By Lindy Edwards
THE cuts to middle-class welfare are politically and economically clever but will deliver a set of disturbing long-term consequences. For all the hype about tough budgets, most Australians will barely notice the key budget measures kick in. The rhetoric of "middle-class welfare" refers to two quite different types of programs. One is most usefully described as universal entitlements (where we all get pretty much the same amount) and the other type subsidises activities that mostly rich people do.
The Government's approach to (almost) universal entitlements is gently-gently. They have changed the indexing of the thresholds and payments for the Family Tax Benefits and the baby bonus. This means that, over time, the value of the payments will decline, and fewer people will qualify for them. It is a politically clever manoeuvre because people will barely notice the gradual erosion of the benefit. It works economically because it won't bite while the recession is deepest, but there will be greater and greater savings as the economy starts to grow.
The second type of program — those that subsidise wealthy lifestyle choices — has been hit hard. Superannuation concessions, the private health insurance rebate and the first home buyers' grants have all funnelled large wads of cash to the rich. These programs ballooned in the Howard years, at considerable expense. Slashing them serves three goals for Labor: it saves money, rebalances the income divide between rich and poor, and rejects the ideology behind programs such as these.
Generally such programs exist to encourage people to rely less on the public system. Sometimes they are cost-effective but often they are ideologically driven. In the early days of the private health insurance rebate, public servants used to joke that you could have built a small regional hospital for each person the scheme shifted into the private system.
It is easy to justify cutting these programs in a downturn. Recessions are notoriously patchy. Some people lose their businesses, jobs and homes. Others in secure jobs have their spending power surge. Their mortgage repayments plunge and they benefit from price-cutting by distressed retailers. There is a strong case that those who benefit from recessions should kick in and help.
While the budget should be politically saleable, the big question is whether the Government has ducked making tough calls now, and is setting itself up for a much more difficult future if it is re-elected.
Firstly, it is not clear that it has cut enough to tackle the silent time bomb it inherited from John Howard and Peter Costello. Over the boom years, Costello handed out tax cuts, and the budget became reliant on mining revenue to pay for ongoing program spending. Now that mining commodity prices have collapsed, there is no way to pay the bills. It is a long-term problem because commodity prices were artificially high. The small-beer cuts in middle-class welfare are nothing like enough to patch the problem.
The second question is whether the Government has made the right strategic choice about how to reform the welfare system.
The Government has two choices about how to go about its social justice goals. One option is to keep taxes low and target welfare tightly at the most needy. The second option is to have a strongly progressive tax system and higher taxes and pay universal benefits to everyone.
This budget nails the Government's colours to the wall in going for low taxes and means-testing. It presents an important value shift that will have implications for welfare well into the future.
For Labor, social justice traditionally meant providing a level playing field so that everyone had an equal chance to succeed. It was quite different to the perspective of the right that accepted income inequality and supported a safety net to prevent the worst suffering among the very poor. By limiting themselves to targeting those at the very bottom, Labor is ceding the ground. Targeting also presents a threat to the long-term support for social justice. There is an old saying that if you want to have a safety net for the poor, you should never let it become a system for the poor. When it stops being a concern of the average citizen, it is allowed to fall into decay.
But perhaps, most pressingly, targeting creates a string of immediate practical problems; it inevitably creates problems of who is in and who is out of a target group. We already know that targeting payments to low-income earners has created serious poverty traps, where the poorest people face very high marginal tax rates as they try to get back on their feet. Targeting family payments risks creating similar sorts of problems for women returning to the workforce. The thresholds kick in at a level where many families will lose their benefits if the mother returns to work. All the good work done by the paid parental payment risks being undone as women are being coralled into a position of economic dependence.
On all fronts, the Government has taken the easy options for this budget. It might get away with this in the short term, but Rudd and Swan are setting themselves up for a very rough road down the track.
Dr Lindy Edwards is a political scientist at the Australian National University.