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Wednesday, 16 October 1985
Page: 1311

Senator PETER BAUME(12.31) —The Opposition does not oppose the Social Security and Repatriation (Budget Measures) Amendment Bill 1985. This Bill seeks to amend four Commonwealth Acts and serves mainly to adjust rates payable as a result of decisions made by the Government. The amendments are to the Aged or Disabled Persons Homes Act 1954, the National Health Act 1953, the Repatriation Act 1920, and the Seamen's War Pensions and Allowances Act 1940. The amendments generally effect rate changes in various benefits which are payable, and the Opposition does not oppose those. We note in passing that not all the rates have increased. I note that, with regard to the rates payable under the personal and respite care headings of the Aged or Disabled Persons Homes Act, although they are computed differently as a result of this measure, they do not represent any effective rate change. I make that observation for the record.

I want to use this opportunity in discussing the social security Bill to comment upon some of the problems associated with the poverty traps in relation to those receiving social security benefits, and to say that there are some misconceptions about the ways in which people go about relieving poverty traps. The kinds of poverty traps which exist are quite horrendous. Some of them were drawn to the attention of the Australian public in the recent taxation statement made by the Treasurer (Mr Keating). I had occasion to look at some of the benefits and some of the withdrawal rates which applied to benefits when people earned some income. Effective taxation rates of well over 100 per cent-sometimes 112 per cent-applied. Indeed, following the August Budget and before the taxation statement was made, some of those marginal withdrawal rates had actually increased. I note that one of the rates after the Budget was 118.75 per cent. It was actually 112 per cent before the Budget was handed down. That means, of course, that of every extra dollar that a person earned, he lost not only the extra dollar but more than the dollar in terms of benefit to which he was entitled. That is the origin of the term `poverty trap'. One of the reasons why some people in receipt of benefits were simply not able to improve their circumstances was that they lost more by way of combined effect of pension withdrawal and tax than they gained from their earnings.

I observe that if one attacks a poverty trap simply by raising the area of income which is permissible before the various withdrawal rates arise, it must follow that one has not attacked the poverty trap at all. All one has done is to raise the level which applies before the trap operates. If the withdrawal rate has not been changed and if the same number of cents are withdrawn for each extra dollar earned, the fact that that does not apply until a higher level of income has been achieved does not remove the poverty trap; it simply alters the level at which that poverty trap operates.

Senator Walsh —And it affects a much smaller number of people.

Senator PETER BAUME —It will affect a smaller number of people, but I put to the Minister, who acknowledges my point, that one therefore has to watch very closely the effects of rising benefit rates and rising income under various awards, because increasing numbers of people will be caught while inflation continues to operate.

I want to draw attention to several of the effects of the taxation reform measures as they affect poverty traps. The decision to increase the income-free area from $30 to $40 for single people, and more for married couples, will affect the aged, invalid pensioners, and the recipients of widows' pensions and supporting parents' benefits. It will also cover the wives' and carers' pensions which we will have soon. It will affect the recipients of sheltered employment allowances and rehabilitation allowances. All of those people stand to benefit from the fact that they have a bigger cushion. But the effect of the measure will not in any way alter the effective marginal tax rate that will apply once they cross the barrier, even though it is a higher barrier. For those people the poverty trap will still exist, albeit at a higher level and, as the Minister for Finance (Senator Walsh) stated quite correctly, albeit that fewer people will be affected and many people will have relief at present. But the poverty trap will not have been touched.

The Government has announced that it intends to increase the amount of income to be disregarded in respect of certain children. This will affect all pensioners and those in receipt of supporting parents benefits who have dependent children. The effect of this measure, again, will be to increase the margin of safety within which withdrawal will not occur. But it will leave in place the effective marginal tax rates which lead to the poverty trap. It will leave the poverty traps in place, but at a higher level. I acknowledge that a third thing the Government has done is to abolish the separate income test for rental assistance. Again, this will affect all pensioners, those in receipt of supporting parents' benefits, unemployment benefits and sickness benefits, who are eligible for rental assistance. There will no longer be a separate income test. Any income that they earn will be considered in the general income test. For those people, again, there will be an increased cushion. Fewer will be affected by the withdrawal rates, but the high effective marginal withdrawal rates that make up the poverty traps in Australia will remain.

No one would cavil at what the Government has done in trying to improve the free income areas and what it has done to try to ease the number of people caught by the poverty traps. But I put to the Government that it has not, in regard to measures it has announced, ended the existence of the poverty traps. To that extent the problem has simply been put aside for another day. As I said, the Opposition does not oppose these measures.

Senator Walsh —The maximum effective marginal tax rate for rent payers-

Senator PETER BAUME —The rate for rent payers is the only one in respect of which the effective marginal tax rate has been reduced. But in regard to the major groups of beneficiaries which I mentioned, in the first two categories, the effective marginal tax rates remain the same. As I said, the Opposition supports this legislation and will be pleased to see it passed by the Parliament.