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Consumer confidence at a high

National economics correspondent Peter Martin explains new figures showing burgeoning public confidence in the economy.

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Physics and economics are bedevilled by the phenomenon known as ''hysteresis''. It's where, once made, a change can't be easily undone. In the physical world it applies to breaking an egg. In the world of social policy it applies to extending to the well-off benefits that were previously reserved for the poor.

The Baby Bonus is a case in point. By the end of the Hawke-Keating government in 1996 Australia had one of the tightest social security systems in the world. On one estimate, 92 per cent of government payments went to the half of the population that earned the least. By the end of the Howard government a decade later, many more of the payments were spilling over to the top half. A lesser 87 per cent went to the bottom half.

The Australian National University's Professor Peter Whiteford, who did the calculations, is keen to point out that even after the Howard era, Australian payouts were still the most tightly aimed of the nations that make up the Organisation for Economic Co-operation and Development.

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The Baby Bonus was one of Howard's most brazen spillovers. Instead of directing it to parents who had earned the least, it was funnelled to those who had earned the most. Mothers who had high incomes in the year before their child was born were able to claim $2500 per year. Mothers who had been on low incomes got $500.

Two years later it became a fairer flat $3000, which later climbed to $5000. But that was as fair as it got. No means test, no cut-off. Once extended to the well-off it couldn't easily be pried from their hands.

Kevin Rudd developed courage in 2008 and denied it to families earning more than $150,000 a year. For his trouble he was accused of being anti-children.

''Every mother loves her baby,'' declared opposition leader Brendan Nelson. ''Every baby is valued and Mr Rudd should value all babies equally. We should not live in an Australia where Mr Rudd thinks that some babies are more valuable than others.''

Late last year as the government's budget woes worsened it decided to trim the bonus for second and subsequent babies. They were each to attract a payment of $3000 instead of $5000. ''The government seems to want to penalise anyone that has a second or third child,'' said Coalition Treasury spokesman Joe Hockey. ''I think that worked quite well in China, didn't it?''

The Private Health Insurance Rebate was the Baby Bonus writ large. Overwhelmingly taken up by middle-to-high-income earners who could afford private health insurance, it was budgeted to cost the Howard government $1 billion in its first year. Thirteen years on it is costing $5 billion a year. The Bureau of Statistics says Australia's highest earning families (the top 20 per cent) get $16 a week. The lowest earners get $5. Labor has hacked away at the rebate since taking office, most recently means testing it so that families earning more than $260,000 get nothing.

But in assembling $6 billion of proposed savings for the May budget the Australian Council of Social Service has eschewed even bigger measures, such as getting rid of the private health insurance rebate in its entirety.

''We would need to convince powerful people,'' ACOSS president Cassandra Goldie says. ''We would like to do more, but we need to build a consensus.''

Meanwhile, Labor has been quietly eating away at the rebate's foundations. Until now it has paid a certain proportion of whatever the health insurance funds have charged. As medical costs have soared (by 7 per cent a year) so have the payouts. But from April next year the payout will only climb by the rate of inflation, typically just 2 per cent to 3 per cent a year. Over time this will mean the government will pay out much less than it would have to families that aren't particularly needy.

Labor has done the same sort of thing with pensions. The Howard government made it easier for middle earners to keep at least a part pension by cutting the rate at which the income test took it away from 50¢ in the dollar to 40¢. Labor has changed it back to 50¢.

Professor Whiteford wants Labor to go further and cut the rate of six-monthly pension increases.

The Henry Tax Review recommended finding a midpoint and increasing both the pension and unemployment benefits at a rate somewhere in between the consumer price index and wages.

The number of middle-income Australians with benefits to lose has grown. They are better organised than low-income Australians, better able to use the political process and have entire industries such as superannuation and private health insurance behind them.

It took just a week for the Gillard government to back down on a plan floated in January to tax currently untaxed super payouts on balances of more than $1 million.

Because middle class welfare is hard to unwind, Labor has been moving slowly and, for the most part, quietly. Future governments may thank it, but not many people will thank it today.

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