Australia’s ‘overly generous’ welfare in context

The government’s plan to cut welfare payments, as outlined in the federal budget, has attracted much gnashing of teeth from the Left. News Corp, on the other hand, says our welfare system is overrun by rorting and the cuts don’t run deep enough. But how does Australia’s social expenditure stack up against overseas examples?

News Corp columnist Simon Benson calls the current system “overly generous, and in need of dramatic reform” in this morning’s Daily Telegraph. In much the same light, Tim Blair also pointed the finger at the record number of Australians on the disability pension, who he says are “sending Australia broke”.

Complex our welfare system may be, but the claims that we are overly generous with our expenditure are a little murkier.

Australia spends 19.5% of our GDP on social welfare, whereas some European countries like France and Belgium spend upwards of 30% of their GDP on the welfare system.

This contrasts with Social Services Minister Kevin Andrews’ claim that Australia’s welfare system is “not sustainable” when he demanded a review of our expenditure in February this year.

The unemployed have come in for a particular shellacking, but Australia ranks 25th of 30 countries in the Organisation for Economic Co-operation and Development with data available in terms of expenditure for unemployment.

Jan Libich, senior lecturer at La Trobe University’s School of Economics, says the Australian welfare system does not seem to be overly generous in comparison with that of other countries. “In international comparisons, Australia is doing well, better than most other countries. Our pension and healthcare systems are in a much better financial position than those of other nations.”

But Libich says the real problem with Australia’s welfare spending is the rate of increase. “It’s not so much where we are compared to other countries, it’s more about the trend we have seen over the past three decades,” he said.

If you look at social expenditure as a percentage of our GDP, our 19.5% figure compares favourably, but this is almost double our 1980 figure. And looking at the per person figure, social expenditure (at constant prices and purchasing power parity) has tripled in Australia between 1980 and 2013.

The largest slice of our welfare payments goes towards the age pension. According to OECD Pensions at a Glance 2013, Australia’s public spending on the age pension is much lower than pension spending in Europe.

Australia spends 3.5% of GDP on the age pension, while Italy spends 15%, France spends 14% and the United Kingdom spends 6%. While our figures look good on a global perspective, the nations we are comparing ourselves against are in a pretty bad shape themselves.

“Yes, we are better off than other countries, mainly because our superannuation system takes the pressure of the public purse, but given past trends, we should not be complacent about for the future. These long-term trends require long-term reforms to be able to ensure the sustainability of the system,” Libich said.

In addition to the reforms, saving could be achieved by eliminating so-called tax-churning, whereby the taxes collected fund the welfare given back to the same individuals. The government is essentially taking money with one hand and giving it back with the other.

“Tax-churning is inefficient, as a non-negligible portion of the collected money is wasted on administration,” Libich said. “There seems to be a lot more redistributive mentality in politics these days — this is something that needs to be looked at if we are to raise the efficiency of the Australian welfare system.”

The rapid rate of increase in the welfare system is something Australian politicians will need to address in the future, but quick cuts and short-term fixes like we’ve seen in Europe are not the answer, says Libich.

“They tend to be counter-productive as they reduce economic growth. Conceptual reforms that take into account the demographic trend towards an ageing population are the way forward.”