Urgent reform of Working for Families needed not tinkering

The flaw was exposed for all to see in the latest announcements that from 1 April 2022 there will be an increase in real Family Tax Credit (FTC) of a pitiful $5 per child.

While the most efficient way the worst-off children can be helped is via the FTC, sadly, there can be no major improvement in the FTC because it is too expensive- any increase flows right up the income scale.

So even the paltry $5 increase had to have consequences: middle and high-income families have to PAY IT BACK with a higher abatement once incomes exceed $42,700.

We are told that the average family will be $20 a week better off in 2022 or $1040 per year. The raising of the abatement rate from 25% to 27% is designed to clawback this back, even the bit that is the inflation adjustment.  

Thus, this latest ad hoc policy change will be used to make Working for Families less generous for ‘working’ families by a poorly understood sleight of hand. The 2% extra clawback on incomes will slowly erode the $1040 until it all disappears at $94,700 of family income.

This has all sorts of flow on effects for effective marginal tax rates over long income ranges and thus, ironically, given the obsession over work incentives, just adds to the already high disincentives to increase paid work. Once low-income families reach $48,000, their effective marginal tax rate will be 57%, or 69% if repaying student loans. For incomes over $70,000 this becomes 60% and 72% respectively, and still more with ACC and KiwiSaver contributions, let alone child support payments.

The government is well aware of this problem. This fatal flaw keeps low-income desperate whānau and families in poverty as the government tinkers. But surely the answer is obvious. It is to increase the FTC significantly and abolish the outdated In Work Tax Credit (IWTC) at the same time. This removes the unjustified discrimination against children in benefit and lowest income families and gives them the full WFF package.

The WEAG said in 2018 that the first child FTC (now $113) needed to rise to $170 and additional children (now $ 93) to $120. In inflation-adjusted terms this is $185 for the first child and $130 for each additional child.

This should be implemented immediately. To focus spending where it is most needed the IWTC should be abandoned (saving $600m). Middle-income families are no worse off because their loss of the IWTC is balanced by the gain in the FTC. At about $500m per annum this is the most cost-effective spending that the government could do to reduce the worst of child poverty. It contrasts starkly with the paltry $68m per annum Labour announced on Saturday.

Over the years since the introduction of the IWTC, the government has saved $7.5 billion by denying the full WFF to the very worst-off families. No wonder so many children (at least 160,000) are located below the very lowest poverty line (40% after housing costs median income).

For families in growing debt, with parents having to beg for food at foodbanks and for recoverable grants from Work and Income, an extra $5 at some time in the future is a meaningless and demeaning gesture.

Once the fatal flaw is fixed then WFF should be further improved. The FTC would become the only tax credit paid to the caregiver making it much simpler, but it should also be annually adjusted for wage growth just as NZ Super is. Over time, the threshold for maximum payment should be lifted significantly from the fixed $42,700 level and the rate of abatement should be lowered to 20% where it used to be.

The longer it is believed by Labour that a child poverty alleviation payment should also be a work incentive, the more bogged under the long awaited review of WFF will be.

In the meantime, CPAG research released this week shows that in even in Australia, families on benefits receive far more in tax credits than families on benefits in New Zealand - they do not discriminate against the worst-off families. Canada made its child tax credit available in full to all low-income families in 2016. To alleviate suffering in the lockdown, the US child tax credit was paid in full to all low income families, even when they didn’t have enough taxable income and as a result the child poverty rate fell significantly. The Biden administration is determined to make this permanent. It is beyond time in New Zealand to make some bold, mana-enhancing transformative changes for the sake of our children.