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Budget Policy shows some progress, but more work is needed

Budget Policy shows some progress, but more work is needed

Treasury’s Budget Policy Statement (BPS) 2018 indicates some real progress in terms of social wellbeing, but there are still outstanding issues that need to be urgently considered ahead of the upcoming Budget, says Child Poverty Action Group (CPAG).

While Government has committed significant additional spending to reverse the deliberate reductions and neglect of Working for Families (WFF) during the last nine years, projections show these gains will erode over time.

"The current 5% cumulative inflation rule is very harmful to low-income families who are forced to wait many years before any increases," said Associate Professor Susan St John, who spoke today to CPAG’s Submission on The Budget Policy Statement(December 2017) at the meeting of the Finance and Expenditure Select Committee.

"We urge the Government to index WFF tax credits annually."

Fair indexation of WFF to reflect Cost-Price Index (CPI) inflation and also average wage inflation - as is the case for New Zealand Superannuation (NZ Super) - is critical to the success of child poverty reduction policies.

CPAG also says that the working poor are impacted adversely by the clawback of WFF tax credits. For low-income families earning just over the new income threshold of $42,700, the increased abatement to 25% for WFF tax credits compounds the Effective Marginal Tax Rate (EMTR) problem.

"Any dollar earned over the threshold is not only taxed but results in a loss of 25 cents of WFF tax credits. As well as this, the Accommodation Supplement (AS) abates at 25% alongside WFF, and Student Loan repayments at 12% may apply." says St John.

An example appended below shows that EMTRs of between 84% and 95% are possible. These create a vicious poverty trap for low income working families.

In the short-term CPAG suggests an immediate return to a 20% abatement for WFF. Longer term, a move away from use of AS is required, and a complete overhaul of student debt policy. The abatement of Best Start from incomes over $79,000 adds an unnecessary and overlapping layer of abatement.

"Too many children under the 40% poverty line will remain there because they are currently excluded from the full WFF package that rewards paid work. The needs of people, especially children, should be at the heart of the system not paid work," says St John.

"To put children at the heart of policy a substantial overhaul of the welfare system is needed, beginning with a serious rethink of the purposes and principles section of the Social Security Act."
For CPAG’s full recommendation the Budget Policy Statement 2018, download the submission here.
More information: Further fraying of the welfare safety net (2017)

EMTR example:
A family earning another $5000 over the new threshold of $42700 may face a total loss of nearly 84% of that extra income, leaving only around $800 in the hand.
Tax + ACC (18.7%)
Student Loan Repayment (12%)
KiwiSaver (3%)
Loss Working for Families (25%)
Loss Accommodation Supplement (25%)
This family potentially faces other losses, such as of the community services card, child support payments, and childcare subsidies, that can leave the family worse off than before the extra income was earned. A family earning an extra $5000 over $48,000 could face an EMTR of 95% because the tax rate for income over that level has been kept at 30%.

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