Hockey: mean or means- tests?

Hockey is too experienced a politician not to know that. His statements are and will also be seen to be, a form of warning shot across the bows of the Leader of the Opposition, Tony Abbott, who has long been causing angst among the more economically minded of his colleagues over the impact of some of his policy positions on the bottom line for a Coalition government. As Labor critics point out, Abbott has, in opposition, strongly opposed any changes to the welfare system which have had the effect of tightening the system, and has himself made open-ended promises (for example over maternity leave) or floated policy options (for example about subsidising nannies) which could massively increase the welfare bill. If one adds in Abbott's stalwart defence of the status quo over tax expenditure (for example over health insurance or superannuation), and his timidity about removing the quid even as he has promised to remove pro quos , one can understand a certain despair among those shadow ministers genuinely attempting to present themselves as guardians of fiscal surpluses and cautious economic management.

That some of the obvious tensions between Andrew Robb and Abbott, or Hockey and Abbott, or between ''responsible'' Liberals and the more ''populist'' Nationals also reflect leadership tensions does not help.

In the time of the Howard government, one of Abbott's cabinet colleagues complained that Abbott did not ''have a fiscally responsible bone in his body''. He added that Abbott had always benefited from Howard's patronage, not least in always being allowed to throw money at any political or administrative problem, as in health. He had not, as many other ministers had done, ever had to make big savings, unpopular cuts to programs, or to defend the inevitable anomalies resulting. As a result, some think, Abbott tends to downplay the difficulties of finding savings.

He is still also very cautious, despite what many observers now see as an inevitable landslid Coalition victory at the next election. The collapse of Labor support means that the Liberals could give themselves a moral mandate to do some genuinely unpopular things in which many Liberals believe - perhaps a restoration of Work Choices. But Abbott knows that the Liberals could still blow it, and is very reluctant to embrace policies of a sort which - by having immediately obvious losers as well as winners - could cost the Coalition votes.

That, he must fear, is just the sort of thing that a sustained Labor scare campaign over welfare cuts, brought on by Hockey's statements, could bring. Alongside the continual Labor scare campaigns about a secret Coalition agenda on Work Choices, it could shape the political contests as being one about hard economics on the one hand, and social policy (including IR) on the other. An incumbent government might well have ways of staging such debates to the coaltion's disadvantage, presenting itself as tough but fair, and Abbott and Hockey as ruthless and heartless. Welfare is not only about the ''poor'' but about the rights and expectations of ordinary, decent

middle-class Australians - just the sort of people now on Abbott's side.

It is within this zone that Hockey is right, if sometimes, just a little cute. If one compares Australia with Asian economies, our welfare sector looks big, whether in absolute terms (bigger than most neighbouring GNPs) or as a proportion of GNP. By comparison with Europe, however, our sector is small - typically taking up about half of the proportion of GNP.

Australian welfare is more tightly targeted towards those who need it. Europe, by comparison, has more universal entitlement, with high taxes to match. And European benefits are generally far more generous than ours.

One consequence is that the combined welfare and tax regimes of Europe are generally far more progressive in economic effect than in the Australian regime.

But another consequence, as Hockey points out, is that cycling money through government agencies seriously reduces choice and runs the risk of corroding the very heart of free enterprise. All the more so if it's all subsidised by debts instead of taxes.

But even if we think that our targeting system is better, it is still highly inefficient at serving those in genuine need, while doling out billions to some who hardly need them.

The British Parliament's public accounts committee has recently completed a report into means testing in Britain, well worth a study here, where the problems are almost entirely the same.

Britain, like us, has a bewildering set of programs designed to deal with people needing or wanting help from the state. There are scores of health, welfare, and community service programs feeding off such entitlement programs. Although the kingdom is not exactly a federation, it also has the Australian feature of programs run, or administered, at national, regional and local government level - with all of the familiar problems of silos, coordination and priorities this involves.

A good many programs are means- tested, of course. But the system of means testing varies according to program, if without reference to any central organising principle. Thus, as in Australia, we have some programs which are means-tested according to income and assets, some by assets only, and some by income only. In some tests, as in Australia, more liquid assets are often double-counted as imputed income. Often very similar programs having essentially identical ends have greatly differing means tests, or entitlements once one has negotiated them. Likewise, a good many means tests impose high effective marginal tax rates that operated as disincentives to work, get well or change one's circumstances.

Here, anyway are the chief conclusions, all of which are also major problems in Australia.

■ No single body is responsible for coordinating means-testing across government. As a result there is limited oversight of the interactions of benefits programs.

■ It is not clear what effect some means-tested systems have on incentives to work.

■ Agencies do not understand the impact of administering means tests - or how to devise schemes that fit in with broader objectives, or work out the impact of different schemes on claimants.

■ The benefit system is hard to understand and places a high burden on claimants. It does not directly say so but difficulties of comprehension are not only for claimants: people behind the counter often have only hazy understandings.

■ Agencies cannot explain why the administrative costs of different means-tested schemes vary so widely. In Britain, for example, the cost of processing a new claim for pension credit is £351 ($A545)and a new claim for income support is £181 ($A281). Here in Australia, the cost of paying white bureaucrats to ensuring that half of the welfare income of a remote Aboriginal area is spent only on food and clothing is many times the income in question.

■ Schemes that work well with firms having big payrolls and computer systems do not necessarily work well with small businesses, often causing major problems with real time information, overpayment and underpayment.

I could imagine extra problems. I would not mind betting, for example, that the more a benefit, means-tested or not, applies as ''middle-class welfare'' the less tightly it is monitored to prevent fraud and abuse. By contrast, anything focused towards the underclass is premised on the assumption that most of the recipients are unworthy, potential fraudsters, with payments suspended until there is cross-checking, and with non-stop efforts to effect ''compliance'' with requirements at the risk of entirely arbitrary penalties.

We certainly have schemes whereby people with exactly the same level of wealth are getting quite different levels of assistance, thanks to the operation of different tests.

Such are not problems merely for Centrelink - the agency charged with administering schemes devised by other - or even for the Department of Human Services.

Nor is it just for agencies such as Education, Employment and Workplace Relations, which write the rules for the meanest and least justifiable of the entitlement schemes.

It is, rather, a problem of central government. Indeed the most useful work on the subject has been done by Treasury, particularly with the Henry review of the tax system published two years ago, but now mouldering in the too-hard basket.

As that review recognised, one cannot tinker with the welfare system without also tinkering with the tax system. Actually, one can (and indeed often does) but often with quite perverse effects.

On Thursday night, the Gillard government was ''officially leaking'' details of a new scheme to make older people contribute more to the cost of aged care. This is so that news of this saving initiative is not swamped by the ''bad'' news of the budget.

This announcement, spun to make it sound wonderful, turns on means tests. I expect that it is sensible, and rational, and that its means test is defensible.

But I expect that this is but yet another addition to about 30 means tests imposed by government, and that the differences between this new test and existing tests imposed on, say, student allowances, defence force housing, or eligibility for child care rebate are incapable of being justified on social, economic or even crude political grounds.

Where Australia is a little ahead, however, is that the Henry review has spelt out the general principles on which serious economic and social reform of such matters, or even wider reform of interactions between tax and welfare payments, could occur.

It does not envisage a single means test, embracing both income and assets, operating for every type of help from government. Some differences are justified. The means test for a pension, given to someone not expected to work, need not be as focused on disincentives to work for people who are able and expected to work, now or in the near future, for example. Family assistance payments, through the tax system, address horizontal as well as vertical equity.

Some other types of help, particularly though tax deductions, actually benefit the rich much more than the poor.

No wonder the Henry review is gathering dust. Even starting on an exercise of producing fairness and equity, and economy, might be, as Paul Keating might put it, like throwing a grenade into a billabong.

Who knows what perks, anomalies and political problems could emerge among the dead logs and fish?

I should not be surprised if a reforming Joe Hockey or Andrew Robb could find $20 billion in savings by having more rational systems of entitlement.

The problem for them - and Tony Abbott, or for that matter Penny Wong, Wayne Swan and Julia Gillard - is that the savings would not be coming from the poor but from entitlement-minded members of sensitive political constituencies.

That might, indeed, help explain why there are so many different systems in the first place.