This report is the second in a series of three titled ‘Restoring Self-Reliance in Welfare.’ The first report, The $85 Billion Tax/Welfare Churn, showed the mass welfare state has outlived its usefulness. This second report explains why we should replace it with greater use of self-funded benefits and services. The third report, Twenty Million Future Funds, explains the economic and social reasons for reducing tax welfare churning by allowing people to retain more of their income in return for reduced use of government benefits and services. This requires lower taxes and increased use of personal savings, loans and insurance.
Most people earn enough to buy the services they need, but they cannot do so because they have to pay high taxes to fund the services the government wants them to have. The mass welfare state came into existence to provide people with resources they could not afford, but it has evolved into a system that is preventing them from leading independent lives.
The report lists six key arguments for moving from state welfare to self-funding:
(1) Efficiency: When the government taxes people’s earnings, and then returns their money to them in the form of welfare benefits or services in kind, it incurs unnecessary administrative costs, it imposes compliance costs, and it generates enforcement costs incurred in detecting and chasing people who fraudulently claim benefits. All three would fall if people paid for their own welfare (although government provision will still be needed in some areas).
(2) Incentives: Scaling back the welfare state would dramatically reduce the tax burden. This would raise the rate of economic activity, and lift general living standards.
(3) Sustainability: The ageing population will increase pressure on government age pensions and health budgets. A move to self-funding would reduce this pressure. Australia’s personal superannuation accounts mean projected spending on pensions is well below the OECD average. Introduction of medical savings accounts would similarly reduce pressure on government health budgets by helping contain escalating public demand for newer, high-cost treatments.
(4) Personal empowerment: When people use their own money to provide for themselves and their dependents, they derive a sense of autonomy, self-worth and personal responsibility which is denied when money is taken from them in taxes and then returned as government benefits and services. Because it does not trust us to determine things for ourselves, the welfare state ends up infantilising us. Whenever a problem arises, we expect government to do something about it, rather than tackling it ourselves.
(5) Social cohesion: Despite a widespread academic belief that the welfare state promotes social harmony, the reverse is the case. Cohesion is built from the bottom up, not by governments taking responsibilities away from us. Far from contributing to social harmony, increased government welfare spending has coincided with rising social problems such as crime.
(6) Depoliticisation of civil society: The welfare state is now the core business of government. As spending increases, so government’s influence on society increases. We start to compete to gain a bigger share of government handouts, and the knowledge that the government will pick us up if we behave foolishly has enabled foolish and ill-advised behaviour to flourish.
The key social division today is that between a self-reliant ‘middle mass’ and a state-dependent, marginalised ‘underclass.’ The mass welfare state is unravelling because the former can now afford to exit the system. Defenders of this mass system want the escaping ‘middle mass’ to be locked back in to state dependency by increasing their taxes, thus forcing them to accept state services. A more sensible alternative is to let the existing system wind down, and to redirect resources into boosting the purchasing power of those who are currently unable to afford self-funded alternatives.
Professor Peter Saunders is the Social Research Director at The Centre for Independent Studies.