Keith Rankin: Carrots, not sticks, way to the future

Keith Rankin

It is not clear from Don Brash's latest Orewa speech whether he is on a moral or a fiscal crusade.

I'll focus first on the fiscal crusade. Dr Brash seems most concerned about the tax burden that state-funded benefits place on ordinary "Kiwi battler" families (many of whom work 80 hours a week for a living). The implication is that a purge on beneficiaries will reallocate money from beneficiaries' pockets to these battlers' pockets.

The Government can afford tax cuts right now without taking the scalpel to sickness and domestic purposes beneficiaries. The argument against tax cuts is that aggregate demand is so strong that any extra spending unleashed upon the economy will be inflationary. Extra spending on imports would also aggravate our huge balance of payments deficit.

So we are in a zero-sum world. If the battlers are to have more to spend, someone else (for example, beneficiaries) must have less to spend. If Dr Brash can reduce beneficiaries' spending by $400 million, he would be able to reduce the 33c personal tax rate (and company tax rate) to 30c, while also spending $70 million to fund the extra case-management costs.

How would the gains from such a tax cut be allocated? If a battler is defined as a person in fulltime work or self-employment who earns less than $38,000, battlers would receive nothing at all. Those grossing $50,000 would get an extra $6.92 a week from such a tax cut. People on salaries of more than $60,000 would each gain $12.69 a week.

If the net gains were spent on tax cuts of the kind National has talked about, only the richest 800,000 New Zealanders would gain anything. Half the gains would be captured by the highest-earning 200,000 New Zealanders.

In fact, the battlers would probably be worse off. The benefit system gives workers some bargaining power. It gives them a safety net if they say "no" to unreasonably low wages.

Any undermining of the benefit system can lead to a reduction of market wages and a commensurate increase in profits. Indeed, the benefit cuts that coincided with the 1991 Employment Contracts Act were an integral part of a policy to boost profits by reducing labour costs.

Dr Brash is not being straight if he uses the rhetoric of the "battler" but does not explain what gains the battlers can expect to achieve from the policy. He is also not being straight if he knows that the lion's share of the gain will go to people other than the battlers in whose name he speaks.

Let's now consider the moral crusade. Although Dr Brash doesn't use the term in his speech, the innuendo surrounding single mothers is sufficient for most of us to recognise a favourite scapegoat, the deadbeat dad.

While the Orewa speech was specific about the matter of beneficiary mothers not naming the fathers of their children, the innuendo was that the unnamed fathers were men who did not want to provide for their children and had intimidated the mothers (possibly through threats of violence) into not naming them.

Mothers' domestic purposes benefits are funded, in the first instance, by fathers' child support payments. The Government tops up those father-funded payments, which are insufficient to pay the entire benefit.

So the cost to the Government of the DPB is much less than suggested by the gross figures upon which Dr Brash makes his case.

From the point of view of separated parents where the mother is on a benefit, the child support payment from the father neither supports the children nor adds to the mother's disposable income. For them, child support is nothing but an income tax.

The irony of this is that child support payments, coming on top of all the other costs of living that battling Aucklanders face, are one reason many separated fathers are prevented from making a net contribution to their children's wellbeing.

Many domestic purpose beneficiaries have worked out that all family members are better off if the father contributes directly to his children's welfare in lieu of child support. The benefit to the mother of this direct contribution by the father will in most cases far exceed the loss of DPB incurred by her not naming the father.

From their point of view, not naming the father is a form of tax avoidance. All tax avoidance is legal. The amounts at stake here are small compared with other forms of avoidance.

Will the country benefit if we continue to harass parents who have separated for one reason or another? No. The children affected already lose too much of their fathers' input into their lives.

Further, as Herald columnist Fran O'Sullivan reminded us, children are a scarce commodity today. We need to bear and raise compassionate children who will be willing and able to support their grandparents' generation in retirement.

Parents (and potential parents) need carrots, not sticks, if we wish today's 40-somethings to retire in dignity.

* Keith Rankin teaches economics at Unitec.