How much bigger has Australia’s economy become since 1994? The answer, per head of population, seems to be: close to 50%. That’s not in current dollars, but adjusted for inflation.
So can “Australia” (read: the big end of town) afford to raise the rate of Newstart payments — currently at a base rate of $273 a week for a single person — for the unemployed?
The year 1994 is significant here. That was the last time a federal government raised Newstart in real (after-inflation) terms. None of the increased wealth since then has flowed to the jobless.
It seems “Australia” could afford a better deal for the unemployed in 1994, when the economy was much smaller, but not now given the resistance to any real rise in the Newstart allowance.
So why hasn’t someone taken a professional look at what the costs and benefits of a substantial raise to Newstart might actually be?
Well, someone has. On September 17 the Australian Council of Social Service released the report, Analysis of the impact of raising benefit rates. Prepared by the firm Deloitte Access Economics, the study analyses the likely effects of raising Newstart by $75 a week.
The main conclusion? Granting this raise to the 770,000 people on the Newstart “single rate” (or on other benefits paid on the same basis) would not send the economy into a tailspin — in fact, the move would provide a useful stimulus.
Effective demand
The direct cost to the federal budget would be about $3.3 billion a year. But this value would not just disappear; it would flow on as additional effective demand for goods and services.
This extra demand would mobilise private capital that was idle or being used in relatively ineffective ways. Existing businesses would be encouraged to expand their activity, and owners of capital, to set up new businesses.
Deloitte’s report argues that “the size of the Australian economy … would lift by some $4.0 billion [in 2020-21] as a result of that extra spending.”
About 12,000 extra jobs would be created. The total real wages being paid to workers would rise fractionally, by about 0.2%. Corporate profits would also rise in a similar proportion.
To be effective, a monetary stimulus needs to be spent quickly rather than saved. No problem here — Newstart recipients typically live from payment to payment, and find saving money next to impossible.
Also, the extra money needs to be spent mainly on goods and services from within the country, rather than on imports. Newstart recipients overwhelmingly spend their money to meet a few basic needs, primarily rent, food and electricity. These are almost all supplied from within Australia.
Not only would a raise to Newstart provide a closely targeted stimulus to the economy; additional tax revenue would flow back to the government from the new or expanded businesses and their employees.
The report suggests an extra $1 billion in federal revenues in 2020-21, and $250 million in state and territory taxes. A substantial part of the cost of raising Newstart would be met by the economic flow-ons from the initiative itself.
Regions
As a stimulus measure, a raise to Newstart would also be well targeted in another respect: the money would go heavily to deprived localities. Deloitte’s report provides figures on how Australia’s municipalities would benefit.
For plush North Sydney, the total extra disposable income in 2018-19 would be just $2.25 million. But for Blacktown in Sydney’s west, the sum would be $45.33 million. Salisbury municipality, in Adelaide’s depressed northern suburbs, would gain $33.28 million.
In per capita terms, low-income regional areas (where unemployment rates tend to be higher) would benefit especially. Residents of Walgett Shire in western NSW would gain, on average, $376 each in additional transfers in 2018-19, and those of Whyalla in South Australia, $328.
Denizens of well-heeled Peppermint Grove, in Western Australia, would have to be content with just $61.
The picture is not exclusively positive. Everything else being equal, the heightened economic activity would result in slightly greater inflation — though prices, according to the report, would not rise by as much as the rise in wages.
Interest rates would also rise, tending to reduce housing construction and renovation.
Further, the exchange rate of the Australian dollar would rise, and the more expensive dollar would weigh on exports.
Together with other factors, the slightly higher interest and exchange rates would cause the stimulus to fade within a few years. By 2024-25 the extra 12,000 jobs would be back to around 4400.
But other, less easily quantifiable benefits would be more enduring.
Misers pay twice
For modern societies, extreme inequality never comes cheap. Australia pays mightily for keeping its unemployed on wretched incomes.
For a start, there are the health implications. People who struggle to pay everyday bills suffer high levels of stress. The Deloitte report notes research linking unemployment to mental health problems and heart disease. Both cost the public health system dearly.
People who are chronically short of money also tend to eat badly, filling up on cheap sugars and other carbohydrates. The resulting obesity and diabetes, with their many lifelong complications, cost the health budget big sums.
A further cost relates to social deviance. A government that keeps unemployment benefits at some of the lowest levels in the advanced world during the first year of payments should not be surprised if jobless people turn to crime. When that happens, the cost to society of police, courts and jails is not small.
Meanwhile, the costs of extreme social inequality do not stop with the current generation of the deprived. As Deloitte’s report points out, children growing up in households where parents spend long periods on income support are less likely to complete Year 12.
Raising households out of dire poverty can make the children of the jobless healthier and more productive in later life.
In deliberating on whether to raise Newstart, the government might keep in mind a Russian saying: “Misers pay twice”.
The truth, though, is that conservative governments have always done their sums. Prime Minister Scott Morrison and his ministers must be aware that paying inhumanly low unemployment benefits probably costs more than it saves.
The real reason why Newstart has been kept so paltry is that the wealthy backers of the federal Coalition need it that way.
Imagine if working people did not fear unemployment, with the prospect of repossessions and homelessness, along with the threat of punitive “breaching” and the humiliations of Work for the Dole.
Workers would be readier to organise themselves, and to fight for secure full-time jobs with safe conditions and liveable pay. For the employer class, things would then start getting really expensive.