The Energy Supplement cut in context

Why the budget pain will hit the poorest Australians hardest

Peter Whiteford, Daniel Nethery

Economics and finance, Government and governance, Social policy | Australia

27 August 2016

The Australian Government is set to discontinue the Energy Supplement which tops up major social security payments, but as Peter Whiteford and Daniel Nethery write, the pain of the cut will disproportionately hit the poorest Australians.

On Monday a coalition of welfare groups called on the Government to abandon its Budget 2016 measure to discontinue the Energy Supplement, which tops up all major social security payments, including the Age and Disability Support Pensions, Family Tax Benefit Parts A and B, Parenting and Carer Payments, and Newstart and Youth Allowances.

The measure would see people who become new recipients of a payment on or after 20 September 2016 lose entitlement to the Supplement.

The Budget 2016 measure is the most recent of several modifications of what began as the Clean Energy Supplement, introduced by the Gillard Government over the course of 2013 to compensate social security recipients for increased costs arising from the introduction of a carbon price.

In Budget 2014 the Abbott Government initially proposed to cease indexation of the Supplement from 1 July 2014; the legislation subsequently passed by the Senate ceased indexation on 1 January 2015. That legislation also rebadged the Supplement to drop the word “Clean” from its name.

The Budget 2016 measure also closes to new recipients another component of carbon price compensation, the Single Income Family Supplement, from 1 July 2017. Taken together these changes are expected to save $1.4 billion over the four years of the forward estimates.

While discontinuing the Energy Supplement would affect many social security recipients, the coalition of welfare groups rightly focused on the plight of those on Newstart Allowance.

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Newstart Allowance is already low by any relevant national or international benchmark, and has not increased in real terms since 1996.

Moreover, closing the Supplement means that Newstart will actually be worse for the newly unemployed than if the Supplement had never been introduced. This is because the Supplement was used to offset indexation increases that would otherwise have applied to Newstart itself.

To put these changes in context, we have once again calculated the impact of Budget measures on the disposable income of households typically affected. Our calculations apply on 1 July 2017 so as to fully capture the combined and accumulated impact of the various measures.

Our calculations show that by removing the Energy Supplement the level of benefits for people receiving Newstart Allowance would fall by $4.40 per week for singles and for $7.90 per week for couples. In both households this would equate to 1.6 per cent of basic disposable income – not including Rent Assistance, which however only partially covers a typical rent.

This impact must be considered alongside other measures that will affect these households.

The Government has already legislated to abolish the Income Support Bonus once the forthcoming September 2016 instalment has been paid. In September 2017 the Bonus would have been worth $112.80 for singles and $93.90 for members of a couple, also equivalent to 1.6 per cent of the basic disposable income of these household types.

Then there is one of the so-called “zombie” measures to introduce a one-week ordinary waiting period for all working-age payments. From 1 July 2017 this proposal would see new recipients of Newstart Allowance forgo $267 as singles or $241.40 as members of a couple, or 1.9 per cent of annual basic disposable income.

Taken together these three changes would see the disposable income of single and couple households on Newstart Allowance fall by approximately 5 per cent.

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Compare this to the outcomes for households at the higher end of the income scale. At the same time as the Government asks new single Newstart recipients to forgo around $720 per year, people on annual incomes of $80,000 or more will receive a tax cut worth up to $315 once their income exceeds $87,000.

For singles and couples without children, this tax cut will represent less than half of one per cent of their disposable income.

For couples and singles with children, the situation is complicated by other measures that affect their disposable income.

For instance, some families may see their tax cut effectively voided by the closure of the Single Income Family Supplement mentioned above. This supplement is worth $300 per year for families with one primary earner, whether a member of a couple or a lone parent, on an income between $80,000 and $120,000.

Families may also experience reductions in their disposable income due to the other “zombie” measures, which according to the latest update by the Parliamentary Budget Office yield, over the forward estimates, gross savings of $9.1 billion from social security programs, especially Family Tax Benefit.

These savings would be partly offset by the cost of the new childcare package, estimated at $3.4 billion over the same period. But the winners from this new spending would not be the same as the losers, and many of those benefiting from increased childcare assistance would be higher income families.

Calculating the impact of these changes on families with children requires a more comprehensive analysis due to the raft of measures, both legislated and proposed, that affect their disposable income.

What is already clear, however, is that the Budget pain still falls disproportionately on the poorest Australians.

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Citation

Whiteford, Peter and Daniel Nethery. 2016. "The Energy Supplement Cut In Context - Policy Forum". Policy Forum. http://www.policyforum.net/energy-supplement-cut-context/.

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