Public Finances in a Nutshell - Essay Example

?Public Finance The aim of this study is to consider the surrounding welfare programs and reforms designed for the low income workers. In every country, especially in developing and underdeveloped countries particular consideration is given to welfare and development programs for eradicating poverty and assisting the lower income groups in the society. This study would be highlighting various welfare issues of Australia, with respect to the world economy, under three major aspects. The first part of the essay would be focusing on the welfare economics, welfare programs designed for lower income groups to relieve them from poverty. It would also include government’s initiative and legal foundations established for such programs. The second part would be dealing with the effect of such welfare payments and programs on the labour supply decisions, and the last part would consist of the economic theory for explaining the effect of labour supply incentive of these social welfare programs, which is designed for the low income household. Empirical evidence would be also included to support such viewpoints. In order to understand the concepts of welfare payments and its relation to labour supply, firstly one needs to understand the concepts of welfare economics. Welfare economics utilises the perspectives and procedure of microeconomics, but the concepts can be exploited to derive macroeconomics assumptions. It assists in analysing and measuring social welfare, in terms of the economic society. The concept of welfare economics lays down welfare improvement framework in term of Pareto efficiency. The two conventional approaches in welfare economics are: a) The New Welfare Economics Approach, and b) The Neoclassical Approach. Neoclassical approach was formulated by Marshall, Edgeworth, Pigou and Sidgwick. This theory assumes that utility is a scalable measure by judgement or observation. The preferences are stable and the additional consumption would increase the utility successively. This concept is also known as diminishing marginal utility. However, the new welfare economic theory is based on the studies of Parato, Kaldor and Hicks. This theory specifically explains the difference between the efficiency aspect and the distribution aspect of a discipline. The criteria of efficiency are treated with Parato’s efficiency and the compensation tests of Hicks-Kaldor. The concepts of welfare economics would be included in the study to understand the concepts of social welfare. Let us understand it with the help of utility function, which can also be derived from points on the contact curve. So abundant utility functions can be derived from the production possibility curve, stated in figure 1. Figure 1 Figure 1 is a combined graph which would explain the efficiency between consumption and production and also include the ingredients of maximising social welfare. Each point on the curve represents the allocation of efficiency of the economic resources. It is Pareto optimum in the factor allocation, in consumption, in the interaction and in production. The curve MN represents a social utility frontier curve. Point D on the MN curve corresponds to Point C. Point D lies on the social utility frontier, as the marginal rate of substitution (MRS) of C is equal to the MRS of A. Similarly Point B corresponds to point E and both of them lie within the social utility frontier, which signifies inefficiency. This is because the MRS at C is not equal to Marginal rate of transformation (MRT) at point A. Although this was Pareto’s way of presenting the points of efficiency, but there is one point where the social welfare has maximized and that point can also be called as the point of bliss. This point is Z, where the MN curve is tangent to the highest possible indifference curve. After discussing welfare economics through graphical representation, the basic concepts of providing welfare payments to the low income households, would be studied. The term welfare is used to denote minimum level of social support and wellbeing for all the citizens in the country. In most of the developed countries, social welfare provisions are provided by the government. Welfare is made available directly by the government or agencies are given the responsibility to provide such services. The welfare is funded by the government through redistributive taxation or general revenue generation. Welfare such as Medicare, Aid to the poor family with dependents and social security is provided to the citizens of the country. The welfare payment systems are different in different countries, based on the laws, economic condition of the country and government policies. The initiatives of the government and the legal foundations such schemes would be discussed later in this study. This report would only consider the welfare payments and social security polices of Australia. The Commission for Social Welfare was set by the Australian government in the year 1973, under the Social Welfare Commission Act 1973. The function of this commission was to provide recommendations for the development of balanced national program of welfare. These social welfare programs are targeted to assist child and family welfare, handicapped welfare, income maintenance systems, housing and other urban facilities. The budget allocated by the Australian government for welfare and social security in 2012 is $ 131.61 billion. This budget was announced to fund the project called National Disability Insurance Scheme from 2013. This scheme would involve assistance to 10,000 people having disabilities. The single unemployed parents, who received payment from the government for parenting, would receive it until their children turn eight years old (Miller, 1974, p. 447). The families in while children below 18 years are there receives tax benefits from the government. Apart from the government funded agencies, there are many voluntary agencies or bodies too which take part in welfare payments to the low income householders for relieving poverty. After understanding the welfare economic concepts for social welfare, and learning about the welfare systems that generally prevails in the countries, now the focus can be shifted to the legal foundations based on which the government designs these welfare payment programs for the low income households. There is legal framework under which the benefits are made available to the people. For example act like Social Security Act of 1991, Student Assistance Act of 1973, and Family Assistance Act of 1999 are the pillars of welfare. The payments made to the people under the social security act and the student assistance act includes allowances for the new apprentices and the students to support their education, pension for those planning for retirement or already retired, assistance to the isolated children, career allowances to the minors and to those adults who are disable, to those who are unemployed and also youth allowances (Farrell, D. 2012). The family assistance act has been recently introduced. It is segregated in four parts; family tax part A, family tax part B, maternity allowance and benefit for child care. The family tax part A is for those parents who have little children to be raised and are unemployed. Similarly family tax part B is for those for single unemployed parents to raise their children, maternity allowance is for immunised children and children care benefit is also to help the families bear the cost of upbringing the children. The government of Australia spent roughly $2.1 billion in 2011 for children care benefits (UNICEF, 2007). There are certain concession cards which are issued to the citizens by the Centrelink for health care for the recipients under the family tax part A category. Through this card the people can also avail public transport benefits. The other concession cards include the commonwealth senior health cards and the concession card for pensioner. All the provisions of social welfare and welfare payments discussed above are stated with context to Australia and the policies of the Australian government. However, a vital point of discussion can be that, when the government of a country takes the responsibility to such an extent to assist low income household or unemployed people, what would be the effect of such polices on the labour supply decision. Would the people be enthusiastic enough to work or seek employment when they are getting money and other facilities, doing nothing? In the next part of this study the affect of welfare payment on the labour supply would be discussed. The most important purpose of social welfare payments is to redistribute income with the motive of social objective. The welfare payments are targeted for those who are unemployed, disabled, or not eligible to earn his or her living that means a minor. However, the affect of such welfare on the labour supply cannot be denied. It can be very easily analysed that the welfare payment is responsible for the reduction of labour supply. Based on the standard economic model, it can be said that a worker would judge two questions while taking decisions regarding how much to work; the first would be the expected income he/she wants in return for specific working hours, and second is the subjective value of the relaxation compared to the value of consumption. So if the worker accepts the employment then he/she will have income for consumption, but less time for relaxation. In most of the cases there are other viable options from which the worker can choose from, so the individual tries to maximise his/her utility. Figure 2 displays the negative effects of welfare payments on the labour supply. Graph A explains a default position, in which the curve indicates the individual preferences. The straight line indicates the budget constraints due to the market wage rate. The X axis represents the leisure hours and Y axis represents the total income. The unearned income here is assumed to be zero and the substitution rate is displayed here with the help of the slope defined as w (1-t). In graph B, the worker earns wage according to his ability to earn. There are certain fixed costs that he/she has to bear such as travel expense, children, clothing, food, etc. So the budget line in this case shifts downwards. In graph C, the cost of labour supply is not significant, but the wage rate is below the market rate (w). The uneducated people or those stay in isolated rural areas fall under this category. Figure 2 Source (Scharle, and Cseres-Gergely, n. D., p. 40) The labour supply incentive is a vital issue under labour economics. Labour economics involves the dynamics of the market for the labour. After studying the welfare payment and programs from every dimension and understanding its effect on the labour market, this concept would be explained with the help of empirical evidences from journals. The two journals that would be studied here are: “Welfare Reform and the Labour Supply of Lone Parents in Australia: A Natural Experiment Approach”, by Denise J. Doiron: This journal article discusses the shift in the labour supply of the lone parents in Australia. The observations are recorded within the timeframe of 1986 to 1990. The changes are observed in the characteristics of the lone parents and difference –in – differences and propensity score matching have been utilised to estimate the policy shifts that were implemented in 1987. For conducting the research, control groups of married mothers are formed. The results derived from the research suggest that the policy reforms has caused substantial hike in the employment of the lone parents, while the hours of work has reduced among the workers, as the results state in Appendix 1. “Welfare, the Earned Income Tax Credit, and the Labour Supply of Single Mothers”, by Bruce D. Meyer and Dan T. Rosenbaum: The second journal discusses the earned income tax credit and the labour supply of the single mother. The tax and the transfer policies in between 1984 and 1996 for the single mothers’ have been included. This paper involves several methodological improvements even than the past research. The simple structural framework of employment provides many independent tests of hypothesis that involves single mothers who responded to the economic incentives. The results which were derived indicate that the financial incentives have a powerful effect on the employment decisions of the single mothers. The different sources of incentives have different magnitude of effect on the single women. The research conducted in this journal also discovered sizeable transaction cost to welfare. The researcher had relied on less biased measures of the welfare waivers, like implementation dates, etc. The findings on the tax and welfare effect on employment are vigorous. References Boughton, J.M., 2002. Welfare, the Earned Income Tax Credit, and the Labour Supply of Single Mothers. The Quarterly Journal of Economics [e-journal] 116 (3) Available through: Oxford University Press [Accessed 28 September 2012]. Doiron, D. J., 2004. Welfare Reform and the Labour Supply of Lone Parents in Australia: A Natural Experiment Approach. The Economic Record [e-journal] 80 (249) Available through: University of New South Wales [Accessed 28 September 2012]. Farrell, D. 2012. Senate Debates. [Online]. Available at: [Accessed 28 September 2012]. Miller, J. G., 1974. Official Year Book of Australia. Canberra: Aust. Bureau of Statistics. Scharle, A., and Cseres-Gergely, Z., no date. Social Welfare and Labour Supply. [pdf] Available at: [Accessed 28 September 2012]. UNICEF, 2007. A World Fit for Children. [pdf] Available at: [Accessed 28 September 2012]. Appendices Appendix 1 Read More