Welfare—what does it cost?

Michael Klapdor and Don Arthur, Social Policy

Key issue
Social security and welfare represents 35 per cent of the Australian Government’s expenses. The level and sustainability of this expenditure will be a key issue for the Parliament.
Commentary on welfare expenditure often focuses on income support to working-age people. However, key drivers of growth in expenditure are expected to be in the National Disability Insurance Scheme and assistance to the aged.

In 2016–17, the Australian Government estimates that it will spend around $158.6 billion on social security and welfare, and around $191.8 billion in 2019–20. This category of expenditure includes a broad range of payments and services including:

most income support payments such as pensions and allowances (for example, Newstart)
family payments such as Family Tax Benefit
paid parental leave pay
child care fee assistance payments
funding for aged care services
funding for disability services and
payments and services for veterans and their dependents.

This administrative category of expenditure does not include other programs associated with the welfare state such as health and education (including income support for students) but does include a broader range of services and supports than are often associated with the term ‘welfare’. Public debate over the cost of welfare often focuses only on cash payments to working age people such as unemployment benefits and the Disability Support Pension (DSP) but these payments only represent around 17 per cent of welfare expenditure as presented in the budget and are not the main drivers of growth in expenditure.

Key drivers of cost increases

Welfare and social security programs are primarily demand-driven, so costs are affected by factors such as population growth, population ageing, labour market changes and economic circumstances as well as policy changes relating to eligibility requirements. Most welfare payments are also adjusted regularly to maintain their value over time.

The biggest driver of growth in both welfare expenses and overall government payments is the National Disability Insurance Scheme (NDIS). As shown in figure 1, expenditure on disability services was $4.7 billion in 2015–16 but is expected to rise to $24.0 billion in 2019–20 when the NDIS roll-out is completed (the Australian Government is responsible for just over half the NDIS expenditure of $21.6 billion in 2019–20 with states and territories funding the rest). The Parliamentary Budget Office (PBO) estimates that real annual growth in expenditure on the NDIS will be 43.6 per cent between 2014–15 and 2025–26, rising from almost zero to 1.1 per cent of Gross Domestic Product (GDP) (see ‘Funding the National Disability Insurance Scheme’ elsewhere in this Briefing Book).

Figure 1: Estimated Australian Government expenses on social security and welfare

Chart 1: Estimated Australian Government expenses on social security and welfare

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2016–17, pp. 5-25-5-29.

According to the PBO, expenditure on child care will also grow from 0.4 per cent of GDP in 2014–15 to 0.7 per cent in 2025–26 (from $6 billion to $20 billion) as a result of the Government’s proposed child care package.

The ageing population will see aged care expenditure grow from 0.9 per cent to 1.1 per cent of GDP. Expenditure on the Age Pension is expected to grow in nominal terms to $72 billion in 2025–26 but not as a percentage of GDP. Expenditure on carer payments is also expected to rise, partly as a result of population ageing, from 0.5 to 0.6 per cent of GDP (from $7 billion in 2014–15 to $18 billion in 2025–26).

Expenditure in some areas is expected to decline with Family Tax Benefit falling from 1.4 to 0.9 per cent of GDP over the medium term—partly as a result of policy changes. Income support for jobseekers is projected to fall (from 0.7 per cent to 0.5 per cent of GDP), as is expenditure on Parenting Payment (0.4 per cent to 0.3 per cent of GDP) while DSP is projected to remain at 1.0 per cent of GDP.

Sustainability

Given its size, the welfare budget is often a target for savings measures, particularly in the face of budget deficits. While welfare expenditure is increasing, it is primarily in areas tracking demographic trends—support for the aged—and areas in which there is bipartisan support for additional funding—disability services and child care. It will be difficult to achieve significant savings without looking at addressing spending in these areas, particularly the largest component: the Age Pension. Working-aged payments are a less contentious target for savings but are not the source of the Government’s main fiscal pressures (see: ‘Where to for welfare reform?’ elsewhere in this Briefing Book).

Welfare—what does it cost?

Key drivers of cost increases

Sustainability

Further reading