Scheduled address to the Committee for Economic Development of Australia

The Committee for Economic Development of Australia (CEDA) is a forum for some of our best and brightest and one that is to be congratulated for its commitment to building a more prosperous and generous Australia.

We may not always agree on policy but there can be no doubt of the tremendously important role that the CEDA plays in our national debate – be it in the area of welfare reform that I am addressing today, federalism, disadvantage in Australia or the future of our workforce. I commend you for your contribution to our economic and policy debate.

NEED FOR REFORM

CEDA’s April report, Addressing Entrenched Disadvantage in Australia highlighted the ‘tragedy for individuals concerned and a loss of economic potential for the nation’[1] when Australians are excluded from the workforce and locked in poverty.

The report correctly identifies the urgent need for policy change to break the cycle of poverty and tackle disadvantage.

This is why welfare reform must first and foremost be about improving the social and employment outcomes of Australians.

This government strongly believes that the best form of welfare is a job. Where people have capacity and availability, they should be working.

A job provides what welfare cannot – a sense of purpose, dignity, worth and the opportunity for economic advancement. Welfare cannot break the poverty cycle. Only a job can do that.

In the last budget we focused heavily on jobs and small business.

In my own portfolio the Jobs for Families package will allow more families to work or work more by providing an additional $3.5 billion in additional child care assistance. Families using child care in 2017, on family incomes of between $65,000 and $170,000 will be around $30 a week better off.

Nor do we leave people behind.

Families on incomes of less than $65,000 per year will receive ongoing access to early childhood learning and can be eligible for additional financial support through a new Child Care Safety Net.

The safety net will act as a form of early intervention for vulnerable families or others with disadvantage – so they can overcome barriers to accessing quality early childhood education. As the McClure Review noted, early intervention approaches like these reduce the risk of long-term income support dependence by improving children’s physical, social and educational development. And I will have more to say on the early intervention policies later.

Clearly, a safety net is essential, but the most vulnerable in our community can only continue to be supported at the standards we expect if we can pay for it.

Our annual social services bill is $154 billion – one-third of the Government’s Budget. This bill will rise to $227 billion in the next decade as we see increasing pressure on the aged care, disability, carer and child care systems.

There is a pressing need for sustainability of welfare in the long term. This is about social, fiscal, and economic sustainability.

But equally the reform challenge is mandated by the prevalence of persistent unemployment, intergenerational welfare dependence and entrenched disadvantage. These challenges starkly demonstrate that we can do more to support people to live a life they value.

Central to this is the encouragement and support of self-reliance. Better building the capability of Australians to become engaged will support increased participation and contribute to future economic growth.

Strong economic growth and welfare reform are intrinsically linked. Welfare reform will free up labour to enter the economy. And it only does that when we open up the opportunities to free people from welfare.

As Patrick McClure and his team illustrated we have inherited a complex and inefficient arrangement of 20 payments and more than 50 supplements.

It should be much easier for people to understand and access the support they may need.

Our system should ensure that those with the capacity to work are able to identify a clear pathway from welfare to work and that the benefits of that work should be obvious and better encouraged. People must be supported in their journey to self-reliance.

COMPLEXITY

The current complex payment arrangements I have referenced sit atop an even more convoluted framework of rates, eligibility, activity testing, and compliance. This can result in people in similar circumstances having dramatically different experiences of income support.

It is also unwieldy for the Department of Human Services to deliver and not easy to change quickly to adjust to government priorities.

Complexity impacts on the way individuals interact with welfare and can perversely discourage participation. The uncertainty it creates about the rewards of work, or the confusion stemming from how earnings interact with income support, tax withdrawals, or child care payments can mean people are discouraged from work.

Some intricacy is necessary to preserve the highly targeted nature of Australia’s means tested welfare structure but this needs to be balanced against the benefits of simplicity.

Simplicity can help make the benefits of work clearer.

It would also help address administrative inefficiency and unacceptably high operating costs as well as allow quicker delivery of policy changes to adjust to changes in policy direction.

The way income support currently operates for students is a prime example of how complexity can undermine incentives to participate and can make it difficult to navigate.

We know that educational attainment strongly correlates with employment outcomes. CEDA’s report finds those who are most at risk of long-term disadvantage or of falling back into poverty include less-educated Australians.[2]

It is imperative we don’t allow complexity to cloud and undermine students’ decisions when they are looking to build their capability for work.

Currently, students can be in receipt of any one of a range of income support payments, each with their own rules for approved courses of study, study loads, mutual obligation and satisfactory progress.

Consider two students, one on Austudy completing a full-time 12 month Graduate Diploma, the other a Youth Allowance Jobseeker completing a full-time 12 month short course. Both full-time students, both building skills to improve their chances of finding secure employment, yet they are treated very differently in the income support system.

The Austudy student is taken to be fully meeting their mutual obligation requirements through full time study. They can access the Student Income Bank which allows them to accrue up to 10,600 work credits per year, so that if they choose to work they can keep more of every dollar they earn.

The Youth Allowance jobseeker, studying a short course full time is expected to look for and accept paid work where it doesn’t conflict with their study. They are also only eligible to accrue work credits, which allow someone to keep more of their support payments while working, of up to 1,000 per year.

This fails the fairness test of similar treatment for people in similar circumstances. The harsher treatment of the Youth Allowance jobseeker may also discourage them from trying to build their capability for work, despite the fact that this is exactly the type of behaviour we should be encouraging.

By streamlining the payments architecture, and starting to look critically at some of these anomalies we can amend the current welfare model so that it encourages work and encourages capability building, and more importantly, treats people fairly.

INCOME REPORTING COMPLEXITY

Four primary factors contribute to inaccuracies in working age payments. Three of these are issues around reporting of income and assets; incorrect reporting of earned income, unearned income or declaration of assets. The forth relates to reporting of changes to a member of a couple status.

Income and asset reporting can be especially complex where a household receives a number of different payments. For example a couple with children receiving income support are subject to an income support income test, and a second earner income test in respect of Family Tax Benefit Part B. These payments have different periods of assessment–fortnightly and annually respectively–and different definitions of income.

Income support payments use the Social Security Act definition of ordinary income for the purposes of income and asset testing. This is a broad definition that includes income from a range of sources and only excludes maintenance income and certain exempt lump-sums. On the other hand, Family Tax Benefit uses adjusted taxable income, this is a much narrower definition which excludes and exempts a number of income sources that would be counted for the purposes of income support income reporting.

People may report their income for FTB purposes but not realise they also need to report their income separately for income support. They may also get confused about how to report their income, given the different definitions of income.

This level of complexity is not only unnecessary and time consuming but it can lead to people inadvertently failing to meet reporting obligations. This non-compliance could potentially result in suspension or cancellation of payments.

While using means testing to maintain a highly targeted welfare system is crucial to achieving sustainability over the long term, it is also necessary to balance the necessity of targeting against the need to create work incentives.

The combined effect of income support withdrawal and personal tax obligations as a person increases their hours of paid work needs to be carefully maintained to ensure incentives for participation remain.

This brings me to High Effective Marginal Tax Rates [EMTRs]. EMTRs are not a wide spread problem, rather they hit small numbers of people at random points on the earned income scale, or can suddenly spike at specific income points. Again, this is a result of complexity and can only be addressed through reform.

EMTRs become particularly complex where income support recipients are subject to a number of different income tests at the same time. Because of the complex interaction between income tests there can be anomalies in a person’s EMTR where they can actually lose money by increasing their hours of work. The perverse incentive this creates chokes an individual’s or family’s opportunity for advancement.

Consider a two child FTB family; if one of the children moves on to Youth Allowance when they finish secondary school they become subject to two concurrent income tests. This increases their EMTRs and reduces the overall assistance available to the family.

How do we fix this?

Income support recipients could better understand the rewards of work through consistency of withdrawal rates within payments. To the extent possible, withdrawal rates across payments should be coherent so that people transitioning between payment types are not subject to a sudden drop in income.

Through simplification, we can make it easier for families to understand the clear benefits of getting back into work, or working more.

We need to have the settings for work incentives and work expectations right.

THE NEED FOR ICT IMPROVEMENTS

An essential first step on welfare reform is to update our ICT infrastructure.

The Coalition Government is embarking on the Welfare Payments Infrastructure Transformation (WPIT) Programme. The WPIT will see replacement of Centrelink’s ageing payment infrastructure, designed at the time, as I have often said, that Peter Brock was winning Bathurst.

This transformation will provide more efficient and effective services and we have contributed $60 million as a first step to this project.

The 30 million lines of code currently used to undertake 50 million daily transactions, delivering around $100 billion in payments to 7.3 million people every year, results in an extremely complex, inflexible, costly to maintain and difficult to secure compliance

By its completion in 2022, the new payments infrastructure will be focused on the customer, taking full advantage of real-time data monitoring and analysis to deliver significant benefits to government, taxpayers and welfare recipients.

It will be faster, more efficiently implement government policy; provide better data to support government decision-making and policy modelling. For example it will allow us to better identify the results of moving someone off payments. It will reduce manual processes and costs of administering government welfare payments; increase the ability to detect and prevent fraud and non-compliance and reduce red tape for customers.

EARLY INTERVENTION AND INVESTMENT APPROACH

Social responsibility has an important role to play in contributing to the solutions in this space and supporting vulnerable individuals and families.

This is why the government is pursuing the implementation of an investment approach in Australia, backed by $20.7 million in funding announced in the last Budget.

The Australian Investment Approach involves the actuarial valuation of Commonwealth social security liabilities. It will allow us to identify the cohorts at greatest risk of long-term welfare dependency. Based on this analysis, Government can invest in evidence-based policy interventions tailored to improve the outcomes of those identified cohorts.

And I can formally announce the first significant milestone in the implementation of the Investment Approach. PricewaterhouseCoopers (PWC) has been selected by my Department to undertake the actuarial analysis supporting it.

PWC has a four year contract to provide annual valuations which determine the estimated future costs of the welfare system, looking at past evidence and how people interact with welfare. We will be able to more readily identify which policies are working for which groups of payment recipients.

This approach will ultimately enable the social support system to become more responsive to emerging needs, and set people back on a path to self-reliance sooner.

It will lend itself to a more flexible system of supports and services, ensuring that every dollar spent is working hard to improve outcomes for the cohorts most at risk.

Another aspect of welfare reform the government is exploring is through partnerships with the broader not for profit sector and private sector, which is increasingly involved.

I have spoken recently about my interest in how Social Impact Bonds, or SIBs, can help extend the financial risk of funding social services to include the private sector.

Each model is different but the concept is simple enough: Government commits to pay for improved social outcomes that result in public sector savings. The private sector funds the solution, and when it works Government pays a dividend.

Successful SIBs are emerging across the world and here in Australia. They are being used to help single parents in Canada, unemployed migrants in Belgium, homeless people in Ireland, youth in Germany, people with diabetes in Israel and New Zealanders with mental health issues.

In my home state of New South Wales, the Government is implementing SIBs to offer support to children at risk and families in need.

If implemented effectively and tested appropriately, SIBs can benefit government, civil society, the private sector and above all can benefit individuals in need.

We must be on the continual lookout for new and innovative ways to deliver and fund the social services on which so many Australians rely.

The government is eagerly and actively exploring how SIBs might operate at the Commonwealth level and in the social services sphere, including how the Commonwealth and states might collaborate.

CONCLUSION

In conclusion, the government owes it to our citizens and the community who also contribute in the welfare space to ensure we develop better ways of managing the national asset that is our social services system.

We simply have to manage it sustainably.

We do have one of the most targeted welfare systems in the world – but we can do better.

Simply put, too many Australians are missing out on the benefits of work. We must be able to effectively address peoples’ barriers to work and support them on their journey to self-reliance.

If we do not we will be left as a nation that cannot support those unable to work, those genuinely vulnerable Australians, who rely on welfare to survive while they get themselves back on track to the independence and dignity of paid work.

By acting effectively we can ensure that safety nets are not traps that consign vulnerable citizens to a lifetime on welfare, but trampolines from which they can bounce off and re-enter society as socially and economically engaged citizens.

This is the path we need to take if we are to ensure both the welfare of the individual and indeed the welfare of our nation.

[1] Addressing entrenched disadvantage in Australia, CEDA, p. 7

[2] Addressing entrenched disadvantage in Australia, CEDA, p. 9