CD Kemp Memorial Lecture
Melbourne, 12 June 2001
Winston Churchill described the British Government's 1906 legislation for pensions and for unemployment relief as "drawing a line below which we will not allow persons to live and labour". Churchill's political thinking owed as much to liberal as to conservative traditions and his summation of the social safety net as freedom to succeed but never entirely to fail mirrors the aspirations of Australian Coalition Governments.
I suspect that, as long as schemes of social support were within the means of the governments proposing them, they would also have passed muster with CD Kemp, who combined a passion for individual freedom with a strong sense of social responsibility, and whose values, life and memory we celebrate tonight. One of "Ref" Kemp's passions, according to his son David, was making sure people were out of bed on time. Born a leisured aristocrat, Churchill would also have been quite aware of what can happen to people who don't need to work.
Since the beginning of the welfare state, successive governments here and abroad have made the discovery that guaranteeing the wherewithal for life can easily remove the motivation for work. After 100 years, western countries are still coming to terms with the complex impact of the welfare state on the work ethic and wrestling with new ways of supporting people which don't discourage self-help.
The welfare state is an essential part of modern western civilisation. But like motor cars and bio-engineering, it is not an unmixed blessing. Much of the task of modern government is coping with the unintended consequences of good things and working out how we can live more successfully with something we can't live without.
Australians are inclined to be generous to old age pensioners and people with disabilities but to question whether having nothing to do should be a life-style option for people who could work. Many years of well-intentioned decision-making means that unemployed people can easily become trapped inside the welfare system. People who would never consciously decide to stay on welfare can often find that working is almost more trouble than it's worth. The resentment of people whose benefits rarely seem enough, coupled with the resentment of middle-income taxpayers at those "working the system", threatens to undermine the social consensus on which the welfare state rests.
There is a vast difference between poverty a century ago and poverty now. Then, poverty meant utter destitution. By modern definition, it seems that the poor are always with us because "poverty" has become a relative measure which generally means lacking the disposable income of the richest 70 or 80 per cent. Then, unemployment meant no income except what could be begged. Today, unemployment means living on social security rather than wages.
The development of the welfare state has transformed the way unemployed people live -- but has not made commensurate impact on the way opinion formers think. Opinion formers still tend to see unemployment as a function of the total number of jobs in the economy or the relative cost of labour. In an era when people don't have to chase jobs around the country and don't have to work for the bare necessities of life, boosting the economy can produce labour shortages in some areas without affecting high unemployment in others. Hence the modern Australian paradox of continued high unemployment at a time of significant skill shortages and up to 50 per cent of employers claiming that they can't find staff.
This phenomenon of the "jobless boom" seems to date from the time it became possible to go on unemployment benefits with few questions asked and little expected in return. There was a even a period under the Whitlam Government when it was officially decreed that people on unemployment benefits were not expected to take jobs beneath the status of their former employment. Although the Fraser Government quickly reversed this edict, the era of unconditional entitlement had begun, if not in theory at least in general practice, and unemployment steadily rose from under 2 per cent in the 1960s to about five per cent a decade later.
There's little doubt that the unions $50 a week wage claim helped deepen the 1982 recession. According to Paul Keating's famous 1986 ALP conference taunt, AMWU boss George Campbell had "100,000 dead men round his neck". The Hawke/Keating government learned the wrong lessons from that mistake. Between 1983 and 1996, the lowest award pay rates actually fell by 5 per cent in real terms but unemployment never fell below 6 per cent. The gap between welfare payments (which were indexed) and wages (which were discounted under the Accord) narrowed and unemployment peaked at a post-depression record of nearly 11 per cent.
As the "natural" level of unemployment approached double figures, some commentators discerned a "ratchet" effect in operation under which unemployment rose during economic downturns and never subsequently returned to previous levels. What they mostly failed to identify were the fiscal and structural shifts which helped to lock-in unemployment at much higher levels than ever before.
The former Labor Government's decision to de-regulate finance markets and privatise assets such as Qantas and the Commonwealth Bank obscured its commitment to big government and old-fashioned welfarism. Its capitalism was strictly for the big end of town (and understandably mesmerised many high-income earners, such as journalists and economists) -- while low income earners were enmeshed in the welfare system and middle-income earners were squeezed by the tax system.
In a seminal paper published in 1998, Michael Keating and Simon Lambert pointed out the extent to which Labor had turned working families into pensioners. In January 1997, a single income family on two thirds average male earnings, renting privately with a dependent spouse and two dependent children, had up to 75 per cent more disposable income than in January 1982 -- but the share of this family's income received from government cash transfers had increased from under one twentieth in 1982 to just on one third after 13 years of Labor. Greater dependence on social security had been necessary, they said, to counteract the big increase in income inequality over the period. However, "welfarising" modest income families had meant that large numbers of households with private incomes between $250 and $600 a week faced effective marginal tax rates of 90 per cent and extra work could actually make some families worse off.
It's counter-intuitive for families to pay tax and receive transfer payments at the same time. Apart from the inefficiency of both giving and taking with the same people, there's the suspicion of official sleight-of-hand, of governments bribing people with their own money.
A society which discourages work is cannibalising its own future. The nagging sense that modern Australia has lost its way owes far more to this fundamental disorientation than to any lack of official compassion. In fact, official compassion arguably has done as much harm as good by trying to alleviate the results of poverty rather than its causes. Until recently, more disadvantage, higher spending, higher taxes, and higher unemployment leading to still more disadvantage risked becoming a self-perpetuating spiral.
One unsophisticated (and often self-serving) response to inequality has been to demand big across the board pay rises in the name of the "working poor". After being prepared to trade wage rises for tax cuts under the Accord, the union movement has subsequently revived Federation era demands for a "living wage". Arbitrarily boosting wages made some sense then, when wages were the only form of social security, but can compound people's feeling of futility if the result is more unemployment. Pay rises do not simply "emerge" from the economy but have to be paid -- often by struggling small businesses. Some forecasters put the unemployment impact of the ACTU's recent $28 across-the-board wage claim as high as 45,000 jobs.
Prior to the new tax system changes last year, a family with a dependent spouse, one child under five and another between five and 12 on the federal minimum award wage of $400 a week granted the $13 a week pay increase just awarded under the Safety Net Wage Case would have had $1 a week less disposable income due to tax and welfare clawback. For this family, the ACTU's $28 a week wage rise would have meant just $5 in additional household income. To achieve the same 4 to 11 per cent boost in household income delivered by the new tax system, families earning the minimum federal award wage would need wage increases of between 23 and 72 per cent, depending on household size.
This Government supports high wages and is proud of the way its policies have boosted average weekly earnings and basic award earnings since 1996. But wage increases must be backed by higher productivity if they are not to be eroded by higher inflation, higher interest rates and higher unemployment. In addition, wage earners who also receive transfer payments need to keep more of their pay rises if incentives to work and earn are to prove meaningful and if they are to enjoy the benefits of the "ethical free enterprise" which CD Kemp did so much to promote.
It's obviously true that single income families on modest wages struggle to meet every day expenses: for mortgage repayments, leisure expenses, education costs, major household items and so on. Even so, less than 5 per cent of individuals living in households where wages are the principal income source are below the poverty line -- so boosting wages in ways which worsen unemployment is a completely self-defeating strategy, reminiscent of the unions' disastrous move to boost Aboriginal stockmen's pay in the 1960s which substituted "sit-down money" for honest wages.
A much more sophisticated response to disincentives to work has been the call for an "earned income tax credit" made by five economists (Messrs Dawkins, Freebairn, Garnaut, Keating, and Richardson) in a letter to the Prime Minister after the last election and taken up in part by market-minded economists such as Des Moore. Acknowledging the critical relationship between welfare, wages and tax, the five economists say that families living on modest incomes should pay a lower rate of tax than similar wage earners without dependents or people with similar incomes derived entirely from the welfare system.
The five economists' proposal marks an important shift in academic thinking about disadvantage and its relief. The supporters of the welfare state have finally accepted that lower taxes can be more effective than higher spending -- and that, in place of tax and spend policies, it's better not to tax beneficiaries in the first place. The emphasis seems to have shifted from providing income alone to acknowledging the significance of work as a source of self-esteem and social cohesion as well. Welfare academics now seem to appreciate that the source of funding matters a great deal; that a dollar earned is different from a dollar received; that money is better gotten than being given; in short, that "dollars ain't dollars". This concession to the common sense view that "impoverishment of the spirit" can be as corrosive as material want is no less welcome than it is overdue.
In the wake of the five economists' proposal, there's now much academic interest in designing a distortion-free tax and benefit system under which people and households can move from welfare to part-time to full-time to well-paid work without, on the way through, experiencing punitive effective marginal rates of tax. The difficulty of fixing basic welfare payments, withdrawal rates, tax-free thresholds and tax rates at levels which leave no-one worse off and produce the same amount of tax should not be under-estimated.
The earned income tax credit, on Lambert's estimate, would cost some $4 billion a year if no-one were to be significantly worse off. Even so, it would shift poverty traps from families with incomes of about $20,000 a year to families with incomes of about $30,000 a year. There would be more incentive for families to move off welfare and into work -- but less incentive for families to work hard, earn more and move from low to middle income.
Well before the five economists' letter, the Government developed the $2 billion Family Tax Initiative (as part of the new tax system) to reduce effective marginal tax rates from nearly 90 to about 60 per cent for a wide range of low and middle income households. For instance, prior to July 1 last year, a single income earner on the minimum federal award wage of $400 a week with a dependent spouse, one child under 5 and another between five and 12, had a weekly disposable income of $534 a week. Thanks to tax and benefit changes under the new tax system, this household's disposable income increased $40 to $574 a week in July last year.
The Working Credit, announced in the Budget, builds on the Family Tax Initiative. Unemployed people accumulate a "credit bank" for each week they are on full rate of benefit. Instead of losing welfare benefits once they earn more than $31 a week, previously unemployed people will continue to receive benefits (plus their after tax wages) until they have exhausted a "working credit" of up to $1000. With maximum Working Credit, a previously unemployed young person earning $10 an hour for 8 hours a week will lose no benefit for 18 weeks -- instead of facing an immediate effective marginal tax rate of between 50 and 70 per cent. Like the proposed earned income tax credit, the Working Credit cannot eliminate steep effective marginal rates of tax -- but, at much lower budgetary cost, it can shift the point at which they apply and minimise the demoralisation effect on new workers.
Financial incentives are important -- but they're not necessarily the most important change government can make for people on benefit. Because people respond to values as well as financial incentives, the Government has been ready to ask more of people as well as to give more; to appeal to people's pride as well as their "hip pocket nerve". Work can be made more attractive than life on welfare by changing the rewards of work or by changing the conditions of welfare. No government could cut unemployment benefits, because living on $170 a week is hard enough already, but this Government has changed what's expected of people who have been on benefit for some time.
Work for the Dole marks the end of the era of permissive welfare. It's the most important single change to the culture of employment and unemployment since 1972. Budget changes specifying that all job seekers under 40 on benefits for more than six months must do Work for the Dole or other structured activity, and undergo new cycles of activity as long as they stay on benefit, complete the new institutional architecture begun with the Job Network in 1996.
These changes are designed to make work more attractive than the alternative without increasing labour costs and without making anyone on welfare financially worse off. Another way to make work pay is to make non-work not pay. If the alternative to working for a wage is working for the dole, there's much more incentive to take work, particularly the entry-level and temporary jobs that employers often find hard to fill even when unemployment is high.
In the end, policy makers have to make common sense judgments about whether long-term unemployed people are likely to be motived more by the prospect of an extra $30 a week if they work or two days unpaid work if they don't. One of the problems with making marginal changes is that they only make marginal differences to the way people behave. These are important over time but rarely produce the quick results governments generally promise and voters usually expect.
Referral to Work for the Dole seems to have a galvanising effect. For instance, of the 7400 job seekers referred to Work for the Dole on January 21, just over 1000 had begun participation two months afterwards (and 60 had already left because they'd found a job). Of those who were still to begin, nearly 1000 had reduced or gone off benefit through finding work or study, nearly 1000 had become ineligible for Work for the Dole (usually through declaring a part-time job) and over 500 had had their benefits reduced as a penalty for non-participation. About 1500 had been exempted from the activity test, obtained a medical certificate against participation in particular Work for the Dole activity, or moved. The rest were mostly waiting for re-referral because Community Work Coordinators had been unable to place them within six weeks.
The lesson of experience over the past three and half years is that people need regular (rather than "one-off") referral to programmes to avoid "falling through the gaps". Over time, the implementation of an on-going cycle of referral and re-referral should demonstrate to people who would rather be left alone that "the game is up" and that there is no alternative to work. In a market economy, it's impossible to ensure that everyone has a job -- but not impossible to ensure that everyone eventually has something to do. Far from "painting rocks white", Work for the Dole involves activities such as restoring heritage buildings, designing community web sites and providing entertainment at old people's homes as well as traditional "environmental" work such as weeding and rejuvenating parks.
As governments continually demonstrate, it's easy to change policy but hard to influence the way people think and behave. Making a difference requires new structures, new attitudes, and new connections between people sustained over a long period of time. The advent of community-based Job Network members and Community Work Coordinators, the development of Work for the Dole and other Mutual Obligation programmes and, above all, the clear and constant expectation that people will be active citizens rather than welfare clients are designed to be revolutionary.
The Government is determined to replace passive welfare with a more self-reliant culture providing a series of stepladders to success. This is a Government with conservative values -- but not with conservative instincts when it comes to running a system which has taken unemployment for granted for too long -- because a decent government can never adopt the approach of "business as usual" when systems are managing problems rather than solving them.
In 1996, the OECD estimated that Australia's structural rate of unemployment (or the best rate good economic management could produce on its own) had risen to 8.5 per cent. In their 1998 letter to the Prime Minister, the five economists said that economic growth alone would only bring unemployment down to about 7 per cent. By 1999, the OECD had already given Australia accolades for significantly reducing its structural unemployment (along with Britain, Canada, New Zealand and Ireland). Last September, the Treasury indicated that the structural unemployment rate may have fallen have fallen below six per with further improvements possible as the benefits of reform continue to accrue.
The fact that unemployment fell to 6.1 per cent in the pre-Olympic boom and has been slow to rise in the post-Olympic slowdown suggests that the Government's attempts to replace a passive welfare culture with a participation ethic are making a difference. Governments can never do enough to bring unemployment down. Even so, this Government can take a measure of quiet pride from engineering, at any given level of economic activity, significantly lower unemployment.
If unemployment is, almost by definition, always too high -- almost by definition, I am never too pleased with the performance of governments, especially governments which share our philosophical values and whose inevitable delinquencies sting more sharply. For nearly 11 years, I have reminded Coalition politicians that citizens are more important than governments. The spirit of CD Kemp, which has done so much to maintain the intellectual content and coherence of our public life and is his priceless gift to Australia's future, lives on.
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