The welfare trap is when the benefit starts to disappear as you earn money. Photo / 123RF
The welfare trap is when the benefit starts to disappear as you earn money. Photo / 123RF
COMMENT:
The Opportunities Party (TOP) congratulate the Green Party on finally putting forward some real ideas to address poverty in New Zealand. Unfortunately, we have some serious concerns about their Guaranteed Minimum Income policy, which guarantees everyone not in full-time paid work a weekly income of at least $325.
Webelieve this policy will have side effects that could make poverty worse, not better. The main problem is that it makes it even harder for those on benefits to get out of the welfare trap.
The welfare trap is when the benefit starts to disappear as you earn money. Imagine going for a walk. You are making good progress when suddenly the ground gives way and reveals a big hole. Do you try to leap across? Or climb down and up the other side? Or turn back? In effect, the welfare trap punishes people for taking on work.
The trap exists in our current welfare system, including Working for Families. Employers know it well when they ask staff to work more in a busy period and the employee screws up their face and says, "It's just not worth it."
The Greens' Guaranteed Minimum Income (GMI) turns the welfare trap from a big hole into the Grand Canyon.
Currently, abatements (the mechanism under which the benefit disappears) start kicking in at $90/wk. For people on the minimum wage that is about five hours' work. The GMI policy pushes this out to 10 hours. But as with all targeted benefits, all this does is simply kick the can down the road and make the welfare trap harder to get out of.
Under the Greens' proposal, anyone earning between $10,000 and $35,000 per year will face having their GMI abated. They will be stuck in the canyon.
For someone on the GMI and earning the minimum wage, this means it would be virtually pointless working between 10 and 36 hours a week. If they do work, they'll face the highest marginal tax rates of anyone in the country, leaving them with a take-home pay of around $3.30 per hour.
For those on the average wage, the abatement would kick in after just seven hours of work and last until they have worked 26 hours.
The Greens' GMI would kill many part-time or flexible work arrangements. Businesses looking to grow may find they have to offer someone on the GMI full-time work because they would find it difficult to recruit otherwise.
Anyone who is happy to survive on $500 per week would take the GMI and pick up part- time work of up to 10 hours a week – but no more. If enough people do this, then working hours would fall.
This raises the possibility of unforeseen consequences. Will more people simply work less and rely on the GMI? If so, the nation's tax take would fall and the cost of the GMI would rise. This would make the policy dramatically more expensive than the Greens have bargained for.
Of course, the benchmark for welfare reform from TOP's perspective is the Universal Basic Income. Under our UBI proposal everyone gets $250 per week, no questions asked. It would be paid for by a flat tax of 33 per cent.
Mathew Pottinger, The Opportunities Party (TOP) spokesperson for tax and candidate for Nelson. Photo / Supplied
Because everyone gets a UBI there are no abatements. So the welfare trap only applies to those who can't work and require a benefit top-up. That means the incentive for work is much stronger right across the income spectrum.
Under UBI trials conducted overseas, people tend to work more, rather than less. The only people that work less are those that are training or raising children – both of which would no doubt be considered worthy endeavours.
It's true that under the Greens' GMI, beneficiaries would be better off than they would be under the current welfare system or the UBI. But for anyone working 16 hours or more on the average wage, they would be better off under a UBI.
The real winners under a UBI are the working poor. TOP's UBI gives essential workers the pay rise they deserve without forcing businesses to foot the bill. Full-time workers on the minimum wage would get $6285 more per year, taking them over the living wage.
International evidence is clear – the best way to reduce poverty is by making work pay. The UBI does this, the GMI doesn't.
The UBI is also much simpler to administer even than the Greens' GMI, so spending on bureaucracy would fall.
TOP and the Greens clearly agree that our current welfare system needs reform. The question facing voters is whether you want to increase benefits or improve the incentives for work. You can't have both.
• Mathew Pottinger is a small business owner and The Opportunities Party (TOP) spokesperson for tax and candidate for Nelson
