The Conversation | 1 May 2014
The National Commission of Audit has made 86 recommendations with a focus on the federal government’s 15 biggest and fastest-growing areas of spending. The result is proposals for sweeping spending cuts for the government to consider for its May 13 budget, ranging from the politically possible to the crazy brave. Rolling expert responses follow.
Ben Spies-Butcher, Lecturer in Economy and Society, Department of Sociology at Macquarie University
As expected, the Commission of Audit has set its eyes on substantially reducing access to the aged pension and gradually reducing its relative value. The Commission of Audit goes further than previous speculation, creating a new test for the age restriction on the pension, benchmarking it to life expectancy. This would potentially see the eligibility age increase indefinitely.
It is unclear how quickly increases in the future would take effect, but this would create new uncertainties for all older workers, with little evidence of significant budget savings. It also proposes tightening means-testing and inclusion of the family home in the means test.
More surprising are proposals to reduce the aged pension as a proportion of average weekly earnings. The previous Labor government only recently raised the pension rate amidst concerns of growing aged poverty. There is no mention in the report of the impact of the proposals on poverty rates. Compared to other rich countries, Australia has traditionally had very low public spending on the pension, but relatively high rates of aged poverty. These proposals would likely see poverty rise, especially amongst those in private rental.
The proposals are largely the result of the Commission of Audit’s terms of reference, which demanded savings while excluding tax expenditures (to be dealt with in the Tax Reform White Paper). This division of responsibilities creates significant incoherence in an area like retirement incomes. The changes proposed on the spending side are likely to have much smaller budgetary impacts, but much larger and more negative social impacts, than would any more holistic approach.
Tax expenditures are the real budgetary problem. Concessions for superannuation are set to over take the entire cost of the pension and grow at a substantially faster rate. Even in the area of housing, it is tax concessions more than the exclusion of the family home that generate fiscal pressure. As the Australia Institute has shown, when we take pension payments and tax expenditures together, the problems of inconsistency created by the current means-test and fiscal pressures are more easily addressed by eliminating the means-test, creating a universal payment, and correcting the tax distortions.
This may sound idealistic, but would do more for budget sustainability and be less distortionary than all of these proposals combined.
Veronica Sheen, Research Associate, School of Social Sciences at Monash University
As the Commission of Audit says itself, it has not dealt extensively with taxation issues, which are the subject of a forthcoming White Paper. So we have a set of proposals focused on government expenditure and ancillary recommendations related to state-Commonwealth responsibilities and more efficiency in government agencies and services. This means that the big numbers on social spending are very compelling outside a broader context in relation to revenue.
There have been long-term problems with some aspects of pension eligibility. My long-standing view from work in this policy area has been that it is reasonable with the burgeoning prices of capital city housing, which has particularly benefited older home owners, that this be included in the means test through home equity conversion for high value homes.
The recommendation on lifting the pension age to 70 over a long period to 2053 is better than some reports that it would be lifted to 70 as early as 2030. This gives time for a better adjustment across the working-age population.
However, the recommendation to change indexing arrangements is of concern. For those solely reliant on an age pension and with a low asset base, it is still a low payment.
The recommendation on reducing growth of the minimum wage for low-skilled workers sets a benchmark of a minimum wage at 44% of Average Weekly Earnings. The minimum wage is currently 43.3% of the average full time wage so the NCOA recommendations would pull the minimum wage lower than this using a AWE benchmark. Ten years ago the gap between minimum wages and average full time wages was 48.2% so the NCOA recommendations would consolidate further erosion of living standards for those on the lowest wages.
The recommendation is also set against increasing the withdrawal rate of the income test for unemployment payments to make Newstart even more unattractive as a payment. They include measures to force young unemployed people to move to areas with better job prospects. There are no recommendations to improve the very low Newstart payment.
The Carer Payment and Disability Support Pension are sensitive areas of public expenditure. I have never seen any evidence that there is large-scale or inappropriate reliance on these payments, so I am sceptical about the relevant recommendations.
Ben Phillips, Principal Research Fellow, National Centre for Social and Economic Modelling (NATSEM) at University of Canberra
The suggestions by the Commission of Audit deliver some very large savings to Australia’s welfare system.
The largest savings would likely relate to the aged pension. Tighter means testing, older eligibility ages and ultimately lower payments will offer very large savings in the long term. The means-testing arrangements are currently pretty light on, so some savings here do make some sense from a budget perspective. Some of the political pain would be eased by the fact the pain won’t be felt for some time and will be largely grandfathered to future pensioners.
Other large savings will be made on family payments. Millions of families will be left worse off by these policies if they are ever implemented. A couple family with a single income will be worse off by around $8,000 a year. Given that the median income of couples with children is around $120,000 a year, these cuts will hit not just hit middle-income families but also lower-middle-income families.
FTB part B is poorly designed with too many high-income families receiving this payment. Combining the part A and part B payments for single parents with young children does make policy sense. Removing the payment entirely for couples with very young children may be a bridge too far for the government. Lower-middle-income families will be hit hard by the reduced part A payment.
The commission sensibly suggests the removal of various supplements that make no policy sense – such as the multiple child allowance and large family supplement – and reducing payments for children subsequent to the first on the ground of economies of scale. Under their current design and trajectory, family payments were a shrinking share of the budget and generally considered by experts to be mostly well targeted, albeit with some areas of fat. These cuts are certainly more dramatic than was expected.
The commission sensibly recommends a simplification of Australia’s very complicated childcare benefit and rebate system. I would suggest their suggested design will be more expensive than the existing scheme and there will be some significant winners and losers as a result of a move to a simpler scheme. Including nannies in the subsidy scheme may prove to be wildly expensive if people turn away from long daycare centres, which are naturally much cheaper on a per-child basis.
The paid parental leave recommendation sensibly suggests a lower maximum payment as a proportion of the average weekly earnings. The Productivity Commission recommendation on this was that the minimum wage was a superior policy and would have resulted in much more significant savings.
The unemployment benefits (allowances) recommendations suggest young unemployed should move to high-employment centres and that their payments be reduced more quickly than is currently the case. These recommendations are mostly based on ideology and are unlikely to have a significant impact on the unemployment rate. The impact will hit single parents who have been shifted onto the Newstart Allowance payment as they will have less incentive to work and a smaller allowance for the hours they already work.
Glenn C. Savage, Researcher and Lecturer in Education Policy, Melbourne Graduate School of Education at University of Melbourne
Ultimately, the Commission of Audit’s school funding recommendations are designed to drastically cut the size of the Commonwealth Department of Education. This reduction is to be achieved mainly by transferring all policy and funding responsibilities for schools to Australia’s state and territories.
Calls to abolish or reduce the size of the federal department have been popular among the economic Right for many decades, mirroring arguments in the US. Indeed, if implemented, the Commission of Audit’s recommendations would see Australia edge closer to the American system, where states and local districts govern funding and the federal government plays a minimal role. This has resulted in a highly inequitable system, with the funding of American schools varying dramatically based on location.
If implemented in Australia, the Commission of Audit’s recommendations would allow for the unequal funding of public schools between states and territories. Rather than moving towards a more equitable funding system, therefore, the Commission of Audit provides a platform for further entrenching existing inequalities. On what basis could this be seen as a fair or reasonable outcome for young Australians?
The Commission of Audit also implicitly suggests that the Coalition should abandon the needs-based funding model proposed by the Better Schools Plan (known as the Gonski reforms) from 2018 onwards. The Commission of Audit argues that “increasing funding does not necessarily equate to better student outcomes”, arguing instead that “what matters most is how schools and classrooms are run”.
This argument is another staple of the economic right. It is a highly reductive and simplistic argument that seeks to abrogate responsibility for properly funding schools by putting the onus for student achievement onto schools and teachers.
In summary, the Commission of Audit puts forward a dangerous set of reforms for schools: a perfect formula for deepening inequalities in Australian education.
Andrew Dodd, Senior Lecturer in Journalism at Swinburne University of Technology
The ABC’s first reaction to the release of the Commission of Audit report must be one of relief. Major cuts to the ABC and SBS have been averted, for now.
The same cannot be said for the Australia Network, which is funded by the Department of Foreign Affairs and Trade but run by the ABC. The Commission of Audit has recommended it be scrapped because it claims it is not the most efficient way of achieving soft diplomacy in our region. This is certainly arguable and definitely unfortunate given the network’s successful inroads into China in recent weeks.
But there are no real surprises here: the government has been sending not-so-subtle messages that the Australia Network faces cuts or closure.
On ABC and SBS funding, the Commission of Audit said there really is no such thing as the right amount, insisting instead on driving a culture of efficiency in both organisations. On this score, it looks like the right hand knows what the left is up to because the commission has recommended that the ABC and SBS be benchmarked against commercial television networks and that funding should be based on this.
It is as if communications minister Malcolm Turnbull has already anticipated this, because in January he commissioned former Seven network executive Peter Lewis to conduct an efficiency review of the ABC and SBS.
So now, all eyes must be directed at Lewis’ report, which is due to be released around the time of the federal budget. Insiders say Lewis has taken some convincing that the ABC’s approach to news and current affairs requires greater funding than the Seven Network. So his recommendations, and the ABC’s reaction to them, will tell us much about the future of funding for our national broadcasters.
This article by Veronica Sheen, Monash University; Andrew Dodd, Swinburne University of Technology; Ben Phillips, University of Canberra; Ben Spies-Butcher, and Glenn C. Savage, University of Melbournewas originally published on The Conversation.