Gradual family-tax change eases loss

Joe and Annemieke Sonneveld of Drury with four of their six children (from left), Joanna, 4, Amy, 7, Samuel, 9, and Suzanne, 17. Photo / Sarah Ivey

Family tax credits are being chopped more harshly than expected to help close the Budget deficit - but the cuts will be phased in over seven years so most families will barely notice.

For a two-income, two-child family working 60 hours a week between them at the median wage of $20 an hour, the changes will cut family support by $33 a week when they are finally phased in by 2018 - not counting inflation.

But they will be dwarfed by wage increases and regular inflation adjustments in family support over that period.

What will be noticeable, however, is that family support in New Zealand will fall even further behind Australia, which already has a more generous system.

Australia pays A$94 ($126) for every child under age 13 at present, compared with $88 for the first child and $61 for each subsequent child here.

And the Australian subsidies are clawed back by only 20c for every $1 earned above A$45,114 ($60,453), inflation adjusted each year.

In New Zealand, yesterday's Budget will lift the clawback rate from 20c to 25c in the dollar and cut the income level where the clawback cuts in from $36,827 to $35,000 a year by 2018.

It will also freeze family support at current levels for children over 15 until rates for younger children catch up.

Auckland University economist Susan St John said the real significance of the changes was that, unlike in Australia, there was now "no commitment to improving the lot of families with children". "So it does reinforce the difference between Australia and New Zealand," she said.

Finance Minister Bill English said the changes would target subsidies to "those who really need them" and align the payments with "what the economy can afford".

There will be no changes at all for families earning less than $35,000 a year with no children over 15.

Above that level, there will be bigger reductions at every income level until the subsidies cut out. By 2018, they will cut out sooner - at incomes of $78,520 for two-child families, compared with $91,227 now, or at $138,790 for six-child families compared with $166,565 now.

The changes will be phased in at each of the next four inflation adjustments due in April 2012, 2014, 2016 and 2018.

The clawback income threshold will be lowered by about $450 each time, from $36,827 to $35,000 over the full period, and the clawback rate will rise by 1.25 percentage points each time, from 20 per cent to 25 per cent.

These changes are to save $197 million a year by June 2015, halfway through the process. The final savings by 2018 are not stated but could be roughly double that, or about $400 million a year. That will cut the $2.8 billion cost of Working for Families by about a seventh.

The changes are harsher than expected because they will cut in significantly below the median wage of $20 an hour, or $41,600 a year.

They will also effectively negate last October's income tax cuts for many of the 382,500 families who currently get WFF tax credits - 75 per cent of all NZ families with dependent children.

For the most common tax bracket of incomes from $14,000 to $48,000 a year, the marginal tax rate came down 3.5c in October, from 21c to 17.5c in the dollar. The 5c lift in family support clawback will more than wipe out that gain by 2018 for families above $35,000.

Allowing for the GST increase from 12.5 per cent to 15 per cent, also last October, the net effect of all National's tax changes will be to cut the net income of a two-child family, with one fulltime earner and one half-time earner on the median wage, by 1.4 per cent by 2018 (disregarding inflation).

In contrast, higher earners without children or above the current cut-off points for family support have gained hugely from the tax cuts and are not affected by the family support changes.

Lower-income families earning below $35,000 a year are also relatively unaffected. A two-child family with one fulltime earner on the minimum wage of $13 an hour ($27,040 a year) is 0.2 per cent better off.

CUT IN TAX CREDITS GOOD MOVE, SAY FAMILY

A Drury family of six who say they do not need family tax credits believe the Government is right to cut them, but has not gone far enough.

Orchid growers Joe and Annemieke Sonneveld have received $20,000 from Working for Families in some years because, with six children, they qualified for partial subsidies as long as they earned less than $172,425.

Even with their eldest, 17-year-old Suzanne, now at Manukau Institute of Technology, they still received partial subsidies on income up to $148,991 before the Budget.

The Budget decisions to claw back the tax credits at a faster rate of 25c in each $1 above $35,000 a year will cut their family support drastically, but Mr Sonneveld is not worried.

"I'm happy with the higher incomes being targeted for less family support," he said. "That's a good move - people who can afford less Government help will feel it, and I'm quite happy ... Lower incomes will still have access to it."

But he worries that Finance Minister Bill English has not done enough to bring the state's spending into line with its lower income, especially in health, where spending will keep rising.

"The country is sick and we are trying to plaster over something that needs stitching up," he said. "With health spending, we should be targeting more prevention, healthy lifestyles and healthy eating. We can spend more on chemotherapy and all those things but we need a radical change."

He was also unimpressed by plans to sell shares in state enterprises. "It would be like us selling the business, going on a cruise, coming back and having nothing. That's a bad move."

As an exporter, sending 98 per cent of his orchids to the United States and Japan, he felt there was "nothing much in it for the export sector".

"And I don't know if there's a lot in it to address our growing debt problem."