Colin James: State income assistance can be a double-edged sword

What the state gives, the state can take away. That is a message we usually learn too late.

Take farmers. In the late 1970s, Sir Robert Muldoon, National Party Prime Minister, dreamed up a supplementary minimum price scheme (SMPs) to support farmers under pressure.

Inflation was rampant, costs were high and prices were low. The terms of trade had dropped by a third between the mid-1960s and the mid-1970s.

The SMPs were intended to smooth market fluctuations - though also, as initially designed by the bureaucrats, to respond to market changes over time.

When market prices at the farm gate kept moving in the wrong direction, Muldoon disconnected SMPs from prices. They became, in effect, a welfare scheme for farmers.

Muldoon also thereby disconnected his prime ministership from reality. You cannot heavily subsidise your principal exports for long and maintain a viable economy.

The farmers' leaders, to their credit, grasped this. Leading to the 1984 election, they did not issue their usual long shopping list to the political parties, instead urging radical economic reform.

And they got it - in the neck. The radically reforming post-1984 Labour Government removed the subsidies, cold turkey. Farmers had a rough time of it in the late 1980s, but once through that, they benefited from the lower-inflation, lower-cost environment the reforms brought - just as their leaders had hoped.

Manufacturers, by contrast, clung to their social welfare, which came in the form of protection from imports at the border and heavy regulation inside the border to blunt competition.

Manufacturers didn't go cold turkey. They got time to adjust, but by comparison with Australia, the adjustment time was ungenerous.

A lot of manufacturing workers went down the road, many of them Engineers Union members. It was a wrenching time. But now most of the manufacturing left has adjusted and some of it does very well internationally.

Many other workers were on welfare in the 1980s. They "worked" for the Railways or the Forest Service or the Post Office or some other loss-making Government department or agency - kept in their "jobs" by the prices the Government made us pay for their agencies' "services" and by the subsidies pumped from our taxes into the agencies to offset their trading losses.

Tens of thousands of workers went down the road when those agencies were turned into state-owned enterprises. Cold turkey again.

Next to do cold turkey were the usual sort of welfare beneficiaries, those without income whom the state maintains: Ruth Richardson and Jenny Shipley cut their benefits 10 per cent on average after the 1990 election.

You will be getting the picture by now: keep out of the State's clutches if you can.

Ah, but this government is social democratic. It likes helping you out. Hence the Working for Families package, about to cut in on April 1.

Last May, when it was announced, I asked whether it would work. It seemed a complicated extension of welfare that would make headaches as wage and price inflation amended people's entitlements.

This will become evident to those Engineers Union members who have children and others who coat-tail them as they exact a decent wage rise to make up for marking time while profits soared.

As John Key points out, a fair dollop of their rises will be clawed back through abatements of the tax credits and other assistance under the scheme.

The gains of April 1 will turn into the drag of May, June and July - fiscal drag, to be precise.

Fiscal drag is a hungry beast. Also called bracket creep, it wolfs a higher share of your wage or salary in income tax as your income rises through the thresholds that trigger higher rates.

The simple fix is to raise the thresholds - $38,000 for the 33c rate and $60,000 for the 39c rate - in synch with general wage movements. (Average earnings are $40,700.)

That way you continue to pay the same proportion of your income in tax as the rate for your job goes up (though if you are promoted to a job with a higher rate you still pay the higher tax take).

Michael Cullen has flatly rejected such adjustments - though Gordon Copeland of Labour's helpmate party, United Future, is firmly in favour.

Working for Families, however, has created a host of new thresholds. And they hack right into Labour's heartland.

So the Government will adjust the assistance and tax credits by inflation, Steve Maharey says.

While Engineers Union members with children will initially have much of their pay rise clawed back, the clawback itself will be rolled back, come the annual adjustment, to the extent prices rise.

So all is sweet? No, actually.

Some future government will delay or discount or abolish the price-adjustment. Or cut the assistance and credits. Anyone who comes to rely on Working for Families might remember the farmers, manufacturers, state-owned enterprise workers and beneficiaries.

What the state gives, the state can take away. And from to time it does.