What’s in store for Working for Families?

Working for Families has been tweaked in recent years in ways that squeezed inflation-adjusted incomes and increased marginal tax rates. Shane Cowlishaw examines whether the policy is failing and if it could be given a boost in the Budget.

When Finance Minister Stephen Joyce’s bright blue Budget books are published on 25 May, there’s likely to be some sweeteners for struggling families.

Just what those sweeteners are remains to be seen, but could possibly be in the form of a family package that includes tweaks and boosts to several measures.

One possibility is tweaks to the Accommodation Supplement, a payment designed to help people with their rent, board, or cost of owning their own home.

It has not risen since 2007, despite the cost of accommodation skyrocketing, so is ripe for change. More details on its possible future can be found here.

Another option is adjustments to Working for Families(WFF), the tax credit package announced by the Labour government of 2004.

Despite early comments from National’s former leader John Key that it could go (he called it “communism by stealth”) the current government has kept the policy.

But critics, as well as arguing the policy itself is deeply flawed, claim it has been left to wallow in a pit of underfunding as it failed to keep up with the rising cost of living.

Joyce has hinted that WFF could be in for a boost in this year’s Budget, telling RNZ it would be one way to help struggling families.

He was tight-lipped when questioned by Newsroom, but said he was confident WFF was achieving its aim of supporting lower income families.

“The government won’t be commenting on any matters it may or may not be considering in the Budget ahead of Budget announcements, beyond what has already been said about Budget priorities.”

What is Working for Families, how much does it cost?

Essentially, it’s a series of tax credits for families that encourages parents into the workforce.

There are four types of credits families may be entitled to: the family tax credit, the in-work tax credit, the minimum family tax credit, and the parental tax credit.

The first is a weekly payment dependent on the number of children in a family, beginning at $92.

Both the in-work and minimum family credits require a parent to be in paid work; the former provides $72.50 a week for up to three children while the latter is aimed at the poorest families and brings their net annual income up to $23,764 if they work at least 30 hours a week.

The parental tax credit is worth $220 a week for the first 10 weeks after a baby is born, but the parent must not be receiving paid parental leave or be on a benefit, student allowance, or ACC.

Since 2011, the total amount spent on WFF has fallen.

Treasury figures show that in 2011 the system cost the Government $2.7 billion, while in 2015 that number was $2.4b.

That is forecast to stay reasonably static in the next few years.

It’s a lot of money, but it helps thousands of people - although the exact number has risen, then fallen, in the past decade.

In 2006, 290,000 families received some form of a WFF credit.

The number peaked in 2011 at just under half a million, before beginning to drop and settling at 347,000 in 2015.

Despite the fall in the number of families receiving WFF, the average amount received per family has increased.

In 2006, it was $4,928. By 2011 it had risen to $6464 and in 2015 it was $6788.

So, while fewer people are receiving WFF, those who do receive more.

Is it enough?

Critics don’t think so.

In 2015, the Government announced a boost to welfare with an extra $25 a week for families on benefits and $12.50 a week for those working.

It argues that fewer families need to access WFF because incomes are rising.

“A lot of parents are so confused they don’t even apply for what they are entitled to; of course, Treasury loves that so it won’t change.”

The Child Action Poverty Group (CAPG) has been noisily campaigning for years about inadequacies with the system.

Recently it issued a press release claiming the government had cut more than $2.8b since 2010 from WFF in real terms and an extra $700m per year was needed to bring it back to the original level.

CPAG’s economics spokesperson Susan St John, an associate professor of Economics at the University of Auckland, said there had been subtle cuts to WFF that had been squeezing the policy, namely the double-punch of lowering the salary threshold and increasing the abatement rate.

While the average paid out per family had risen slightly, there were a lot of people that had been forced out.

“The story that the Government would want to spin is that more people are getting more money and this means they need less Working for Families, but what we’re observing is the working low-income families, round about $36,000, $40,000, minimum wage type families, are the ones that are turning up at the food banks now because they can’t make ends meet.”

To solve the situation, an extra $700m should be pumped in to bring it back to 2010 levels, the abatement rate should be lowered, and a further $500m added to extend WFF to people who missed out because they were unable to work.

“I think we’ve got to be generous with Working for Families because we have a very lowish flat-tax system and we have GST on absolutely everything and we need to balance that, and we’re not doing that at the moment.”

More harm than good?

WFF gets tricky when considering something called the abatement rate.

Simply, this is the rate at which welfare payments fall as income rises.

The higher the abatement rate, the higher the recipients' marginal tax rate, which is the rate of tax on any extra dollar earned and includes the base tax rate.

This means that as people earn over the income threshold, they start paying some seriously heavy tax on their earnings.

Currently, the abatement rate is 22.5 percent. But since law changes introduced in 2012 the rate has been rising by 1.25 per cent each time WFF is adjusted for inflation. It will stop rising when it reaches 25 percent.

Alongside this, the earning threshold where WFF tax credits begin to reduce began to lower in 2012, reducing by $450 each time the amounts were increased for inflation. They will stop dropping when the threshold reaches $35,000. It is currently at $36,350.

St John says Australia’s abatement rate is 20 percent and considers New Zealand’s “appallingly high”.

Economist Gareth Morgan, who is also the leader of The Opportunities Party, agrees the system is broken.

“It is complex, confusing and reduces the incentive to work because if you earn more money you lose Working for Families.

“A lot of parents are so confused they don’t even apply for what they are entitled to; of course, Treasury loves that so it won’t change.”

Morgan is a proponent of replacing WFF with a universal benefit, paid for by reducing superannuation payments for wealthier older citizens.

All families with children under three would receive $10,000 per year, plus free childhood education for three and four-year-olds.

This would mean people would not miss out if their circumstances changed and it removed the stigma of a benefit, as everyone would receive it, he said.

“We want to minimise the use of complex targeted benefits and the punitive, stigmatising witch hunt welfare that goes along with them.

It sounds simple, but Eric Crampton, chief economist at the New Zealand Initiative, said it’s far from it and every policy had trade-offs.

To really encourage a shift from welfare to work would require an extraordinarily expensive wage subsidy if provided to everyone.

WFF had a high abatement rate to avoid that huge expense, but this discouraged people in some income brackets from taking on longer hours or from going the extra mile to get promoted.

“There is little point in working harder if you only get to keep ten or twenty cents on each dollar’s wage increase – which happens in some ranges of income for some people.

“Were I considering tax cuts in the next Budget, I would especially be looking at income tax cuts in the income ranges where too many families wind up having very high effective marginal tax rates.”

Is that likely to happen?

A spokeswoman for Joyce told Newsroom that there were no immediate plans to address the concern.

“The Minister has made a number of comments about his desire to simplify New Zealand’s tax and transfer system including addressing marginal tax rates. However, this is a longer-term piece of work.”

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