Shortly before stepping down as Prime Minister, John Key indicated that the government would implement a ‘tax and family package’ for 2017 and beyond. It is unclear how the recent changes in governmental leadership and the cost of the Kaikoura earthquake will alter its size, shape and timing.
But several matters need underscoring. First, income and wealth inequality has increased substantially across much of the developed world, including New Zealand, since the 1980s. Recent events in Europe and the US illustrate the political risks and social costs of rising inequality. Hence, any tax and family package, which delivers gains mostly to better-off households, would be imprudent. Nor would it be fair.
Second, there is a demonstrable need to reform public assistance for families. Current arrangements are unduly complex, inequitable, inefficient and inadequate.
The recently published Child Poverty Monitor highlights New Zealand’s unacceptable levels of childhood deprivation. While the 2015 Child Hardship Package made welcome changes, it has not resolved the major challenges.
For one thing, housing assistance for low-income families, especially in Auckland, remains totally inadequate. In part, this is because the Accommodation Supplement has not been inflation-adjusted since 2005.
For another, the Working-for-Families tax credits are complicated, only partially indexed and not well targeted. They disproportionately favour small families and those with older teenage children. This has exacerbated poverty rates amongst larger families and those with younger children.
Given these considerations, any tax and family package should have the following objectives: reducing material hardship, reforming housing assistance, simplifying family assistance, and protecting the long-term living standards of low-income families through a principled system of indexation. It must also be fiscally prudent, maintain work incentives and reward effort.
Enhancing housing affordability must be a priority. There are no silver bullets. But any family package must address the accommodation supplement. First, the various rates should be adjusted to reflect the changing national pattern of accommodation costs since 2005. Second, the supplement should be properly indexed. Third, the amount available to larger families should be increased. Currently, the maximum rate is capped at four persons per household. Almost certainly, this has exacerbated overcrowding, especially in Auckland.
Reforming the Family Tax Credit (FTC) is another priority. Currently, there are five different rates of assistance, from $64 to $101 a week, depending on a child’s age and their order within the family. The maximum rate of $101 has not been inflation-adjusted for almost a decade. It applies only to the eldest child in a family once they reach 16. All other children receive less assistance.
The best way to help struggling families, especially those with two or more children and/or young children, would be to adjust all FTC rates to the top rate. This would create a standard maximum rate per child, thereby simplifying the FTC.
Further, the standard rate should be increased by around 10 percent to reflect the failure to compensate for price increases since the global financial crisis. The new rate should then be linked annually to movements in prices and average wages, as applies to New Zealand Superannuation. This would help protect the living standards of low-income families, as for elderly citizens.
The FTC income thresholds and abatement rates also need adjusting. The current abatement threshold is a mere $36,350 per annum. It was lowered following the global financial crisis and has not been raised again since then. Hence, many families with relatively low incomes are ineligible for the maximum FTC rates of assistance. Ideally, the abatement threshold should be increased to reflect price increases since the late 2000s. Similarly, the abatement rate should be reduced to its original level of 20 percent, thereby extending a modest level of financial assistance further up the income hierarchy.
The other main component of Working-for-Families is the In-Work Tax Credit (IWTC). The Child Hardship Package raised the base rate by $12.50 in April 2016, to $72.50. Hence, no immediate inflation adjustment is required. Nevertheless, aspects of the IWTC are poorly designed and should be reviewed independently.
Aside from improving the living standards of low-to-middle income families, the 2017 Budget should enunciate a longer-term vision for family assistance. In particular, the government should indicate how it will fulfil its commitment to halve poverty rates by 2030, as required by the United Nations Sustainable Development Goals. Achieving such targets will require significant additional changes to the tax-benefit system, including a proper review of the structure and level of welfare benefits.
Investing in New Zealand families, especially the least advantaged, should be a priority for the 2017 Budget. Such an investment will help reduce financial stress and material hardship. If well designed, it should also enhance social mobility, improve educational, health and employment outcomes, and generate long-term economic and fiscal dividends.
This commentary was originally published in the Dominion Post, 14 December 2016.