Welfare reforms are worthwhile, but not an easy budget fix

Earlier this year, with Queensland devastated by natural disasters, I was asked about a possible alternative to the mooted flood levy. "We spend $13 billion each year on the Disability Support Pension," came the question, "and everyone knows that lots of the people on the DSP could probably work. So why don't we just get them off welfare and into jobs, and use the savings for the reconstruction effort?" My answer was, unfortunately, if it were that easy we would have done it already.

I was reminded of this question on Tuesday night when watching Treasurer Wayne Swan deliver his budget to parliament. With a mining boom, an ageing population, and a nasty hangover from the overzealous GFC-induced spending spree, Swan's theme was productivity and participation. We all need to be working to make the most of the good times (and pay off that pesky deficit too).

A big part of this narrative is welfare reform. There are currently 2 million working age Australians on welfare, a number that has barely shifted for a decade despite a fall in unemployment. Getting people off welfare will save some of the $120 billion we currently spend on social security; getting them into work will boost the $240 billion we pay in income tax.

But the truth is in fact a bit murkier than this. Welfare reform will undoubtedly save money in the long-term, for exactly the reasons mentioned above. But in this year's budget it will actually cost money to get tough on the indolent and inactive. And if we don't get the settings right, we run the risk of these expensive programs having no impact at all.

Yet despite these difficulties, there is a growing consensus- across the political spectrum- that welfare reform is worth doing. What's more, we have been at it for long enough to know what works, and what does not.

Previous reforms targeting sole parents have been remarkably successful. Since 2006, single mums (and a few dads) have been required to look for part-time work when their kids reach school age. Previously, they were allowed to remain out of the workforce until their children turned 16.

After the change was enacted the number of people claiming Parenting Payment fell 20%, and continued to slide. With unemployment low and female workforce participation on the rise, the vast majority moved into jobs rather than the unemployment queue.

The changes were so successful that there are now increasing calls for single mums to be required to look for work, or at least begin to prepare for work, when their children are of pre-school age. This week's budget sensibly gives sole parents a greater incentive to work, by increasing the amount they are allowed to earn before their benefit is cut. But the government could have reasonably applied a bit more stick to go with this carrot by increasing activity requirements for mums of four and five year olds too.

The budget targets teenage mothers, but they represent only a small fraction of single parents without a job. More could be done to ensure that all sole parents retain a connection with the workforce while their children are young.

Another important target in the budget is Disability Support Pension. With more than 800,000 people on DSP – around 5% of the working age population- the government is rightly worried that the payment is ballooning out of control.

Now DSP recipients under the age of 35, excluding those with very serious disabilities, will have to attend Centrelink interviews to help them prepare for work. New applicants will need to prove they have tested their ability to get a job before they are accepted onto the payment.

Given the big changes in the demographic characteristics of disability pensioners, these are potentially important reforms. While DSP was previously the domain of older men who had once worked in manual jobs, new recipients are increasingly in their 20s and 30s and many suffer from intellectual disabilities and mental illness.

The old model of DSP providing a stop-gap for workers too old to return to manual labour but too young for the age pension is now outrageously outdated.

We need instead to focus finding places in the workforce for young people with disabilities- and getting tough on those who shouldn't be on the pension at all- rather than confining them to the dustbin of life-long welfare.

But we need to be circumspect about what these changes can achieve. The Howard, Rudd and Gillard governments have all had a go at reforming disability pensions, and none have had much luck. With 26 million Europeans and 12 million Americans on disability benefits, there are no clear international 'best-practice' examples that we can emulate either.

Like with previous DSP reform, the road ahead will be long and rocky.

In contrast, changes to unemployment benefits have yielded the most positive results of the welfare reform era. But in many ways they have now become victims of their own success.

With a booming economy and tough rules for jobseekers, the job-ready and the young and lazy have largely been pushed into the workforce. Very long-term unemployed account for an increasing proportion of jobseekers, making the job of policymakers much more difficult.

The Gillard government's instinctive reaction to this has been to increase training for the long-term unemployed.

More than a quarter of all Newstart recipients who have been on the payment for longer than twelve months are exempt from job search due to training, up from less than ten percent in 2004. Moves to provide more skills training for unemployed people in the budget suggest the government will continue down this path.

But while training programs are a tempting fix for governments who want to look like they are doing something to help long-term unemployed, we now have good evidence that they very rarely work.

Basic literacy, numeracy and job-search classes can help, but ultimately the best way to get an unskilled worker into work is to find them an unskilled job - not try to train them for a skilled position they may never get.

The 'work-first' approach has proven to be the most successful way to reduce unemployment. Low-level jobs often lead to much better jobs.

The budget's focus on requiring long-term unemployed to participate in more work experience - despite Labor's obvious predilection for expensive training programs- perhaps shows that deep down the government knows this is true.

Welfare reform is difficult. It is an expensive, long-term, trial and error process. Often, the easy targets have been targeted and the hard cases remain. It is certainly not a very fast way to get the budget bottom line on track.

But welfare reform is worth doing. When it works, it's a win-win. Individuals benefit by becoming self-reliant. Taxpayers benefit from not having to meet the costs of an overgrown welfare state. And the community benefits from having more of its members actively involved.

The Gillard government has largely got its new focus on welfare right. But we should see the measures for what they are: a political positioning tool rather than a quick way back to surplus. Despite what Wayne Swan says, being tough on welfare is not the same thing has handing down a tough budget.

Just like welfare reform won't help us rebuild after the floods, it won't help us get back in the black either – at least not in the short term.