Testing the means-testing debate

This article forms part of an ongoing series looking at economic issues as Australia heads into the Federal Election. More coverage can be found on the Election 2013 page of ESSA’s website.

One of the greatest accomplishments of the 20^th century was undoubtedly the conceptualisation and implementation of what has become known as the ‘welfare state’. The term is generally not used in any exact way, rather in a vague and imprecise manner with an overarching theme of the government having a degree of responsibility for the health and social well-being of the population.

Broadly speaking, the two extremes of the potential function of the welfare state are universalism and selectivism. Universalism, as the name suggests, refers to universal access to welfare programs regardless of an individual’s wealth. Selectivism is the opposite, with welfare ‘means-tested’ and distributed based on an individual’s needs.

What is particularly interesting about these extremes is that in the left-right ideological spectrum, there is a distinct divide across nations. For example, in the United States the right generally favour selectivism. This is primarily because of the paramount priority of ‘small government’; given that means-tested welfare translates to a lesser aggregate spend. The US left favour universalism as they see it as having a greater social impact, and fear that selectivism would simply lead to a slow, conservative-led demise of the welfare state.

It is the exact reverse situation in Australia. The right tend to favour universalism because it gives proportionate returns to taxation, reflects the Liberal party values of individualism and self-reliance (at least more so than selectivism), and can be used to promote the private provision of services. The Australian left prefer selectivism because it is viewed as fairer, targets the most needy and pedals the core ALP value of reducing inequality.

Selectivism may present itself as the cheaper and more effective option, but it comes with a variety of complications. The processes by which individuals are assessed can be an administrative nightmare, and this combined with the stigma and intrusiveness of such processes can act as a barrier to entry that discourages uptake. Furthermore, unless the specific testing is carefully designed, it can create poverty traps and disincentives to work (as many university students on youth allowance will testify). These factors represent a gap between the ideal and the application of means-testing – a gap that has the potential to substantially water-down the welfare systems’ effectiveness. Universal or middle-class welfare does away with many of these complications, and is inherently popular with governments looking to shore up voter support.

In recent times there has been a significant push to scale back what is perceived as a bloated middle-class welfare system in Australia. Given the concerns surrounding the end of the mining investment boom and government revenue shortfalls it seems a sensible target for expenditure reduction. However, in a global context, Australia’s welfare system is much more selective than most. Danish sociologist Gosta Esping-Andersen developed an approach to classify different welfare systems. Australia was classified as ‘liberal’ – the third category which is characterised by a high prevalence of means-testing and a low prevalence of universal benefits[1].

A highly significant statistic from an OECD study is that in Australia, 6.5% of direct welfare transfers go to the richest 30% of households – the lowest of the 21 countries studied by a significant margin. Furthermore, 62% of benefits received by individuals represent redistribution from rich to poor (as opposed to full-circle benefits paid for via taxes earlier in life). The same statistic in the UK is 38%[2]. The CEO of the Grattan Institute and public policy expert John Daley was on ESSA TV recently supporting the notion that Australia has comparatively low levels of middle-class welfare.

The misconception may be a result of a policy swing in the last few decades. The Hawke and Keating years were characterised by welfare selectivism, with means-testing introduced for the aged pension and family payments. John Howard then reversed this trend. With record high tax receipts, Howard was able to relax a number of existing means-tests and introduce elements of universal welfare. Channelling the conservative ideal of support for the traditional family, the Liberals introduced Family Tax Benefit B and the infamous baby bonus. Incentives to enter the housing market and exit the public health care system were other measures in the relatively modest use of universal welfare by the Howard government. It is therefore plausible that the present perception of excessive middle-class welfare is little more than a contrast bias.

Since Howard’s defeat in 2007, the Rudd and Gillard governments have predictably reversed the trend again. The baby bonus was pulled back and private health insurance rebates are now means-tested. This may not all be ideologically driven; the need for fiscal restraint may be a contributing factor. None the less, a distinct welfare policy direction is evident.

Leading into the election, Opposition Leader Tony Abbott has reinforced the right’s preference for universalism with his generous Paid Parental Leave Scheme. A proposal which is causing significant conjecture, even within the LNP ranks. Consistent with the party divide, the Coalition is also championing a reduction in selectivism, with the Low Income Superannuation Benefit and the means-tested School Kids Bonus both on the chopping block.

Economic conditions will invariably play a significant role in determining the aggregate welfare expenditure, but empirically it seems that the balance of selectivism and universalism in the Australian welfare system will swing depending on the government of the day. Although such swings are likely to be the cause of misconceptions around the magnitude of each distribution method, the positive is that it does mean that voters can observe a clear differentiation in principles between the two major parties.

References