Debt and Discipline from Cradle to Grave
It is hard to underestimate the scale of the transformation being attempted by this budget. It is true that it continues on trends begun earlier, and that many changes face substantial opposition in the Senate. It may be that this is an ambit claim. But if it is to be implemented it will fundamentally reshape the social contract, and even if it fails it will signal an ongoing struggle.
Before looking at those changes, it is important to understand the fiscal arguments that justify its severity. Like many first term budgets, it takes a political opportunity to blame poor economic conditions, attributed to a past government, for forcing upon a reluctant government choices it would prefer not to make. Except, that story is particularly weak this time.
First, Australia’s public debt, at 14% of GDP, is a fraction of the average of rich nations, now over 70%, and of key countries like the US (72%) and Germany (80%). The deficit that does exist is almost entirely the result of falling revenues. If tax receipts were the same now as they were during the Howard years the deficit would shrink by more than 80%. Australia’s overall level of taxation remains one of the lowest in the rich world, ahead of only Korea, the US, Chile and Mexico.
So there is no crisis, and to the extent there is a deficit it is the result of low tax revenues. Remember that. Because this budget proudly boasts that it cuts taxes. You may have missed that in the extended discussion about the deficit levy and fuel excise. But there are three large tax cuts – the abolition of the Mining Tax and the Carbon Tax and a cut in the company tax rate. All are paid by corporations, particularly the largest polluters.
This explains perhaps the most striking feature of the budget. Despite all the cuts – attacks on Medicare, pensions, the unemployed, single parents, universities, the states, the environment, public transport and more – it makes very little difference to the bottom line. Once you take out some tricky accounting, our return to surplus is much as it was before the budget.
What does all this mean? If the cuts are not addressing a crisis, then the government is doing them for other reasons. It is difficult to see the budget as anything other than an attempt to tear up the social contract and to redistribute income from households and public services to corporations and private business.
There are three substantial components to the cuts. First are changes to payments, indexation, eligibility and mutual obligation rules that undermine the reliability and fairness of social security. Second are attacks on institutions designed to promote alternative ideas, or the voices of weak groups. And finally, there are changes that dismantle public provision, allowing greater reliance on private, for-profit businesses.
The first set of changes effectively pay for the corporate tax cuts that are the centerpiece of much of the budget. Most concerning, there are changes to access. Workers will have to wait until 70 to access the pension, those with disability will be subject to more frequent medical examinations, and the younger unemployed will lose their benefits entirely for periods of six months at a time – while continuing to be subject to mutual obligation.
Families, particularly single parents, lose payments and the school bonus. Travel concessions are cut. And there are cuts to the formula for indexing a range of benefits. The message is clear – those reliant on any form of direct government assistance should be allowed to fall behind, it is not the role of government to mitigate inequality. These changes will increase poverty and homelessness.
The second set of changes dismantles those public institutions that give voice to views the government does not approve of. Gone are the Climate Change Authority and Clean Energy Finance Corporation. There are significant cuts to most of the institutions of science, like the Bureau of Meteorology, to those representing the Arts, like the Australia Council, to those defending the poor or the environment, like legal aid, and to those supporting non-corporate news reporting, like the ABC. The purpose here is to reshape civil society and silence critics.
Finally, the budget transforms social services. Changes to universities and Medicare, to schools and hospitals via the states, and to housing and retirement savings, all shift funding away from direct public provision towards user-pays systems based on competition and profit.
These changes are not primarily about savings, but about changing the nature of service provision. Take the GP co-payment. There is a reason bulk billing is so popular, not only with the public, but with doctors. Medicare only pays doctors 85% or less of the fee they would normally charge a patient. But that is still worth it for doctors because they don’t need to administer payments and cash – which dramatically reduces their administration costs.
Bulk billing isn’t just cheaper for the patient, its more efficient for the doctor. So the government is threatening to fine doctors that don’t charge their patients, precisely because doctors wouldn’t have any incentive to charge fees otherwise.
Charging fees does reduce the number of times people go to the doctor. The problem is, that reduction is not based on how sick you are, but how poor you are. So poor sick people stop going to the doctor, while better off less sick people continue to go. The end result is people become so sick they end up in hospital. This substantially increases the total cost of health care, because hospital visits are much more expensive than early intervention.
The government claims many of these changes are needed because Australia’s population is ageing. This will force up public spending, which the government claims is unaffordable. That is not a new claim. Labor governments have said much the same. And it has been a key theme of three Inter-Generational Reports from the Treasury.
But as the Medicare changes show, the changes designed to address population ageing often cost more than they save. This is even more true in relation to pensions. The Treasurer, Joe Hockey, has cited pension costs as the largest component of social security, and the fastest growing. This has justified a higher retirement age, lower indexation and tighter eligibility.
What Mr Hockey does not mention is that Australia’s pension costs are one of the lowest in the developed world, and will remain one of the cheapest schemes in the future. That’s partly because Australia’s population is relatively young, and will age relatively slowly. Its also because our pension system is very efficient, targeting those on the lowest incomes.
Mr Hockey has also carefully avoided talking about how we support alternatives to the pension. And here lies the rub. The alternative is to encourage private savings, so people can pay their own pension, and become ‘self-funded retirees’. The two main forms of savings are superannuation and housing.
This is the huge hidden story of this budget (and many before it). While the pension is a large part of the budget, and is growing, it is only as large as the tax breaks for superannuation. Unlike the pension, those tax breaks go overwhelming to the rich, and are growing at twice the rate of pension costs. By 2016 they will cost $45 billion a year, well in excess of the total cost of the pension.
How does it work? If you put money into super you pay a flat rate of tax. For low-income part-time workers that means they pay more tax on super than on money they get now – to pay the rent or the GP co-payment. But if you earn over $180,000, you pay just a third of your normal rate. That is a huge discount, and has led many high income earners to put large parts of their income into super accounts, costing the budget billions.
There are similar tax breaks for housing, which mean investors can write off their mortgage interest costs and pay less tax on capital gains than most workers pay on their wage. It means that people who can afford to save can make serious money at the expense of other tax payers forced to pick up the bill.
This is the real effect of the changes the government justifies on the grounds of population ageing – they mean those on low incomes pay, while those on high incomes have their savings subsidized. This has a significant impact on people’s experience of social security and taxation across the life course.
For those on low incomes, the budget reduces their income directly, by cutting parenting payments, pensions and benefits. It will substantially increase the amount they pay for university, because it increases the interest rate on HECS debt, meaning moderate income earners will take longer to pay it off and pay more. That debt will make it harder for them to afford a mortgage, trapping them in private rental. And they will receive relatively little in superannuation.
Alternatively, if you are lucky enough to have a family of means you can pay those fees upfront, making it easier to get into the housing market, and by your 50s you will likely be buying investment properties and making top-up payments to your super. That will cost the budget more than all the welfare payments going to someone on a lower income, but it will feel like you’re the one paying your way.
This is the profound change we are seeing. Gone is a commitment to provide equity and security. This is the welfare state as a tax minimization strategy for some. For most people it means debt and discipline from cradle to grave.
About the Author
Ben Spies-Butcher lectures in Economy and Society in the Department of Sociology. Ben completed his PhD in Economics at the University of Sydney while working in the non-government sector on issues of human rights. His research focuses on the economics and politics of social and environmental policy, and political participation. He teaches courses on economic sociology and political sociology at undergraduate and post-graduate level. He is also a Fellow of the Centre for Policy Development, a Research Associate at the Retirement Policy and Research Centre at the University of Auckland, and a member of the Centre for Research on Social Inclusion.
Disclaimer: Dr Spies-Butcher did not receive any funding from institutions, public or private, in the preparation of this post, and the views expressed are his own and do not necessarily reflect those of the Journal of Australian Political Economy, Macquarie University or the University of Sydney.
