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Tax & welfare reform: a forward focus for the Party organisation: [address to] the Federal Young Liberal Convention 2005.

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Tax & welfare reform: A forward focus for the Party organisation SPEECH 23 January 2005

Source: Federal Young Liberal Convention, [Wrest Point Convention Centre, Hobart, Tasmania]

Only last weekend I had the distinct pleasure of being elected as Patron of the Queensland Young Liberal Movement.

It is an honour because for me, like a number of us in the Federal Parliament, the Young Liberals was my training ground - or to use another less-kind analogy, my petrii dish, where we could experiment with idealistic policy, true to core liberal-democrat philosophy. Pragmatic constraints and electoral appeal had less weighting than I notice they tend to have in our Party room.

There have been a number of Parliamentarians who have spoken of the Young Liberal Movement as the conscience of the Party. A recent example is the Movement’s championing of Voluntarily Student Unionism, a policy which embodies one of our core Liberal faiths - that of freedom of association. After years of effort by the Movement your success lies in the fact that VSU legislation is expected to be introduced in the 41st Parliament.

Now, following your this win, I would like to lay out another, broader issue for the Movement to consider championing over the coming years.

It is the issue of tax and welfare reform.

No doubt many of you would have noted comments Senator Fifeld, Sophie Panopulous and I have made regarding our belief about the necessity of tax reform. Earlier this week, I indicated my intention to broaden the discussion of tax reform to include welfare reform.

To my mind, there can be no worthwhile pursuit of tax reform without a concurrent discussion and commitment to welfare reform. In isolation, tax reform represents the sound of one hand clapping.

Any meaningful reshaping of Australia’s tax policy must embrace a fundamental understanding that tax policy is one of the key drivers of welfare reliance.

Australia, for a combination of reasons I do not have time to delve into today, has cripplingly high effective tax rates. These effective tax rates, a consequence of the withdrawal of

welfare and the impost of marginal income tax liabilities at ridiculously low income levels, create significant disincentives for people to be self reliant. Coupled with our generous welfare system, it is little wonder the ratio of welfare recipients to tax-paying Australians is rapidly approaching an unsustainable equilibrium.

As Young Liberals, but more importantly, young Australians, we must be concerned about the pattern of tax and welfare growth. As the youngest member of the Coalition, I am greatly concerned that Australia has seen a ratio of 1 person on welfare for every 22 working Australians around 40 years ago, collapse so now 1 person on welfare is supported by only 5 working Australians.

At this point, I acknowledge Peter Saunders, the Social Research Director at the Centre for Independent Studies, who has coherently and incisively researched and outlined the extent of, to use his words, ‘Australia’s welfare habit’. In his recent publication, “Australia’s Welfare Habit and how to kick it”, Saunders outlines his views of the causes and consequences of mass welfare dependence in Australia.

Whilst there are some areas in which my views differ to Saunders, he makes some exceptional insights into how successive Australian Governments have ‘dropped the ball’ on welfare.

With majority control of the Senate from 1 July this year, I cannot see a more important reform agenda for the future benefit of all Australians than tax and welfare reform.

There can be no doubt the past forty years of government policy on tax and welfare have been poisoned by Labor Governments content to permit hundreds of thousands of Australians to develop welfare dependency, fuelled by social-democrat rhetoric dictating that the true pursuit of egalitarianism is achieved through income redistribution, and that welfare dependency is an ugly by-product of capitalism.

Most attempts by conservative Governments to reform tax policy to encourage enterprise and individual responsibility, and attempts to reform welfare to promote a culture of self sufficiency have all been blocked by an obstructionist Senate.

Today I, and others in the Coalition, are steeled in our resolve to have wide ranging tax and welfare reform introduced in this new Parliament so future generations of Australians can better enjoy the spoils of their enterprise, and recognise their responsibility for self sufficiency.

It is these two key tenets - reward for effort and self sufficiency - which must resonate much more loudly in policy deliberations within the Party organisation, and within the Government’s policy committees.

Recently, the Australian Chamber of Commerce and Industry published their December Review which highlighted Australia’s extraordinary diaspora. For a country with a population of only 20 million, there are some 1 million Australians - 5 per cent of our population - who live overseas.

As young Australians, we know who they are. I spoke about the Australian diaspora about two years ago in a tax debate in the House, highlighting that I knew about 20 friends from my University days who were now residing overseas.

These Australians are of our generation - of those moving to the UK, 76 per cent are aged between 20 and 34; they are highly educated with around 42 per cent of Australian expatriates holding post-graduate degrees (compared to an Australian resident average of 7 per cent). They are professionals, with almost 89 per cent employed on a full-time basis. And they are making a bundle by living overseas - a 2002 study finding that 21.5 per cent of

respondents had an annual income greater than $A200,000. Contrast that with around 2 per cent of those employed in Australia earning above the same threshold.

These bright young Australians know their labour worth. If we want to attract them back we must make it a priority not to cripple individual enterprise with high marginal tax rates at relatively low income levels.

Similarly, however, Government policy must refocus on empowering low and middle income Australia. This is the second tenet I mentioned earlier, the promotion of self-sufficiency through reform to both tax and welfare policy.

Many of the disincentives for Australians to better embrace self sufficiency are borne from the significant inefficiencies of Government policies which tax those with low incomes on the one hand, and hand wads of welfare back with the other. Whilst handouts are electorally

popular, they promote a problematic social disconnect in which the relationship between taxation and welfare is lost.

For many Australians, welfare is Government money, there to be taken. Yell loud enough, and if the Government knows what’s good for it, you’ll have your share from those surplus budget bounties. Any penetration through the veil of Government handouts, any realisation that the money could have been left in their pockets to begin with, is disappointingly missing from too many public debates.

With a Senate which better reflects the values of mainstream Australia from 1 July onwards, we must all recognise our role to be advocates of this connection. We must allow individuals to keep surpluses to spend how they choose, not have Government redistribute that income or determine which part of the economy should have fiscal stimulus at that point in time.

An article by Chris Richardson of Access Economics in last week’s Business Review Weekly magazine highlights how, as a Government, we cannot afford to squander opportunities. On a four year projection, we could have reduced our top marginal rate tax rate to 30 per cent, inline with our company tax rate, at a cost to revenue of approximately $10 to $12 billion per annum. This cost would have been more than offset by forecast budget surpluses. This, however, is not possible following new spending initiatives taken since May last year, at least, not with any concurrent reduction in expenditure. What’s more, those forecasts do not reflect any foreseeable economic dividend which would undisputedly flow from the economic stimulus.

Whilst income redistribution, or welfare, is often electorally appealing, it is responsible for the collapse of the welfare to workers ratio I mentioned earlier.

Saunders paints a grim picture of where Government has taken welfare policy. To quote:

“In 1965, only 3 per cent of working-age adults depended on welfare payments as their main or sole source of income, and most of them were invalid pensioners or widows. Fewer than 5 per cent received any income support at all. In the last forty years, all this has changed dramatically. Today, one in six working-age adults depend on welfare payments as their main or sole source of income, and close to three in ten are in receipt of some sort of payment. Welfare dependency has increased more than 500 per cent.” (source: Saunders P, Australia’s Welfare Habit and how to kick it, page 3)

With an ageing population and one of the largest diasporas in the world, all young Australians must recognise this trend is unsustainable.

More troubling is when you consider the economic change accompanying this blow-out in welfare. In the last thirty years, Australian’s have become more than twice as prosperous. Economic growth has averaged between 2 and 4 per cent over the same period. Australia’s

unemployment rate is at record lows, the number of entrants into the labour force is declining and thereby spurring demand for labour and yet, welfare dependency has increased by 500 per cent.

We know the rich are getting richer, and despite popular myth to the contrary, the poor are getting richer. So why is welfare growing so rapidly?

Why, as a proportion of the working-age population, have the number of Australians receiving unemployment, disability support, and single parent payments grown from just over 2 per cent of the population in 1969 to nearly 14 per cent of the population in 2002?

Welfare dependency is growing because our Nation’s tax and welfare policies do not reflect the two key tenets I highlighted earlier - reward for effort and self sufficiency. Tenets I believe the majority of Australians support.

Welfare policy in Australia, especially unemployment benefits, is built on the principle of demonstrable need. If you demonstrate your need, principally governed through the income and assets test, you receive your taxpayer funded welfare. Keep demonstrating need, and you continue to receive welfare.

Recipients need to demonstrate little about their proactivity in pursuing employment outcomes. A job application diary is required in the short term. After three months, job search training and intensive assistance is offered. If the recipient remains unemployed after six months and is under age 50, then the Howard Government’s mutual obligation activities kick in.

This cycle continues, with no further consequences for as long as there is demonstrable need.

Given the growth of unemployment, DSP, and the sole parents payments, it is clear this compliance framework does not adequately reinforce the desirability of self sufficiency. Further compounding this are the punishing effective tax rates borne from the low tax free threshold.

In the United States, and many other overseas countries, there has been success achieved in arresting the growth of welfare dependency through the introduction of time limits on the provision of unemployment benefits. Indeed, the OECD promulgates the economic and social

benefits of time limits on unemployment to reinforce the need for self sufficiency.

In an Australian context, I do not believe a time limit with a benefit cessation point is an appropriate policy tool the community would support. However, a time limit which triggers a change to the context of taxpayer funded support is, in my view, both culturally acceptable and considerable disincentive for the long term unemployed to remain on welfare.

In this vein, I foreshadowed a proposal which would see those unemployed for a period of two years be subject to an enhanced requirement for mutual obligation. After two years, rather than being stripped of the benefit as a number of other countries do, I propose recipients would be required to undertake the mutual obligation activities full time in return for their tax payer support. Those who did not participate or who display a lack of commitment to their obligations, would have the nature of their support benefit altered.

This alteration would be in the form that the quantum of the support would be the same, however, future payments would be via a rechargeable smart card, less a small proportion which would continue to be credited to the recipient’s bank account. This smart card would then permit the recipient to still continue to have purchasing choices, constrained however, by not having access to cash withdrawals or to certain facilities and stores, for example casinos, electronic gaming machines in pubs and clubs etc. Additionally, there could be

provision for apportioned credit on the smart card if appropriate - for example, amounts reserved for utilities and groceries and the like.

These constrained purchasing decisions would be reflective of the community’s attitude toward appropriate use of tax payer funded support.

In recognition of the fact there are some recipients for whom such enforcement is not practical owing to specific unmanageable factors, I would propose the introduction of a 20 per cent exemption among eligible recipients, with strict enforcement of this proportion threshold tied to payments made to job network providers.

The introduction of this benefit alteration trigger reinforces the community’s view of the importance of self sufficiency and underscores the fundamental expectation that those paying the taxes which support recipients are compassionate and happy to provide assistance, subject to the recipient also recognising their responsibility to attain self sufficiency in as timely a manner as possible.

Over time, if successful, this model may also have application to recipients of single parent payments once the recipient’s youngest child attains school age.

It is my belief that such a model, when coupled with a significant increase in the tax free threshold in accordance with the $12,000 threshold mooted by myself and others prior to Christmas, would significantly arrest the growth of welfare dependency. It would also curtail the disempowerment of recipients through providing more equality between the recipient undertaking the work in receipt of support and the tax payers of Australia funding them. And, most importantly, it would incorporate into tax and welfare policy the two key tenets of reward for effort and self sufficiency.

Thank you.