The way ahead means tax and welfare reform

The consequence of reducing the taper rate is to broaden the range of people who are in receipt of the benefit.

There are real risks in reducing taper rates over and above the obvious additional cost to the Commonwealth. As Professor Dawkins recently observed, reduction in taper rates may lead some income support recipients, such as those on Newstart Allowance, to work part-time rather than full time, representing a loss to the productive capacity of the labour market.

The short point therefore is this: high EMTRs are an inevitable consequence of means-tested welfare payments. There is, therefore, no silver bullet.

But apart from continuing to tweak the interaction between tax and benefits to insure the loss of benefits tapers smoothly, we need to examine seriously the state of social welfare in Australia today.

Why? Because Australians have enjoyed enormous growth in their real incomes - more than 25 per cent over the last ten years. Incomes are now more than twice as high as they were in the 1960s. And Australians are healthier now. We are living longer and healthier than our parents and grandparents. Yet the welfare state has never been larger.

Forty years ago only 3 per cent of working age adults relied mainly or wholly on welfare. Today 20 per cent of the working age population are in receipt of income support, 70 per cent of those welfare recipients have no obligation to seek work. Almost all of that 70 per cent are made up of recipients of the Disability Support Pension or the Single Parenting Payment.

As well, some parts of our welfare system are clearly anomalous. Recipients of the Disability Support Pension have more than doubled in the last twenty years to equal 5.5 per cent of the working age population 16-64. Because the cost of managing the welfare system is enormous. The cost of administering the family tax benefits system alone runs into hundreds of millions of dollars.

Despite its significant redistributive effect, there is a great deal of churning in the system. The welfare system operates to redistribute income from the top 40 per cent of income earners to the bottom 40 per cent with the 20 per cent in the middle getting not much more in welfare and other benefits than they pay in tax. It is also redistributive from the young and childless to the over 65s. Families with children on average are only modestly advantaged.

The circumstances of our times make continued economic reform a necessity. It is not an optional extra. We have the opportunity, the chance, to ensure we are best positioned to deal with the challenges of demographic change.

It is customary nowadays to say demography is destiny. So it is, but the consequences of that destiny, the way in which it affects our lives and those of our children and grandchildren will depend on the decisions we take today.