Neoliberalism changed many things in Australia. Unions are weaker. Inequality is higher. But exactly what changed is often surprising. The state did not shrink. Social spending did not decrease, nor did it become less redistributive. Household wealth has increased rapidly, but largely due to changes in social policy rather than rising productivity.
The relationship between liberalisation and the welfare state is both more central and more complicated than we often imagine. In Politics, Inequality and the Australian Welfare State After Liberalisation I sought to move beyond a lament for declining egalitarianism, and to instead learn from the political strategies that have mitigated and even reduced inequality in hard times.
The book examines case studies from three forms of liberalisation – targeting benefits, marketizing services and financialising the life course. Through each I highlight different models of reform that are broadly consistent with liberalisation (means-testing benefits, facilitating private service providers or using asset-debt relations), yet have different political and distributional consequences.
Asymmetric budget rules
To unpack these differences, I use theories of state finance (which Gareth Bryant and I explore elsewhere) that explain the size and structure of the state’s economic role. Liberalisation both seeks to constrain and redefine state finance. Key to Australia’s expertise is a strong focus on the size of the state, as measured by the tax to GDP ratio (and social spending to GDP).
From the 1980s Labor has been committed to the so called ‘trilogy’, promising not to raise taxes, social spending or debt as a proportion of the economy. That commitment breaks a decades long post-War trend across high income countries for the welfare state and taxes to grow faster than incomes. This strong fiscal constraint rules out most traditional social democratic strategies for advancing equality.
Alongside fiscal constraint, liberalisation also remakes the state to resemble the market. Competition policy reorganises state finance. Each service is fiscally separated, allowing corporatisation and privatisation, and competition within social provision. Enforced competition underpins both marketisation and financialisation.
But the construction of the state in market terms doesn’t produce the ‘level playing field’ it promises. Market rules allow private providers to access uniquely ‘private’ advantages, but are applied to government in ways that prevent the state doing likewise. Corporations can borrow to invest more easily than states (even though they are riskier). State promises to pay for citizens’ pensions or healthcare are reimagined as liabilities, but the future taxes to fund them don’t count as assets.
These budgetary asymmetries reflect the challenges of applying accounting rules designed for the private sector (which focus on profitability and solvency) to the public sector (that doesn’t return profits and can’t go bankrupt). Those challenges are combined with a good dose of politics and self-interest to use budget rules to constrain state action.
Asymmetric budget rules help to break the older social democratic politics of the post-War era. They make it harder to use politics to simply take some parts of life out of the market – to decommodify welfare through public finance. Instead, they push governments towards quasi-market solutions.
The dual welfare state
Traditionally social policy has expanded by asserting different criteria for social spending than for market activity. However, many of the strategies that advanced equality did the opposite – they attempted to treat taxation and spending in the same way to show how market advocates were not so much winding back the state as they were creating a ‘hidden’ or ‘dual’ welfare state. Market advocates had worked out how to structure public spending as tax cuts and structure tax increases in spending cuts.
The history of the dual welfare state pre-dates liberalisation. Mid-century public budget rules were constructed to aid macro economic management by tracing how much demand the state was adding or subtracting from the economy. Thus, budgets focused on cash flows in real time. Macro economically, a tax cut is pretty much the same as a spending increase. Politically, though, the fiscal constraints of liberalisation made them worlds apart. A tax cut fit Labor’s trilogy rules, a spending increase broke them.
The hidden welfare state works by disguising fiscal support for the better off as tax cuts – such as the tax concessions once enjoyed for having a stay-at-home wife and still enjoyed on capital gains – and constructing bigger fiscal claims on low-income folks as tighter means-tests. It is not just that tax concessions work like spending, but are not budgeted like spending, or means-tests have almost identical effects to marginal income tax rates, it’s that the politics reverses. Citizens resist spending on the rich and tax claims on the poor, but tolerate tax concessions and means-testing.
Where more egalitarian social policy did advance, it often did so by revealing these asymmetries and finding ways to reframe state finance. Australia decreased child poverty more rapidly than almost any other high-income country in the 1980s and 90s, but if you count tax concessions as expenditure, the total amount spent barely moved. Feminists successfully resisted the tight targeting of new family spending – although they failed to make it entirely universal. Almost all the new money needed for Medibank (the first version of Medicare) came from closing tax concessions for private health.
The strategies used to expand social spending applied market logics to manage the limits of state finance more consistently. The two accounting techniques that support these strategies – tax expenditure statements and effective marginal tax rates – apply orthodox economic and tax principles, rather than asserting an alternative ‘social’ logic. A similar extension of economic principles pushed in the other direction, not to clarify the boundaries of the state, but to facilitate the state taking on ‘market’ roles.
Hybrid policy tools
Where the hidden welfare state presents the state as more egalitarian than it really is, the financialisation of the state often suggests it is more privatised than it is. Budgetary changes designed to facilitate the corporatisation of state functions created unexpected opportunities for the state to act like a private firm. Of course, the state did shift functions from public to private, but it also extended its reach to invest, insure, lend and underwrite in hybrid forms that combine public and private logics, marketizing social life while also socialising risk.
We often forget just how marketized Medicare is. Its power comes not through traditional nationalisation, but as a public competitor to existing private (hospital, health insurance, health services) markets. Because Australia lacks a strong tradition of virtually any form of socialised care, marketisation enabled the state to enter the market as a competitor, rather than undermining an existing public monopoly. Medicare’s structure promised to lower medical inflation (and thus costs to government) through competition, while avoiding constitutional barriers to overt nationalisation.
Similarly, student loans are clearly market-like compared to ordinary tax and spend policies, but they are not market contracts. The debts are issued and collected by the state, and their conditions reflect social principles around ability to pay. Likewise, the newly established Housing Affordability Future Fund is invested entirely in market products, but because it is a public fund, its proceeds follow social principles.
These hybrid policies are not a public finance. They remain marketized, and thus more limited instruments of egalitarian social policy. But nor are they private finance, even though the expansion of hybrid models seems to defy the fiscal constraints of liberalisation. Our tools for understanding hybridity are underdeveloped, making it hard to evaluate policy alternatives and challenge inequalities. In many cases, what appear as technical changes (like how super funds operate), are the most consequential for determining just how public or private a hybrid model is.
Contests around dual and hybrid welfare continue to dominate welfare politics. The most promising campaigns to expand state finance continue to emphasis tax concessions. Linking the concessions in our housing and superannuation systems to addressing the increasingly generational inequalities they produce has the potential to mobilise a powerful new politics. Likewise, despite its extreme fiscal caution on social issues (not submarines) Labor’s HAFF appears to have simply created money out of nothing. There is no new tax or conventional fiscal claim at all, yet there is new spending.
Understanding the policy tools at stake in liberalised welfare is only half the story. Converting tax concessions into spending, highlighting the disincentives of means-testing and mobilising the state as an insurer or lender all aid egalitarian strategies, helping to navigate the fiscal constraints applied by liberalisation. But none of these changes advanced through clever design alone. All were hard fought through contentious politics. Importantly connecting policy design to political mobilisation involved a very similar hybrid logic, where liberalisation’s attempt to turn everything into a market was met by a feminist counter-movement to contest the social as the economic – which I explore in Part 2 of this post.