Home' Policy Magazine : Policy Vol 33 - No 3 Contents 19
POLICY • Vol. 33 No. 3 • Spring 2017
The Henry Tax Review agrees noting ‘the primary
purpose of government assistance payments is to
ensure a minimum adequate standard of living,
taking into account individual circumstances and
prevailing community standards’.
Yet many people do not consider welfare from
first principles like this, which is one reason why
analysis of the welfare system defaults to a binary
assessment of who wins and who loses out of
proposed changes, with a particular focus on those
who lose out. This in turn makes the system very
hard to change without increasing the overall size,
as recent attempts to remove compensation for a
repealed carbon tax have shown.
As the welfare system is primarily an instrument
of public policy, like all public policy, it is necessary
to examine the benefits and costs.
Box: A Note on Positive Externalities
Universal or quasi-universal payments such as parental leave and childcare rebates could potentially be justified on
the basis they generate a benefit for the public. At times this argument is used interchangeably but incorrectly with
the characterisation of these payments as ‘public goods’. This misnomer is perhaps not accidental. A public good is
a product or service that is non-excludable (an individual cannot easily be prevented from accessing it) and non-
rivalrous (use by one person doesn’t limit the use by others).3 The benefits accrue to everyone generally, not one
person in particular. The most obvious example is national defence. These characteristics lend themselves to public
provision of those goods, paid for through taxation, rather than private provision paid for by fees for use or access.
Childcare, paid parental leave and other welfare payments do not have the characteristics of public goods. They are
money or services provided directly to individuals who qualify, and as such are obviously excludable and rivalrous (no
other person can have the money provided to the recipient). Their benefit flows directly to the person who receives
the payment or service.
What these payments and services (arguably) generate are positive public benefits in addition to that private benefit.
That benefit is called a positive externality and is secondary to the primary benefit, which accrues to the person
receiving the payment or service. Education is an example of a positive externality: the main beneficiary of a child
receiving an education is the child themself, but there are additional ‘spill-over’ benefits to society that come from its
citizens being educated (for example, higher expected lifetime tax receipts).
The distinction between public goods and positive externalities is important. Government is reasonably expected to
fund and provide public goods, however government should only fund positive externalities if two criteria are met:
1. the benefit of the positive externality would not be received without government funding; and
2. the cost of government funding does not exceed the benefit received.
In short, government intervention should occur only to maximise the benefit from the externality. Incentive payments
should be targeted to minimise the payments made to those who would undertake the activity anyway. There is no
general cause for taxpayers to compensate people for the generation of positive externalities, even if that person
incurs a financial cost in doing so.
In practical terms the difference in cost may be substantial: for example, if paid parental leave were a public good,
government would be expected to provide it for all citizens. As a positive externality, the government would fund
parental leave only for those who couldn’t fund such leave themselves, in the absence of intervention—and only then
if the benefit exceeded the cost of doing so.
Given this substantial difference in funding obligations, it would be surprising if the misuse of the term ‘public good’
by those who want increased government funding was an accident.
More importantly, in the welfare space being unable to meet the cost is far and away the most likely reason someone
who would otherwise generate a positive externality, through childcare or paid parental leave, would not be able to do
so. This makes ‘need’ quite a good proxy to test when looking at subsidies for positive externalities; suggesting that
paid parental leave and childcare should fit into the welfare model outlined in this article.
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