When it comes to the statistics on inequality and welfare dependence, it all depends on how you look at it

It’s abundantly clear that the criticism of the budget as being unfair and fostering inequality has hit a nerve. Last week the treasurer, Joe Hockey, attempted to sell his budget as fair in a speech he gave to the Sydney Institute, entitled A Budget for Opportunity. Unfortunately, the evidence Hockey used to make his case showed that his budget fails to meet his own objectives.

After firstly suggesting his critics were indulging in “1970s class warfare”, he attempted to argue that his budget was all about equality. But whereas he accused his critics of being concerned about equality of outcomes, he was focused on equality of opportunity.

Apparently this is a superior form of equality. And it appears he views the main impediment to such equality is welfare.



He noted, with strange amazement, that the amount spent on welfare amounted to “35% of the federal budget”, and that more is spent on welfare than “on any other single policy area including health, education or defence”.

We can only hope Hockey did not think this unusual, because we have always spent more on welfare than on health, education or defence. Even the US, with its huge defence budget, spends more of its federal budget on welfare than defence.

And actually, our spending on welfare has declined over the past decade as a percentage of both the budget outlays and GDP:





Spending on both health and education have outpaced social security spending this century. But social security was Hockey’s main target, and he argued that “payments are too broadly available to too many people. As a result, less is available for those most in need.”



To support this assertion he noted that the OECD had recently found that “Australians in the lowest 20% of income had the highest reliance on government for income of any country in the world.” This is not quite true – we have the fourth highest reliance.



He also asserted that our lowest 20% “have less private income and more government income than Germany, France, the Netherlands, Finland, Norway or many other countries where government is much larger and the private sector smaller as a percentage of the economy”.



This is true, and I guess he thought it a winning point. Hilariously, however, the very OECD report that he cited shows that our welfare system is actually not too broad, but highly targeted. Indeed, his own statement gave it away. If our government is a much smaller part of the economy, and we spend less than other nations overall on welfare, but our lowest 20% get more welfare than others, then clearly our welfare system is much better targeted.

The OECD’s report, Economic Growth from the Household Perspective, which Hockey cited, did indeed show that our lowest 20% are more dependent on welfare than most other nations, but it also showed our top 20% were the least dependent on welfare.

Even more damning to Hockey’s argument, Australians on both median and average incomes are less dependent on welfare than all other OECD nations except Mexico and Korea:





If Joe Hockey wants to suggest our welfare system is too broad he is best not to compare us with Germany, France or the Netherlands. And perhaps in future he should also not cite a report that actually contradicts his argument.



The OECD in the past has, like Hockey, talked about equality of opportunity. But for equality of opportunity to mean anything it needs to be about more than just as Hockey would suggest, about getting people to the starting line. How you do after the race starts has a lot to do with luck and individual ability, but also the situation of life into which you were born.



In 2007, the OECD noted that equality of opportunity is highly linked to social mobility – i.e. the level with which your parents determine your income. It noted that a driver of increasing equality of opportunity was to reduce income equality. It also noted that a key role in improving equality of opportunity is “early childhood education, care and health”.

These “in-kind payments” – such as education and health care – are crucial for reducing inequality. As I noted in May, while such benefits go to all, they greatly reduce inequality.

Hockey, however, seemed to suggest our current tax system could be considered unfair. He noted that “just 10% of the population pays nearly two thirds of all income tax. In fact, just 2% of taxpayers pay more than a quarter of all income tax.

Maybe these taxpayers would argue that the tax system is already unfair.”



And he is right, the richest do pay a lot of our income tax:





But as I noted last month, such people are dentists, doctors and lawyers. They have achieved such an income in part because they were able to attend subsidised education at a university. In effect, the public subsidised them then so that when they earn more later, they are expected to take on a greater share of the tax burden. And that tax burden allows the government to help lower income people get good health care and education so they might be able to go to university, get subsidised education and become one of the higher tax payers.



It’s a social contract, and it works well. Australia’s social mobility is quite good – not as good as in Scandinavian countries, but not as bad as in the US.

But when Joe Hockey turned to talk of higher education he noted that the government’s policies mean that “no longer will the brickie, the painter, and the chef be subsidising the degrees of the dentist, the doctor or the lawyer to the extent that they currently are.”

And this causes a fatal rift to the social contract.



If the subsidy to those studying to become doctors, dentists and lawyers is reduced then so too is their obligation to pay the tax burden that they do. This budget inevitably creates a drive for lower taxes for the richest.

And with lower taxes means less government revenue to spend on benefits, and less to spend on education and health and other benefits which decrease income inequality and improve equality of opportunity.



Joe Hockey’s budget contradicts his own statements about what it is meant to achieve. In his speech, Hockey suggested that he admires “Australians’ egalitarian concerns forfairness”. He may “admire” those concerns but his budget displays he does not share them.