most become more inclined to question a system which no longer strikes them as fair.

It’s very hard to see the fairness in a system which works against people looking for jobs. The tax transfer system should reinforce civic values, not undermine them. The Labor Party of Ben Chifley would have understood this, but such a basic application of the fair go principle seems to have escaped the Labor Party of Simon Crean. The Crean/Macklin preoccupation with making life more comfortable on social security fuels the blue collar sense that modern Labor represents the welfare class ahead of the working class. Howard, by contrast, strikes a chord with traditional working people because he understands that battlers want a hand up not a hand out.

Howard has never made the mistake of taking a strong economy for granted but he’s never treated it as an end in itself either, just the best way to give ordinary families higher living standards.

The Government has created a more buoyant economy through low interest rates and carefully targeted fiscal measures such as the First Home Buyers Scheme to maximise the total number of jobs and potential jobs in the economy; delivered better education and training systems so there are more people capable of performing the work that’s available; and invested enormous energy and political capital in new employment services and social security rules to ensure that there are more people willing to fill the jobs available. These policies seem to have broken the unemployment “ratchet” operating since the 1970s which had underlying unemployment inexorably increasing behind the fluctuations of cyclical unemployment. The OECD estimates that Australia’s “non-accelerating inflation rate of unemployment” (the unemployment that can be expected in an otherwise healthy economy) has fallen from over eight per cent to about six per cent since the mid 90s.

Poverty traps for people trying to move from welfare to work would be much deeper but for measures the Howard Government has already taken. The new tax system introduced on July 1 2000 reduced marginal rates of tax on incomes under $60,000 by between 3 and 13 per cent (at a cost of over $12 billion) and reduced withdrawal rates for family payments. In the 2001 Budget, the Government introduced a working credit to enable people moving from welfare to work to keep most of their extra income for the vital first few weeks of employment. In the 2002 Budget, the Government announced changes to employment services which should make it impossible to go on benefit and disappear into the system. This constant engagement with job seekers should mean it’s no longer possible for the dole to become a way of life, supplemented by unofficial odd jobs. Also in the 2002 Budget, the Government announced changes to the disability support pension (which are still contested in the Senate) designed to keep more people in the workforce and introduced the baby bonus to give more help to families with children.

Work for the Dole is starting to change the culture of welfare and work. Work for the Dole demonstrates to unemployed people that they have not been abandoned to quiet despair in front of the television set. It reassures wider society that people are pulling their weight in a largely shirker-proof system. Most significantly, it helps overcome the impact of a regressive tax transfer system by creating a strong non-monetary incentive to find paid work. If the alternative to working for a wage is working for the dole, even part-time work at modest rates of pay becomes considerably more attractive. There’s nothing “punishing” about Work for the Dole projects but participation invariably involves turning up on time, attention to detail, taking responsibility and working as a team (like a normal job) and failure to perform can involve a failure to be paid (like a normal job). The conceptual clarity and practical straightforwardness of Work for the Dole contrasts with a labyrinthine tax transfer system which people don’t understand and so tend to assume works against them.

The Government is committed to a simpler, fairer welfare system with more built-in incentives for people to find work. As Senator Vanstone said, launching the Government’s welfare reform paper in December, “the system is now complex and difficult to understand and does not always reward people’s work efforts…Leaving the system the same could be unfair to many people particularly if it locks them out of opportunities or incentives to move to greater independence”.

The paper canvassed three broad options: “mini” reform to remove the worst disincentives to work from the existing benefit system; “midi” reform to create a uniform working age benefit with different supplements and requirements for people in different circumstances; and “maxi” reform to integrate the new working age benefit fully into the tax/transfer system so that at any given level of income and in any particular household type people can earn an extra dollar and keep a reasonable percentage for their efforts. Mini reform is unlikely to stop unemployed people retiring onto the disability pension. Midi reform won’t end the problem of people simultaneously paying tax and receiving benefits and thus finding themselves exposed to punitive effective marginal tax rates. Maxi reform has the potential to develop into a new round of tax reform, this time for direct rather than indirect tax, with the same problems of compensation for people who might be worse off.

The Government’s paper is “up front” about the daunting fiscal, administrative and political challenges of major reform which would take several years to implement fully with a long transition period. “However”, as the paper says, “it’s important to make a start” so the Government will begin public consultations next month and aims at policy decisions later in the year.

Public consultations will give individuals and groups the chance to talk about the particular hardships they face. For its part, the Government will have the chance to develop support for the principles of a new system. It should be possible to build a consensus for a single working age payment with supplements based on special needs and participation in the community. It seems reasonable that activity testing should apply to people who can work. Obviously, people should always be significantly better off once they are in paid work. The logic of putting money into one pocket via the welfare system while taking it out of the other via the tax system is likely to come under sustained challenge. Even so, building an alternative which passes the common sense test but which is affordable and which does not leave people dramatically worse off could readily become the hardest policy task the Howard Government has undertaken.

There will be an understandable desire to focus on specific problems such as the difficulties of working families with children or the inadequate returns from entry level work. The trouble with changes specifically targeted to these problems (such as a new maternity payment or an earned income tax credit) is that they shift disincentives rather than eliminate them. The current uncoordinated system is the result of precisely such well-intentioned, “non-ideological”, incremental rather than architectural policy-making. Too often, governments have tackled smaller problems in ways which make bigger ones worse.

Paradoxically, sweeping changes (which challenge the electorate to focus on the national interest) might be less vulnerable to scare campaigns than modest changes (where people inevitably focus on “what’s in it for me”). The 1998 election demonstrated that voters can be persuaded to support reform which they fear could make them somewhat worse off provided they’re confident it should make the country as a whole substantially better off. Reform of personal income arrangements, especially reform for low and middle families, could have wider appeal than reform of indirect tax because it would be reform with a social conscience as much as reform for a stronger economy.

In the end, Hancock’s rueful judgment about the polity is a reflection on the historical quality of our political leadership. When democratic electorates reject good policy, it’s the leadership rather than the voters who have failed. Over gun reform, East Timor, Work for the Dole, border protection and, above all, the GST, Australians have shown their readiness to accept that long-standing problems are never solved by politics as usual.

Governments are at their best when determined to make a difference rather than mind the shop. Governments don’t achieve democratic legitimacy just by winning elections but also by making good use of the influence, authority and power that they have. In the coming year, let’s renew our commitment to reshape our systems and institutions to reflect better the best values of the Australian people.

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Malcolm Farnsworth
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