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The National Welfare Fund

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I. Scott

21 May 1985 Education and Welfare Group


Summary i

Sources ii

Historical Context of the Setting up of the Fund 1

Parliamentary Committee Arguments on the Structure of Social Service Funding 2

The Setting up of the Fund 2

Post-Mr Changes and the Introduction of the Levy 3

Structure of the Levy and Financing of the Fund, 1945 4

Changes to the Fund and the End of the Specific Levy, 1950 5

Funding from. Consolidated Revenue, 1952 6

Abolition of the Fund 7


1943 National Welfare Fund trust account established and financed from the lesser of a £30m grant or one-quarter of income tax.

1946 From 1 January, a specific and separate levy operated on incomes to finance the Fund.

1950 The special levy is merged with general income tax; financing of the Fund passes to pay-roll taxes and an amount equal to updated 1950-51 levy contributions.

1952 Fund financed from Consolidated Revenue Fund; payments into the Fund to equal appropriations from the Fund; Fund becomes an accounting mechanism only.

1976 Under Audit Act powers, the then Treasurer, Nr Lynch, had accumulated balance paid into the Consolidated Revenue Fund.

1985 Bill passed to repeal the Fund.


This paper depends heavily on T.H. Kewley.(1973) Social Security in Australia, 1900-72, published by Sydney University Press, and on the Commonwealth Parliamentary debates printed in Hansard.

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Although Australia's social security payments have, for the most part, been financed from Consolidated Revenue there was a period when there was a move toward social insurance and when the basis for a contributory scheme existed. In the late 1940s and early 1950s all payments for social welfare were financed by a separate levy on

incomes and/or pay-rolls. The levy was known as the social services contribution but the scheme was generally known by the name of the trust account into which the tax levy went and from which payments were made, the National Welfare Fund.

Historical Context of the Setting up of the Fund

The war period gave the Commonwealth Government the opportunity to enact a number of programs especially those relating to social security. Implementation of these programs was greatly enhanced when the Commonwealth Government gained effective control over income taxation in 1942.

In July 1941 a Commonwealth Joint Parliamentary Committee on Social Security was established under the Menzies Government. It was given a broad commission "to enquire into and, from time to time, report upon ways and means of improving social and living conditions

in Australia and of rectifying anomalies in existing legislation". The Committee, subject to some changes in membership, remained in existence until 1946. During that period the Committee published nine reports on a wide range of social welfare matters.

Whilst presenting his Financial Statement in February 1943, the Commonwealth Treasurer, Mr Chifley, indicated that the Government planned to establish a comprehensive scheme of national welfare, which would include health services, unemployment and sickness benefits,

family allowances and other welfare and social services. Over time, the Federal Government added to its existing age and invalid pensions (instituted 1908) and maternity allowances (1912), with child endowment (1941), widow's pensions (1942) and unemployment and sickness benefits (1944).

These new measures, including the establishment of a National Welfare Fund, were financed out of increased taxation brought about primarily by lowering the tax threshold from £156 to £104. The establishment of the National Welfare Fund provided some political

justification for this increase in taxation which was thought necessary to restrict civilian consumption.

The Government confirmed its constitutional rights to legislate in these and related fields, by an amendment of the Constitution in 1946. In 1947 all the Commonwealth's income security legislation was consolidated into a single Social Services Act which united the existing laws relating to age, invalid and widow's pensions, child endowment, the maternity allowances, and employment

and sickness benefits.

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Parliamentary Committee Arguments on the Structure of Social Service Funding

As part of its enquiries, the Joint Parliamentary Committee on Social Security examined the contributory method of financing social services and maintained that it had drawbacks which rendered it unsuitable for adoption in Australia. (Third Report, 25 March 1942).

The Committee argued that in order to ensure protection against loss of income it was the obligation of all potential beneficiaries to contribute to such a scheme. However, under such a scheme as proposed contributions would be made via a general tax graduated according to the income of the taxpayer. An exception would be made for those on the lowest income scale.

The Committee also suggested that, in order to separate the operations of the scheme, the proceeds of the tax be placed in a special fund, from which all disbursements for benefits and administration could be made. All deductions were to be made in the same way as other income tax. (Second Report, 6 March 1942).

This was not, however, the only view in currency at the time. When the National Welfare Fund Bill was debated some Opposition members spoke in favour of the principle of contributory funding. In 1944 when the welfare scheme was extended to unemployment and sickness benefits the then Opposition leader, Mr Menzies, moved an amendment

for re-drafting to provide for 'an equitable scheme of benefits on a contributory basis'.[1] Kewley (p.237) cites Menzies' arguments as being that a contributory scheme was necessary to preserve self-respect, to keep the fund solvent and to dispense with a means test which required an applicant to 'prove his poverty'.

The Setting up of the Fund

On 20 March 1943 a trust account known as the National Welfare Fund was established by the National Welfare Fund Act 1943.[2]

During the 1943-44 financial year money for the Fund was to come from either a grant of #30m from the Consolidated Revenue Fund or a sum equal to one-quarter of income-tax collections from individuals, whichever was the smaller. Interest from the investment of money from the National Welfare Fund were credited to the Fund.

Although social security arguments were important, economic criteria played a part in the establishment of the Fund. There was a need to restrict the level of civilian consumption, particularly as

1. Hansard, 178, 29 March 1944, p.2263. 2. Under Section 62A of the Audit Act 1901-34.

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aggregate incomes were rising, and the Fund was seen as a way of draining off purchasing power. In the interest of both war expenditure and fiscal control the tax base had been extended in 1943 after the introduction of Commonwealth control of taxation. The rate of tax rose and the statutory exemption was lowered from £156 to £104 per year, significantly increasing the number of people taxed.

Initially the only charges on the Fund were expenditures on maternity allowances and funeral benefits for age and invalid pensioners (totalling £2.4m in 1943-44).

Post-War Changes and the Introduction of the Levy

A new financial approach to social services along the lines mentioned by the Parliamentary Committee was announced by the then Prime Minister and Treasurer, Mr Chifley, when introducing the first post-war Budget in September 1945. He proposed that the existing income

tax be separated into two levies, one of which was to be known as the social services contribution and used exclusively for financing social services.

Speaking in the "committee of supply" stage of the 1945-46 Budget, Mr Chifley said:

This problem of a high level of private incomes accompanied by a great deficiency of supplies has not disappeared with the cessation of hostilities. At the present time aggregate incomes are running in excess of supplies almost as strongly

as at any time during the war and the existence of excess spending power will be a dominant feature of the whole transition period. ...There are many things - and in particular houses - which the community badly needs, but it will be impossible in any short period completely to satisfy these needs. All these considerations combine to present a problem of potential inflation.

The Government was faced with a strong demand for reductions in income taxation which would have accentuated the problem of inflation. Consequently the new financial approach to social services with a levy to be used exclusively for financing them was an anti-

inflationary measure which provided the Government with a reason for continuing relatively high taxation (although tax rates were lowered from January 1946) with the tacit endorsement of the all-party Committee.

The new financial approach was embodied in the Social Services Contribution Assessment Act 1945 and the Social STN71.-d-éE Contribution Act 1945. The legislation provided for a contribution to be collected on all income of individuals in excess of £104 a year for a person without dependants. The income level was higher where the taxpayer had dependants. The contribution became payable from 1 January 1946.

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Kewley (p.243) notes that the imposition of a special levy, earmarked for financing social services, created a mistaken belief in some quarters that the social services were thereby placed on a contributory basis. This idea was partly dispelled by the leader of the Opposition, Mr Menzies, who described the new arrangements as a

'hesitant step towards a contributory system'. He correctly pointed out that the requirement of a direct contribution from the prospective beneficiaries is a necessary, but not a sufficient, condition of a contributory scheme.

Structure of the Levy and Financing of the Fund, 1945

The levy was payable for those on income above #104 per year and without dependants with the income threshold rising with dependants. The tax was imposed on a graduated scale, rising from 3 pence in the # to a maximum rate of one shilling and sixpence (is 6d) in the #. The

scale increased fairly steeply, reaching the maximum rate at an income of #220.

Regular deductions for tax had been made from December 1941 and from July 1944 these were based on current rather than the previous years income. This meant that when the two-tier levy with the social service contribution was introduced Australia had a Pay-as-you-Earn (PAYE) taxation system. To minimise inconvenience the social

security levy was collected in the same way as income tax with one income tax return serving both purposes. The two charges were shown separately on notices of assessment.

With the introduction of the levy which took effect in the second half of 1945-46 the financing of the Fund was changed.[3]

The basis of appropriations from the Consolidated Revenue Fund was altered and the arrangements were to be:

1945-46: An appropriation of #35m plus all pay-roll tax collections (estimate #11m).

Of this appropriation #20m was intended to represent the expected level of social service contributions.

1946-47: Pay-roll collections plus expected amount from social services contribution (#51m).

1947-48: Fund to be credited with social services contribution, including provisional contributions, plus pay-roll tax collections.

3. The change was instituted via an amendment of the National Welfare Fund Act (No. 41 of 1945) which also set out funding for the following years.

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Although future contributions from consolidated revenue were expected, for the time being any disparity between Fund income and expenditure was to be met from its credit balance. At 30 June 1945 this balance was £53m.

Changes to the Fund and the End of the Specific Levy, 1950

The financial arrangements established in 1945 continued until June 1950 during which time the rate of levy progression was decreased on several occasions and the points at which the maximum rate of contribution became operative were raised. A change in the arrangements was brought about by a change in Government in December 1949. The Menzies Government was pledged to simplifying the tax system and introduced legislation (Act No. 52 of 1950) which provided for the merging of the social services contribution and income tax into a single levy. Although the tax on income was still called

'Income Tax and Social Services Contribution' from that time the contribution lost its identity as a separate and identifiable levy. However, it had served a useful political purpose by gaining acceptance by persons in the lower income groups.

The focal point of the change was that the Fund was no longer to be replenished by a special contribution. Transitional arrangements were instituted for 1950-51 with longer term arrangements to operate thereafter.

1950-51 funding arrangements were:

(i) actual payroll collections (estimated at £26m)

(ii) an amount equal to the social service contribution payable in 1949-50 and earlier incomes (estimated at £71m), plus

(iii) an amount from provisional tax, E30m.

For 1951-52 and subsequent funding years the Fund was to be financed by:

(i) actual collections from pay-roll tax

(ii) arrears on social service contributions payable for income years 1940-50 and earlier years, and

(iii) an amount based on 1950-51 contributions but increased by the percentage growth in pay-roll tax using 1950-51 as the base.

The third source of funding was designed to ensure that the Fund would receive approximately the same level of funds as it would have had the levy remained separate from general income tax.

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In introducing the legislation Treasurer Mr Fadden made the point that he saw existing sources of revenue as inadequate as a basis for any expansion of social services and that the Government hoped to submit, later on, a plan to put social services funding on a new and more satisfactory financial basis.[4] Kewley infers from this that Fadden had in mind some form of contributory scheme of finance.

The immediate possibility of a change toward a contributory system was ended with further changes to the National Welfare Fund in 1952.

Funding from Consolidated Revenue, 1952

The 1952 changes (Act No. 65 of 1952) provided that, as from 1 June 1952, the appropriation from the Consolidated Revenue Fund should be equal in amount to the money paid out of the National Welfare Fund in each financial year.

It is with this move that the Fund ceased to have any direct relationship with tax collections and thus with any prospective or possible contributory scheme to finance social security.

Treasurer Fadden's argument for this change was that:

Under the formula, the total appropriation to the fund is directly related to pay-roll tax collections; that is, to aggregate earnings. This direct relationship could mean too great a contribution from revenue under some conditions, such as, for example, when aggregate earnings are rising because of a larger volume of employment or rising rates of wages and salaries, and expenditure from the fund is remaining relatively stable or even declining. Under a different set of conditions, however, such as if aggregate earnings were falling, the contribution from revenue to the fund would fall at a time when expenditure from the fund might well be heavy. Thus the weakness of the present formula is that the income

for the fund which it produces is directly and solely related to aggregate earnings and has no regard to likely calls on the fund in varying circumstances. [5]

The underlying reason for the change was probably related to the substantial growth in Fund reserves. At 30 June 1949 the balance stood at £99m. By 30 June 1952 this had risen to £185m mainly because of high money incomes and a low demand related to high employment

levels. The Government in all probability related a growing reserve of funds to demand for wider benefits the continuing finance of which would have an inflationary effect.

4. Commonwealth Parliamentary Debates, 210, 8 November 1950, p.2075. 5. Hansard, 218, 27 August 1952, p.637.

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A further change as a result of the 1952 legislation, was that the Fund was allowed to grow each year by the amount of income from its investment.

Abolition of the Fund

In January 1976 the then Treasurer, Mr Lynch, wrote to the Department of Social Security. He stated that, as the balance of the Fund was only an 'historical balance' not affecting the payment of funds and not necessary, the balance was to be paid into the Consolidated Revenue Fund. At that tiue the balance was $469.9m.

He reported to Parliament in February during discusssion of the Loan Bill 1976

... balances amount to some $470m and are currently invested in internal Treasury Bills. While this measure requires no legislative action, it is, I believe, appropriate it should be the subject of information to the Parliament... Obviously, in these circumstances, no working balance is

required in the Trust Account. The Audit Act provides a procedure whereby moneys not required for the purposes of a Trust Account may be transferred to the Consolidated Revenue Fund upon determination by the Treasurer. I intend that the

internal treasury bill holdings of the National Welfare Fund Trust Account be redeemed. The cash resulting from the redemption of the internal treasury bills will be paid direct to the Consolidated Revenue Fund. It is, of course, from the Consolidated Revenue Fund that all expenditures on social

security are now met. [61

The fund was then merely an accounting step between the Consolidated Revenue Account and payments to people and organisations and it served no real function. The 1980-81 Auditor-General's Report criticised the arrangement as inefficient.

On 26 March 1985, the Minister Assisting the Treasurer, the Hon. C. Hurford, introduced a Bill to repeal the National Welfare Fund Act 1943 and to make all relevant social service payments directly from the Consolidated Revenue Fund. This Bill passed the House of Representatives on 22 April and the Senate on 10 May 1985.

May 1985

6. Hansard, 26 February 1976, p.328.