Friday, June 20, 2014

Reality check. Working one month just to pay for welfare?

It’s the best-remembered phrase of the budget, and it wasn’t even in the budget. Treasurer Joe Hockey used it while selling the budget last week to dramatise Australia’s welfare bill.

“The average working Australian, be they a cleaner, a plumber or a teacher, is working over one month full time each year just to pay for the welfare of another Australian,” he told the Sydney Institute.

The concept is catching on. The Greens say almost half of Hockey’s one month – 11 working days – goes to assistance to the aged. Only 2 days pay for the dole. Another 9 days pay for what the Greens say are tax concessions for well off Australians and fossil fuel industries.

But the calculation is flawed, marred by two mistakes which partly cancel each other out.

The budget papers put this year’s social security and welfare bill at $140.6 billion. Of this around $36 billion goes to families with children, $26 billion goes to help people with disabilities and $10 billion to help the unemployed and the sick. Only around $2 billion goes to help indigenous Australians.

The total does indeed come to near $6000 per head as the treasurer said, but only if all Australians are counted in the population, including those who are too young and too old to work. Limiting the population to workers (Mr Hockey says only 45 per cent of the population pays income tax) the welfare burden per worker is around $13,400.

But that’s way more than one month’s tax...

The latest Tax Office figures show a total of 12.7 million individual Australians paid a total of $144.8 billion in net tax in 2011-12, producing an average tax bill of $11,400 each. Updated for subsequent wage rises the current average individual tax bill would be around $12,200.

Which causes a problem. The welfare burden per worker is greater than the entire year’s tax collected per worker. In the treasurer’s language “the average working Australian, be they a cleaner, a plumber or a teacher” needs to work a bit over 13 months per year to pay for the welfare of others.

Which means something’s wrong.

What’s wrong is the assumption that individual tax is government’s only source of income. This year the government expects to take in from all sources $363.5 billion. Only $164 billion will come from individual tax. Among its other sources of revenue are company tax, petrol, alcohol and tobacco excises, superannuation and fringe benefit taxes and the petroleum and minerals resource rent taxes.

As a proportion of total government revenue (excluding the goods and services tax) the amount the Commonwealth spends on welfare and social assistance will be 45 per cent.

It’s a finding that would only shock someone who didn’t think that welfare was one of the main reasons the government collected revenue.

So where did the Treasurer get his figure?

His office says he calculated the welfare bill at $6000 per head, calculated average monthly income at “around $4,800 to $6,500 per person” and concluded that the average Australian was “working over one month full time each year just to pay for the welfare of another Australian”.

It would be correct if the average tax rate was 100 per cent. But its closer to 20 per cent, meaning the average individual taxpayer would need to work for much longer than one month to pay the welfare bill. Except that the average worker doesn’t need to work that much longer because workers aren’t the government’s only source of revenue. Two mistaken assumptions have partly canceled each other out.

Expect more of this sort of talk. Accompanying each of this year’s tax returns for the first time will be “concise one-page personalised and itemised receipt”. It will show “in dollar terms, how much of a person’s tax bill was spent on each budget area”.

An initiative of the treasurer, it also has the potential to be misleading. Its oddest feature will be the way it treats government debt. Debt will be displayed as a total, rather than an amount per person, and displayed as gross debt rather than net debt. Net debt per person is around $9800;  per taxpayer it’s around $17,200.

In The Age and Sydney Morning Herald

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. Budget reality check. Is $150,000 typical?