Clawback erodes Budget largess

By SIMON COLLINS

Middle-income families earning $40,000 to $50,000 a year will lose almost 90c of every extra dollar they gain under the Working for Families package unveiled in the Budget.

An analysis for the Weekend Herald by economist Patrick Nolan has found that Thursday's Budget has given families more incentive to get part-time work paying up to $80 a week, and to jump into fulltime work paying around $500 a week ($26,000 a year).

But the price will be paid by families earning between $800 and $1200 a week ($42,000-$62,000). They will actually lose more out of every extra dollar they earn than they have lost until now.

In effect, Finance Minister Michael Cullen has simply shifted the penalty on work higher up the income scale.

"It's all about tradeoffs," said Mr Nolan, who worked on the early stages of the package at the Treasury before leaving to study for a doctorate at Victoria University.

"They have tried to remove the disincentives for beneficiaries to take up part-time work, and to leave the benefit altogether and get to that point where they are just off the benefit [in fulltime work].

"But that has come at the cost of shifting disincentives further up the income distribution."

Dr Cullen has raised family support payments and accommodation supplements, abolished the clawback of accommodation supplement on the first $80 of weekly income, and raised the income level at which family support starts to reduce from $20,000 to $27,500, from April 2006.

Abolishing the clawback on that first $80 a week will cut the effective tax rate on a beneficiary's initial part-time income from more than 40c in the dollar to an initial 16c, then 22c.

But the Budget made no change to the rate at which the benefit is then clawed back by 70c out of every extra dollar earned above $80 a week.

Adding 22c tax on top of that means that beneficiary families will still lose 92c of every extra dollar they earn from $80 a week up to the point at which they stop receiving their main benefit.

That point will vary depending on the number of children and the family's housing costs. But for a single-income family with two young children receiving the maximum accommodation supplement of $120 a week in a second-ranked city such as Manukau or Waitakere, the 92 per cent clawback will last until the family's non-benefit income reaches $471 a week ($24,500).

Getting a fulltime job will then be more worthwhile than it is now, as the effective clawback rate will drop from 65c to 47c in the dollar until they start earning more than $528 a week ($27,500), because of the lift in the threshold at which family support starts reducing, from $20,000 to $27,500.

But above $27,500, the family will lose 30c in the dollar off their family support and 25c in the dollar off their accommodation supplement and pay tax of 22c, losing a total of 77c out of every extra dollar they earn.

Above $38,000 ($731 a week), their tax rate jumps to 33c and they will lose a total of 89c from every extra dollar until their accommodation supplement disappears when they earn above $49,450 ($951 a week).

They will then continue to lose more out of every extra dollar than they do now until their family support and the new in-work payment cut out at $61,930 ($1191 a week).

Dr Cullen said the penalty on extra work for higher-income families was "an area where, if we have room to move, we will move".

"There are other priorities. Our first priority is making sure people have adequate income."