The Welfare State: Beyond 2000

An Address to University Politics Society, Albert Hotel,
Thursday 7 March 2000

Understanding what has happened with welfare -- under which I include government spending on income transfers, welfare services, health and education -- is necessary in order to understand the public policy history of the last 25 years and to get some handle on what is likely to happen.

Welfare reform has followed a four-part pattern, with each part, particularly the first, overlapping with the others.

1. Expansion, particularly under the Whitlam government, though each PM adds his own extensions to the welfare system.
2. Targeting, particularly under the Hawke government
3. Contracting out
4. Mutual obligation

EXPANSION

Welfare can expand by adding new clients, increasing the level of assistance, or increasing the range of assistance provided.  The Australian welfare system has expanded in all these ways over past decades.

The greatest expansion of the welfare system, occurred under Gough Whitlam, but almost every PM has added to, or otherwise extended, the system.  Examples include (and this list is by no means exhaustive):

• Menzies (Commonwealth scholarships and State Aid to private schools)
• Gorton, (arts funding)
• Whitlam, (sole parents pension, free tertiary education)
• Fraser, (Family Income Scheme)
• Hawke, (Medicare)
• Keating, (Child care)
• Howard, (Work for the dole)

The welfare system has a natural tendency to expand for various reasons:

• it is difficult to exclude similar cases to those already included (Charles Murray);
• politicians get credit for new spending, not old spending;
• if the aim is to do good, there is always more "good" to do;
• one intervention tends to lead to another as various social equilibria are disturbed.
• it lowers the price of foolish or irrational behaviour (Coase), leading to more of such behaviour.

Welfare is difficult to fund -- the willingness to receive benefits exceeds willingness to pay for it.  It imposes compliance costs, costs in losses of economic activity, administration via both the taxes which fund it and the processes which hand it out.

(One way of looking a distortionary effects is that a tax rate sets a price:  the price of not changing your affairs to avoid tax.)

An extensive welfare system also has some tendency to lead to a more politicised and divided society, as people fight over "free" benefits.  Markets have the virtue in that they put price on benefits, effectively forcing people to share them.  Politics, on the other hand, tends to reward making the loudest claims possible.  Moreover, politics requires winning coalitions, markets don't:  they much more able to provide niche solutions.  (Sowell)

Also, markets involve consent for income;  politics transfers income coercively, making exploitation of third parties easier.

We have certainly seen signs of stress in the Australian political system from such pressures.

In the last 40 years, Australian GDP per head has about doubled, taxes per head have about tripled, but government health, education and welfare spending has gone up about fivefold per head.

Since the end of the Whitlam Government, Australian Governments have spent $111 billion more, in 1996/97 dollars, on non-capital expenditure than they have taken in revenue.  That is, assets have been sold and money borrowed to pay salaries, schools, hospitals, pensions.  Most of this "negative saving" has been done by State Governments.

In Europe, welfare spending has created levels of public debt from its "natural" operation that previously only occurred during great national disasters like war.

In Australia, the fiscal pressure from welfare expansion has been perhaps the most important single driver of public policy.  It has both fed back into welfare policy, as well as affecting other areas of public policy:  budgetary reform, privatisation, microeconomic reform.  Much of privatisation has been driven by debt pressures, while micro-economic reform has sought to make the economy more efficient, partly in order to make funding the expanding welfare state easier.

TARGETING

An obvious way to relieve fiscal pressure is to narrow the number of clients.  Done properly, this can also increase the redistributive efficiency of the system.  Targeting is also a natural approach for Australia, since we have never had universal systems on the scale of continental Europe.

The most obvious form of targeting is by asset and income testing, though it can also be done by group-specific programs.  A major problem with targeting is it can create very high effective marginal tax rates.  Another is that it can weaken the sense of "one set of rules for everyone" if one group seems to be getting "special" assistance.

CONTRACTING OUT

Once you start worrying about redistributive efficiency, it is a natural step to worry about delivery efficiency.  Trying to get as large an effect in service delivery from the money spent leads you to competitive allocation and use of low-cost providers.

Contracting out is about getting more for dollar, worrying about effectiveness.

Virtues:  able to tap into volunteer labour, flexibility of service groups free from public service rigidities, the strong ethos many such groups have.

Problems:  risk management questions (where do the risks lie?), effects on institutions of government accountability requirements (turning them into institutions like the public service), accountability and contract-management difficulties.

MUTUAL OBLIGATION

As mentioned, targeting has a major disadvantage in that can exacerbate "poverty traps", particularly by creating very high effective marginal tax rates.  These can be very expensive to fix.

Also, the issue ultimately arises about the effect of welfare provision.  An endless expansion of dependency is not an outlook governments can be expected to favour.  There are also issues about the effect of dependency itself, the effects of something for nothing (Noel Pearson's point about welfare:  hunter-gathererer and market economies are both real economies where behaviour affects your situation directly;  welfare is an unreal economy, because it doesn't.)

What mutual obligation attempts to do is get away from "something for nothing" and reconnect people to their own efforts making a difference, being important.  It is not necessarily cheaper in the short run, but if it gets people off benefits, it certainly is in the longer run.

Welfare reform in the US:  more active means of moving people into work, is ver much part of this trend.

FUTURE

Pension pressure in Europe:  debating whether solution is to cut pension rates and delay eligibility or promote employment growth.

Is it sustainable, what will happen?

We know it will change.  How it will change is less clear.  As for sustainability, the feedback effects within our society are strong enough that it is very unlikely any crunch will come.  Instead, there will be shifts to cope with emerging pressures.