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The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!
In this week’s blog:
Australian economic briefing
UK economic briefing
International economic briefing
This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.
Newstart needs a new lease on life
At under $39 a day for a single person, Newstart allowance (unemployment benefits) is far from generous. Even taking into account the full rate of rent assistance and the energy supplement, that amount only rises to $49 (it’s even less generous for those who are on youth allowance). This compares to $75 a day for a single pensioner, $89 for a full-time worker on the minimum wage1,2 or $135 for someone on average earnings3,4.
This stark difference in generosity has not always been the case – it is a policy choice. The incomes of pensioners and most other beneficiaries are benchmarked to wage growth so that recipients receive broader real wage increases. That ensures that their ‘standard of living’ keeps up with the rest of society.
However, those on working age payments aren’t as lucky. These are adjusted in line with price inflation – meaning that, in real terms, recipients of these payments are no better off. This has seen a growing divergence between average earnings (AWE), the pension and Newstart over time (Chart 1).
Benchmarking payments to prices rather than wages would be less of a drama if these payments were still doing the job that they were designed to do – acting as a stopgap measure to help unemployed Australians get by while they find work.
As the Centrelink website states, Newstart allowance is “the main income support payment while you’re unemployed and looking for work.”5 It was designed to supplement other savings which would help unemployed Australians and their families through periods of unemployment.
Yet a significant number of recipients spend longer and longer on these payments. Chart 2 shows that, for many recipients, being on unemployment benefits is not a temporary state. Some 46% of Newstart recipients and 27% of Youth Allowance recipients have been on their respective payments for at least two years. There are also a bunch of Youth Allowance recipients who simply transition from Youth Allowance to Newstart when they turn 22 (or 25 pending the passage of legislation before the Senate6).
Yes, it would be nice if unemployment were temporary. But for many it isn’t, and there are a range of reasons for this, which have very little to do with welfare payments encouraging people to stay out of work. Australia has very low Newstart payments at the same time as we have high wages and, by global standards, very high minimum wages. The financial incentives to work are very strong.
Yes, increasing Newstart will cost the taxpayer, but Deloitte Access Economics has argued in our latest Budget Monitor, that is absolutely a choice we should make. That is both to address the societal failure of long term welfare dependency, and to allow unemployed people to live in a circumstance which actually allows them to be job ready as opportunities arise.
We estimate that the direct cost of giving every recipient of a working age or student payment an extra $50 a week at around $3 billion. With stronger Commonwealth taxation revenues coming in, an increase to Newstart should be top of the list in how that additional revenue is spent.
1.Social security payment rates are as at 20 March 2018 and are from the Australian Government Guide to Social Security Law.
2.Minimum wage rate is as at 1 July 2017 and is from the Fair Work Ombudsman Minimum Wages Fact Sheet.
4.Figures for full-time minimum wage and average earnings are net of tax.
A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/
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David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Ben is a manager in the macroeconomic policy and forecasting group within Deloitte Access Economics. Ben is an expert in Budget policy and is a key author of Deloitte Access Economics’ Budget Monitor publication. Ben also has experience advising public and private sector clients across macroeconomics, tax and scenario modelling. Ben is responsible for producing Deloitte Access Economics’ State economic forecasts which are published in our flagship Business Outlook publication. Prior to joining Deloitte Access Economics, Ben worked at the Commonwealth Treasury across the macroeconomics, tax modelling and social policy teams.