ARPA: Tales of Robin Hood (part 1): Welfare myths and realities in the UK and Australia

John Hills Good Times, Bad Times: The Welfare Myth of Them and Us, Policy Press, Bristol, 2014 (336 pp). ISBN 9781447320036 (paperback) RRP $45.99.

John Hills’ Good Times, Bad Times: The Welfare Myth of Them and Us was published to considerable acclaim in Britain in late 2014. Writing in The Times Higher Education Supplement, Danny Dorling of Oxford University described the book as ‘painstakingly produced and eminently readable … It is essential reading for physicists and medics, schoolteachers and school cleaners, pensioners and students of all kinds. Social scientists will love it and learn an enormous amount from it—even those of us who think we are already well informed. This is an academic book for everyone’ (Dorling 2014).

Labour MP Sheila Gilmore also suggested that it ‘should be compulsory reading not just for politicians and journalists, but for us all’ (Gilmore 2014). Her review in The Guardian described the book as ‘a bracing defence of the welfare state’ and ‘a meticulous compendium of decades of empirical work that seeks to upend the divisive discourse of “the welfare myth of them and us’” (Clark 2014). Similarly, a review for the Intergenerational Foundation suggested that it deserves to be required reading for anyone who wants to really understand the true picture of inequality and redistribution in Britain today (Kingman 2014).

Some of the flavour of the book and one of its most important themes is captured in the opening paragraphs:

Good Times, Bad Times is panoramic in its scope, based on extensive empirical evidence and presented in a lively and engaging manner. For an Australian audience, what is likely to be of most interest is how relevant are the analysis and conclusions to our own circumstances. So how do we compare? Given the scope of Hill’s work, answering this question will take some time. This is the first of a series of articles that compares the Hills’ findings for the United Kingdom with comparable data for Australia. The aim is to identify the similarities and differences in our two countries’ approaches to social security and welfare, and thus to identify the extent to which Hills’ conclusions can be applied here.

The UK and Australia have obvious institutional and cultural similarities, belonging to the same ‘family of nations’ (Castles 1993) or ‘welfare regime’ (Esping-Andersen 1990). In the welfare field there is evidence of past policy learning and transfer (Pierson 2001; Pierson & Castles 2002). There are also current examples of potential policy transfer, with recent recommendations that Australia should introduce a common workforce age payment based on the UK’s Universal Credit.

There are also some striking points of common interest in recent welfare policy debates—the dichotomy drawn in the UK between strivers and skivers has its parallel in last year’s Federal budget in Australia, in the language of ‘lifters’ and ‘leaners’ (Hockey 2014). The 2014–15 Budget proposed a wide range of changes to Australian social programs that have some similarities to aspects of the austerity program in the UK. It was after all in London in 2012 at an address to the influential think-tank the Institute of Economic Affairs that the then Shadow Treasurer presaged an end to the ‘Age of Entitlement’ (Hockey 2012).

WELFARE STATE REGIMES AND DESERVINGNESS

As noted above, Australia and the UK are commonly classified among the ‘liberal’ welfare regimes. Gøsta Esping-Andersen (1990) found Australia to have the lowest score on his de-commodification index, which measures citizens’ social entitlements and the extent to which social and economic policies free them from dependence on the market. However, while Esping-Andersen also classified the UK as a liberal welfare state, it had the highest de-commodification score in the liberal grouping, and was on the borderline with the Conservative welfare states (Bambra 2006). These characterisations are disputed, however, by Frank Castles and Deborah Mitchell (1993) who argue that Australia and the UK (as well as New Zealand) are part of a distinctive ‘radical’ group of nations, which focus their redistributive effort through targeted instruments rather than high expenditure levels. These typologies are not simply of academic interest but go to the heart of political and policy debates about the welfare state in both Britain and Australia and elsewhere.

Broadly speaking, there are three main approaches to the allocation of welfare spending, each of which suggests a different set of criteria for access to benefits: benefits can be distributed on the basis of contributions (contributory), they can be seen as a right of citizenship (universal), or they can be distributed on the basis of need (targeted or selective). In practice most welfare states combine programs of different sorts—most Australian government cash benefit programs are usually seen as being targeted to those most in need, superannuation is based on contributions and health care is closer to a citizenship right. The UK also combines programs ostensibly based on different principles. It is the balance between these three kinds of programs that characterises different welfare regimes.

Welfare regimes are configurations of institutions, actors and distributive outcomes (Castles & Mitchell 1992, 1993; Svallfors 1997), and it is possible that the ways in which policies are structured and distributed can have an independent influence on their political acceptability (Andreß & Heien 2001). As Wim van Oorschot and Femke Roosma put it, research ‘shows that support for benefits and their related legitimacy is never self-evident, but can differ quite strongly between types of benefit, target groups of social protection, categories of citizens, countries and regions, and over time’ (2015, p. 6). Accordingly, in contrast with welfare states dominated by universal or contributory benefits, selective welfare states inherently raise questions about whether recipients are actually in need, whether they are to be held responsible for their own situation, whether they are a special group distinct from the majority, and whether there is a boundary between those who ‘give’ and those who ‘receive’. Targeted programs may even raise issues of whether recipients are appropriately grateful for the support given to them (Larsen 2008). In this sense, it is possible that selective or income-tested benefits create the dichotomy between ‘them’ and ‘us’ that Hills discusses.

Another way of classifying and evaluating alternative welfare state arrangements is on the basis of the forms of redistribution they emphasise. Nicholas Barr (1992, 1999, 2001)—a colleague of John Hills at the London School of Economics—points out that the main objective of social security systems in most Organisation for Economic Co-operation and Development (OECD) countries is to provide insurance in the face of adverse risks (unemployment, disability, sickness) and to redistribute across the life cycle, either to periods when individuals have greater needs (for example, when there are children in the household) or would otherwise have lower incomes (such as in retirement). Barr (2001) describes this as the ‘piggy-bank objective’—although it may be more appropriate to think of it as two objectives, a piggy bank or savings role and an insurance role. The second main objective of the welfare state can be described as ‘taking from the rich to give to the poor’—what Barr calls the ‘Robin Hood’ motive. Targeting of benefits through income or assets tests is usually justified as a means of achieving the ‘Robin Hood’ objective. We can categorise welfare states according to which of these two objectives is prioritised. As discussed below, Australia is closer to the Robin Hood end of the welfare state continuum than any other rich country—but does this mean that we are more likely to classify welfare recipients as ‘them’ relative to ‘us’ taxpayers?

BACKGROUND – COMPARING THE ARCHITECTURE OF WELFARE STATES

Spending and taxing

Table 1 compares some of the main features of social spending in the UK and Australia in 2011 (the year to which much of the data in Hills’ book refers) with the OECD average and the range from lowest to highest in the OECD.

In 2011, Australia spent 3.4 per cent of its gross domestic product (GDP) on cash payments for the aged, considerably less than the UK at 5.5 per cent of GDP, but both countries spent less than the OECD average (6.9 per cent of GDP) and certainly much less than the highest spender—Italy—where cash payments to the aged amounted to 13.2 per cent of GDP. Both countries spend less than the OECD average on total cash payments, with spending being particularly low on payments for survivors (widow and orphans) and on unemployment benefits, both countries spent just above the OECD average on disability benefits; Australia spends well above average on ‘Family Allowances’ (that is, Family Tax Benefit), while the UK spends well above average on other family benefits (that is, Tax Credits). It is also notable that the UK has the highest (identified) level of spending on housing benefits in the OECD, a point to which I return.

Australian public spending on health care is below the OECD average, while health spending in the UK is above average, but as shown under ‘Other social spending’, Australian private spending on health care (out of pocket expenses and private insurance) is above the OECD average and the UK is below, so that total public and private health spending are nearly the same, and also at the OECD average for both.

The second part of Table 1 shows estimates of a broader definition of social spending developed by the OECD (Adema & Einerhand 1998; Adema & Ladaique 2005). This broader measure takes account of the role of the tax system, through which governments can: 1) claw back financial support through direct and indirect taxation of benefit income; 2) directly provide support to households (for example, with child tax credits); and, 3) encourage individuals and companies to provide social support (for example, through favourable tax treatment of private superannuation contributions or private health insurance coverage). The broader measure also takes account of other mechanisms of public provision, for example, when governments mandate employers to provide pension coverage or sickness insurance, or when governments regulate the conditions of private health insurance coverage. Furthermore, the private sector, including individuals, can also provide social benefits voluntarily which top-up government regulated provisions.

Both the UK and Australia have low levels of clawback through the direct tax system and Australia also has a low level of indirect tax clawbacks (reflecting the relatively low level and coverage of the Goods and Services Tax). Tax breaks that are similar to direct spending programs are also relatively low, although in both countries superannuation tax expenditures (separately identified) are well above the OECD average, and Australia’s are the highest in the OECD. Net mandatory private expenditure in Australia is close to the OECD average, but well above this level in the UK, while voluntary private social expenditure is above average in both countries and particularly in the UK.

Total government spending is above average in the UK and below average in Australia, with tax revenue being below average in Australia and just on the average in the UK. The composition of tax revenue also varies significantly—Table 2 shows that Australia relies relatively heavily on income taxes but lacks social security contributions. Australia is above average on payroll and property taxes but below average on taxes on goods and services. In 2011, the general government deficit was lower in Australia, as were net debt interest payments. Government gross and net financial liabilities were much lower in Australia than in the UK, but in both cases the UK levels of debt were below the OECD average.

In summary, the UK has higher levels of government social spending than Australia, higher general government expenditure and higher taxation, with higher government debt and a larger Budget deficit. Australia is below the UK and the OECD average on the majority of indicators shown in Table 1—apart from spending on families—and relies more heavily on the private sector for health and education spending than many other rich countries.

PROGRESSIVITY AND REDISTRIBUTION IN TWO LIBERAL WELFARE STATES

The levels of spending and taxing are only part of the ways in which government has an impact on the economy and on society. The extent to which different welfare states redistributes between rich and poor, for example, is determined by the interactions between the tax and spending systems, both in terms of the size and type of taxes collected, the benefits that are paid, but also by the distribution of taxes and benefits—and the ways in which benefits are distributed in Australia and the UK differ markedly from many other rich countries.

As discussed earlier, Australia is the most extreme example of a country using the ‘Robin Hood’ approach to the welfare state (Barr 2001), relying more heavily on income-testing and directing a higher share of benefits to lower-income groups than any other OECD country and a lower share to high income groups—by a very wide margin. The poorest 20 per cent of Australians receive nearly 42 per cent of transfer spending; the richest 20 per cent receive only around 3 per cent. As a result, as shown in Figure 1, the poorest fifth of Australians receive twelve times as much in cash benefits as the richest fifth, the highest ratio in the OECD and about 50 per cent more than the next most targeted country, New Zealand (Whiteford 2010; OECD 2013). If households are ranked by private income—the measure used in income-testing payments—then the poorest 20 per cent of Australians receive 29 times as much in social security benefits as the richest 20 per cent (Whiteford 2014).

This result, however, is mainly driven by the very low share of transfer spending going to the richest quintile in Australia. It is true that the share going to the bottom quintile is the highest in the OECD at about 1.7 times the OECD average, but the share going to the rich is just under one fifth of the OECD average. In effect, this is a distinctive form of targeting to exclude ‘tall poppies’, raising the possibility that the implication of this form of means-testing for the political acceptability of welfare may differ from those in other countries—a point discussed further below.

Figure 1 also shows that the UK also has one of the more targeted social security systems in the OECD, with the poorest 20 per cent receiving about three times as much in benefits as the richest quintile. It is worth noting, however, that Denmark is more targeted than the UK, and all the Nordic welfare states apart from Iceland are more targeted than the United States.

Figure 2 shows the same ‘ratio of transfers’ measure for a wide range of UK (in grey) and Australian (in orange) cash benefits. It is also notable that the extent of targeting varies quite widely between specific programs, and while on the whole, there are many more UK benefits which are less progressive than Australian payments, there are UK payments more progressive than the Australian average.

These differences reflect the differing ways in which the UK and Australia structure their income support payments for people of working age. The OECD Benefits and Wages data (OECD n.d.c) allow comparisons of a number of different household types receiving income support, housing and family benefits. To take the example of a single unemployed adult, in the UK in 2010 they would have been eligible for a Job Seeker’s Allowance of just under 10 per cent of the average UK wage. In Australia, in contrast, a single adult on Newstart would have been eligible for a much higher basic payment of 18.3 per cent of the average Australian wage. (Nevertheless, these are the two lowest short-term replacement rates in the OECD!) However, if a single Australian on Newstart was renting privately they would have been eligible for Rent Assistance of a maximum of just over 4 per cent of the average wage, giving a total benefit payment of 22.5 per cent of the average wage. In the UK Housing Benefit covers all eligible rent, which in the OECD calculations would be worth 18.3 per cent of the average wage. Thus the total package of assistance at 28.2 per cent of the average UK wage gives a higher replacement rate than Australia.

In the case of a lone parent with two children, in Australia they would be eligible for a Parenting Payment of 19.5 per cent of the average wage, Rent Assistance of 5.2 per cent and combined family payments of 24.3 per cent of the average wage, giving a total package of 49.0 per cent of the average wage. In the UK, Income Support for a lone parent was only 9.9 per cent of the average wage, but Housing Benefit was 22.3 per cent of the average wage and combined family payments were worth 20.1 per cent of the average wage, producing a slightly higher overall package of 52.2 per cent of the average wage.

However, if working age people on benefits faced lower rents than assumed and calculated by the OECD then the relative positions of these households could change. Moreover, these income support payments in the UK are those payable for people working less than sixteen hours per week. Any earnings above fairly low levels—£5 per week for a single person and £20 per week for a lone parent would be deducted ‘penny for penny’ from their benefit entitlements; that is, they would face a 100 per cent withdrawal rate. In contrast, in Australia a single unemployed person could earn $62 per week before their benefit was reduced by 50 cents in the dollar and then by 60 cents in the dollar on income above $250 per week. For a lone parent the income test free area was somewhat higher and the withdrawal rate lower at 40 cents in the dollar.

Overall, this produces very different work incentives—the Australian system reinforces the benefits of part time work, while the UK system means that no one has any incentive to work less than sixteen hours per week—or if they do they have no incentive to report it. This also means that comparisons of the numbers of people receiving benefits are not straightforward—a point I will come back to later. For example, the cut-out point—the income level at which households no longer receive income support benefits—is about 11 per cent of the average wage for a single person and 13 per cent for a lone parent in the UK, whereas the corresponding cut-out points in Australia are 33 per cent of the average wage for a single person and 57 per cent for a lone parent. The assets tests for payments are also much more biting in the UK, with claimants for many benefits not being entitled to payments if their assets apart from the family home are above £16,000; the corresponding figure for a single claimant in Australia is $190,000 (and more for couples and non-homeowners).

Virtually by definition this will mean that Australia is likely to have more ‘welfare recipients’ than the UK. Of course, low income households are still receiving assistance at higher income levels in the UK either in the form of Housing Benefit or as tax credits if they are working more than sixteen hours per week, but they will not be classified as receiving ‘welfare’ payments. Paradoxically, if the proposed system of Universal Credit is eventually successfully introduced, it will apparently increase the level of ‘welfare dependency’, simply because the cut-out points for benefits will be further up the earnings distribution.

As discussed above, the Australian approach to means-testing excludes ‘tall poppies’ and is actually much less targeted to the very poor than the UK (or most other OECD countries). The Australian system is the most targeted overall simply because there are no contributory benefits without any means-testing. This probably reflects the fact that a system that only had benefits targeted to the extremely poor would be politically unsustainable as it would not adequately cover the risks that lower and middle income groups face in the labour market and in their personal lives.

To return to Figure 2, it is evident that the most progressive payment is the Australian Parenting Payment—which is simply shown as a label rather than a specific value. This is because Parenting Payments make up so little of the income of the richest quintile that the Australian Bureau of Statistics rounds it to zero. After Parenting Payments, the most targeted benefits in Australia are Family Tax Benefits, but they are not as progressive as Housing Benefit, Tax Credits or Contributory Job Seekers Allowance in the UK. Income Support and Non-contributory Job Seekers Allowance in the UK are also more progressive than most Australian income support payments, reflecting the fact that the income tests on these payments impose higher withdrawal rates than most Australian benefits.

However, the UK State Pension, which is their largest cash benefit, is significantly less targeted than the Australian Age Pension, and Child Benefit is also less targeted than Australian Family Tax Benefits. Overall, this suggests that UK benefits are more diverse in their degree of targeting than are Australian benefits.

One point of interest is whether public perceptions of different benefits are influenced by the degree to which they are targeted. That benefits in the UK are more diverse in their degree of targeting than benefits in Australia raises the possibility that there is more divergence in the UK about which groups are more or less deserving. Moreover, because the cut-out points for most Australian payments are further up the earnings distribution than for means-tested payments in the UK they are likely to include a greater share of the population and payments may therefore be less stigmatising.

In addition, with the exception of the Superannuation Guarantee, the Australian system offers no alternative to claiming means-tested income support (apart from family, charity or deep poverty). In the UK, by contrast, there has been long-standing concern with low take-up of benefits particularly among old people (Hancock et al., 2003) potentially reflecting the different social perceptions of contributory benefits which are ‘owed’ to recipients, and more stigmatised non-contributory benefits.

Given these design features of the two welfare states, what are the distributional outcomes? Table 3 shows a range of relevant outcome measures, starting with income inequality and ending with poverty. As indicated by the Gini co-efficient for market income (A), income inequality before taxes and transfers is much higher in the UK than in Australia. Indeed, this is a specific point made by John Hills in Chapter 2 of Good Times, Bad Times, that the UK has one of the highest levels of market income inequality in the OECD, with only Ireland and Chile having more unequal distributions of the benefits of the market. Australia is very much towards the middle of the OECD pack, ranking seventeenth in terms of market income inequality.

It is also worth noting that while there are fluctuations over time, market income inequality increased significantly in the UK between 1995 and 2012, but actually fell in Australia over this period.

The next two panels illustrate some of the factors contributing to this wider market inequality in the UK, showing trends in the minimum wage relative to the median wage for full-time workers (B) and the extent of low pay (C), defined as the per cent of full-time workers earning less than two-thirds of the median full-time wage. A National Minimum Wage was not introduced until 1999 in Great Britain, but since that time has risen from around 41 per cent to 47 per cent of the median wage; the Australian minimum wage has fallen relative to the median since 1995, but remains above the British level. Correspondingly, the extent of low pay in Australia has remained well below that in the UK, fluctuating over time, but in the most recent figures being about three-quarters the British level (15.8 per cent compared to 20.5 per cent).

Inequality of disposable income (D) is also lower in Australia, with both countries showing fluctuations over the period, but higher levels of inequality at the end of the period. However, the impact of taxes and social security benefits in reducing inequality is greater in the UK than in Australia, with the effectiveness of taxes and transfers increasing over time in the UK, but actually falling in Australia.

Given that Australian benefits are more progressively distributed than UK benefits, why is the impact of the welfare state less than in Australia? As indicated by the social expenditure data in Table 1, this is mainly because the UK collects a lot more in taxes than Australia and spends a lot more on social security. In this sense, this supports the point made by Barr (1992) and Korpi and Palme (1998) that it is interaction between the volume of benefits and progressivity that matters most in terms of reducing inequality.

If we measure social security benefits from household income surveys rather than government finance statistics, benefits have increased in the UK to just under 20 per cent of average household income, but have fallen from 15 per cent to 12 per cent in Australia (F). Similarly household direct taxes were similar proportions of average household incomes in the two countries around 2000 but have fallen by close to seven percentage points in Australia since then, and increased by a similar level in the UK (G). The rise in benefits in the UK is close to the rise in taxes.

In part, this reflects divergent trends in household incomes in the two countries (H). Between 1995 and 2004, real mean household disposable incomes increased at roughly the same rate in Australia and the UK, by just over one quarter. Between 2004 and the onset of the Global Financial Crisis (GFC), household income growth accelerated enormously in Australia as a result of the mining boom. Household incomes in Australia stagnated at the time of the GFC, but then resumed to grow, albeit at a slower rate. In contrast, household incomes in the UK fell and by 2012 were back at the same real level as in 2004.

Poverty rates (I) (that is, the percentage of the population with incomes below 50 per cent of the median) have been higher in Australia than in the UK, and have increased over time, whereas they have fallen over time in the UK, both because of specific initiatives to reduce pensioner and child poverty in the UK, and because Australian median incomes have increased to a much greater extent. In contrast, poverty gaps (J)—the mean difference between the incomes of the poor and the poverty line—have moved in the opposite direction, with Australia having a higher poverty gap at the beginning of the period but lower at the end of the period.

These income trends are clearly of major significance in assessing the mood of the two countries—or at least they should be. Australians on average remain more prosperous than at any earlier time in their history, while the UK appears to have experienced what amounts to a lost decade—both in income growth and market income inequality.

To conclude the first article in this series, it is apparent that, as might be expected from Australia’s British heritage, there are similarities in the way we structure our social policy institutions, but there are also differences that matter. The next article will compare the extent of redistribution at a point in time in the UK and Australia, addressing the question ‘Are the poor too expensive?’

REFERENCES

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Peter Whiteford is a Professor in the Crawford School of Public Policy at The Australian National University, Canberra. He has researched child poverty, family assistance policies, welfare reform, and other aspects of social policy, particularly ways of supporting the balance between work and family life over several decades.

View other articles in this series by Peter Whiteford:

Tales of Robin Hood (Part 4): Social Security and Risk Over the Short and Medium Terms (Digest, Oct 2015)
Tales of Robin Hood (Part 3): The Long View – Social Policies and the Life Cycle (Digest, Oct 2015)
Tales of Robin Hood (Part 2): Are the Poor Too Expensive? Redistribution and the Welfare State (Digest, Sep 2015)

Tales of Robin Hood (part 1): Welfare myths and realities in the United Kingdom and Australia

WELFARE STATE REGIMES AND DESERVINGNESS

BACKGROUND – COMPARING THE ARCHITECTURE OF WELFARE STATES

Spending and taxing

PROGRESSIVITY AND REDISTRIBUTION IN TWO LIBERAL WELFARE STATES

REFERENCES