Hockey’s welfare claim confused and ultimately flawed

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It’s the best-remembered phrase of the budget – and it wasn’t even in the budget.

”The average working Australian, be they a cleaner, a plumber or a teacher, is working over one month full time each year just to pay for the welfare of another Australian,” Treasurer Joe Hockey told the Sydney Institute last week.

But the calculation is flawed, marred by two mistakes that partly cancel each other out.

The budget papers put this year’s social security and welfare bill at $140.6 billion. Of this, about $36 billion goes to families with children, $26 billion to help people with disabilities, and $10 billion to the unemployed and the sick. About $2 billion goes to help indigenous Australians.

The total does indeed come to almost $6000 per head, but only if all Australians are counted, including those who are too young and too old to work. Limiting the population to workers, the welfare burden per worker is about $13,400, which is way more than one month’s tax.

The latest Tax Office figures show 12.7 million individuals paid $144.8 billion in net tax in 2011-12, producing an average tax bill of $11,400 each. Updated, that would now be about $12,200, which causes a problem.

The welfare burden per worker is greater than the entire year’s tax collected per worker. In the Treasurer’s language, the average working Australian needs to work a bit more than 13 months a year to pay for the welfare of others, which means something is wrong.

What is wrong is the assumption that individual tax is the government’s only source of income. This year the government expects to take in $363.5 billion from all sources. Only $164 billion will come from individual tax. Among its other revenue sources are company tax, petrol, alcohol and tobacco excises, superannuation and fringe benefits taxes, plus the petroleum and minerals resource rent taxes.

So where did the Treasurer get his figure? His office says he calculated the welfare bill at $6000 a head, calculated average monthly income at about ”$4800 to $6500 per person” and drew his conclusions from that.

This would be correct if the average tax rate was 100 per cent, but it’s closer to 20 per cent, meaning the average individual taxpayer would need to work for much longer than one month to pay the welfare bill. Except the average worker doesn’t need to work that much longer because workers aren’t the government’s only source of revenue. Two mistaken assumptions have partly cancelled each other out.

Expect more of this. Accompanying this year’s tax returns will be a ”concise one-page personalised and itemised receipt”. It will show ”in dollar terms, how much of a person’s tax bill was spent on each budget area”.

An initiative of the treasurer, it also has the potential to be misleading. Debt will be displayed as a total, rather than an amount per person, and it will be displayed as gross debt rather than net debt. Net debt per person is about $9800; per taxpayer it’s about $17,200.

Peter Martin is economics editor of The Age.

Twitter: @1petermartin

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