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September 2015 Tales of Robin Hood (part 2): Are the poor too expensive? Redistribution and the welfare stateJohn Hills Good Times, Bad Times: The Welfare Myth of Them and Us, Policy Press, Bristol, 2014 (336 pp). ISBN 9781447320036 (paperback) RRP $45.99. The welfare states of Australia and the United Kingdom share much, but not everything, as I showed in the first article in this series comparing the two countries, working with John Hills’ findings about the UK in Good Times, Bad Times: The Welfare Myth of Them and Us and my own analysis of the corresponding data for Australia (Whiteford 2015). In Chapter 2 of the book, Hills looks at ‘snapshots’ of redistribution in the UK combining a ‘case study’ approach with national survey data on the distribution of direct and indirect benefits and taxes.
Throughout Good Times, Bad Times, Hills illustrates his analysis quite concretely with ‘case studies’ of two generations of fictional families, the Osbornes and the Ackroyds. He looks at how they pay into and benefit from the welfare state, at points in time, throughout their lives and over three generations. The younger Osbornes are a well-off two-parent family with a two year old child, while the Ackroyds are single parent family, with an eight year old child, living in social housing. Naming the well-off family the Osbornes may seem to refer to the current Chancellor of the Exchequer, George Osborne. However, the Osbornes of Alderley Edge in Cheshire and of the Ackroyds of Salford in Greater Manchester first appeared as fictional characters in a 1989 World in Action television documentary, Spongers. Like Hills’ book, Spongers attempted to uncover whether the middle classes of the time were being ripped off by having to contribute so much for the upkeep of the working class and poor. (The short answer was no.) But what if we were able to transport the Osbornes and the Ackroyds from their home country to the former colony? Fortunately, the Australian Bureau of Statistics conducts almost exactly the same kind of statistical analysis as the UK Central Statistical Office (Australian Bureau of Statistics 2012; Whiteford 2014), and Table 1 replicates the circumstances of the two young families under the benefit and tax systems of the two countries.
Not surprisingly, there are many complexities in these comparisons, which the table glosses over. The figures for the UK are based on the 2010 year, while the figures for Australia are based on the parameters of the tax and benefit systems in January 2015. If anything, however, this temporal mismatch is likely to favour the UK, where real wages have been falling since 2009 (Levy 2013) and working-age benefits and tax credits have been cut in real terms or limited in recent years (Belfield et al. 2014). Nevertheless, it is better to concentrate on the second part of the table, where the impact of taxes and benefits is calculated relative to the market earnings of each family.
Remember that the younger Osbornes are an upper-middle income family—Henry is 29 years old and earns around £40,000 pa, which puts him in the top 10 per cent of men of his age, while his wife is in paid work for three days a week. The Osbornes use paid child care for two days a week. Michelle Ackroyd is 28 years old and in paid work for 16 hours per week, which means she is eligible for tax credits rather than income support; her child goes to school. Transporting them to Australia means that the Osbornes are assumed to have the same combined earnings (translated by average exchange rates over the past twelve months), then subject to the Australian family benefits and tax systems. Michelle Ackroyd works sixteen hours per week at the Australian minimum wage and also under current welfare and tax parameters. The Osbornes’ earnings are the same in both countries in exchange rate terms, but Michelle Ackroyd’s are higher in Australia because of our higher minimum wage. In the UK, the Osborne’s receive some relatively small direct cash benefits, but in Australia they receive none. In both countries, the Ackroyd family receives substantial cash benefits, but these are higher in Australia even as a percentage of the already higher market earnings. The middle class family pays higher direct taxes in the UK—these include Council Tax, but local government rates are included in indirect taxes in Australia. The working lone parent pays higher direct taxes in Australia—a result which surprised me, but is possibly explained by the fact that both earnings and taxable benefits (Parenting Payment Single) are higher in Australia. At 80 per cent in the UK and 81 per cent in Australia, the cash disposable incomes of the middle class families relative to earnings are very similar in both countries, but the lone parent is better-off in Australia (at 284 per cent of market earnings, compared to 247 per cent in the UK). Housing benefits in kind for low income families are much greater in the UK, but this also reflects the fact that housing benefits in cash are included in the cash benefit figure for Australia. Adding together cash and non-cash housing benefits in the UK would give total housing-related assistance of around £2,700 per year or 12.3 per cent of final income. In the case of Australia I have assumed that the Ackroyds are in private rented accommodation and receiving maximum Rent Assistance of $3,900 per year, or 7.8 per cent of their final income. Around 41 per cent of lone parents with one child were in this tenure in 2009–10 compared to around 13 per cent in public housing, but if the Ackroyds were in Australian public housing then the imputed rental subsidy could be up to twice as high. Indirect taxes are significantly heavier and more negative in the UK, and as a result total taxes are heavier on both families there. The main benefit available to the Australian middle income family, apart from health coverage, is support for child care—although this still leaves them about $7,000 per year out of pocket. Another difference is in the treatment of private pensions or superannuation contributions. In the UK the high income Osbornes personally contribute 7 per cent of their wages into a private pension, thereby lowering their take home pay, while the lower income Ackroyds are not covered by a private pension at all. In contrast, in Australia, both families benefit from contributions from their employers into their superannuation accounts. Looked at in terms of total net transfers (benefits minus taxes), net transfers are a much higher proportion of original earnings in the UK, with the Osbornes paying 28 per cent of their earnings in net taxes in the UK compared to 10 per cent in Australia. For the Ackroyds, positive net transfers are higher in the UK—relative to their somewhat lower earnings from paid work. The table shows that in the UK, the net transfers from the middle income family and to the low income family are roughly the same, at around £16,000. It is striking that this symmetry is not replicated in Australia. Here the transfers to the working lone-parent are 2.6 times as great as the net taxes paid by the Osbornes. In part, this is due to the greater assistance with child care costs received by the Osbornes in Australia, and also by the fact that the taxes on middle income families are greater in the UK.
But if the benefits received by the Ackroyds are not markedly different between the two countries, where do these higher taxes in the UK go? Part of the answer to this is that the UK has a range of contributory benefits, particularly the state retirement pension. So this destination for tax revenue is not included in the comparison of these young working age families. It is possible to broaden out the picture beyond the examples of the Osborne and Ackroyd families. Table 2 shows the distribution of benefits and taxes in the UK and Australia by quintiles of equivalised household income. To facilitate comparisons all components are standardised by being expressed as percentages of average disposable income in each country. Accordingly, the first row of Table 2 shows that the private income of households in the lowest quintile is 16.1 per cent of average household disposable income in the UK and 17.3 per cent in Australia. For the richest quintile, average private incomes are 16.5 times higher than in the poorest quintile in the UK, but 13.7 times higher in Australia. The table confirms the considerably greater progressivity of transfers in Australia discussed in detail in the first article in this series (Whiteford 2015), with high income British households receiving cash benefits that are 28 per cent of those paid to the poorest quintile, while the corresponding Australian figure is just 7 per cent. In the case of the UK it is possible to separate contributory from non-contributory benefits (for an explanation, see Whiteford 2015) and—as expected—non-contributory benefits are significantly more progressive than contributory benefits. Direct taxes are also much more progressive in Australia: the richest quintile pays nearly 50 times as much as the poorest quintile, compared to 16.7 times as much in the UK. But as discussed earlier, the weight of taxes and benefits is higher in the UK than in Australia, so that the tax and transfer system reduces disparities in incomes more in the UK. It is also possible to make a calculation of net transfers, which is simply the sum of all cash and non-cash benefits (such as health, education and housing) received by each income group minus the value of direct and indirect taxes paid by that income group. Interestingly despite the greater weight of taxes and transfers in the UK, the turning points—where households move from ‘getting more’ out of the system than they contribute at a point in time occurs in the fourth income quintile in each country—although the somewhat lower level of negative transfers in Australia for this quintile suggests that the turning point would be a little higher in the income distribution here.
Table 3 shows related estimates of the components of final income for different income quintiles in Australia and the UK in 2009–10, in this case with income components adjusted to Australian dollars using purchasing power parities (which adjust for the relative costs of living in each country).
As before, private incomes are higher for all income groups in Australia, while on average cash benefits are higher in the UK except for the lowest income quintile. Benefits in kind are higher in Australia for all income groups, while direct and indirect taxes are lower in Australia for all income groups, and as a result final incomes are higher in Australia for all income groups. On average, all income groups in Australia have considerably higher incomes in purchasing power terms than corresponding groups in the UK—ranging from around 38 per cent higher for the lowest income quintile to 15 per cent higher for the richest quintile. In addition, as could be expected, while the private and final incomes for all households on average are similar (more so in the UK than in Australia), the effect of redistribution is to increase the incomes of low income groups and reduce the incomes of high income groups. For example, the final income of the poorest income quintile in Australia is 3.4 times their private incomes, while for the richest quintile their final incomes are 79.5 per cent of their private incomes; the corresponding figures for the UK are 3.1 and 74.5 per cent.
To assess the effects of these different income components on inequality, Table 4 shows an estimate of the distribution of benefits and taxes in each country, the weight of benefits and taxes, and the impact of benefits and taxes on income disparities. Distribution is the ratio of the benefits received by the poorest quintile to those received by the richest quintile and the ratio of the taxes paid by the richest quintile to those paid by the poorest quintile, respectively. Weight is the level of benefits and taxes as a percentage of final income. Impact is the difference between the Q5 to Q1 ratio as a result of adding each income component. As a starting point, it is worth noting that data presented in Tables 2 and 3 suggest that overall income disparities are narrower in Australia than in the UK, as the Q5 to Q1 ratio for final income is 3.21 in Australia and 3.84 in the UK. However, the Australian data include imputed income from owner-occupied housing which will have an inequality reducing effect not included in the calculations for the UK.
The progressivity of cash benefits is greater in Australia than in the UK, with the poorest quintile of households receiving nearly 15 times as much as the richest quintile, compared to a ratio of 3.4 to 1 in the UK. However, the overall weight of benefits in the UK at 17.5 per cent of final income is greater than in Australia at 10.4 per cent of final income, and this greater weight means that the UK benefit system actually reduces income disparities by more than the Australian benefit system. Similarly, even though the direct tax system is more progressive in Australia than in the UK, the greater volume of taxes in the UK means that the two systems reduce disparities to a very similar degree. Comparisons of the impact of non-cash benefits are complicated by the fact that the approach used varies between countries, with the Australian Bureau of Statistics adding non-cash benefits to disposable income before deducting indirect taxes, while the Office for National Statistics in the UK deducts indirect taxes before adding non-cash benefits. This difference in ordering does not affect either the progressivity of these benefits or taxes and their weight but will have an effect on their measured impact, since the starting point differs between countries. However, these figures suggest that non-cash benefits reduce inequality to a somewhat greater extent in the UK than Australia, but that indirect taxes have a stronger effect in the UK in widening disparities. It is also worth noting that in both countries indirect taxes appear to increase disparities by about as much as direct taxes reduce disparities, but as noted above, taxes are necessary to pay for the spending which appears most effective in reducing inequality. Comparing the Osbornes and Ackroyds has given us some sense of the impact of taxes and welfare spending on two kinds of family household at the same stage of life. It is also possible to compare the distribution of taxes and benefits across a wider range of typical household arrangements to approximate the life cycle distribution. These calculations are shown in Table 5, with the figures once again standardised to percentages of overall average household disposable income in each country. In both countries, only working age singles and couples without children are, on average, net taxpayers, although couples with children nearly balance out the taxes they pay and the benefits they receive. So at a point in time, it appears that households without children are ‘paying’ for families and for older people. It should be remembered, of course, that many younger households currently without children will go on to have children in future, while many older households will have had children who have grown up and left home; in addition, the vast majority of younger households will go onto to become retired households. Moreover, one of the indisputable facts of human life is that all adults have been children, so that from an individual perspective they will have already benefited from spending on families and on education.
It can be calculated from Table 5 that, in the UK, retiree households constitute 26.8 per cent of all households, but receive 47.5 per cent of all cash benefits, 37.2 per cent of health spending and 34.2 per cent of total social spending, and pay 11.5 per cent of all direct and indirect taxes. In Australia, households with a reference person 65 years and over constitute 17.6 per cent of households and receive 32.5 per cent of cash benefits, 29.9 per cent of health spending, 23.6 per cent of all social spending and pay 5.2 per cent of all direct and indirect taxes. These data show that older people constitute a significant share of welfare state spending, more so in the UK than in Australia. Standardising for the population share of older households, Australia is actually slightly more ‘generous’ to older households, so the difference between the UK and Australia is almost entirely due to demography—the fact that the UK simply has a higher proportion of older households—nearly 50 per cent more, in fact. That the UK has a more ‘old age-oriented’ welfare state will become more important as the focus of analysis shifts to measures of redistribution across the life course, the topic of the next instalment in this series. REFERENCESAustralian Bureau of Statistics 2012, Government Benefits, Taxes and Household Income, Australia, 2009–10, Cat. no. 6537.0, Australian Bureau of Statistics, Canberra. Belfield, C., Cribb, J., Hood, A. & Joyce, R. 2014, Living Standards, Poverty and Inequality in the UK, The Institute for Fiscal Studies, London [Online], Available: http://www.ifs.org.uk/uploads/publications/comms/r96.pdf [2015, Jul 24]. Levy, S. 2013, Changes in Real Earnings in the UK and London, 2002 to 2012, Office for National Statistics [Online], Available: http://www.ons.gov.uk/ons/rel/regional-trends/regional-economic-analysis/changes-in-real-earnings-in-the-uk-and-london--2002-to-2012/art-changes-in-real-earnings-in-the-uk-and-london--2002-to-2012.html [2015, Sep 23]. Office for National Statistics 2015, The Effects of Taxes and Benefits on Household Income, 2009/10 [Online], Available: http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/2009-2010/index.html [2015, Jul 24]. Whiteford, P. 2014, ‘What difference does government make? Measuring redistribution in a comparative perspective’, in Measuring and Promoting Wellbeing, How Important is Economic Growth?, eds A. Podger & D. Trewin, ANU Press and Academy of Social Sciences in Australia, Canberra [Online], Available: http://press.anu.edu.au/titles/australia-and-new-zealand-school-of-government-anzsog-2/measuring-and-promoting-wellbeing/pdf-download/ [2015, Sep 20]. Whiteford, P. 2015, ‘Tales of Robin Hood (Part 1): Welfare myths and realities in the United Kingdom and Australia’, Australian Review of Public Affairs [Online], Available: http://www.australianreview.net/digest/2015/09/whiteford.html [2015, Sep 20]. 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:
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