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Australia is a global success story. The structural reforms in the 1980s and '90s of liberalising trade, floating the dollar and reducing government involvement in the economy ignited an unprecedented period of growth.
By avoiding means testing, the government is giving handouts to the rich
Australia is a global success story. The structural reforms in the 1980s and '90s of liberalising trade, floating the dollar and reducing government involvement in the economy ignited an unprecedented period of growth. What followed was almost 30 years of uninterrupted economic growth and a substantial increase in living standards.
Crucially, this happened without a massive spike in inequality. A 2024 report from the Productivity Commission affirmed that our tax and transfer system played a significant role in redistributing income.
And while the size of government ballooned in Europe, with government expenditure soaring to around 50% of GDP (gross domestic product) in the EU, it has remained comparatively lean in Australia, staying around 24%.
Yet, unlike the US, Australia did not gut its social safety net. We deliver top-tier health outcomes, provide robust support to low-income earners and maintain a high-quality public education system.
How did we pull off this exceptional outcome? It's largely because of something the current government seems to want to do less and less: means testing. We can see this in action with policies such as student debt cuts and electric vehicle tax concessions.
The shift towards universal policies may seem fair, but it's creating a system that gives to the wealthy at the expense of the poor.
Hitting the target
The idea is simple: support should be directed to those who lack the financial capacity to pay, while those with sufficient means should contribute for themselves.
Our tax and transfer system is one of the most targeted in the world. Research by academic Peter Whiteford highlights that Australia's social security system is more targeted to the poor than that of any other OECD country.
But despite the success, Australia is drifting from means testing and towards universal programs: initiatives that deliver goods and services to all people irrespective of their ability to pay.
Universally good
Of course, there are some services we should, and do, provide universally. For example, take the armed forces (which protects all Australians equally), public education or even public parks.
Scholars such as Louis Kaplow argue public goods shouldn't be means tested as they're positive for society as a whole.
Universal programs can be attractive to policymakers because they're cheaper and easier to administer since they don't require the assessment of eligibility.
It has also been argued that universal programs can generate broader political support. However, support for Australia's targeted social safety net has remained strong, largely because the majority of Australians benefit from that safety net at some point in their lives.
One argument against means testing is that, by withdrawing benefits as incomes increase, it creates large effective marginal tax rates. These rates capture the increase in tax paid and the reduction in benefits received as a person's income increases.
On paper, these can negatively impact workforce participation, especially for the lower income member in a household, as people may decide they're financially better off not working and receiving welfare instead.
But in practice, it's hard to find large effects of these tax rates as many people simply jump over them when they increase their hours of work by a substantial amount.
Money to the privileged
Our targeted system is fraying on two fronts: the rapid expansion of new universal programs and widening cracks in how we means test existing ones.
Consider the proliferation of universal (or poorly targeted) benefits.
The Energy Bill Relief Fund was first introduced in 2023. Every household and around one million small businesses have received rebates automatically applied to their electricity bills, regardless of income, financial circumstance or energy usage.
The NDIS was designed as a lifeline for those with severe disabilities. But the scheme's costs have blown out, partly because its uncapped model lacks the strict targeting traditionally seen in Australian social services.
The Fringe Benefits Tax exemption for electric vehicles (EVs) removes the 47% tax on eligible, employer-provided EVs, significantly lowering costs via novated leases. This policy provides generous tax concessions to individuals purchasing EVs. It's a targeted subsidy for the rich, as EV owners are primarily high-income.
Universal can be regressive
The combination of progressive taxation (a tax rate that increases as your income rises) and targeted assistance produces a system that is highly progressive. Universality moves away from progressiveness by giving benefits to the wealthy.
Sometimes universality is downright regressive, where more of the relative tax burden is shouldered by low-income earners, such as the EV tax concessions.
Look at the government's decision to cut all HECS-HELP student debts by 20%, which applied universally to all holders of student loans regardless of income.
When we account for the fact that university students and graduates tend to come from wealthier families and generate higher lifetime wages, it becomes clearer how this "universal" program can be seen as taking tax-money away from the broader, often less well-off public to give money to the more privileged.
As I have argued elsewhere, our current childcare subsidy regime is well targeted, reducing costs for low-income families to a small fraction of the true price.
But recent expansion of these benefits has been far less targeted, with a growing share of additional spending flowing to relatively wealthy households.
Proposals such as a three-day guarantee would push this further, funnelling substantial new subsidies to families who can readily afford to pay.
Rather than focusing support on those who need it most, these policies risk making the system increasingly regressive.
Their political appeal is obvious. But universal subsidies come at a cost: the broader and less targeted they are, the less equitable they become.
And even when we do means test, loopholes can undermine effectiveness.
Means testing only works if we accurately assess people's wealth and income. If certain assets are "excluded", wealthy people can look poor on paper and receive government benefits.
Older Australians have become much wealthier on average. A substantial proportion receiving the full age pension live in homes worth more than A$1 million. As highlighted in our paper, excluding the family home from the pension asset test means taxpayers subsidise the consumption of asset-millionaires, who then pass their untaxed wealth to their children. This is a disaster for intergenerational equity.
What do we want?
Universal benefits are extremely expensive. Despite the popular narrative that suggests "we can just get the rich to pay more tax", this is not reflected in reality.
France and the Scandinavian countries have had to rely on very heavy tax burdens on the middle class in order to afford their universal systems. These are achieved through high income taxes, broad social security levies and GST rates of well over 20%.
We can go down this road if Australians truly want it, but they likely don't.
The alternative, of course, is to just fund these universal schemes through larger budget deficits. But this is simply a tax on future Australians.
TheConversation.com
Author: Robert Breunig - Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University
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