Positive welfare and compassionate conservatism – address to the Institute of Public Affairs, Melbourne
In 1989 the Berlin Wall fell. Francis Fukuyama described these events as the end of history. While this could now be seen as excitable commentary, the sentiment was accurate. This was a world changing event.
Just as remarkable as the dramatic fall of communism was the fact that its destructive force had emerged, matured and wreaked misery in the space of largely just one generation. This is a chilling reminder of the power of dangerous ideas in the modern world.
Such threats are even more dangerous today as we have seen with extreme Islam, following a similar path.
You can do a lot of damage in the space of just one generation.
Thankfully there were heroes, none less than Margaret Thatcher and Ronald Reagan, from that generation who made it their life’s work to tear down that wall, based on their unshakable conviction that a system that crushed the human spirit and denied its potential could not stand.
This year we have witnessed the collapse of another socialist inspired edifice of a different kind. This time in Greece.
In just one generation Greece has been forced to surrender their economic sovereignty.
The source of their troubles can be traced back, amongst other contributing factors, to the election of the Socialist PASOK Government under Andreas Papandreou in 1981. PASOK ruled Greece for 19 of the next 22 years, enshrining the modern Greek age of welfare entitlement.
In PASOK’s first two years, Greece’s ratio of debt to GDP increased from 21% to 32%. In 1983 the OECD said of Greece that ‘reducing the current structural component of government borrowing is all the more urgent since, in the years ahead, social transfers are projected to grow markedly’.
The report’s warnings cited as evidence large increases in pensions flowing from the significant extension of coverage and rights, the projected ageing of the population and planned expansions in social services expenditure.
Instead of heeding this warning the welfare continued to flow and the debt continued to mount.
When they were defeated in 2004, debt to GDP had already eclipsed 100% on their watch and was hovering just beneath that mark.
Debt was out of control. When the GFC hit, all of Greece’s fiscal defences were down. At the end of 2014, Greek debt to GDP was 177%.
No doubt the welfare measures were well intentioned and in many cases addressed some serious injustices in Greek society. But history has proved they were unaffordable and unsustainable.
This all happened in the space of just one generation.
Today, those who the Greek Socialists claimed would be the beneficiaries of their welfare reforms, have become their victims. Drachmanomics has shut the ATMs, forced pensioners into the streets in tears and economically cursed at least one Greek generation and perhaps more.
But it wasn’t just the failed policies of Greece’s political leaders that led Greece to this point. This didn’t occur in a closed state. This occurred in the birthplace of democracy with elected Governments.
Churchill once cheekily described democracy as the worst system of Government except for all the alternatives.
Democracy can guarantee an elected Government, but it can’t guarantee a good one. The Greek electorate has been complicit in its demise. It is also true that where reform attempts were made, those Governments were quickly shown the door. The recent plebiscite results indicate the Greek electorate remain complicit, if not deluded.
The Greek electorate wanted to believe in free money and they’re not the only ones – welfare without cost – because in their view their welfare measures were right and just and their sense of entitlement was enough. But as Hayek explained, the difference between social justice and more classical human rights is that the rights demanded by social justice must be provided for by someone – they are not innate. The right to a job, a fair wage, a minimum standard of living, shelter, public education, universal health care does not simply come into existence by noble proclamation.
To achieve social justice requires a plan not a placard. This is what compassionate conservatism is all about.
The plan must be funded, it must be measured, it must be targeted, it must be delivered by a competent government. It must be sustainable and affordable and have the integrity necessary to sustain taxpayer confidence. Above all, there must be a strong economy to support it.
The Greek experience shows that you can live beyond your means for a while – perhaps even a generation – for a while the consequences may not be apparent, but this is no reason for confidence. Eventually the money runs out and those who kept funding your habit will shut the door.
The drachmanomics experience shows you can’t pay off your debts with moral virtue. Creditors prefer cash.
The Greeks must now reform their economy and their welfare system from a position of weakness.
The road ahead for Greece is difficult and bleak.
The global impact of the fiscal collapse of Greece may not be as tectonic as the fall of communism, but the warning, however distant, is still real.
Greece has not been alone in their journey.
Chancellor Merkel regularly reminds Europe that it has 7% of the world’s population, 25% of its GDP and 50% of its social spending and that If the region is to prosper in competition with emerging countries, it cannot continue to be so generous. The Chancellor’s warning channels the OECD’s own warning to Greece more than 30 years ago.
Reform from strength
In Australia we are in a much stronger economic position.
Fiscally we are not as strong as we were when Peter Costello was Treasurer, courtesy of the fiscal arsony of the Rudd Gillard Rudd government that boasted they had brought Government back to the centre of the economy, like it was a good thing. However, more than two decades of economic reform, including the fact that the budget was in surplus and we had money in the bank, meant that we have been able to survive both the GFC and a Labor Government and remain relatively strong.
However, it is sobering to reflect on the fact that our comparative ratio of debt to GDP in 2014 was 34% – thirteen percentage points higher than where Greece was in 1981. We never think it can never happen to us, as remote as that prospect may seem.
Our welfare system is also relatively strong.
It is true that it takes at least eight out of ten income taxpayers go to work every day to pay for our $154 billion annual social services bill and that this represents more than a third of the federal budget. However, once again, by international standards our welfare system is measured and targeted.
Using standard comparison data Australia’s welfare spending as a percentage of GDP is 17% compared to 24% in Germany and 20% in the OECD more broadly.
Similarly our aged pension represents 3.5% of GDP on comparative estimates, which is well below the OECD average of around 7%. However, it is important to note that we separate our public non contributory welfare based pension scheme from our private contribution based superannuation scheme. This is not the approach adopted by most countries in Europe such as the UK. This only serves to highlight the superior wisdom of this earlier system reform.
Australia also leads in the world in targeting our welfare expenditure. OECD analysis shows that in 2010 the bottom 30% of incomes in Australia received more than 200% of the average total cash transfers across all families, compared to just over 20% for the top 30%.
This level of targeting was more than ten times greater than the average for all OECD countries, including 28% more than New Zealand, 100% more than the UK, 200% more than Canada and more than eight times than in Germany.
While it is true that income support measures are highly targeted, we cannot be confident that the targeting of our service delivery and programmes are as effective.
While in static terms our welfare spending is comparatively favourable. It is the growth in our spending that we must be careful to manage going forward.
Research by the OECD reveals that despite Australia being one of the countries least affected by the GFC, our real change in working age cash income support over the five years to 2012/13 was higher than the OECD average for that period at more than 20%.
Since 2004/05 our welfare and social services bill has increased from around $90 billion to over $150 billion this year. This included a doubling in expenditure on the age and disability pensions and job seeker allowances, a fourfold increase in carer income support and a 350% increase in child care subsidies.
Going forward, social services expenditure is projected to rise by 21% to $187 billion by the end of the forward estimates, an increase of $33 billion. In ten years the budget will hit $277 billion, growing at a rate of 5.6% per year.
This growth will be fuelled by our ageing population and indexation of benefits to rising costs of living.
However, it is the policy decision to move forward with the National Disability Insurance Scheme that will require the single biggest increase. By 2018/19 this cost will increase from less than $1 billion to almost $20 billion per year, with $5.2 billion unfunded by the NDIS levy. By 2025/26 the total cost is projected to be $32 billion.
The NDIS is a worthy initiative and we are committed to it. But our job now is to turn this worthy idea in theory into a funded, affordable and implemented policy.
The bottom line is we have to spend our social services budget more effectively to reduce the long term pressures on the budget, to free up resources to target support to those who need it most and to ensure that our safety net is sustainable.
We are not alone in these challenges or our responses.
Liberal Conservative Governments in the UK, NZ, Germany and Canada , under the banner of compassionate conservatism, are also repudiating the welfarist drachmanomics of Europe and charting a new course to sustainably help society’s most vulnerable and balance the budget.
The best form of welfare is a job
This approach begins by acknowledging that the best form of welfare is a job.
With a job comes choice. With a job comes independence. With a job comes the ability to frame your own future and to enliven the aspiration that is so often smothered by entitlements based welfare.
This is an agenda rooted in our sincere belief in the individual and the family as the central building blocks of our society and economy.
Since establishing the UK Centre of Social Justice in Opposition, Iain Duncan Smith, the Conservative Minister for Work and Pensions in the Cameron Government, has challenged liberal conservatives around the world to re-conceive how we think about welfare and social justice and its interaction with our broader economic security policy agenda.
Duncan Smith has challenged the monopoly that social democrats believe they have had on compassion but at the same time championed the role that welfare policy can have to restore individuals and families, not just break their fall.
Duncan Smith’s compassionate conservatism agenda was best summarised in his introduction to his universal credit reforms of 2013, where he stated,
A life on benefits is a poor substitute for a working life but too much of our current system is geared toward maintaining people on benefits rather than helping them to flourish in work; we need reform that tackles the underlying problem of welfare dependency.
Duncan Smith was seeking to deal with the UK having one of the highest rates of children growing up in homes where no one works and the pattern had repeated itself through the generations. There were 613,000 plus such families in Australia in 2011. Less than 60 per cent of lone parents in the UK back in 2013 were in employment. The same was true of Australia at the 2011 Census. This compares to 70 per cent or more in France, Germany and the Netherlands.
Duncan Smith’s Universal Credit is all about addressing the effective marginal rate of taxation for welfare recipients as they transfer to work.
Universal Credit is designed to ensure that people will be consistently and unambiguously better off for each hour they work and every pound they earn.
Universal Credit draws together six separate payments and credits – including housing assistance – into a single payment that tapers off as a person earns more, mitigating the impact of welfare withdrawal that effectively penalises people on welfare for working.
The UK Government has introduced a cap on the total amount of benefits that most people aged 16 to 64 could receive so that households on certain benefits can no longer receive more in benefits than the average wage for working families.
The system is supported by a Real Time Information (RTI) link with Her Majesty’s Revenue to facilitate the taper arrangements. Payments are made in arrears and to the household.
It introduces a new ‘Claimant Commitment’ setting out what is expected in return for receiving assistance.
It is still early days with the introduction of Universal Credit. While there have been practical issues in the implementation relating to back end ICT and real time information support, the roll out has been impressive and extensive.
In Australia the Claimant Commitment contract is already part of our Jobactive programme. We are also engaging in the most significant re-build of our payments system – the largest of its kind in the world. This will provide the Government with greater dexterity in managing income support payments and enable policy to focus more on understanding and managing what the individual and the family is receiving, rather than the siloed perspective of delivering separate payments.
We are also moving towards the implementation of our own RTI system known as “one touch payroll”. This will link up with the Australian Taxation Office and enable real time management of family incomes, rather than relying on the estimation method.
Where there is more work to be done is in the consolidation of payments, as recommended by the McClure report earlier this year. Our system has 20 separate payments and more than fifty supplements. Patrick McClure recommended reducing this to just five payments and four categories of supplements.
This would not just make the system simpler, but would better equip us to more effectively address the issue of effective marginal tax rates in the welfare system and remove the disincentives to work.
The trampoline effect
An effective and reliable safety net that catches and supports the most vulnerable is absolutely necessary. But we need a safety net that acts like a trampoline, not a snare.
Our welfare system must be well sign posted to show people the way out, not just the way in. We need a safety net that protects but also restores.
In NZ, the Key Government has been delivering their own 100% Pure Brand of compassionate conservatism to reduce long-term welfare dependency through what has been called the Investment Approach.
The Investment Approach aims to direct the funding where it will do the most good, and establish a clearer link between the application of funds and how they impact on peoples’ risk of long-term benefit receipt.
The approach involves:
- an annual actuarial valuation of the forward liability of the welfare system for people of working age,
- a Multi-Category Appropriation (MCA) which provides greater flexibility to direct funding to where it will be most effective at improving long term employment – this includes the ability to stop, trial and expand programmes and services, and move funding to where it improves outcomes, and
- strong accountability mechanisms where performance is measured transparently against the future liability through the actuarial analysis.
The approach effectively runs the welfare system like an insurance company, where the taxpayer is paying the premiums. Its job is to successfully intervene and reduces liabilities by helping people become independent and lessen their reliance on the welfare system.
Initial outcomes of the NZ analysis has directed the focus of intervention to teenage youth and young female single parents in particular.
While teenage recipients of benefits were found to be small in the overall scheme of things, the analysis identified that 75%, or $57 billion of the total $76 billion liability related to beneficiaries who entered the system as teenagers. In addition, more than a third of all new youth beneficiaries were entering the system as parents, particularly females.
Further analysis showed that young people who received a benefit in their own right at age 16 or 17 had very high rates of contact with the benefit system, one third having substantiated emotional, physical, or sexual abuse, or neglect and one in four having contact with justice services in adolescence. For young men, it was more than one in three.
For a large portion of youth the path to dependency was established long before they began receiving benefits in their own right.
The analysis also showed that 55% of those who were returning to claim benefits (65% for unemployment) did so within twelve months of exiting the system, highlighting a further problem of welfare recidivism.
The analysis concluded that early support to youth was necessary for future long term benefit numbers to be reduced. For these young people work placement alone would be insufficient. Programmes would be needed to help overcome fairly entrenched barriers to sustainable employment – so young people could get a job and stick in a job.
A series of initiatives to sustain return to work were introduced including delivery of more tailored case management support, transition to work grants and increased work obligations for sole parents. Control groups were assessed against other beneficiaries and showed superior performance for those engaged in the new programmes.
The estimated reduction in liabilities for the system in the first report was almost $1.8 billion from jobseekers and sole parents going off benefits as well as lower than expected numbers coming on and a further reduction of $2.6 billion when these results were extrapolated forward.
In Australia we are heading in the same direction.
In response to the recommendation of the McClure Report we have begun the work of setting up the Australian Investment Approach, with $20 million allocated in the recent Budget for this purpose.
Tendering processes are underway to select the preferred providers of these services and we expect initial results of the analysis early in the new year.
We have also set aside more than $100 million to run a series of targeted two year trials of youth employment programmes for young people with a mental illness, vulnerable migrant youth and other disadvantaged groups to support their transition to get in work and stick in work, including lone parents and jobless families.
Bigger than Government
Thirdly our approach must recognise that the challenge we face is bigger than Government alone.
This requires a focus on enlisting and empowering communities to respond to social challenges. We must avoid becoming what John Stuart Mill described as ‘a people … [who] have their faculties only half developed’ as they ‘look habitually to their government to command or prompt them in all matters of joint concern – who expect to have everything done for them’.
Simply paying our taxes and expecting the Government to do the rest is not enough. We cannot allow an all-encompassing state run welfare system to anaesthetise our citizens to community. Paying taxes is the law. As citizens, as Australians, it is our natural instinct to go further. This generous sentiment needs to be more effectively harnessed.
Social Impact Bonds are an area of innovation that not only empowers community engagement but enlists private investment as well. This is where private investors provide capital and operational funding for particular community based social programmes and receive a dividend payment on the bond, plus the principal from Government, funded from savings generated from the successful impact of the programme on predefined metrics.
Social Impact Bonds allow us to extend the financial risk of funding and delivering social services to include the private sector.
SIBs are being used to help single mothers at risk in Canada, unemployed migrants in Belgium, the homeless in Ireland, unemployed youth in Germany, diabetics in Israel and New Zealanders with mental health challenges.
In New South Wales the Baird Government is conducting three SIB pilots in the areas of family support, child safety and recidivism.
Mission Australia has partnered with Social Finance Australia, to develop a Social Benefit Bond to reduce prisoner reoffending rates. The Benevolent Society is partnering with Westpac and the Commonwealth Bank to strengthen families and reduce the need for foster care.
UnitingCare Children is being supported by Social Ventures Australia to expand the existing New Parent and Infant Network programme or Newpin with $7 million four additional Newpin Centres.
I anticipate that the compilation of the information base on Commonwealth welfare liabilities through the Australian Investment Approach will have the added benefit of enabling SIB opportunities to be more effectively evaluated at the federal level.
This will form part of the broader work being done by the Prime Minister’s Community Business Partnership that brings together leaders from the business and community sectors to promote philanthropic giving and investment in Australia.
Bigger than one Government
Better partnerships are also needed with the States and Territories.
Today, the Prime Minister is meeting with Premiers to discuss many of the issues that challenge and confound our federation. Housing is one of those issues and is on the agenda for discussion.
It is an area where our federation is failing us. We are spending more than $10 billion a year and making very little progress. The Commonwealth accounts for around 60% of this expenditure and in 2014/15 this equates to $6.3 billion. Commonwealth rental assistance (CRA) accounts for the majority of this investment at $4.2 billion, the balance being transfers to the states. CRA has been increasing at a rate of almost 7% a year. At the same time State housing expenditures have been flat.
There are few issues more important to ensuring the welfare of Australians than housing.
Housing provides the stability and certainty needed for individuals and families to deal with the many challenges they face – unemployment, the breakdown of relationships, a place to care for those who need care, a place of refuge from violence and the list goes on.
It is also the principal source of wealth for most families. Australians hold more than $5 trillion in real estate and dwellings.
You will find housing failures at the centre of most social service challenges. It is either a cause or consequence.
Two thirds of Australians either own or are paying off their home. The balance are in rental accommodation, with almost a half of those receiving some form of housing support.
Despite the best efforts of many – on both sides of politics – more than 100,000 Australians remain homeless.
For those seeking to buy their own home, the price has more than doubled the increase in wages over the past 25 years. More than 30% of family income is now required to meet median loan repayments, breaching a commonly accepted housing affordability threshold. The ratio of owner occupied housing debt to disposable income is now more than 90%, up from 55% in December 2000.
The supply of housing is simply not keeping up with demand. While record low interest rates is extending credit to more home purchasers, the lack of stock is forcing up prices.
Fortunately for renters, wages and rents have moved largely at a similar pace to wages and rents as a proportion of gross household income remain well below the 30% affordability threshold.
In Australia, private rental accommodation is supported by a large pool of mum and dad investors making private rental stock available, through negative gearing. By number, almost 80% of these investors are middle income Australians earning $80,000 a year or less, owning just one property. They are school teachers, police officers, nurses and office workers saving and investing to provide for their financial security. In the Europe and the US, it is large institutional investors who often play this role. They are absent from our housing market.
For the more than 1 million households relying on CRA, while the costs have risen sharply for the taxpayer, the indexation to CPI has meant a widening gap between the level of support and the cost, particularly in our large cities.
Social housing stock is static at around 400,000 units, with the only change being internal transfers from public housing to community housing stock.
Affordable housing initiatives have had mixed success, with very few able to scale up to the level of supply needed to make a real difference at a sustainable level of taxpayer support. NRAS costs were 150% higher per unit than social housing or CRA.
I commend the Prime Minister for putting this issue on the agenda with the states and territories. We must address this in an holistic way, not by portioning out the social housing and private market factors separately.
The full list of interconnected issues need to be on the table. This means land release planning, regulation reform, infrastructure provision, seniors downsizing, transaction taxes, management and financing of social housing stock, the interface between CRA and wrap around services that transition people from homelessness to independent housing, just to name a few.
There is also a need to understand how housing assistance impacts on effective marginal tax rates when combined with other income support measures that can work against making people and families more independent.
We cannot continue the current failed one way track of shovelling money to the states for social housing, with no accountability for outcomes or integration with broader policy measures that impact the entire housing market. For the federal government such an approach means that the federal taxpayer end ups paying twice to deal with the same problem as housing policy failure at the state level only compounds income support dependency at the federal level. To borrow a phrase from the NZ Finance Minister Bill English, this approach just services misery rather than relieves it.
But there are examples of how things can and do work to guide us.
In Perth, Foyer Oxford, which I visited last week, Anglicare has brought together federal and state governments, community housing, the local TAFE and private philanthropy to create 98 accommodation units to transition young homeless Australians to long term accommodation. The building is an oasis of stability where young people can make good decisions, get themselves sorted into education and employment and move on. Their success rate at transfers into long term accommodation is 80%.
Apart from the obvious nature of this success, what makes this project even more important is that it deals with one of the other great weaknesses in our welfare system – transience.
Transient disadvantage caused by the loss of a job or an escape from domestic violence. Transient disadvantage caused by an accident or an illness, while you restore your capability. Transient withdrawal from work, due to caring responsibilities, in the knowledge that you will one day return.
For the majority of Australians our goal must be for the welfare system to be a transit stop not a destination. We must deal with changing life circumstances and disruptions more effectively than we do today.
So in conclusion, our compassionate conservative view of a future positive welfare system is one that is more effective, more restorative, more reliable, more sustainable, more accountable, more innovative, more engaging, more flexible, better targeted and ultimately lesser populated as a proportion of our overall population.
In Greece they showed how getting it wrong on welfare for a generation could destroy their economy. Equally we can demonstrate how getting it right on welfare for a generation can have the opposite effect.