Budget cuts set to hit big families

Joe Sonneveld and his wife Annemieke with four of their six children. Photo / Sarah Ivey

Large families and those with teenagers may bear the brunt of Budget cuts in Working for Families, experts believe.

Working for Families, a package of family tax credits costing $2.8 billion a year, is one of three elements of "middle-class welfare" expected to be cut in Thursday's Budget, along with KiwiSaver subsidies and student loans.

Prime Minister John Key said last week that the family subsidies would be "better targeted at lower-income families" and "a little less generous to families higher up the Working for Families scale".

"That is bearing in mind, of course, that when it comes to Working for Families, being 'higher up the scale' depends on how many children a family has," he said.

"The changes will make Working for Families simpler and more sustainable into the future."

Experts point to at least four cost-cutting options. The Government may pick one or more of them.

LOWER THE INCOME CAP
Current family tax credits are reduced by 20c for every $1 a family earns over $36,827 a year. A simple way to save money would be to lower this threshold, perhaps to $27,500 as in Labour's original plan before the package was extended suddenly a month before the 2005 election.

For a working family with two preschoolers, that would mean cutting out tax credits completely at an income of $81,900, almost $10,000 below the current cut-out level of $91,226.

However, this seems the least likely option because it would affect families earning below $36,827, who can't be called "higher up the scale". Half of all wage and salary earners last year earned less than $20 an hour, or $41,600 a year.

RAISE CLAWBACK RATE
The cuts could be targeted at those "higher up the scale" by raising the clawback rate from 20c for every extra dollar earned above some high income level to perhaps 25c, or even 30c as in the pre-2005 Labour scheme.

Raising the clawback rate to 25c for every dollar earned above $70,000, for example, would cut out payments to the working family with two preschoolers at $86,982, about $4000 below the current level.

For the Sonneveld family of Drury, with five children still qualifying for tax credits, they get tax credits on income up to $148,991 at present. A 25c clawback rate above $70,000 would reduce that to $133,193 - arguably still not a hardship.

However, the disadvantage of this option is that it would effectively negate the tax cuts on high incomes that took effect only last October.

CAP LARGE FAMILIES
Dr Patrick Nolan, a Kiwi expert on family tax credits who is now chief economist of the British think-tank Reform, says the Government could consider capping the total subsidy that any family gets.

"Currently, assistance increases with the numbers of children in the family and this is why some higher-income families receive assistance," he says.

"Should there be a limit to the number of children that support is provided for?"

This would be an effective way to cut payments to large but well-off families, such as the Sonnevelds.

But Auckland University economist Dr Susan St John, a member of the Child Poverty Action Group, says most large families are not on high incomes because they are more likely to have only one income-earner.

"Larger families would be more likely to be in the lower-income range and, therefore, to support them is really important," she says.

CUT THE TEENAGE RATE
The current tax credits increase with age - from $88 a week for under-16-year-olds to $102 for those 16 or over for a first child, and from $61.19 for under-13-year-olds to $69.79 for 13-to-15-year-olds and $91.25 for those 16 and over for subsequent children.

(There is also a $60 in-work tax credit for couples working at least 30 hours a week and sole parents working at least 20 hours).

The current age structure dates from the introduction of family tax credits at the same time as GST in 1986 and was based on the fact that older children cost more in food and other expenses.

But Dr Nolan says families with younger children actually need more support because one parent usually has to stay home to look after them. Dr St John says Mr Key's aim to make the system "simpler" might point to gradually phasing out the current higher rates for teenagers.

Australia's family tax credits recognise the extra costs at both ends of childhood. A "Family Tax Benefit Part A" pays A$94 a week for each child under 13 and A$118 for each teenage child aged 13 and over, while a "Family Tax Benefit Part B" pays A$75 a week for each family with children under 5 and only A$54 for families with school-aged children. Part B is paid only to families where one parent stays home with the children most of the time.