KEY POINTS:
Working for Families is a pretty big deal. Thousands of families are now receiving Working for Families tax credits, making it one of the most significant welfare initiatives in New Zealand's history.
There's no argument with the goal of helping working families - we all want that.
But is Working for Families helping families to get ahead and improve their prospects? Or is it actually reducing the incentive to work?
We've done some analysis and found that in many cases it is causing strange outcomes.
For example, some people are finding they can make more money working part-time than by working full-time (i.e. working part-time and receiving WFF instead of working full-time and not receiving the payment.)
While this may seem a rather pleasant prospect, it presumably was not what was intended by those who planned the scheme.
Having a welfare scheme that encourages you to work less - that's not a particularly good outcome for the workplaces of New Zealand, especially given our tight labour market and widespread shortages of many key skills.
Moreover, WFF seems to be discouraging productivity. It's happening at the point at which a firm offers a pay increase.
Many employees are discovering that the result of a pay increase is that their WFF goes down.
Take the example of "the Smiths", a family of Mum and Dad with three children under 13, with a family income of $35,000 a year. Mr Smith's job brings in $533 in the hand per week.
The Smiths also receive WFF payments of $256, boosting their weekly income to $779. But if Mr Smith received a 5 per cent pay increase, it would mean the WFF payment being cut back to $244 a week.
After tax and with the WFF cutback, the Smiths would get only a 1.8 per cent pay increase instead of the 4.9 per cent without WFF.
This is a common outcome. On average, a single income family receiving WFF payments will receive only 50 per cent of the net value of any pay increase, compared with over 80 per cent for a similar but non-WFF family.
Such a small increase as received by the Smiths is unlikely to motivate Mr Smith to work more productively. There's a strong link between reward and motivation. If you don't feel fully rewarded by a pay increase - because WFF has taken away half of it - you won't be so motivated to work harder or smarter in future.
The Smiths' situation is echoed throughout New Zealand, since two thirds of all income earners earn $35,000 a year (like the Smiths), or less.
WFF will put a brake on their productivity, just like for the Smiths. The overall result - a general dampening of productivity and effort in workplaces all over New Zealand.
Productivity is a big issue for New Zealand - without improved productivity we can't grow our economy or standard of living. But the latest statistics show New Zealand's labour productivity barely grew at all (0.4 per cent) over the last year surveyed.
Dampening productivity is not a good outcome from a welfare scheme that eats up more than a billion dollars every year of taxpayer funds.
It's not known how many families receive WFF, but given that it is available to anyone with children earning less than $81,500 a year, the take-up must be huge.
Do we really want a scheme with such a negative impact on productivity and on workers' willingness to put in the extra effort for success?
Another uneasy outcome of WFF is what it does to the aspirations of people now on low incomes. The WFF subsidy drops rapidly once your earnings exceed $35,000.
The message here is pretty negative. You get the most out of WFF if - and only if - you remain a low-income earner. In other words, the incentive is to stay on $35,000 or less. The incentive is not to try to improve your circumstances through work.
This just doesn't make sense. We all want a high skill, high wage economy. We all want people to go on improving their situation. We all want people to get ahead.
There's great support for the concept of helping families, but if it's done as a welfare scheme it surely should be done in such a way that it supports the goal of a high skill high wage economy, rather than working against it.
Of course the simplest way to help families would be to tax people less in the first place, perhaps by adjusting tax thresholds, so families kept more of their own money. This would get rid of the "churn" factor that comes with a large, complex income-boosting welfare scheme.
It would improve the incentive to be productive and earn wage increases through personal effort.
Higher thresholds for all levels of personal tax would provide a great incentive for everyone to work smarter and harder - surely that would be good for every New Zealander.
* Phil O'Reilly is chief executive of Business NZ
