Friday, February 08, 2013

Social spending plans will be a hit ... in the pocket

That the federal election campaign seems set to be dominated by a social policy auction between the two major parties illustrates just how profoundly the nature of government has changed over time.

To a great extent, Labor and the Coalition are in lockstep on the desire to implement a National Disability Insurance Scheme, arguably representing the single greatest extension to the social services state since Medicare in 1984.

In an effort to shift female electoral sentiment away from a female prime minister, the Coalition has maintained its promise to introduce a lavish parental leave scheme, partly funded by an increase in the corporate tax rate for large companies.

To date the two major parties continue to lock horns over the details of the Gonski education funding plan, with a sticking point concerning potential public funding losses for certain non-government schools under the proposed needs-based model.

The ramparts of our modern social policy were erected from the late 19th to early 20th centuries, with Prussian statesman Otto von Bismarck playing a key demonstration role in implementing the likes of a state age pension, disability and unemployment insurance, medical care subsidies and state education.

The policy seeds Bismarck sowed quickly sprouted in many other Western countries, especially in Australia and New Zealand, and his policy legacy remains deeply embedded within the economic, fiscal and social structures of countries today.

The growth of federal education, health and welfare spending has snowballed since the early 20th century, as successive commonwealth governments shifted their expenditure mix favouring the Bismarckian model of redistributive state activity.

In 1909 the first Commonwealth social expenditures were undertaken, comprising a share of less than 1 per cent of total spending, but the rate of expenditure increased rapidly and by World War I already accounted for about 13 per cent of spending.

During the interwar period, social expenditures kept consuming a greater share of the commonwealth budget, but the federal takeover of state income taxes during World War II and a successful social services referendum proposal shortly after provided the impetus for the welfare state to be extended in ways previously unimaginable.

From the height of World War II to the defeat of the McMahon government in 1972, the Commonwealth embarked on social expenditure forays such as unemployment payments, pension and family payments, funding for state hospitals and disability services, and financial support for non-government schools.

By the time Gough Whitlam's brief period of fiscal adventurism concluded by the mid-1970s, social spending represented about 44 per cent of total Commonwealth spending covering Australians from cradle to grave, from child endowment to funeral payments.

By the early 1990s recessionary period, education, health and welfare spending by the Commonwealth accounted for at least half of its total expenditures, however during the following 15 years of largely unbroken economic growth the share of spending for social purposes continued to expand.

In 2011 it is estimated that social spending represented about 58 per cent of commonwealth expenditure, with welfare cash payments and other social security expenditures in turn accounting for more than half of the social spending.

The relentless growth of federal social expenditure is astounding on its own terms, but perhaps even more so when it is recognised that the Commonwealth does not own schools and hospitals, and is a relatively minor player in delivering welfare and other social services.

With the government struggling to contain its self-induced budget deficit, and with gross indebtedness exceeding $260 billion, it is entirely appropriate for voters to ask from where exactly will the money come to make future rounds of social spending expansionism a reality?

As fundamental as such a question is, and putting aside the usual inter-country variations, it also seems useful to ask what makes the Bismarckian state such a prevailing and common feature of modern democracies?

There is little intuitive doubt that politicians prefer to expend on programs rather than compulsorily raise tax and other revenues to finance these, but perhaps politicians also prefer to target swinging voters with direct spending programs rather than undertaking initiatives which provide generalised, though less perceptible, benefits across the entire community.

The recipients of welfare payments tend to know that the incumbent political party butters their bread, so to speak, whereas voters may have difficulty in attributing electoral credit to a party for providing long-lived assets, such as infrastructure, especially if there is a reasonably regular turnover of governments in time.

Politicians also discovered long ago that social spending allows them to electorally position themselves as philanthropic, even though the reality is that all public spending financed by taxes deprives individuals and families of disposable income and crowds out non-governmental spending and services.

The Bismarckian state is eating the Commonwealth government budget alive, and without significant corrective action it will continue to do so at great economic and financial expense as a growing share of our population ages.

Political parties, all and sundry, may want to commit taxpayers into big-spending NDIS, Gonski and parental leave payment futures, but the voting public should defer its judgment about such proposals until they are fully assessed with regard to their economic, financial and social implications.

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