The Iron Triangle of Means Testing

I spoke today on a private member's motion, moved by Adam Bandt, to raise the level of Newstart by $50 per week.



Private Member's Motion - Adam Bandt
28 May 2012


The issue of movement from welfare into work is one that has long concerned me. It was the reason that I chose 12 years ago to study overseas, researching on the topic of poverty and inequality, looking at the issue of how to move people from welfare into work and the relative effectiveness of interventions such as government jobs, wage subsidies and training programs.

It is important that we make that transition from welfare into work as straightforward as possible, particularly for families with children. We know that there are intergenerational cycles of joblessness and we know that high-quality programs that increase employment are at the core of a civilised society.

The Henry Review, in approaching the issue of income support payments, wrote of the iron triangle of means testing. The triangle was payment adequacy, program affordability and the incentive for self-support. In the Henry Review a great deal of attention was given to the effective marginal tax rates faced by income support recipients. It was an issue that Labor focused on a great deal while in opposition. The Treasurer and the Minister for Families, Community Services and Indigenous Affairs spent many years focusing on the issue of high effective marginal tax rates. Thanks to much of the advocacy from Labor in opposition, those effective marginal tax rates have been decreased.

Today we are debating the appropriate level of the Newstart allowance. I do not think any of us in this House would argue that the current level of Newstart is generous. But the Henry Review argued that there ought to be a difference between levels of pensions and levels of what were called 'participation payments', of which Newstart is one. The Henry review argued for restructuring income support into three categories: a pension category, a participation category and a student category. It argued that pensions would be paid at the highest rate in recognition that people eligible for them are likely to rely on them fully for a long time. Participation payments would be paid at a lower rate to maintain incentives to work, the Henry Review argued. The Henry Review further argued that while there ought to be a difference between the levels of those payments, the same indexation levels ought to apply to all three sets of payments.

The challenge for those of us in considering a question like the level of Newstart payments is twofold. The first is that, as I read it, the bulk of the evidence suggests that higher unemployment benefits have the effect of decreasing transitions from income support into work. This effect is not as large as some have claimed and there are theoretical reasons where you might think it could go the other way—for example, if someone is having difficulty affording the costs of work. But the bulk of economic evidence—and I tend to go where the evidence tells me—papers such as Peter Fredriksson and Martin Söderström’s and the work of Anthony Atkinson and John Micklewright, seems to go in that direction. At the same time, we know that while we would like the Newstart payment to be a temporary payment, a significant number of Australians are on the Newstart payment for long periods of time. The Henry Review reported around one-quarter of Newstart recipients have been continuously on the payment for over two years. The issue of adequacy is therefore a large challenge.

If we had substantially more money in the budget, I would see no reason to oppose this measure. I would ideally like to be in a position in which we had the waves of tax revenue that were flooding into this country in mining boom mark I. But we are not in that situation at the moment and so worthy measures, such as this one, sometimes do not get supported.
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