Families to receive a leg-up in Budget

The Budget is being billed as helping low- to middle-income families. KEVIN TAYLOR looks at what's available now and what's coming.

A "social dividend" is coming for Kiwi battlers - low- and middle-income families with children. That's how Finance Minister Michael Cullen's fifth Budget, to be delivered on Thursday, is being billed.

Huge expectations are on his shoulders. The Labour Party wants delivery of the fruits of good economic times to low- and middle-income earners to help it win an elusive third term in office next year.

The centrepiece of Budget 2004 is the Future Directions package. It is expected to be worth about $2.5 billion over three years, with most of the spending - about $1.1 billion annually - coming in years two and three.

National and Act will call this cynical vote-buying and claim the package gives more to families on benefits than those in work.

Whatever the truth, the Budget's theme is about redistribution - Labour believes it should collect money through taxes and redistribute through tax credits and to a lesser extent the welfare system.

The parties of the right think it is better to collect less in taxes and let New Zealanders make up their own minds how to spend the money.

Dr Cullen says the incomes of about 300,000 low- and middle-income households will benefit - 48,000 more than are helped at present. In total, 60 per cent of all families with dependent children will benefit.

"The fact is that the majority of the workforce of the future is currently being formed in families who will receive assistance from this package," he said last week.

Dr Cullen has called the package the largest single set of changes since the 1991 benefit cuts.

Individual families will be affected differently depending on income, number of children, and location.

Dr Cullen told Parliament recently that a working family with four children on $55,000 a year will get "a great deal more" than $60 extra a week under Future Directions. Currently, such a family is entitled to only an estimated $16 of state help through tax credits.

Tax credit payments - either paid fortnightly or in a lump sum - will be the main way assistance is delivered but are only part of a raft of other expected changes.

The benefit system is in for a shake-up, although the new structure is less clear. Benefit payments will rise, as will accommodation supplements. Benefit abatement rates are also likely to change as the Government seeks to get more beneficiaries into work.

Better access to early childhood education and childcare are also promised.

Tax credits will at last be indexed to inflation - a long-time call of those concerned about child welfare.

Child Poverty Action Group spokeswoman Susan St John welcomes the move.

She says that since 1986 the poorest one-child family have had a rise of just $5 a week in family support. To take inflation into account, their family support should now be about $74 a week, but is only $47.

Ms St John, an economics lecturer at Auckland University, says that whatever action Labour takes on Thursday, it has been too long coming and should have been done when it first took power five years ago.

"It's astonishing it's taken so long. All we're talking about is restoring what's been lost because of inflation, and the fact that we haven't had any movement on this for five years means there's a lot of catch-up to do."

She says the lack of action means the package has become a much bigger fiscal and political deal than it needed to be.

"Had it been done in small incremental bits it would have been better for families and it wouldn't have attracted so much political attention."

The problem with tax credits is the sharp abatement of family assistance above incomes of $27,000, says Ms St John. In Australia, assistance extends to A$80,000 ($91,700) income, and only the top 6 per cent of children miss out.

Also of concern is the low take-up rate of tax credits - an estimated 30 to 70 per cent, but Inland Revenue has no figures.

Employment and Social Development Minister Steve Maharey, who has worked on Thursday's package for years, is aware of the problem of take-up rates and intends conducting a campaign after the Budget to ensure that families get what they are entitled to.

Ms St John will be looking closely at the Budget detail to measure how much real redistribution of wealth has occurred over and above an inflation adjustment, arguing that there has been real growth in gross domestic product and wages.

She says Australia is far more generous with tax credits and Britain has grasped the problem of child poverty and devoted whole chapters in recent Budgets to it.

Another concern of the group is its still-unresolved discrimination claim against the Government over the child tax credit, which is given only to families with parents in work. Beneficiary families miss out.

On the overhaul of welfare, Ms St John is cautious about over-simplifying the system but thinks payments need to be raised because of evidence that families are struggling and going further into debt.

Westpac chief economist Brendan O'Donovan says the decision to radically increase spending over three years - a figure he puts at a cumulative $15 billion - is a worry.

The economy may be in a purple patch, but there are long-term questions over the sustainability of new Government spending that becomes embedded, he says.

O'Donovan thinks a wider opportunity has been missed to reduce personal and company tax.

"We are a highly taxed economy when you are adding in central government and local government."

The Salvation Army's national director of social policy, Major Campbell Roberts, says the families package sounds impressive but he wants to see the detail.

He is also frustrated that Labour has taken so long to deliver. He says it remains to be seen whether the package will just spread money around a wide group of people or in fact lift up the vulnerable.

"I'm prepared to be hopeful at this stage but we'll be very critical if it doesn't actually deliver."

The proof of the Budget's success for the Labour-Progressive Government - and confidence and supply partner United Future - will be its impact on low- and middle-income families.