Final Report: Detailed Analysis
F6. Transfers tied to goods and services
Transfers help individuals and families improve their wellbeing by helping them purchase goods and services. Transfers are normally thought of as cash payments made directly to people. They include pensions, allowances and family payments. While the recipients of these payments may need to have certain characteristics (such as being unemployed or having a disability) or undertake certain activities (such as looking for a job) to be eligible, they can generally use these payments to purchase goods and services according to their own preferences. That is, the payments are not 'tied' to any specified use.
Another group of transfers are specifically linked, or tied, to the consumption of certain goods and services. The adequacy, equity and efficiency effects of cash transfers cannot be fully assessed without considering tied transfers. For this reason, the Review has considered some major tied cash transfers such as child care assistance (Section F4) and rental housing assistance (Section F5). This section discusses the issues related to tied transfers, since they arise across a wide range of other government programs and assistance.
Tied transfers can be provided by way of:
- discounted prices at the point of purchase available in specified circumstances and for specified goods and services, such as lower public transport prices for concession card holders; and
- entitlements that can be used at the point of purchase or cash rebates available some time after the purchase of specified goods and services. For example, the Child Care Benefit provides eligible families with funding to reduce their child care fees.
Recently, the tying of some income support has also been trialled in parts of Australia. A proportion of cash transfers are directed to priority needs of individuals, families and children. The central idea of these transfers is that government support should be conditional upon personal and socially responsible behaviour.33
Governments provide a mix of untied cash transfers and tied transfers — either to encourage some types of consumption or to limit or prevent other types of consumption. The purpose, design and relative merits of these different types of transfers are discussed below.
In general, united cash transfers allow people to make the best use of available resources to meet their particular needs. For example, people in rural areas may pay less on rent but more on transport than people living in the city. Providing a cash transfer means they can allocate their resources as they wish, rather than having to spend some minimum amount on rent or transport.
It is also easier to integrate cash transfers with other aspects of the tax and transfer system. Cash transfers can be targeted to people with different incomes by withdrawing the value of the transfer payment as their private income increases. Some transfers tied to goods and services can be withdrawn in a similar way; for example, the value of an entitlement could be based on income. If there are many entitlements for different goods and services, however, simultaneous withdrawal as income increases can create high effective marginal tax rates. In contrast, a cash transfer that helps people access a range of goods and services can be withdrawn as a single payment with a single withdrawal rate.
Transfers provided in the form of discounted prices can be particularly difficult to integrate with other aspects of the tax and transfer system. Because of the complexity of providing individualised discounts to people based on their income and other characteristics, these transfers are typically provided as a set discount to a wide group of people. For example, access to a concession card may be given to all recipients of income support payments. Although this is simpler than providing differentiated discounts, it can result in people with large differences in financial capacity receiving the same amount of assistance. It can also result in 'sudden death' drops in the value of transfers when people lose eligibility for the discount. In some areas, particularly the health system, this risk is removed by providing universal transfers without means testing.
While cash transfers have advantages, there are circumstances where they will not be the most effective way of delivering assistance. Sometimes people may spend cash in a way that is inconsistent with the community's reasons for providing the assistance. For example, many people might object to people spending cash transfers on alcohol rather than their child's education. In such cases, education is a merit good — that is, a good that people should consume regardless of their preferences for other things. At other times, governments may want to limit access to certain goods that may be detrimental to society or a person's development. For example, alcohol may be considered a 'demerit good' for someone who is attempting to escape addiction and poverty. Linking transfers to certain goods and services can encourage the consumption of merit goods and limit the consumption of demerit goods (provided that the transfer cannot be easily exchanged for cash). This can be particularly beneficial for people who have trouble managing their income.
Tying a transfer to a good or service can also ensure that the transfer goes to those in most need. Since cash is of benefit to anyone, people will have incentives to present themselves as being in need (Akerlof 1978). However, by tying a transfer to a particular good or service, the government can ration the good or service to those who actually need it. For example, few people would be interested in having access to disability support services unless they have a disability, but many more would be interested in a (similarly valued) cash transfer. Tied transfers are more likely to be of direct value only to the targeted recipients.
Transfers tied to goods and services can also be tailored to those with high need. A person may have high health or support needs due to illness or disability, or their costs may vary depending on where they live. Determining a rate of payment based on what an average person requires can result in some people receiving less support than they need, and others receiving more. In cases where levels of need vary considerably across the population, a transfer provided as a concession may entail less risk of under-compensating those with high needs and over-compensating those with low needs. It can also allow people to manage their risks better by giving them access to goods and services at times when they need them most. For example, it can be difficult for someone to predict when their health expenses will be high. Providing low-income earners with a guarantee of a discount on their health expenses rather than an ongoing cash payment can be a better way of managing their risk (although for some insurance can also serve this function).
The design of a transfer should take into account whether it will affect how much of a good or service people will consume and how much (and what quality) providers will supply. A transfer tied to a particular good or service can mean that the consumer does not respond to price signals. For example, if the price of water increases, people who receive a discount on their water bill may not reduce their consumption by as much as they would have done if they had they been paying the full price. Capping the value of the transfer can help reduce this effect.
On the supply side, transfers can be delivered by governments requiring providers to charge lower prices or to supply fixed quantities. If providers do not receive the full price from a high proportion of consumers (and they are not compensated for having to provide their good or service at a lower price), they have less incentive to increase supply, or improve the quality of their product. For example, if a large proportion of commuters on a rail service are travelling for free, the rail company has less incentive to invest in the service. While governments have a role in ensuring that quality standards are adequate and can be trusted by all users, regulatory obligations on providers should generally not be used to provide transfers to particular groups. That is, community service obligations should be funded by governments, not by cross-subsidies between consumers. This does not mean, of course, that businesses should not engage voluntarily in social responsibility programs or pricing policies that assist particular groups.
Providing tied funding to people (potentially tailored to their characteristics) and allowing them to choose between providers can often be the best way for governments to encourage the consumption of certain goods and services while also supporting efficient service provision.
Cash transfers are generally a better way to provide general living assistance because they can be provided simply, allow recipients more choice and are more easily integrated with the rest of the tax and transfer system.
Transfers attached to specific goods and services can be effective in encouraging the consumption of merit goods (especially for people with income-management problems) and delivering assistance to people with diverse needs. These transfers should be provided by assisting people so they have the resources to access goods and services — not by regulating providers or through imposing cross subsidies. These transfers can be provided in a manner that supports efficient service provision, consumer choice and equitable outcomes.
Many, if not most, Australians are concerned about other Australians living in poverty. Poverty alleviation can therefore be viewed as a national goal. If the best approach to poverty alleviation is providing a mix of untied and tied transfers, then the national government is best placed to undertake this role as competition between sub-national governments can lead to a sub-optimal level of transfers. For example, if one jurisdiction had higher rates of payments, it may encourage the poor to relocate to that jurisdiction. To prevent this response, sub-national governments may reduce the transfers they provide (Wellisch 2000).
This suggests that the Australian government should fund transfers that are aimed at poverty alleviation to ensure that all Australians have access to a basic standard of living. This includes cash transfers and some transfers tied to goods and services (which may be explicitly linked with the receipt of a cash transfer). State and local governments may choose to provide additional funding to reflect their different priorities, the different needs of their population or the different ways that goods and services are provided in their jurisdiction.
It would be necessary for governments to reach agreement on which transfers tied to goods and services are necessary for poverty alleviation.
Poverty alleviation is a national goal that should be financed by the national government. The Australian government should be responsible for funding those transfers that ensure that all Australians have access to a basic standard of living. State and local governments may choose to provide additional funding, reflecting area-specific concerns.
33 Examples of this type of approach include aspects of the Northern Territory Emergency Response and Cape York Welfare Reform Trials.
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