When Garnaut met Henry: the carbon price and welfare reform

Parliament house flag post

When Garnaut met Henry: the carbon price and welfare reform

Posted 24/03/2011 by Michael Klapdor


Professor Ross Garnaut’s recent update paper no. 6 to the Garnaut Climate Change Review, released on 17 March 2011, found that ‘protecting the most vulnerable is critical to the success of the carbon price’. Professor Garnaut found that while reforms to income taxation would, for most taxpayers, assist in mitigating the effects of a rise in the price of consumer goods resulting from the introduction of a carbon price, those on little or no income could face hardship unless reforms are also made to the social security system.

Garnaut sees the introduction of carbon price as an opportunity for reform, holding that significant benefits to productivity, participation and income could be secured by a ‘judicious use of the revenue from the carbon price’. He points to the Henry Review of Australia’s Future Tax System as a blueprint for possible changes to the tax and transfer system that will enhance economic and social outcomes, help households dealing with the negative effects of a carbon price and possibly assist in efforts to reduce Australia’s carbon emissions by encouraging households to switch away from emissions-intensive goods.

The recommendations for reform of social security by the Henry Review are not examined in any detail by the Garnaut paper. They seek an overhaul of the structure and operation of the system, including:

  • Basing the income support system around three categories of payment: a pension category for those who are not expected to support themselves through work (because of age or disability), a participation category for those who are expected to support themselves at work (paid at a lower rate to pensions but a basic level of adequacy), and a student assistance category for those in full-time study. The effect of this would be to simplify the current system consisting of a multitude of different payments to one where the particular needs of certain groups within these categories, such as carers or parents, could be met through supplements rather than separate payments.
  • Increasing the payment rates for income support recipients in the proposed participation and student assistance categories (current Newstart and Youth Allowance recipients). The Henry Review found significant inconsistencies in the relative payment rates for singles and couples within the different payment categories. It noted that, according to OECD measurements of poverty, those receiving the Newstart and Youth Allowances are in poverty and receive the equivalent of 31 per cent of net median income.
  • Indexing payments and income tests consistently to maintain the relativities between different payment types. The current differences in indexation between pensions and allowances (see below) have seen a large and widening gap emerge between payment types, significantly affecting the equity and efficiency of the social security system. According to projections by the Henry Review, if the current indexation arrangements were to remain in place, it is likely that by 2040 a single pensioner would be paid twice as much as an unemployed person.
  • Replacing the two-part income and assets test with a comprehensive means test that determines access to all income support payments and which takes account of the ability of a person to generate income from their assets. Currently, different income and assets tests apply to different payment categories with different assets being taken into account by the different tests. This results in people receiving different amounts of payment despite having the same means or level of wealth.
  • Replacing multiple family payments with one single payment designed to reflect the additional costs of raising children as they age. The payment should be means tested in accordance with family taxable income so as to minimise workforce disincentives (i.e. high effective marginal tax rates when parents return to work–see below).
The recommendations to increase fairness across the welfare system in terms of rates of payment would be costly to introduce but could be very effective in addressing disadvantage amongst particular sections of the community. The Henry Review envisaged that the expense of improving the equity of the transfer system would be offset by increased participation (and thus less people on welfare) as a result of inbuilt incentives for those of workforce age to take up employment. Closing the gap between the participation and pension category payment rates would reduce the incentive for individuals to find a way into the higher payment category rather than seeking work.

Garnaut does not take up the Henry Review’s recommendations for reform of the social security system. Rather, in suggesting how best to assist low-income households following the introduction of carbon price, he looks to measures used following the introduction of the Goods and Services Tax (GST): bringing forward indexation and introducing a pension supplement.

Indexation of payments (at least in line with the Consumer Price Index (CPI)) can insulate welfare recipients from price rises following the introduction of a carbon price. However, Garnaut admits that the current CPI measure and timing of indexations are not perfect. The CPI does not accurately reflect the different goods purchased by different income groups and the indexation of payments can occur months after households are affected by price increases. The paper suggests that indexation could be brought forward to correspond to the introduction of a carbon price, as happened when the GST was introduced, but care would need to be taken to ensure that price rises faced by low-income households are not overstated and that existing high marginal effective tax rates are not made worse. Effective marginal tax rates—the percentage of an income increase lost to tax and income tests on welfare payments—can act as disincentives to entering the workforce or to increasing workforce participation. Garnaut warns that increasing social security payments through indexation, if not done carefully, can contribute to this disincentive. Too high an increase would mean that less income is effectively gained by taking up employment.

The indexation of pension payments (such as Age Pension and Disability Support Pension) is calculated differently from other social security payments. Pensions are indexed twice a year according to the higher of two different indexes: the CPI and the Pensioner and Beneficiary Living Cost Index. Pensions are also benchmarked to 25 per cent of male average weekly earnings (the single base rate cannot fall below 25 per cent of male total average weekly earnings–MTAWE). The MTAWE benchmark was introduced in 1997 and has driven the increase in pensions since then. The Harmer Review of pensions found that wage growth has increased the real value of pension rates by around 20 per cent since 1997 while, in the same period, Newstart and Youth Allowance have remained unchanged in real terms. The introduction of a carbon price could see prices rise more than wages in which case pension increases would be driven by the greater of the two different indexes.

The Garnaut paper suggests that a supplement (indexed to prices) be introduced for pensions. This would provide greater assistance to this particularly vulnerable group of income support recipients following the introduction of a carbon price and would preserve their real income over time. A similar supplement was introduced following the introduction of the GST with the purpose of offering a real increase to pension payments beyond what indexation would offer. Providing pensioners and not other income support recipients with an income supplement would, however, exacerbate the widening gap between payments rates for pension and allowance recipients.

While Garnaut promotes the introduction of a carbon price as an opportunity for reform, and offers the Henry Review as a blueprint for such reform of the tax and transfer system, he chooses to focus on short term measures for assisting low-income earners during the transition period. However the virtues of the Henry reforms are also recognised by Garnaut as a means of effecting growth in wages and increased workforce participation; helping to offset any short-term negative effects on productivity growth and incomes following on from the introduction of a carbon price. It remains to be seen whether the Government will focus on short-term measures or whether it will undertake the kind of tax and transfer system reforms that the Henry Review proposed.

(Image sourced from http://www.taxreview.treasury.gov.au)


Thank you for your comment. If it does not require moderation, it will appear shortly.

Add your comment

[Click to expand]

We welcome your comments, or additional information which is relevant to a post. These can be added by clicking on the ‘Add your comment’ option above. Please note that the Parliamentary Library will moderate comments, and reserves the right not to publish comments that are inconsistent with the objectives of FlagPost. This includes spam, profanity and personal abuse, as well as comments that are factually incorrect or politically partisan. We will close comments after three months.




Captcha
Generate a new image
Type characters from the image:

Facebook LinkedIn Twitter Add | Email Print

FlagPost

Flagpost is a blog on current issues of interest to members of the Australian Parliament


Parliamentary Library Logo showing Information Analysis & Advice

Archive

Syndication

Tagcloud

Refugees asylum climate change immigration Australian foreign policy parliament social security welfare policy elections welfare reform school education Australian Defence Force health financing higher education emissions trading indigenous Australians women private health insurance people trafficking illicit drugs gambling health reform federal election 2010 United Nations Employment Asia Afghanistan disability income management Middle East Medicare Australian Bureau of Statistics statistics sport health forced labour United States federal budget Industrial Relations Carbon Pricing Mechanism politics dental health criminal law transport aid child protection environment poker machines Australia in the Asian Century Australian Sports Anti-Doping Agency steroids World Anti-Doping Agency National Disability Insurance Scheme detention aged care 43rd Parliament slavery health system Law Enforcement Australian Federal Police Fair Work Act Australian Public Service governance labour force people smuggling debt taxation international relations constitution New Zealand food WADA Australian Crime Commission pharmaceutical benefits scheme corruption pensions public service reform children's health Aviation foreign debt gross debt net debt defence capability parliamentary procedure Senate Senators and Members ALP ASADA Newstart Parenting Payment multiculturalism Youth Allowance sea farers terrorist groups science social media Higher Education Loan Program HECS federal state relations accountability Papua New Guinea youth paid parental leave same sex relationships coal seam gas customs planning federal election 2013 Australian Electoral Commission doping OECD crime health risks International Women's Day Gonski Review of Funding for Schooling sex slavery Special Rapporteur Northern Territory Emergency Response social policy terrorism transparency research and development Mental health welfare ASIO intelligence community Australian Security Intelligence Organisation carbon tax mining High Court military history electoral reform employer employee renewable energy regional unemployment fishing European Union Federal Court family assistance skilled migration banking United Nations Security Council Australian economy forestry food labelling vocational education and training Drugs UK Parliament welfare systems Indonesia children Constitutional reform local government codes of conduct terrorist financing homelessness Parliamentary remuneration money laundering Trafficking in Persons Report energy social inclusion human rights paternalism integrity standards NATO Australian Secret Intelligence Service sexual abuse World Trade Organization Australia public health China housing affordability bulk billing political parties water productivity health policy Governor-General US economy trade unions domestic violence export liquefied natural gas foreign bribery firearms question time speaker superannuation public housing election results by-election expertise public policy climate Intergovernmental Panel on Climate Change leadership voting Department of Agriculture Fisheries and Forestry regulation Pacific Islands reserved seats new psychoactive substances synthetic drugs UNODC carbon markets animal health middle class welfare ADRV Census Indigenous constitutional recognition of local government referendum consumer laws PISA competition policy royal commission US politics violence against women language education baby bonus Leaders of the Opposition citizen engagement policymaking Australia Greens servitude Trafficking Protocol forced marriage Population rural and regional alcohol entitlements ministries Hung Parliament social citizenship maritime Iran ANZUS regional students school chaplains federal budget 2011-12 salary Medicare Locals primary care Building the Education Revolution Bills anti-corruption fraud bribery corporate ownership whistleblower G20 economic reform innovation Members of Parliament Scottish referendum early childhood education Middle East; national security; terrorism social services Criminal Code Amendment (Misrepresentation of Age to a Minor) Bill 2013 online grooming sexual assault of minors ACT Assembly national security smoking plain packaging tobacco cigarettes Asia; Japan; international relations Work Health and Safety Migration; asylum seekers; regional processing China; United States; international relations fiscal policy Racial Discrimination Act; social policy; human rights; indigenous Australians Foreign policy Southeast Asia Israel Palestine asylum refugees immigration political finance donations foreign aid disability employment Economics efficiency human rights; Racial Discrimination Act employment law bullying asylum seekers Animal law; food copyright Australian Law Reform Commission industry peace keeping contracts workplace policies same-sex marriage disorderly conduct retirement Parliament House standing orders prime ministers election timetable sitting days First speech defence budget submarines workers financial sector Canada Somalia United Kingdom GDP Tasmania world heritage political engagement leave loading Trade; tariffs; safeguards; Anti-dumping public interest disclosure whistleblowing Productivity Commission limitation period universities Ireland cancer gene patents genetic testing suspension of standing and sessional orders live exports infant mortality honorary citizen railways disciplinary tribunals standard of proof World Health Organisation arts international students skilled graduate visas temporary employment visas apologies roads Italy national heritage NHMRC nutrition anti-dumping Rent Assistance obesity evidence law sacrament of confession US presidential election international days DFAT UN General Assembly deregulation Regulation Impact Statements administrative law small business Breaker Morant regional engagement social determinants of health abortion Members suspension workplace health and safety marine reserves hearing TAFE Victoria astronomy resources sector YMCA youth parliament Korea fuel rebate Australian Greens presidential nomination Racial Discrimination Act political parties preselection solar hot water Financial Action Taskforce Horn of Africa peacekeeping piracy Great Barrier Reef Stronger futures political financing political education Social Inclusion Board early childhood National Quality Framework for Early Childhood Education and Care Murray-Darling Basin sanctions Norway hospitals republic President Barack Obama Presidential visits qantas counselling Korean peninsula Work Choices biosecurity hendra environmental law federalism federation preselection therapeutic goods Therapeutic Goods Administration plebiscites computer games pests suicide nuclear COAG Ministerial Councils floods ADHD stimulant medication advertising electricity extradition conscience votes poverty preventative health rural health coastal erosion Parliamentary Budget Office work-life balance

Show all
Show less
Back to top