Australian welfare spending trends: past changes and future drivers Brotherhood of St Laurence lunchtime seminar John Daley CEO, Grattan Institute 8 August 213
Overview Stable overall spending conceals big changes in welfare over a decade Welfare remains the largest spend, although health is growing faster Aged pensions grew quickly, while employment payments shrank largely results of policy choices The rising tide of the last decade reduced the impact of high and rising inequality Inequality is high in Australia despite unusually well-targeted welfare Over the last decade, Australia became more unequal, but incomes rose faster, benefiting all income groups The rising tide also minimised inequalities due to education levels Wages and participation became less equal However, inequalities were muted by the increasing supply of graduates and the mining boom Welfare will face more budgetary pressure in the next decade Australia faces a decade of deficits: as the mining boom slows, the structural deficit will be exposed Spending has accelerated, while bracket creep is overtaking previous tax cuts Some tough decisions are required 2
Welfare, health and education are more than half of government expenditure Combined Australian governments expenditure 212-213 1% = $55b Ageing and aged care services Superannuation Everything else 32% Community services Criminal justice Debt management Infrastructure 7% Foreign affairs Disability services Government operations Economy & finance Industry Infrastructure transport and planning Climate change and environment Other Seniors Family support Workforce Hospitals Welfare 22% Disability Welfare - NFS Carers Welfare - other Health 19% Primary care & medical services Defence - other Military operations Intelligence and national security Defence 6% Early childhood Grattan Institute, Budget Pressures on Australian governments Military capability Skills Research Schools Higher education Health - other Pharmaceuticals Private health insurance Health - NFS Education 14% 3
Some welfare categories grew quickly, but health spending grew faster Change in Australian governments expenditure 23-213 $ bn relative to CPI 2 15 1 Real growth Growth at GDP Welfare Health Education Infrastructure 5-5 Education - schools Welfare - seniors Defence - military Welfare - workforce Infrastructure, transport Health - Hospitals Economy and finance Health - primary care Welfare - family support Industry Welfare - disability Criminal justice Debt management Government operations Community services Health - other Ageing and aged care Superannuation Health - pharmaceuticals Education - skills Welfare - not further Education - higher Climate change and Disability services Foreign affairs Research Welfare - carers Grattan Institute, Budget Pressures on Australian governments 4
Seniors and families are the largest categories of welfare payments Combined government welfare expenditure 212-213 1% = $111b Other 8% Other Carers 6% Carers NFS Seniors 33% Disability 15% Disability Age Pension Other workforce Workforce 15% Youth/student Parenting payments Unemployment Other family support Child care FTB Other seniors Families 23% Grattan Institute, Budget Pressures on Australian governments 5
Aged pensions grew quickly in the last decade 15 1 Carers (165%) Child care Seniors Families Workforce and other Disability Growth in spending 22-3 212-13, percent 5 Seniors Disability Families NFS Unemp. Youth/ student GDP growth -5 Parenting payments -1 Workforce NFS 1 2 3 4 5 6 7 8 Spending in 22-3, $b, $212 Grattan Institute, Budget Pressures on Australian governments 6
Health and Aged Pensions (but not ageing) grew largely as a result of policy choices Real increase in expenditure 23-213 ($212 billion) 45 4 35 3 25 2 15 1 5 Health More, improved, and new services per person GDP growth Health inflation >CPI Population ageing Population growth Grattan Institute, Budget Pressures on Australian governments Rate & eligibility change Indexation >CPI Population growth and ageing Age Pension 16 14 12 1 8 6 4 2 7
Households reliant on Newstart do life much tougher Percent of households under stress 6 5 Main source of household income Job seeker payment Other government payment Wages and salaries 4 3 2 1 >2 household deprivations >2 financial stressors >3% of income going to housing In poverty for 2 years Notes: Job seeker payment includes Newstart and jobseeker Youth Allowance. Other govt payment is dominated by age and disability pensions. ]Source: Grattan analysis of Phillips and Nepal (212). 8
Overview Stable overall spending conceals big changes in welfare over a decade Welfare remains the largest spend, although health is growing faster Aged pensions grew quickly, while employment payments shrank largely results of policy choices By international standards, Australia remains relatively unequal, although the rising tide lifted all boats Inequality is high in Australia despite unusually well-targeted welfare Over the last decade, Australia became more unequal, but incomes rose faster, benefiting all income groups Although incomes became more unequal, the gap did not widen much between high and low levels of education Wages and participation became less equal However, inequalities were muted by the increasing supply of graduates and the mining boom Welfare will be face more budgetary pressure in the next decade Australia faces a decade of deficits: as the mining boom slows, the structural deficit will be exposed Spending has accelerated, while bracket creep is overtaking previous tax cuts Some tough decisions are required 9
Australia is less equal than the OECD average Gini coefficient after taxes and transfers, late 2s.6 Less equal outcomes.5.4.3.2.1 OECD average Denmark Belgium Norway Finland Sweden Austria Ireland Switzerland France Netherlands Germany Korea Greece Spain Japan New Zealand Australia Canada Italy United Kingdom United States Mexico Chile Grattan Institute, Budget Pressures on Australian governments 1
Australia has relatively large, very targeted, transfers to poor households Government transfers to households, mid-2s Percentage of population disposable income 4 35 3 25 2 15 Transfers to top 8% 1 5 Denmark Sweden Belgium Norway Australia Czech R. Ireland Neth. OECD-23 France Austria Germany Slovak R. Finland Switz. UK NZ Luxem. Italy Canada Poland Japan US Korea Transfers to bottom 2% Grattan Institute, Budget Pressures on Australian governments 11
Inequality is rising around the world Gini coefficient after taxes and transfers.4.35 Gini index late 2s.3.25.2 Gini index mid 199s.15 Denmark Sweden Finland Austria Norway Germany Spain France Belgium Canada Netherlands Australia Japan Ireland Greece NZ UK Italy US Grattan Institute, Budget Pressures on Australian governments 12
Australian income and inequality both grew faster than in most OECD countries Growth rates, mid-198s to late 2s, percent Difference in income growth between top and bottom decile 2.5 2. 1.5 1. Australia.5 OECD average.. -.5.5 1. 1.5 2. 2.5 3. 3.5 4. Turkey -1. Chile Ireland -1.5 Greece Spain -2. High growth, reduced inequality doesn t -2.5 always end well Portugal -3. Average annual household income growth Grattan Institute, Budget Pressures on Australian governments 13
Overview Stable overall spending conceals big changes in welfare over a decade Welfare remains the largest spend, although health is growing faster Aged pensions grew quickly, while employment payments shrank largely results of policy choices By international standards, Australia remains relatively unequal, although the rising tide lifted all boats Inequality is high in Australia despite unusually well-targeted welfare Over the last decade, Australia became more unequal, but incomes rose faster, benefiting all income groups Although incomes became more unequal, the gap did not widen much between high and low levels of education Wages and participation became less equal However, inequalities were muted by the increasing supply of graduates and the mining boom Welfare will be face more budgetary pressure in the next decade Australia faces a decade of deficits: as the mining boom slows, the structural deficit will be exposed Spending has accelerated, while bracket creep is overtaking previous tax cuts Some tough decisions are required 14
All groups benefited from substantial income growth in the last decade Growth in household post-tax real income, 2 21 Percent increase, mean of quintile 6 5 4 3 2 1 Lowest quintile Second quintile Third quintile Fourth quintile Highest quintile Grattan Institute, Budget Pressures on Australian governments 15
Wage distribution has widened Growth in real weekly full-time earnings, 2 211 Percent increase, mean of decile 25 2 Men Women 15 1 5 1 2 3 4 5 6 7 8 9 Wage deciles Grattan Institute, The mining boom: impacts and prospects 16
Participation also became less equal 9 8 7 6 5 4 3 2 1 Total hours worked by adults in household 2-25 25-21 2th Percentile 8th Percentile 1 5 4 2 3 2 1 Per cent adults working Hours per working adult Number of working-age adults Note: Based on average for households with adults aged 2 to 65 over 5 year period Source: Grattan analysis of HILDA data 17
High growth industries tend to employ workers with higher levels of education Per cent of workforce in 211 Secondary or not stated Inadequately described Certificate Adv. Dip & Dip Bachelor Note: Source: High growth industries (Mean GVA growth 3.9%) Grad cert/dip Postgraduate Low growth industries (mean GVA growth 2.%) High growth industries are Mining, Utilities, Health, Professional and scientific, Wholesale, Construction, Education, Public sector, Arts and Recreation and Finance. Low growth industries are Agriculture, Manufacturing, Other Services, Retail, Transport, IT & Media, Hospitality, Real Estate, and Administration. Growth rate is 22-212 Grattan Institute: Budget pressures on Australian governments 18
Increasing inequality in Australia is not driven by education, unlike the OECD Higher education earnings premium Earnings of higher education graduates as a multiple of earnings of workers with only school leaving qualifications 2.2 2. OECD Average 1.8 1.6 1.4 Australia 1.2 1. 2 21 22 23 24 25 26 27 28 29 21 Note: Wage premium of education: the ratio of wages for those with a bachelor degree over those with an upper secondary education. The Australian values are missing in places linear interpolation has been used. Source: Grattan Institute: Budget pressures on Australian governments 19
Employment growth fastest in high skilled occupations; wage growth more uniform Employment and wage growth, 1997-211, percent Employment Real wage Managers Professionals Techn. & trades Mainly high education Comm. & pers. serv. Clerical & admin. Machin. op. & drivers Labourers Sales workers Mainly low education -1 1 3 5 7 Grattan Institute, Budget Pressures on Australian governments 1 2 3 Growth (per cent) 2
Unemployment has trended downwards Unemployment rate, per cent of labour force 12 1 8 6 Unemployment 4 2 Long term unemployment 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 Note: Financial year average, seasonally adjusted, 213 data for unemployment is the average of July 212 - May 213 Source: Grattan Institute, The mining boom: impacts and prospects 21
Layoffs have not increased much despite disruptions of the boom Proportion of those employed at some stage in the year, per cent 25 2 Total who left a job during the year 15 Voluntary separations 1 5 Involuntary separations 1994 1996 1998 2 22 24 26 28 21 212 Notes: Sources: Breaks in data are interpolated. Voluntary separations exclude workers who have changed locality but not employer. Grattan Institute, The mining boom: impacts and prospects 22
Higher-educated jobs are only growing a little faster, but they are much more secure Annual employment growth, 21-12 14% Mean unemployment rate, 21-12 7% 12% 1% 8% Mining 6% 5% Accom & food Admin & support 6% Utilities 4% Construction Construction Health & social 4% Profess. 3% 2% Mining Education Finance 2% % ICT Health & Education Manufacturing 1% social -2% Agriculture.5 million jobs -4% % % 2% 4% 6% 8% % 2% 4% 6% 8% Proportion with tertiary degree Source: Grattan Institute, The mining boom: impacts and prospects 23
Overview Stable overall spending conceals big changes in welfare over a decade Welfare remains the largest spend, although health is growing faster Aged pensions grew quickly, while employment payments shrank largely results of policy choices By international standards, Australia remains relatively unequal, although the rising tide lifted all boats Inequality is high in Australia despite unusually well-targeted welfare Over the last decade, Australia became more unequal, but incomes rose faster, benefiting all income groups Although incomes became more unequal, the gap did not widen much between high and low levels of education Wages and participation became less equal However, inequalities were muted by the increasing supply of graduates and the mining boom Welfare will be face more budgetary pressure in the next decade Australia faces a decade of deficits: as the mining boom slows, the structural deficit will be exposed Spending has accelerated, while bracket creep is overtaking previous tax cuts Some tough decisions are required 24
Australian governments face a decade of deficits on current trends Potential annual deficit of Australian governments budgets by 223 (Percent of GDP) %.%.5% -2% -4% 2.%.5% 1.% 4.% -6% -8% Forecast surplus 215-16 Signature initiatives e.g. Gonski, NDIS, Direct Action parental leave Health 23-213 trend Welfare response to inequality increase Terms of trade potential fall Deficit 223 on current trends Grattan Institute, Budget Pressures on Australian governments 25
Australia has been running a substantial structural deficit Commonwealth budget balance, per cent of nominal GDP 4 3 2 1-1 -2-3 -4-5 -6-7 Cyclical Terms of trade Structural balance Underlying cash balance 23 24 25 26 27 28 29 21 211 212 213f Source: Grattan Institute, The mining boom: impacts and prospects 26
Both income and expenditure have contributed to the structural deficit Structural income Per cent of GDP 25 24 23 22 21 2 19 18 17 16 15 25 24 23 22 21 2 19 18 17 16 15 23 25 27 29 211 213f Structural expenditure Per cent of GDP If terms of trade uplift is temporary inc stimulus If terms of trade uplift is permanent 23 25 27 29 211 213f Source: Grattan Institute, The mining boom: impacts and prospects 27
Expenditure assumptions in the most recent budget are optimistic Real expenditure growth by Commonwealth government Cumulative annual growth, % per year 4% 3% 2% 1% % Howard first 3 terms Howard last term Rudd-Gillard Next government 1996-97 to 23-4 24-5 to 27-8 28-9 to 213-14e 214-15e to 216-17p 213-14 Commonwealth BP 1 p.1-6 28
Bracket creep has wiped out the effect of personal income tax cuts Commonwealth revenues, deviation from long-term average (% of GDP, = average 2-21) 2 Forecasts Income tax Average 2-21 1 Corporate tax -1 Indirect tax 213-14 Commonwealth BP 1 p.1-6 -2 1999 21 23 25 27 29 211 213 215 217 Financial year ended 29