Easing the transition from welfare to employment requires tough decisions

Because there is no lobby group to assert this inconvenient truth, business leaders only recently learned 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.

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.

The Howard Government is committed to a simpler, fairer welfare system with more built-in incentives for people to find work. As Senator Vanstone said at the launch of the Government's welfare reform paper in December: "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.

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. 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.