Tag Archives: Politics

Newstart and DSP Allowances: the brass tax

A guest post by Mick Peel

People reliant on pensions and benefits are recognised as being amongst the poorest in our community. Age and disability pensioners have always received higher payment rates than the unemployed. But since 1997, when the Howard government started to index pensions to average weekly earnings but continued to index unemployment payments to the consumer price index, the gap has widened significantly.

Pensions are indexed in a different manner to Newstart. Pensions are indexed to Male Total Average Weekly Earnings (MTAWE), the Consumer Price Index (CPI), or the Pensioner and Beneficiary Cost of Living Index – whichever is greater. Newstart is only indexed to the CPI. In September 2011, the MTAWE increase was 4% while the CPI increase was 2.5%, which resulted in an increase of $10 for pensions and $6 for Newstart.

Overview

Following the recommendations of the Harmer Review, in September 2009 the federal government increased the single rate of Age Pension by more than $35 per week – one of the largest pension increases in Australian history. This was a welcome change that significantly reduced income poverty among the aged. However, this further widened the gap between Newstart and pensions to the point where the shortfall is now nearly $266 per fortnight. In 1997, a single unemployed person received 92% of what was paid to a pensioner; that ratio is now 65%. There has not been a ‘real’ increase (apart from inflation) in Newstart Allowance since 1995.The Newstart Allowance is the lowest unemployment payment in the OECD for a single person on an average wage who has just become unemployed.[1]

Since 1996, payments for the single unemployed have fallen from 23.5% of the average wage for males to 19.5%. Furthermore, the level of Newstart for a single person has fallen from around 54% to 45% of the after-tax minimum wage. Newstart has fallen from 46% of median family income in 1996 to 36% in 2009-10.[2]

Currently, single unemployed adults receive $490 per fortnight in Newstart payments, or $35 per day. If they’re renting privately, they’re entitled to up to $120 per fortnight in rent assistance. But, to get that amount their rent has to be more than $267 per fortnight, leaving them with just $24.50 per day for all other costs.

Analysis

The real disposable incomes of Newstart recipients have been flat for the past couple of decades, while the real disposable incomes of minimum wage workers have increased modestly (compound annual growth rate = 0.7%). Full-time workers on average earnings have seen steady real income growth (compound annual growth rate = 1.7%), pulling away from minimum wage workers and from Newstart recipients.[3]

dollarcomparisons

[1] Australian Council of Social Services, 2011 http://acoss.org.au/images/uploads/ACOSS_Poverty_October_2011.pdf

[2] Prof Peter Whiteford, ‘Paltry Newstart Allowance is fast becoming a poverty trap’ 20 April 2012: http://theconversation.edu.au/paltry-newstart-allowance-is-fast-becoming-a-poverty-trap-6218

[3] “Newstart recipients” refers to adult recipients with no dependants and no income other than their Newstart payment. Similarly, “DSP recipients” are single, working-age adults who are wholly reliant on their pension. ‘Minimum wage worker’ refers to a full-time employee employed for 38 hours per week at the National Minimum Wage or its historical antecedent, which is taken to be the C14 rate in the Metals award; the worker has no other income and lives alone.

DSP recipients’ incomes started out at around the Henderson poverty line and ended up at the same point, but lagged behind the line for a decade and a half or so.[1] The gap between Newstart recipients’ income and both of the poverty lines has grown, while the gap between both lines and the income of a minimum wage worker has become smaller.[2]

incomecomparison

[1] Henderson poverty line from the Melbourne Institute. Relative poverty line based on ABS 6523 (median equivalised disposable household income).

[2] We don’t have an official poverty line in Australia, be it an absolute line as in the US or a relative line as in Europe.

In short, Newstart recipients’ real incomes have been flat, while those of full-time workers and DSP recipients have grown. The gap between the incomes of people on Newstart and minimum wage workers has grown; the gap between Newstart recipients and their counterparts on DSP has grown further.

The problems faced by the unemployed were recognised by the Henry Review of the tax system, which highlighted the need for a principles-based approach to setting payment levels: “Establishing adequacy benchmarks for transfer payments not considered in the Pension Review would make the system more robust, particularly if the benchmarks were preserved through a common but sustainable indexation arrangement.” This “would mean an increase to base rates for single income support recipients” on Newstart.

The Henry Review also recommended that the maximum rate of rent assistance should be increased and the rent maximum should be indexed by movements in national rents.

Source note: Calculations via Matt Cowgill at the ACTU – real incomes take into account personal income tax liability, the Medicare Levy, the LITO, and the BTO. “1991″ refers to September 1991, with the tax parameters for the 1991-92 fiscal year; each subsequent year uses the same timing. Payment rates from FaHCSIA. Minimum wage rates from FWA/AIRC. Personal income tax rates and thresholds from the ATO. LITO amount and thresholds from the Income Tax Assessment Act 1936. AWOTE from ABS 6302. CPI from ABS 6401.

Advertisements

Unemployment is a Government Policy Choice

A common misconception is that if everybody was prepared to take awful enough jobs, unemployment would be eradicated automatically, irrespective of the government’s fiscal stance. Embedded in this argument is a misconception that unemployment, overall, can be eliminated through lower wages or deteriorating working conditions. In a capitalist monetary economy, this is not true. To think otherwise is to succumb to a fallacy of composition.

Orthodox neoclassical economists clung to this fallacy – many uninformed ones still do – but it has been shown to be unfounded in the Capital Debates as well as by later work by neoclassical general equilibrium theorists themselves. No other economic school of thought (other than the Austrians) ever suggested such a nonsensical notion. It was a fiction dreamed up by neoclassical economists to serve an ideological purpose (it implies everything will be hunky dory as long as markets are left to their own devices).

The reason no other economists ever supposed such a ridiculous relationship between wages and aggregate employment is that, even intuitively, there is no reason to think it would hold. A reduction in the price of anything always means two things simultaneously. It means: (i) somebody has to pay less for something they want; and (ii) somebody else is receiving less for providing that thing. At the aggregate level, it means: (i) all of us, taken as a whole, are paying less for the stuff we want; and (ii) all of us, taken as a whole, are receiving less for providing the same stuff. Why would anyone think this has any systematic effect on how much stuff will be produced in the economy? It doesn’t, as has been demonstrated formally in the Capital Debates and later work.

Unemployment is a government policy choice. Redistributing existing income from workers to capitalists by lowering wages has no systematic effect on aggregate employment. Why would it, necessarily? The lower wages mean workers are cheaper for firms to hire, but demand for consumption goods may be reduced. So is there more or less impetus for firms to undertake production of consumption goods? Is there more or less impetus for firms to undertake production of investment goods that will increase the capacity to produce consumption goods in the future? The answer to these questions is indeterminate. A mere redistribution of income (from wages to profits or vice versa) has no systematic effect on output and employment.

The bottom line is there are not enough jobs. One person may be able to get an existing job ahead of somebody else by offering to work for less pay or under worse conditions, but this does not alter the aggregate level of employment and unemployment in a predictable way. It may cause employment to increase. Then again, it might cause it to decrease. For instance, redistributing income to capitalists may merely raise the intended level of net private saving and reduce the level of planned private expenditures. If so, there will be a multiplied contraction in output and income, defeating the private-sector attempt to increase its net saving unless – and to the extent that – the government allows its budget to move sufficiently into deficit to satisfy private-sector net saving desires.

Unemployment is the result of the non-government sector wishing to net save more than is consistent with full employment, given its current level of net financial assets. The government has the capacity to eliminate unemployment, because it can alter the net financial asset position of the non-government sector. The non-government sector cannot do this on its own. It can redistribute existing net financial assets among its members, hoping that in some way – by sheer fluke – this will reduce private-sector net saving desires and boost demand, production and employment, but it can’t of its own accord increase its net financial assets.

By injecting sufficient additional high-powered money into the system (through deficit expenditure), the government is in a position to increase private net financial assets and render the non-government sector’s net saving behavior consistent with full employment. That is the straightforward solution to unemployment, and we can have it the moment the general community puts its collective foot down and insists on it.

This is a modified version of Unemployment is a Macro Problem originally published at Heteconomist

My Reaction to Gillard’s Luna Park Speech

Most of you should be familiar by now that I primarily blog over at Modern Money Mechanics on the MMT framework which is the operational framework for any modern fiat currency for a sovereign currency that freely floats on the foreign exchange.

Based on my understanding of these I live tweeted the following during the speech to the Sydney Institute.

    1. Laughing at her cries for a surplus by 2012/13 – think of the unemployment it will create

    1. The unemployed aint currently scarce, there’s 490 000 of them + those underemployed Ms. Gillard

    1. So anyone that can’t get a job should go work in the mines Ms Gillard #abcnews24

    1. Sounds like Abbott with under 30s

    1. Gillard expecting to ride on the forthcoming commodity bubble like Howard before her on the previous one #abcnews24

    1. The GST is unnecessary Ms. Gillard #mmt #abcnews24

    1. If you saw the human faces behind unemployment you would understand a surplus/defict is an outcome not a policy tool #abcnews24

    1. Finally something sensible, if you don’t give the unemployed an entry level job #abcnews24

And in my view the budget was just as bad. Just quickly Gillard summed up Wayne Swan’s budget like this:

Tuesday night’s Budget reflects the values of the Gillard Labor Government – we believe in getting more people into work and training them for more rewarding jobs. It means national prosperity can reach more lives, in more corners of our patchwork economy.

My response was: –

but you haven’t created any jobs and nor has the private sector as indicated by today’s fall in participation rate therefore you are wrong. You can retrain people as much as you like but if the jobs aren’t there it is a waste of time. Superficially your unemployment rate looks good because of that fall in participation.

The Henry & Ergas Tax Reviews

Conclusions of two independent tax reviews

Click to Enlarge

It is clear from the outset that the independent reviews on the Australian Tax system have plenty of common ground. Both agree on land taxes, changes to company tax, road use taxes and the extension of payroll taxes by removing exemptions.

The Henry Ergas Tax Review was commissioned by then Shadow Treasurer, Malcolm Turnbull back in April 2007. The Rudd government followed suit in May 2008 with the budget after the Ergas review finally began in March 08.

Both reviews are now completed and currently gathering dust.

The Rudd government has consistently said it would release the Henry review in early 2010. Most recently, the Treasurer, Wayne Swan has said the review would be released by Budget time.

Both reviews may agree on changes to company taxes but differ on what changes to be made.  Ken Henry reckons cutting company tax below 30% but no lower than 25% will be quite beneficial.  Henry Ergas believes company tax should be treated as a resource rent tax.

What is currently in the public domain of the Ken Henry Tax Review does not seem to mention income taxes. The Ergas Review as shown above however does suggest a 20% flat income tax1.

Not completely flat, because that would be too hard on low-wage earners. By setting the flat rate at 20 per cent and by retaining a tax-free threshold and also making ”negative income tax payments” to low-income earners, the system would become somewhat progressive but also ”as close to flat as one could reasonably get”.

Peter Martin

The Henry review believes mining companies have been treated too generously. It expressed bemusement at the 50 per cent discount applied to income taken in the form of capital gains introduced by John Howard at the start of this decade, noting that income earned from work attracts no such concession. It will recommend either a higher resource rent tax or a switch to a resource profit tax.

The broad principle has received cautious approval from the Minerals Council of Australia. Peter Martin

The Henry review will recommend payroll taxes be extended by withdrawing a range of exemptions as it sees them as pretty harmless.

There are taxes that do genuinely hurt employment, and the review believes they are those that discourage foreign firms from setting up here and staying here.

Payroll tax would stay under the Ergas Review and the exemptions be removed to strengthen state taxing powers and the states would be invited to impose their own income and consumption taxes on top of the Commonwealth’s. States that charged too much would suffer from tax competition. States that charged too little would offer inadequate services. Peter Martin

This is broadly in line with the Garnaut review on carbon trading which says there should be a global system in place and a national scheme can be operated on top of that as well. The Ergas review of Payroll tax suggests the same thing at a national and state level.

Whilst I have not covered everything, as you can see two economists from ideologically opposed sides can broadly agree on many issues. If only it was the same for our parliamentarians and the broader public debate.

If you wish to know more about what is currently in the public domain, check out my sources:-

Ergas Tax Review
What to Expect of Ken Henry
Tax, Tax, Tax
The Henry Tax Review: not quite as leaked

Peter Martin, what would we do without you?

1 See Essays for more information on Flat Taxes.

Parental Leave Wars

Mark Bahnisch writes on Unleashed:

The Government’s scheme would pay eligible recipients the adult federal minimum wage ($543.78) for 18 weeks. Other benefits and transfers available would provide support equivalent to six months.

Abbott’s scheme would pay someone on $150 000 a year $75 000 for six months. (The full replacement of the wage being the reason why his plan would cost close to $3 billion dollars rather than the government’s $300 million a year). But someone on less than the current minimum wage would presumably only receive what they earn.

The article goes on to link to the original Larvatus Prodeo post which in turn links to the original Tony Abbott speech.  I attempted to follow that link today and got a 404 error.

However, a quick search of the Liberal Party site from there linked me to something called Direct Action Plan on Paid Parental Leave.  It says:

The Coalition’s Paid Parental Leave scheme will:

  • provide primary carers with 26 weeks paid parental leave, at full replacement pay (up to a maximum salary of $150,000 per annum) or the Federal minimum wage, whichever is greater;
  • be available to all employees in the public and private sector, including contractors and the self-employed; and
  • include superannuation contributions at the mandatory rate of nine per cent.

Carers will not have to be working full-time to access the Coalition’s Paid Parental Leave scheme because it uses the same ‘work-test’ as the government’s proposal which requires:

  • an average of at least one conventional day of paid work a week;
  • over a ‘continuous qualifying period’ which amounts to a least 10 months of the 13 months prior to the expected date of birth.

It shows that those earning less than minimum wage will receive minimum wage on parental leave. It also shows at the very least, the political bare bones of the package shows that the Tony Abbott Coalition’s plan is superior to the one offered under the Rudd government for the parents that would receive parental leave.

Predicting the Election

In the modern era of politics, we are lucky to have features such as routine consistent polling and the advent of an election calculator / pendulum.

In 2007, Kevin Rudd’s Australian Labor won the election with 52.7% of the Two Party Preferred (2PP) vote.  The exact same figure John Howard’s Liberal Party retained by in 2004.  This was a swing of 5.4% against the incumbents.

It saw Labor gain 23 electoral seats though a uniform swing of 5.4% only implied a gain of 21 seats.  It did however correctly predict 17 of those 23 seats.  Four of the predicted seats were retained by the Liberal National Coalition (LNP), all of the still considered fairly marginal seats.  The seven seats that were not predicted by the electoral calculator suffered much greater swings than expected but every single one of them can also be considered marginal.  This means their is a greater chance of them going to an opposing party at election time.

This result was also very close to Newspoll’s polling near the election date of 53-47 in favour of Labor.  The overall polling throughout the election year was always in favour of Labor and their numbers varied anywhere from 54  to 59 on a 2PP basis which is still above the end result of 52.7 or 53.  Electoral calculators will never be accurate but they are a useful assessment tool.

Rudd Labor has consistently been polling around 56 or 57% and the excessive predicted margin recorded by polls in the last election, this end result is unlikely.  It is not however beyond the realms of possibility however as Harold Holt won the 1966 election with 57% of the vote.

Using data from 1949 since the advent of the Liberal Party as we know it today, the average 2PP of the winning party is 52.1%.

As most polls claim a margin of error of +/-3%.  This would make Labor’s polling more like 53 or 54% on the 2PP which is much closer to the last election result on a 2PP basis.

This gives us about three scenarios for predicting the number of seats at the next election, a 2PP of 52.1, 52.7 (53) or 56%.

If the 2010 Federal election was concluded on a 52.1% 2PP basis, the LNP would arguably gain the following seats:

Herbert*
Gilmore
Macarthur
Macquarie
Robertson
Solomon
Swan*

This would give the LNP 66 seats, not nearly enough to form government and there is probably room for argument against Herbert and Swan.

If the 2010 Federal election was concluded on a 52.7/53% 2PP basis, there would be no net gain of seats for either side.  A possibility of two for Labor but that is highly debatable.  So for the purpose of this exercise we will use the 54% 2PP in favour of Labor which would see them arguably gain the following seats:

Bowman
Cowper*
Hughes
La Trobe
Macquarie
McEwen
Paterson
Ryan*
Stirling*
Sturt

This would see Labor have 97 electoral seats which is 21 in excess of what is required to retain government.  Three of those are quite debatable.

If the 2010 Federal election was concluded on a 56% 2PP basis, Labor would arguably gain the following seats:

Boothby*
Bowman
Cowan
Cowper
Fairfax*
Hinkler
Hughes
La Trobe
McEwen
Paterson
Ryan
Stirling
Sturt

This would see Labor have 101 seats in Federal parliament, 18 more than they currently have.  Two of which could be in doubt using the 2PP as a guide.

With the options of losing up to nine seats, or gaining 10 or 13 seats, it is near impossible for Kevin Rudd to lose the election.

Forgotten Australians

As a counterpoint to the apology to the Indigenous Australians of the “stolen” generations, Prime Minister Rudd has also apologised to the Forgotten Australians.

The Forgotten Australians being the half a million Australians who grew up in institutions, orphanages and foster care through the last century that were exploited and mistreated under the care of the State.

Kevin Rudd said:

So many Senate reports, nearly a decade of deliberation and a unanimous recommendation that the Commonwealth apologise and finally we do so today. The truth is this is an ugly story and its ugliness must be told without fear or favour if we are to confront fully the demons of our past. And in so doing animate once again the better angels of our human nature.

Yet this apology is without the fanfare of a national television audience or broadly publicised around the world as the apology to the stolen generations.

So was more weight given to the Stolen Generations unnecessarily? Or is there no moral equivalence with the Forgotten Australians? Just a lesser equivalence.

Over half a million against this many. Where is the justification?  There should have been a broad public fanfare for these Australians as well!

I wonder if there is grounds for compensation claims for these individuals as some indigenous members sometimes advocate.

Nonetheless the apologies have been made and largely accepted.

It is time to remove the culture of passive victim-hood from both the stolen generations and the forgotten generations and for both to move on and be upstanding members of the community.

Thank you Kevin for providing some social equality for all these Australians.