Australia has always had strong links and shared experiences with the UK and the USA, the two leading members of the liberal welfare state regime to which Australia belongs. There have been many exchanges of policy experience (and policy makers) between Australia and the UK, operating both through organisations like the OECD and on a direct bilateral basis. Although this is less true of Australia—USA relations in social policy, the USA is a natural place to look for empirical evidence on the impact (particularly the behavioural impact) of social policies. It is also the home of many of the most prominent liberal (and libertarian) welfare theorists and the country that has travelled for longest on the ‘welfare to work’ path.

Although it is natural for Australia to look to developments in those countries with which its welfare system has most in common, this should not prevent us from also studying the experience of other countries. There is a tendency in Australia to equate European welfare states with those of Scandinavia—where levels of social expenditure and taxation would terrify most Australian politicians. But there is in fact a considerable diversity of welfare size and experience within Europe and many lessons to be learnt from a careful study of the relevant experience of countries such as France, the Netherlands and Ireland.

Australia can also benefit from the experiences of our nearer neighbours, including not only our OECD partners Japan and Korea, but also others in a region where, even though state welfare plays a subsidiary role to family and civil society, welfare policies still provide many interesting lessons.

These comments notwithstanding, my focus here is on what we can learn from the recent social security experience of the USA and the UK. There is a good deal that is common in the recent welfare reform experience of Australia and these two countries. At the same time, as Julia Perry of the SPRC has observed, although these three countries speak the same welfare reform language, they do so with rather different accents (Perry 2000). One common thread running through what all three countries are trying to achieve is to increase the attractiveness of work compared to welfare through a combination of welfare conditionality and in-work benefits. The former is designed to modify the behaviour of social security recipients (possibly through coercive measures) in order to make them more prepared to seek (paid) work, while the latter is intended to make the transition to work more financially attractive to them. The differences arise in the scope and severity of conditionality and in the nature of the tax, benefit, and labour market changes designed to increase the attractiveness of work.

There is no doubt that the Earned Income Tax Credit (EITC), originally introduced in the USA in 1975 but greatly expanded in the early 1990s (Ellwood 2000), has increased the financial attractiveness of work for those on welfare—although not by as much as is often claimed, according to Wolfe (2000). The Temporary Aid for Needy Families (TANF) program introduced in 1996 as part of the Personal Responsibility and Work Opportunity Reconciliation Act placed a time limit on benefits for single parents. This introduced an element of compulsion into the welfare system that commentators like Lawrence Mead (2000) see as essential in achieving the welfare to work transition.

However, although Mead argues that the evidence on participation rates and poverty is consistent with the view that these programs have been successful, others agree with Giddens’ (2000) assessment that ‘the jury is still out’ on this key question. There is less evidence, for example, that the fall in welfare receipt among US single mothers, although accompanied by increased employment participation, has resulted in increased incomes and lower poverty. There are, however, formidable problems in attributing what has happened to the EITC and TANF welfare reforms, as distinct from the booming US economy. The real test for the USA will come when the next recession arrives.

The other important aspect of the US situation is the labour market, specifically the low wages and working conditions of the low-paid. As Mishel, Bernstein and Schmitt (1999: Fig. 6I) have demonstrated, throughout the 1990s both male and female wages at the twentieth percentile are well below what is required to raise a family of four above the poverty line. In light of this, it is difficult to see how low-wage workers in the USA can be expected to work their way out of poverty. Despite the rhetoric about work being the most effective anti-poverty strategy, the US experience shows that this is not a practical reality if market forces are allowed to dictate what happens at the bottom of the labour market.

Indeed, Wolfe (2000) argues that the USA has not been successful in combining strong work incentives with an adequate welfare safety net that has eliminated poverty. The welfare system (and the welfare budget) may have shrunk, but poverty remains high and inequality continues to rise. The statistics are certainly impressive. As Danziger (1999) indicates, the number of Aid to Families with Dependent Children (AFDC)/TANF recipients fell from a peak of over 14 million in 1994 to 7.5 million by 1998, at a time when employment participation among single mothers increased to the same rate as that of married mothers. Yet the poverty rate for single mothers in 1997 was 35.1 per cent, virtually identical to the figure for 1979 (34.9 per cent) and 1989 (35.1 per cent).

In contrast to the US approach, the New Deal in the UK combines active labour market support for the unemployed with greater emphasis on the obligations of (and, increasingly, compulsion on) the unemployed to achieve financial independence through paid work. But the difference is that the strategy operates within a social security safety net designed to provide security and an adequate standard of living for the unemployed, sole parents, and people with disabilities who are not able to find work. Work itself has been made more financially attractive through the introduction of Working Families Tax Credit (WFTC) and an additional tax credit for those with child care costs (Grover & Stewart 2000).

But arguably the most significant element of the British approach—certainly the aspect that distinguishes it from the American model—is the introduction of a minimum wage. Although there have been criticisms that it has been set too low, two arguments in favour of the minimum wage are of particular interest in the Australian context. The first is that, in direct contrast to what has happened in the USA, a minimum wage has the potential to prevent the erosion of the welfare system in the face of downward wage pressures emanating in the labour market. It reflects the fundamental principle that a coherent welfare to work strategy requires a consistent set of welfare and wage policies. The other rationale for the UK minimum wage was that, since wages are spent locally, a minimum wage can assist in the regeneration of economically depressed regions by injecting additional spending power into the local economy (Grover & Stewart 2000).

It is clear from this discussion that there are both similarities and differences in the recent welfare to work policies of the USA and the UK. The similarities include the use of tax credits to raise the in-work income of low-wage earners, an increased reliance on the obligations of welfare recipients to find paid work, and (although not discussed explicitly above) the elimination of child poverty as a goal of social policy.

The differences are, however, both more important and of greater relevance to Australia. Whereas the USA has continued its laissez faire approach to the labour market, the UK has increased the role of labour market interventions as part of its overall strategy to forge a new (‘third way’) alignment between state and market in achieving economic and social objectives. The logic underpinning the US approach is that an increasingly competitive labour market will continue to drive down wages, making the welfare system unsustainable. In these circumstances, the state has a duty to warn welfare recipients that ‘their days are numbered’ and to take action (including coercion) to force them to compete in the labour market, assisted by tax credits and other programs consistent with a minimalist state, market economy.

In contrast, the UK’s strategy recognises the need for a new approach to state welfare in a world increasingly dominated by market competition, in which paid work is the source of economic prosperity and an expression of personal identity. In this context, the means and ends of welfare may need to be revisited, but neither the welfare state nor those who rely on it should be abandoned. That, at least, is the essence of the UK experience under the Blair government.

Which country offers the better model for Australia? There are aspects of both in the vision and framework developed by the Reference Group on Welfare Reform (McClure 2000), although the strength of its commitment to social security (albeit it repackaged as social participation support) suggests a closer affinity with what is happening in the UK. Against this, the Howard government’s labour market reform agenda has been strongly influenced by the US experience.

We cannot have it both ways. The logic developed above indicates that the social security system is not sustainable in an environment where the labour market is deregulated and where the wages of the low-paid are constantly falling. The need to lower benefits in order to maintain incentives will constantly erode the ability to provide an adequate level of support relative to need. Australia’s traditional emphasis on poverty relief and a targeted, needs-based approach to adequacy suggests that it has more to learn from the UK experience than from what is happening in the USA—particularly when it comes to the labour market.