PM backs away from election vow on family aid

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High-income families might lose at least part of last year's tax cuts in reduced family support if the Government goes ahead with changes mooted yesterday.

Prime Minister John Key confirmed earlier comments by his deputy, Bill English, that changes to Working for Families tax credits could be back on the agenda to help pay the costs of the Christchurch earthquake.

His comments reverse a 2008 election promise that National "intend making no change" to Working for Families, and revert to his position at the previous 2005 election that it was "bizarre" to give welfare payments to families on $80,000 or $90,000 a year.

On Tuesday, Mr English said he could not rule out changes to Working for Families and interest-free student loans because of the huge earthquake double hit of lower tax revenue and higher costs.

Yesterday, Mr Key said tax revenue could be down $5 billion in the financial year to June because of a $15 billion drop in output from Christchurch.

The Government this week approved $120 million to support jobs for the next six weeks, with more expected, and he said rebuilding the city over the next 15 years could cost about $20 billion.

He said he did not expect to charge interest on student loans, but the Government was looking at making savings in the $2.8 billion annual cost of Working for Families.

"Working for Families and student loans are arguably broad and general schemes and there may be the opportunity to make alterations to the generosity of those schemes, particularly Working for Families where it reaches into very high income levels and where those people have enjoyed reasonably good tax cuts," he said.

Asked if the changes would be significant, he said: "I don't think they will be significant changes, but because the schemes are so large and arguably expensive in nature, quite small changes can deliver quite reasonable savings."

Former Labour Prime Minister Helen Clark dramatically increased the generosity of family tax credits a month before the 2005 election, raising the income allowed before credits were clawed back from $27,500 to $35,000 a year and cutting the clawback rate from 30 per cent to 20 per cent.

The changes, unveiled days after a National Party tax cut policy, extended the tax credits from 61 per cent to 75 per cent of all families with children, and raised their cost from $1.1 billion to $1.5 billion a year.

The income allowed before clawbacks is now $36,827 and partial tax credits are paid to families earning up to $75,317 with one child, $91,227 with two children, $107,137 with three children and up to $166,565 with six children.

An evaluation last year found that 74 per cent of all families with children received credits in 2008.

An eighth of these, 47,500 out of 382,500 families, had incomes of more than $70,000 a year. This included 25,200 making more than $80,000.

An Inland Revenue spokeswoman said 6100 families receiving the credits in 2009 had incomes of more than $100,000 a year.

The Government cut the tax rate on incomes above $70,000 last October from 38 per cent to 33 per cent.

Auckland University economist Susan St John said ministers could claw back tax credits from high-income families by raising the income threshold before the clawback starts or raising the clawback rate.

"If they reduced the threshold, the problem would be that there would be a lot of families that would end up being affected around that $30,000 to $40,000 range," she said.

But raising the clawback rate would have a "disincentive effect", discouraging families from earning more money, such as by part-time working partners working extra hours.

Herald calculations show raising the clawback rate to 25 per cent above $70,000, for example, would lower the maximum incomes at which credits could be claimed for three children from $107,137 to $99,709 a year - a significant but not dramatic reduction.

But it would also wipe out the gains of last year's 5c cut in the top tax rate for thosefamilies.