Expectation in the age of entitlement

Will your family be huddled around the TV on Tuesday night to see what goodies the federal government has in store?

Will your family be huddled around the TV on Tuesday night to see what goodies the federal government has in store? For most of this century, budget night has been like a financial lucky dip. No voter had to wait long before something came their way.

Tax cuts, normally reserved for election-year budgets, became an annual ritual. And they were often accompanied by a boost in family payments and other sweeteners. Even when the global financial crisis loomed in 2008, households got extra cash handouts to help limit the damage to the Australian economy. Once the GFC passed, the payments kept coming, this time to compensate households for the effects of the carbon tax.

That decade of budget goodies reshaped expectations. Tax cuts, handouts and surpluses, year in and year out, became the norm for a generation of voters.

But the salad days are over. Thanks to the China-driven mining boom, last decade was the best federal coffers have ever seen. Revenues surged like never before - and likely never will again.

"Politicians assumed that the boom we were in would be permanent, so they made a bunch of permanent promises to Australians off the back of it," says Deloitte Access Economics budget expert Chris Richardson.

"For a decade, treasurers have been pulling rabbits out of a hat, delivering better-than-expected budgets despite a ton of tax cuts, a flurry of family benefits, and a bevy of baby bonuses. But now the rabbit is dead."

It's telling that the prelude to Wayne Swan's sixth budget on Tuesday has been marked by the deferral of tax cuts and the cancellation of family payments, not leaks about new ones.

How much are things going to change for a generation that has grown accustomed to new government entitlements?

There has been a marked shift in thinking about the budget since Swan admitted about four months ago that Labor could not deliver its promise for a surplus next financial year. Since then, troubling warnings have come from independent voices including academics, think tanks and economic consultancies that the budget is under serious stress.

On Tuesday, Finance Minister Penny Wong revealed that Labor would scrap family payments worth $1.8 billion announced in last year's budget and due to take effect in July.

"If you look at what was expected at budget until now, we're going to be receiving as a government about $17 billion less, and we do anticipate that we will see revenues hit across the forward estimates," she said.

"So, in that context, given the challenges the budget faces and the nation faces, the government has to take responsible decisions."

A day later, tax cuts promised to low-income earners to compensate for the carbon tax were deferred.

University of NSW social policy expert Dr Shaun Wilson sees even deeper challenges for Labor. He argues that both the Rudd and Gillard governments have advanced a brand of "low-tax social democracy" that has reached its limits. This is underscored by the government's decision to give up its surplus promise and hang on to three totemic Labor reforms central to its election-year message - the Gonski education reforms, the national disability insurance scheme and the national broadband network.

But the Coalition's pre-budget message has also been mixed. This week, Tony Abbott reaffirmed the Coalition's commitment to his own signature policy - an expensive paid parental leave scheme - after the proposal was questioned by members of his own party. This scheme would replace the full income of a primary carer, up to $150,000 for six months, as well as superannuation contributions. Independent costing of the policy by the Parliamentary Budget Office found the policy would cost $5 billion a year, although the Coalition disputes this figure.

Peter Whiteford, an Australian National University professor who was in charge of social policy statistics at the Organisation for Economic Cooperation and Development for many years, says the Coalition's plan will give Australia one of the world's most generous paid parental leave schemes, should it be implemented.

Meanwhile, shadow treasurer Joe Hockey has been talking tough. In a speech on Monday he declared the era of "universal entitlement" was at an end in developed nations like Australia. The ageing of the population would be one of the drivers of this evolution.

"Addressing the ongoing fiscal crises will involve the winding back of universal access to payments and entitlements from the state," Hockey said.

Wilson says the Coalition's parental leave scheme is potentially good policy because of the improvements to workforce participation it offers, especially by women with children. But it does not conform to Australia's welfare norms.

"It introduces rupture in the traditional way Australians see welfare, which is that the state doesn't give better-off people more than it gives poor people," he says. "For wealthy women to benefit most is not really in the Australian model."

If the polls are right and Tony Abbott becomes prime minister later this year, the budget scenario will be very different to the last time he served in government.

Wilson says there are noticeable policy tensions in the Coalition as it prepares for government. "Mr Hockey seems to be saying nothing is affordable and there's a need to cut to the bone, but there are ongoing efforts by Abbott to show he supports a kind of catholic welfare state that is generous to families and to the middle-class," he says.

"There are significant ideological contradictions in the Coalition's policies that reflect on the one hand the promotion of a family-centred welfare state to win votes, especially the support of middle-class women, but on the other hand there seems to be a commitment to something like the austerity program that the UK is currently suffering. How those two forces play out will be interesting."

Chris Richardson says the recent tax bonanza has been "forgiving every dumb bit of policy coming out of Canberra" for many years. But the recent revenue write-downs will push the trajectory of tax back down to where it was projected to be when the global financial crisis was at its worst, he says. The pressure is on to improve the way taxes are raised and spent.

Does Labor's decision to jettison promised family payments and Hockey's remarks on government entitlements signal changes ahead for Australia's welfare system?

It's an obvious target for savings - social security and welfare is expected to cost the Commonwealth government $132 billion this financial year, about 35 per cent of all federal spending and six times the defence budget.

Family Tax Benefits will cost $20 billion, making it the third-biggest category of federal government spending behind grants to state governments and the aged pension. These family payments dwarf spending on childcare fee assistance ($4.5 billion) and parent and baby payments ($2.3 billion).

There's a perennial debate in Australian politics about whether too much of this spending is wasted on so-called "middle-class welfare" flowing to well-off families.

After spending years monitoring welfare spending across the OECD nations, Whiteford seems surprised this issue crops up so much.

"It seems to me that many people define middle-class welfare as what somebody else is getting," he says. "The idea that there has been an explosion of middle-class welfare in the payments system isn't correct."

Whiteford's analysis shows that just 2 per cent of welfare spending found its way to the richest 20 per cent of households in 2009-10, making Australia's social security system one of the world's tightest.

"We are actually hyper-targeted," he says. "But maybe that's why we get obsessed by middle-class welfare; we've come to expect our welfare to be very targeted."

The family payments introduced by the Howard government between 2000 and 2007 have been blamed for stoking middle-class welfare. But Whiteford says only a small share of payments introduced in that period went to those with high incomes.

"For the top 20 per cent it was only about $1.60 a week, so it's not an awful lot," he says. "In aggregate, they concentrated on low- and middle-income families, the so-called Howard battlers."

But Professor of Social Policy at Sydney University Gabrielle Meagher warns the direct cash payments often favoured in Australia's welfare system makes them difficult to withdraw.

"If you cut them, people feel as though money is being taken out of their pocket and that feels bad," she says.

Whiteford says the tax relief introduced during the 2000s budget boom has had a much bigger impact on public finances.

His research shows that had the average tax rate been left unchanged since 1996, those in the top 20 per cent of incomes would have been paying $3120 more in tax per year by 2007. "The tax cuts for the top 20 per cent were 35 times bigger than the family benefit increases. So the money that was given back in tax cuts for the richest 20 per cent was greater in vast orders of magnitude than increases in welfare payments."

Modelling for the Australia Institute shows that, had the income-tax scale for 2004-05 still been in use last financial year, 2011-12, collections from the tax would have been almost $39 billion higher. "Last decade it was just super easy to run a budget; China was just showering money on Canberra," says Richardson. "We just spent too much during those good years."

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles