Social Policy Whisperer: Could a new 'basic income' protect Australia's most vulnerable?

Australia’s welfare system does a lot with a little. But the plight of growing numbers of precarious workers has led to calls for a new basic income.

The cost of such a scheme seems prohibitively expensive. So, might the lessons of Australia’s super-efficient welfare system offer a potential way forward?

Why do we need it?

British social scientist Guy Standing has argued that the new social divide of the 21st century is between those with secure employment and the “precariat” – a class of precariously employed workers. He argues that a basic income – a universal, low but adequate payment – is therefore needed.

The basic income proposal directly addresses the problem of people falling through the cracks of a complex welfare system. And it would dramatically reduce the cost of administering welfare – costs that have grown as welfare has become more conditional.

While the conditions attached to social payments are justified as providing incentives to work, or challenging a culture of poverty, the evidence is often lacking.

Research suggests work for the dole actually reduces the chances that recipients will find work. There is little evidence that quarantining payments helps either. But both measures dramatically increase administrative costs.

How Australia’s current social safety net works

Unemployment benefits in Australia have gradually fallen behind the cost of living. The benefit, currently called the Newstart Allowance, is now one of the lowest in the OECD.

This makes it hard to effectively look for work, with devastating consequences for those relying on it. Even business economists have argued it needs to be raised.

Despite this, governments have moved in the opposite direction, shifting more people onto lower and highly conditional payments. This reflects the politics of payments that are very highly targeted. As the group of people reliant on them reduces to those at the margins, so too the recipient group becomes less politically influential and more vulnerable to cuts.

If this is the great failure of Australian social policy, we can also identify a unique success. In part, stinginess reflects a low tax base. Total taxation in Australia represents a smaller slice of GDP than most other developed economies, including other English-speaking countries like the UK and Canada. However, not all payments are so stingy.

In some areas Australia does a lot with a little. We redistribute proportionally more to low-income earners than any other country. A key to this efficiency is Australia’s focus on “affluence testing”. This is where payments are designed to give most to those on low incomes, something to those on middle incomes and then exclude those at the top.

Family payments and the age pension are good examples. Both are means-tested, but in both cases most of the potential population – those with children or those over 65 – receive some benefit.

This creates three important benefits:

• It is cheaper than the contributory or universal systems common elsewhere.
• Because it is not too tightly targeted it is less likely to create poverty traps caused by taking away benefits rapidly at the same time that people pay more income tax.
• It guards against stigmatising recipients. Because most people still get some benefit it is seen as normal, and the larger constituency is more politically powerful. Notably, family payments increased throughout the 2000s, and the age pension was raised in 2009.

Lessons from the age pension

We do not often think about it in these terms, but this kind of payment actually looks very similar to a basic income. It ensures a minimum for everyone. It is not based on activity testing and is cheap to administer.

The pension costs Australia less than almost any other comparable country, yet aged poverty is low. Might the age pension provide a model for a more expansive system?

Policy has been moving in the opposite direction. Labor raised the pension age to 67, and the Coalition proposed taking it to 70. Yet the savings are relatively modest, and much lower than the potential savings from fixing the unequal and distorting tax concessions applying to superannuation. These concessions provide enormous benefits to those on the highest incomes and will soon cost the budget more than the age pension.

The Australia Institute has shown that fixing the system of tax concessions would raise enough to remove the means test for the pension, and leave enough to reduce the pension eligibility age. If the means test were retained, the eligibility age could be reduced significantly.

One reason for lifting the eligibility age is that it helps to create a normative retirement age – making people think they should retire at 65. While raising the eligibility age increases this benchmark, lowering it may break it entirely – particularly if the new age was well below what most think of as “older”.

Participation rates are already increasing among older workers, including those entitled to the pension. A basic income should not come instead of paid work.

Older workers are particularly vulnerable, but so too are very young workers. Across the OECD poverty rates are rising fastest among the young. A basic income payment for those aged 18-25 could help turn this around. If it followed the unique Australian model of affluence testing, it could be affordable. Australia would thus lead in remaking welfare for the precarious world of the 21st century.