As the lead party, National’s policies should be central to negotiations. For those without children, its proposed payment of the full Independent Earner Tax Credit for incomes between NZ$24,000 and $66,000 would kick in from April 1 next year.
This would help some 380,000 people in low and modestly paid work with an extra $10 a week. It’s not a lot, but better than nothing. For those with children, National has promised an extra $25 a week from the In Work Tax Credit – providing neither parent receives any part of a core welfare benefit.
At an annual cost of about $200 million, around 160,000 low-income “working families” would gain enough each week to buy a large block of cheese.
At an annual cost of about $200 million, around 160,000 low-income “working families” would gain enough each week to buy a large block of cheese.
But for those roughly 180,000 families where parents are without work and who need welfare to survive, National’s election promises will deliver nothing.
This raises real questions about incoming prime minister Christopher Luxon’s promise to stick to the targets outlined in the Child Poverty Reduction Act and halve child poverty by 2028.
With a willingness to re-examine what is on the table, however, New Zealand’s worst-off children can be helped in a meaningful way. At the same time, the work effort of low-income parents can be better rewarded.
How the poverty trap works
The various tax credits available through Working for Families (WFF) are fiendishly complicated but utterly critical for the negotiating coalition parties to understand.
When a family’s joint gross income exceeds the (very low) fixed $42,700 threshold, every extra dollar earned denies them 27 cents of WFF assistance. To help explain this, it’s useful to imagine a typical family in those circumstances.
Let’s say this family has two children at school, with one parent in full-time employment and the other half-time, both on the minimum wage. That gives them a total annual gross income of $70,824, or $63,984 after tax.
WFF currently provides a maximum of $320 per week, made up of $248 from the Family Tax Credit (FTC) and $72 from the In Work Tax Credit (IWTC). But the parents’ joint income is over the fixed threshold, meaning they lose entitlement to $146 of WFF. This leaves just $174 a week for the needs of their children.
With rent or a mortgage taking maybe half of their net income, their budget just doesn’t add up. The weekly deficit must be covered by food parcels from foodbanks, special assistance from Work and Income, defaults on payments, high-interest borrowing or selling assets.
The parents are already stretched, but let’s say the mother decides to go back to full-time paid work. Her additional gross income would see Inland Revenue reduce her WFF entitlement by $116 a week – or demand repayment of any overpaid entitlements.
If she has a student loan, as many do, she could be liable for another repayment of $51 a week. Her extra income of $454 for 20 hours’ work leaves her better off by just $207.
Letting people work and earn more
To alleviate this kind of poverty trap, National proposes to increase the WFF threshold from $42,700 to $50,000. But this does not happen until 2026, just in time for the next election. In the meantime, rising costs will erode the family’s extra weekly $25 from the IWTC.
To increase the threshold to $50,000 immediately would cost about $250 million according to National’s own calculations. Delaying the change only decreases the incentive to work, with flow-on effects for productivity.
Rather than increasing the IWTC by $25, bringing forward the higher income threshold would be a more effective way to help squeezed middle-income “working” families by loosening the vice of that poverty trap.
It would deliver an extra $38 a week of WFF on joint incomes between $50,000 and, $100,000 or more, depending on the number of children. This would also address child poverty, as about half of the country’s poor children are in families in low-paid work.
But what of the other poor children in families that get nothing from National’s election promises? If their parents are so poor they need a benefit, or part of a benefit, they do not receive the IWTC and would gain nothing from the threshold increase.
These families live on budgets that fall far short of a liveable income. Many slip further into debt every week, waste precious time arguing for means-tested top-ups from Work and Income, or need food parcels from stretched and underfunded foodbanks.
This raises real questions about incoming prime minister Christopher Luxon’s promise to stick to the targets outlined in the Child Poverty Reduction Act and halve child poverty by 2028.
With a willingness to re-examine what is on the table, however, New Zealand’s worst-off children can be helped in a meaningful way. At the same time, the work effort of low-income parents can be better rewarded.
How the poverty trap works
The various tax credits available through Working for Families (WFF) are fiendishly complicated but utterly critical for the negotiating coalition parties to understand.
When a family’s joint gross income exceeds the (very low) fixed $42,700 threshold, every extra dollar earned denies them 27 cents of WFF assistance. To help explain this, it’s useful to imagine a typical family in those circumstances.
Let’s say this family has two children at school, with one parent in full-time employment and the other half-time, both on the minimum wage. That gives them a total annual gross income of $70,824, or $63,984 after tax.
WFF currently provides a maximum of $320 per week, made up of $248 from the Family Tax Credit (FTC) and $72 from the In Work Tax Credit (IWTC). But the parents’ joint income is over the fixed threshold, meaning they lose entitlement to $146 of WFF. This leaves just $174 a week for the needs of their children.
With rent or a mortgage taking maybe half of their net income, their budget just doesn’t add up. The weekly deficit must be covered by food parcels from foodbanks, special assistance from Work and Income, defaults on payments, high-interest borrowing or selling assets.
The parents are already stretched, but let’s say the mother decides to go back to full-time paid work. Her additional gross income would see Inland Revenue reduce her WFF entitlement by $116 a week – or demand repayment of any overpaid entitlements.
If she has a student loan, as many do, she could be liable for another repayment of $51 a week. Her extra income of $454 for 20 hours’ work leaves her better off by just $207.
Letting people work and earn more
To alleviate this kind of poverty trap, National proposes to increase the WFF threshold from $42,700 to $50,000. But this does not happen until 2026, just in time for the next election. In the meantime, rising costs will erode the family’s extra weekly $25 from the IWTC.
To increase the threshold to $50,000 immediately would cost about $250 million according to National’s own calculations. Delaying the change only decreases the incentive to work, with flow-on effects for productivity.
Rather than increasing the IWTC by $25, bringing forward the higher income threshold would be a more effective way to help squeezed middle-income “working” families by loosening the vice of that poverty trap.
It would deliver an extra $38 a week of WFF on joint incomes between $50,000 and, $100,000 or more, depending on the number of children. This would also address child poverty, as about half of the country’s poor children are in families in low-paid work.
But what of the other poor children in families that get nothing from National’s election promises? If their parents are so poor they need a benefit, or part of a benefit, they do not receive the IWTC and would gain nothing from the threshold increase.
These families live on budgets that fall far short of a liveable income. Many slip further into debt every week, waste precious time arguing for means-tested top-ups from Work and Income, or need food parcels from stretched and underfunded foodbanks.
A simple solution
For child poverty targets to have even a remote chance of being met, these worst-off children must be helped. This would best be achieved by an immediate increase to the Family Tax Credit, over and above the required inflation adjustment.
Here is a counter-intuitive but serious suggestion: reduce the In Work Tax Credit by $25 a week and increase the Family Tax Credit by the same amount.
This would mean the poorest families are better off. The working poor would see no difference, as their IWTC goes down while their FTC goes up. But they would still be helped greatly by the increase in the income abatement threshold, because any extra earnings would not be quite so badly penalised.
Much more could be done to reduce the poverty trap, including a reduction of the 27% abatement rate, indexation of the threshold for inflation, and a review of the penal student loan arrangements.
But this basic suggestion could still be a win-win for National’s key objectives at roughly the same eventual annual cost. It should be only a beginning, but it would provide a better path for future adjustments.
Susan St John, Honorary Associate Professor, Economic Policy Centre, Auckland Business School, University of Auckland. This article is republished from The Conversation under a Creative Commons license. Read the original article
For child poverty targets to have even a remote chance of being met, these worst-off children must be helped. This would best be achieved by an immediate increase to the Family Tax Credit, over and above the required inflation adjustment.
Here is a counter-intuitive but serious suggestion: reduce the In Work Tax Credit by $25 a week and increase the Family Tax Credit by the same amount.
This would mean the poorest families are better off. The working poor would see no difference, as their IWTC goes down while their FTC goes up. But they would still be helped greatly by the increase in the income abatement threshold, because any extra earnings would not be quite so badly penalised.
Much more could be done to reduce the poverty trap, including a reduction of the 27% abatement rate, indexation of the threshold for inflation, and a review of the penal student loan arrangements.
But this basic suggestion could still be a win-win for National’s key objectives at roughly the same eventual annual cost. It should be only a beginning, but it would provide a better path for future adjustments.
Susan St John, Honorary Associate Professor, Economic Policy Centre, Auckland Business School, University of Auckland. This article is republished from The Conversation under a Creative Commons license. Read the original article
7 comments:
Nearly all of this country's poverty issues are rooted in the cost of accommodation. Rent takes up around three quarters of a full-time wage and that's simply unsustainable. We are seeing the emergence of an underclass in NZ and Aus who will never be able to contemplate home ownership and whose permanent poverty status is rent-driven. We have to look at making home ownership affordable again as it was in the 1950s and 60s. Bring back the State advances Corp.
This is a supply side problem as simple as that.
The virtuous loop of improving supply reduces inflation and thus reduces likely interest faced by households, that is only one upside.
For the unemployed and low skilled we strive for a standard probably universally acheived in no other country. I recently read the book by Brian Edwards covering his childhood and youth in Belfast post war. Despite his solo mother working meals not bought in. A diet no one would tolerate today. No local store bought cans or even supermarket giant bottles of Cola, potato chips, bought pies etc or expeditons to MacDonalds. No parental smoking, no alcohol. I gather in USA the dole is not for life. Immigration and excessive breeding by some creats the housing problem. I can recall periods of reverse when agents were not interested in an Auckland house I had to let. Their books were cluttered by their regulars then also vacant.
Simply handing out money by whatever method will never achieve anything except creating an expectation that more will be delivered.
All very well, but the poverty trap is not so much faced by families with working parents (emphasis on the plural), but unemployed/welfare dependent single parent families. Yes, we need to assist, but we need to stop the incentivisation of this kind of lifestyle and educate those out of, or ever getting into it. Too many expect the State to pick up the cost of their irresponsibility.
As an oldie who bled for my home, worked like an uncomplaining ( these days stupid) dog
all my life and has saved to supplement my pension, bought a rental as an investment to protect my savings and keep me from bludging, then I selfishly hope demand stays high and interest rates go up for my savings ( yep I saved and scrimped to manage my investments long term). By the way, I limited my children to what I could afford. Long term planning and frugal living. So do not ask me to subsidise the next generation/s. I have done my best not to bludge and to help my family to become a meaningful part of NZ ( despite incorrect DNA for these days). One day, I would love a break from the complaining masses and acknowledgement that I have tried hard not only for myself but NZ as well.
Or am I better off dead?
If people who can't afford to produce a child every year stopped producing there wouldn't be such a big problem. Continual idiotic governments pay low income mothers to churn out kids like production lines so the poor NZ taxpayers carry the burden. Kiwialan.
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