Labor, neo-liberalism and the welfare state

Ben Spies-Butcher, lecturer in economic and political sociology at Macquarie Uni, examines what Rudd’s supposed end of neo-liberalism means for the government’s commitment to the welfare state

The financial crisis has opened up new spaces for voices critical of market economics. Rudd is not alone among world leaders in calling for a new, less extreme, way forward. Yet the nature of the alternative is less clear.
While calling for an end to extreme capitalism Rudd reaffirms a commitment to balanced budgets, constrained spending and even lower business taxes. It seems the alternative to neoliberalism looks remarkably similar to neoliberalism itself.
Here I want to focus on Labor’s approach to the traditional social democratic commitments to a welfare state, and to a limited extent the tax system. These “tax and spend” policies were one of the main targets of neoliberalism, along with government regulation of markets and direct control of some public industries.
Tax and spending are an important way in which governments can make society fairer. Just as importantly, the welfare state in particular helps to “decommodify” life—ensuring some things (like health, education, potentially housing and employment) as a right rather than something bought on the market.
Australia’s welfare state is relatively modest by international standards. We have good quality public education and public health—but these systems are partly compromised by large private sectors and high out of pocket costs. Public transport varies greatly across the country. Housing is increasingly unaffordable. And the broader commitment to full employment (as opposed to moderate unemployment) has virtually vanished.
Despite neoliberalism, however, Australia’s welfare state has grown in the last 30 years, indeed at a faster rate than in most of the developed world.
This was in part the result of a catch up effect—with Australia lagging behind other rich countries in establishing these provisions. But it also reflected a kind of compensation for the other policies of neoliberalism.

Social payments
As Labor and Liberal Governments brought in labour market deregulation and tax reform, so they tended to expand social payments, to families in particular, as a form of compensation. Labor’s Accord with the unions in the 1980s also traded off a decrease in real wages for an increase in the “social wage”, like super and Medicare. So ironically, the welfare state in Australia expanded in tandem with neoliberalism—as a trade off for lower wages, less progressive taxes and free market reforms.
This partly reflects the “Third Way” approach of the Hawke and Keating Governments, as well as the political pragmatism of Howard—summed up in what the free market Centre for Independent Studies called “Big Government Conservatism”. Australia expanded free markets, but also expanded social support to prevent a voter backlash.
There is an obvious problem with this strategy: it sacrifices some important policy achievements for others. But at least it prevented Australia from experiencing the more brutal face of neoliberalism that occurred in New Zealand. It meant that while the rich became massively wealthier through deregulation, the poor did not become markedly poorer (although they often became more stigmatised).
The bigger problem has been what it has meant for the type of welfare state Australia has; and the type of tax system we have. Particularly under Howard, social payments have increasingly taken the form of bonuses and tax breaks, rather than public services and universal provision. Our tax system has also become less progressive, partly as a result of lowering the top income tax rates and the introduction of the GST, but also because of the growing number of tax concessions that let the rich reduce their taxable income.
The expansion of tax breaks is a particularly worrying development. These programs give greatest assistance to the wealthy and are far less transparent or accountable than equivalent direct spending policies.
There has also been a slow merging of tax breaks and direct spending. Think of the private health insurance rebate or the child care rebate. They have elements of both tax deductions and direct spending programs.
In a recent paper for the Centre for Policy Development, Adam Stebbing and I examined how these tax policies have begun to change the face of the Australian welfare state. These payments have expanded rapidly in the era of neoliberalism. We argue there that three factors explain this development—all are shaped by the dominance of neoliberalism.
First, neoliberalism’s dominance made it more difficult to expand government spending. This was partly because of real constraints from slower growth, but in Australia’s case was largely self-imposed, particularly by Labor, as a way of proving “economic credibility”. Rudd’s commitment to limit the growth of public spending during recovery reaffirms Labor’s position here. This meant that proposals to introduce new social spending were fiercely resisted, and so instead government looked for backdoor methods.
The ideal backdoor is tax expenditures (or tax breaks), which show up on the Budget as a reduction in tax, but have the effect of an increase in spending. This is because tax breaks (like the concessional treatment of superannuation) require you to change your behaviour and spending patterns. Tax cuts give you money to spend how you like. Tax expenditures are really like subsidies that only give you money if you do what the government wants.
Second, tax expenditures promote private welfare provision through the market, rather than public provision. You usually only get the benefit if you purchase a private welfare service (like private health insurance or investing in a super fund).
So the subsidy is not even really to individuals, but to private welfare providers like ABC Learning and NIB. Again, Labor’s refusal to take public control of ABC Learning after it collapsed suggests a continuing commitment to market provision.
Finally, tax expenditures favour the rich over the poor—fitting with the “incentives” of neoliberalism and appealing to aspirational voters who want help with health and education but don’t like to think of themselves as using welfare.
Tax expenditures benefit the rich because they pay people in proportion to how much tax they pay. So those on high incomes with higher tax rates actually get more than those on low incomes. Second, to qualify you need to spend some of your own money first—and the rich have much more to spend than the poor.
The most shocking example is superannuation. Here someone on the top tax rate (those earning over $180,000) gets a deduction every year that is at least as big as the full age pension. Those earning over $70,000 on average over their life get more in tax deductions than they would get if we just gave them a full pension once they retired.
The result is that after 30 years of neoliberalism Australia has a two-tiered welfare state, where those on low incomes get one set of benefits (Medicare, public education and the pension) and those on high incomes get another (private health care, subsidised private education and child care and super).

Labor’s changes
So what has Labor done to change this situation—to slay the neoliberal welfare state and return to a public, universal welfare state? It’s a very mixed bag. One that suggests slow, timid steps, rather than the determination of Rudd’s Monthly article.
There are some positive signs. Labor lifted the pension—making a real difference to many low income earners, and strengthening the most universal component of our retirement system. It means tested the family benefit part B (which was really a payment to stay at home mums) and (soon) the private health insurance rebate. Means tests usually prevent universalism, but in these cases the payments themselves are counter-productive, so means testing is an easy way to wind them back.
Labor has also tightened the rules around some tax expenditures. This has meant that those using salary packing or negative gearing to reduce their tax, can’t then use their lower taxable income to claim benefits as low income earners. They have also removed the most extreme forms of super deductions (for those washing large amounts through the system as a tax dodge)—although this only affects about 3 per cent of the total super budget.
Other changes are less clearly beneficial. Labor is increasing the threshold for the tax penalty higher income earners pay if they don’t have private health insurance.
This is an insidious piece of policy, introduced by Howard to force people into private health. It should be abolished, but increasing the threshold at least means less people are in the net. But then, as part of its move to means test the rebate it has promised to increase the penalty—entrenching a system where the rich opt out of public heath care.
More disturbingly, Labor has promised to increase the age at which people qualify for the aged pension. There is no good reason for this. Two intergenerational reports under Howard showed no real increase in government benefits as a result of ageing—pensions go up, but student, unemployment and family benefits go down. And while the pension is now effectively much more generous than when it was introduced in 1915—so is everything else. We don’t argue that education or health services should be compared to the early 1900s, and while the ratio of working life to non-working life has increased, it has increased much more slowly than labour productivity—meaning we can easily afford it.
So the rise in the pension age is just a way of lowering benefits and forcing people to work longer—or I should say forcing low income people to work longer. Because you can still access super at age 60. So high income workers can retire much earlier. If people want to work longer, all strength to them. But should we really be forcing 65 year old blue collar workers to slog it out (or more likely search for non existent work)?
There is a common theme to all these reforms. They continue the Labor pattern of the 1980s. Benefits are more tightly targeted, the most regressive ones are gradually wound back. But support for the private sector is kept in place, and productivity is used as an excuse to further reduce real wages by forcing workers to work longer.
There is no vision to expand social protection, to create universal provision or a rights based welfare state. The Henry Tax review suggests Labor is a long way from expanding the tax base—indeed Rudd has signalled he sees company taxes falling.
This is better than the Howard years—where a truly neoliberal welfare state of tax expenditures and private welfare reigned. But it is not a return to social democracy so much as the Third Way—Labor’s disappointing compromise with neoliberalism. As for taking on market fundamentalism, only very softly, very slowly and only if the markets think it’s ok.


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  1. Hmm, well it’s a step in the right direction, the thing is if they made changes too quickly there would be a huge voter backlash, they can’t change the whole society over night. Though yes, the increase in the pension age makes me ill.


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