Middle Class Welfare in Australia

Presentation to Welfare Future Conference, Melbourne– 31 October 2014

Ben Phillips

Principal Research Fellow

Introduction

● What is middle class?

● What is middle class welfare?

● STINMOD modelling

● How much middle class welfare is there in Australia and what are the main elements?

● Poverty in Australia

● Impact of Federal Budget on middle class welfare?

● Future of middle class welfare?

What is middle class

● This is not entirely clear

● Do we base class on income, expenditure, assets, or is it more a social structure/position?

● For the purpose of this presentation and simplicity I’ll consider middle class to be the middle 20% of the income distribution.

● Couple with two kids - $75,000 - $100,000 family income

● Single person - $35,000 to $50,000

● It’s probably a bit broader than this

● A simplification – older families who largely own their own home are hard to compare with a younger FHB family. Old children cost more etc… it’s complicated.

STINMOD - introduction

• STINMOD is a microsimulation tool developed by NATSEM for the Commonwealth from 1994.

• Simulates the tax and transfer system of Australia (for individuals and families) using actual data on real families from ABS income surveys.

• Provides a unique ability to model the ‘distributional’ impact of existing and alternative policies and offers a very detailed snapshot of the Australian population at a given point in time or projection into the future.

• Two standard models – hypothetical and distributional

• Modelled results are benchmarked to administration totals such as the number of pensioners, family payments, unemployed etc..

STINMOD - introduction

• STINMOD is heavily relied upon by the Commonwealth for the modelling

policy change for most of the important government payments and personal

income tax

• Particularly useful for new policy ‘packages’ where administration data lacks

the detail to deal with a range of policy areas, or where policy change

introduces new customers.

• The most famous examples of STINMOD include the introduction of the ANTS

package (GST 2000), welfare to work (2006) and the Carbon Price package in

2012 and 2014-15 budget.

• Regional modelling combines STINMOD with Census/admin regional profiles

• Available as a simple interface version – point and click or much more

complicated ‘source code’ version.

Welfare distribution

$179 $158

$67

$21 $6

$84 $139

$76

$18

$2

$125

$159

$101

$66

$31

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Q1 Q2 Q3 Q4 Q5

Distribution of Welfare Payments (Households), STINMOD, 2014

Aged Pension FTB Other Payments

Welfare distribution

31%

37%

20%

9% 3%

Total Government Transfers, STINMOD, 2014

Q1 Q2 Q3 Q4 Q5

Welfare distribution

0

200000

400000

600000

800000

1000000

1200000

Q1 Q2 Q3 Q4 Q5

Payments recipient numbers by income group

Age Pension Other pension Allowees

Welfare distribution

• Where is the middle class welfare (payments)

● Child Care (CCR universal 50% out of pocket costs)

● FTB (particularly Part B – budget 2014-15 has improved this situation)

● FTB – poverty measure for low income families and tapered away to avoid poverty traps + provides ‘tax justice’

● Reality is that middle to high income families don’t receive a large share of FTB but savings can be made in this area.

● Budget was largely about reducing the payment across the board – stealthy indexation pauses and FTB B (once youngest hits 6 or income > $100K) removal the biggest impact.

● PPL – new scheme for 2015 will significantly increase the middle class and high income welfare in Australia

Childcare distribution

Other middle class payments/tax expenditures

• First home buyers grants (largely middle income)

• Negative gearing (property/other investments) (largely middle income)

• Capital gains tax

• Owner occupier housing

• Superannuation

• Trusts

• Salary Sacrificed vehicles

• These are where significant middle class (and upper class) welfare is.

In-kind government support

$87 $70 $36 $30 $14

$93 $149

$176 $152

$117

$253

$260 $219

$198

$187

0

100

200

300

400

500

600

1 2 3 4 5

In-kind Government Support by income quintile, STINMOD14

Welfare in-kind Education in-kind Health in-kind

In-kind government support

Benefits - trends • Remains heavily skewed to low income families

• Small increase under Labor in middle income welfare – can be distorted by

broader demographic/economic conditions and largest influence remains

pension/DSP – not necessarily policy changes driving result.

31%

45%

18%

6%

1%

35%

42%

16%

5%

1%

28%

44%

21%

5%

1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Q1 Q2 Q3 Q4 Q5

Welfare Distribution by Income level - share of taxable income

2002 2007 2012

Poverty

Budget Impact

Conclusion • With respect to government cash payments middle class welfare is not as substantial as often suggested.

• Cash payments are generally well targeted with the major payments (pensions, allowances) directed

heavily towards the bottom 40% of income distribution

• Family payments do have a middle class welfare element – although majority directed at low income

families.

• Largest element of middle class ‘welfare’ belongs to in-kind health and education services and tax

expenditures.

• Budget does remove some welfare to middle income but is proportionately directed at low income

groups and is highly regressive.

• Future? Influenced by economy, demographics, policy – current government looking to reduce benefits

and reduce taxation – clearly less progressive.

• Demographically – older population implies increased pensions/health reduced relative share of

education

Thank You