Raising Newstart – an economic and social winner

With the economy slowing there are no shortage of suggestions for actions to stimulate growth. Of course the RBA’s rate cuts and the government’s tax cuts package are intended to do just this, although both are the subject of much debate by economists and others.

But there is another action that could be taken which to my mind, has little to dispute its economic benefit. And it has the welcome bonus of being socially equitable too.

Raising the level of Newstart is a policy KPMG has been calling for since our major 2016 paper, Solving the Structural Deficit, which took a holistic look at the budget and included a series of recommendations from welfare, health, super, education and other sectors.

The point of that paper was that while Australia needed to cut back some areas of public expenditure which were adding to the deficit for little gain, there were other areas where investment would pay dividends in the long run. Raising Newstart was one of them.

Why is this? We, and others such as the BCA, argued – and continue to do so – that the low level of this payment was actually forming a barrier to employment, as it was insufficient to allow unemployed people to actively conduct a job search. So it was actually worsening the deficit in the long-run.

The key here is that Newstart recipients are amongst the poorest people in society – so they spend, rather than save, almost all they receive. So while payments higher up the scale have more debatable value in terms of economic stimulus, there is no question that this policy will act as an effective fiscal stimulus by boosting the consumption side of the economy.

The fact is that Newstart hasn’t increased in real terms since 1994. (It is currently $277.85/week for a single person with no dependents). If we were to raise Newstart to match increases in wages over the past 25 years it would need to be raised by 30%, or about $83/wk. If Newstart had kept pace with wage inflation it would be around $360/wk today.

Another way of looking at this is Newstart as a proportion of Average Weekly Earnings. In 1994 Newstart represented around 30% of the average weekly wage of those employed in the retail and accommodation/restaurant sectors – traditionally the lowest paid sectors in the Australian economy.

Today those sectors earn around $1180/wk – of which 30% is equal to $355/wk. So while in our 2016 paper we called for a rise from $250, as it was then, to $300 a week, I would now say that around $355/wk would seem to be a reasonable starting point number for Newstart.

But more detailed analysis research should determine the exact amount, given the interaction of other welfare payments. As we discussed in that report, the low level of Newstart might well be encouraging the unemployed to seek higher income support in the form of disability payments. This is both psychologically damaging for the individuals and costly for government. The differential between the disability payment and Newstart needs to be substantially reduced although it need not be eliminated.

We also pointed out that the low level of Newstart has the effect of locking people into jobs for fear that they could not survive on Newstart and cannot risk moving jobs. All these factors are still valid.

So how much would this cost the public purse? While the number of people receiving Newstart is not a regularly disclosed number, our best estimate is it is around 700,000 to 710,000 – this would mean the direct cost of bringing Newstart up its 1994 wage equivalent is about $3bn.

The FY19 budget outcome is now going to be close to balance – which represents around $4bn of additional tax receipts not anticipated at the time of the April budget. This wind-fall gain in tax receipts has been achieved by, predominately, the higher company tax paid by iron ore miners. The budget had assumed a spot price of iron ore of US$55/tonne by March 2020 and today’s price is ~US$120/tonne.

Of course raising Newstart would be a permanent, not temporary cost to the budget, But with the Budget forward estimates for the next 4 years anticipating surpluses of around $7bn in FY20, increasing to $11bn, $17bn and $9bn in the outer years, Australia can afford it for the foreseeable future.

Some would question whether even $360/wk is enough to enable an effective job search allowance and also a decent, fair living for anyone in our society. Transport in looking for work, appropriate clothing for interviews and other costs don’t come cheap.

These decisions are not easy. But for fiscal stimulus, and a societal benefit of giving people a hand-up when they are trying to get back into the workforce, a raising of the Newstart level has a lot going for it.


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