Perhaps Newstart doesn’t require a new start

In an interview with The Australian earlier this week, the Minister for Social Services, Kevin Andrews, put forward the idea of creating multiple tiers of the Disability Support Pension (DSP) and Newstart Allowance. According to The Australian, these tiers might involve different rates of payment and/or eligibility criteria within each payment.

Australia’s income support system makes a clear distinction between pensions and allowances – distinctions that are largely defined by the rate of payment and whether looking for work is a condition of eligibility.

Pensions are payments made to those who have a legitimate reason for not participating in paid employment – carers, the elderly and those with disabilities who have little capacity to work. These people receive a higher maximum rate of payment and are eligible to receive their pensions whether or not they are looking for work (they are not activity tested). There is not the same expectation that pensioners should support themselves as exists for those on unemployment benefits.

Newstart, on the other hand, is a payment intended for those of working age who find themselves temporarily without work. The maximum rate of Newstart is lower than that for pensions, and eligibility is contingent upon looking for work. Unemployment benefits are a qualitatively different area of income support policy that require finely balanced trade-offs between payment adequacy and work incentives whilst avoiding incentivising recipients to move off activity tested payments onto those that are not.

While there may be good arguments for a more finely tiered DSP, it is not clear what increasing the complexity of Newstart – as Mr Andrews suggests – would achieve. If the activity tests for a subgroup of Newstart recipients were removed, or the maximum rate increased to that of a pension, the line between pension and allowance would become blurred. To do both is to create a new pension.

It is certainly true that many Newstart recipients remain on the allowance for a considerable length of time: Thirty-two percent of those who registered between July 2011 and June 2012 remained on Newstart for at least 12 months. It is not, however, obvious that partitioning the recipient population on the basis of benefit duration is a good move. Relaxing eligibility criteria, such as the activity test, or increasing the generosity of the payment for long-term recipients is likely to increase the number, and cost, of long-term Newstart receipt.

Rather than increasing the complexity of Australia’s (already complex) tax and transfer system, the Abbott government should seek to better understand why it is that so many of those on Newstart are not moving into employment and target policy at the root cause.

Matthew Taylor is a Research Fellow at The Centre for Independent Studies.