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The Achilles heel of National’s welfare reforms

The Achilles heel of National’s welfare reforms

Susan St John
2 March 2012

An interesting exchange in parliament on the 28th of February inadvertently exposed the Achilles heel of National's so-called welfare reform. John Key was asked by Metiria Turei why the Government was "intent on forcing single parents with little babies as young as 12 months" into work.

In reply John Key asked the House the rhetorical question "Why do we think it is better for them to go to work?" Answering his own question revealed that welfare reform is all about moving sole parents from Work and Income NZ, where they get to deal face-to-face with a case worker, into the clutches of the IRD, where they do not.

He said "Well, if you look at the system that has been in place now through a number of Governments, you see that that system supports high levels of income for people in work. Let us take somebody who works 20 hours a week and leaves the domestic purposes benefit. They get the minimum family tax credit, which is $22,204 a year, and on top of that they get the in-work tax credit, which is $3,120 a year- all of which adds up to about $25,300 a year for 20 hours. The domestic purposes benefit for that person would be $15,000. That household will be considerably better off."

In other words, getting a job on low wages at 20 hours a week means getting a big pot of money from the state to "make work pay". Only that way it is better to go to work than remain on a benefit.

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Working 20 hours a week at the current minimum wage of $13 an hour equals $260 gross per week, or $227.50 in the hand, which is not enough to support a family with children.

So with a new-found faith in Working for Families, John Key is arguing that 20 hours of work pays because the sole parent gets a top-up week of $199.50 from the Minimum Family Tax Credit.

But wait, there's more. The government will throw in another $60 for the In-Work Tax Credit. An annual net $13,500 for extra tax credits, plus extra childcare subsidies from the state sounds pretty much the same as a benefit.

The Key government should be ashamed to be promoting these highly complex tax credits as the answer to shortcomings in the relatively simple benefit system. Sole parents with young children need support and calling government support by another name doesn't make a parent more worthy.

Sole parents need to be treated better when they earn a bit more on the benefit. Part-time work needs to be encouraged with less loss of benefit. It is a good way to get work experience that might be manageable with young children.

The government appears to have accepted the recommendation of the Welfare Working Group who mindlessly accepted that welfare was bad and the tax credit system was a superior solution.

As the Tax Working Group showed, the Minimum Family Tax Credit has a 100% effective marginal tax rate, making it the worst work incentive ever devised. That means for every additional dollar of net income earned up to $22,204 per year, the Minimum Family Tax Credit disappears dollar for dollar. At the minimum wage, someone who was working 20 hours would have to work an additional 17 hours before being any better off at all.

The Minimum Family Tax Credit is effectively a subsidy to employers. They can get away with paying only the minimum wage as they know a higher hourly rate will not give any more in the hand to someone receiving the Minimum Family Tax Credit.

This shambles is impossible for IRD to administer fairly and leaves sole parents vulnerable to having their incomes reduced sharply should their hours fall below 20 a week. Workers who face casualised employment have the ongoing problems of reporting in to IRD on a weekly basis, as well as extremely uncertain income.

Sole parents accessing this tax credit report high stress of never knowing exactly what they will get. They may face aggressive demands for the repayment of tax credits from IRD when IRD says they did not satisfy the rules. Families cannot possibly budget or function with any level of certainty and security under these circumstances.

Employers also face uncertainty when they take on sole parents with very young children. It does not take much imagination to see the problems that arise when a child gets sick or school holidays require time off. Sympathetic and accommodating employers are in short supply, especially in a recession.

Sadly, the Minimum Family Tax Credit harks back to the failed policies of Roger Douglas, who tried to introduce a flat tax in the late 1980s. He relied on the "Guaranteed Minimum Family Income" to prop up the income of "working" families.

In 1988 Brian Easton referred to the Guaranteed Minimum Family Income as "a fiasco that reflected badly on quality of Treasury advice". He noted it was open to widespread abuse, and that it was "socially reactionary" and "fiscally explosive". Now renamed the Minimum Family Tax Credit and expanded in use under the National/Act reforms, these criticisms remain as valid as they were in 1988.


Susan St John is Economics spokesperson for Child Poverty Action Group and associate professor of economics at Auckland University.

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