Work and Income's Working For Families tax credits are an area where the major parties could improve the lot of lower-income families, Thomas Coughlan writes.
ANALYSIS
It’s a cost of living election - you’re probably sick of hearing it, but it’s true. Every poll shows that the cost of living is front of voters’ minds.
Inflation popped above the 1-3 per cent target band in June 2021 and has stayed above ever since. On the Reserve Bank’s most recent projections, it will once again fall below 3 per cent in the September quarter next year, having spent three years above the target band.
The cost of living challenge affects every household differently. While parties are squabbling over the “squeezed middle” where marginal voters lurk, very little is being promised to people on lower incomes who are the ones most punished by the cost of living crisis.
Here’s what’s on offer so far:
Main benefits
There is not a lot on offer from the two main parties for people on a benefit. Labour has not yet announced its benefits policy.
Labour has, to its credit, made two big changes to benefits in office, first by the way they were indexed, and then by lifting payment rates. The first of these changes National promises to change.
Labour went big on benefits in this most recent term of government. In its first Budget after the election, the party lifted main benefit levels. The promise lifted all core benefits by $20 from July 1, 2021, eventually boosting all benefits by $32 to $55 overall, costing $3.3 billion over four years.
Treasury actually recommended that the $20 lift go further - as high as $50 - costing an additional $1b.
These payment hikes are not on the line this election, with no one promising to cut levels of payment.
However, a change made in Labour’s first term is on the line. In 2019, Social Development Minister Carmel Sepuloni changed the way main benefits were indexed. Previously, they had been indexed to CPI inflation, rising with the cost of living. Other benefits, like superannuation, which is pegged to wage rises.
Historically, wages have risen faster than inflation, meaning benefit rates have remained low, while wages have risen. This increased the gulf between those in work and those who were not.
In 2019, the Government changed this, indexing benefits to wages. This backfired after 2021, when CPI inflation rocketed ahead of wages, causing the Government to intervene and adjust benefits for inflation rather than wages.
This is on the line this election. Labour, the Greens, and Act have said they will keep the existing indexation system (Act had promised to revert to CPI but reversed this position in the draft budget published yesterday).
National has said it would revert to the old calculation. The change would be quite significant. A single person receiving the over-25 rate of Jobseeker would lose about $33 a week by the end of the next Parliament if National reverted to the old measure.
The current rate of Jobseeker for an individual over 25 is $337 a week. The Greens want to get rid of this, replacing Jobseeker, Sole Parent Support and the student allowance with a single payment of $385 a week, with an extra $135 each week for people caring for children on their own.
The Greens would change the way this is pegged so that it rises by wages or CPI, whichever is larger.
Te Pāti Māori has promised to double baseline benefit levels.
Working for Families
Alongside the benefit system, New Zealand has a labyrinthine system of tax credits known as Working For Families (WFF).
These cost a bit less than $3b a year and work quite differently to the benefit system. Low-income families get two main tax credits, a family tax credit, which goes to all low-income families and an In-Work Tax Credit, which goes to low-income families who meet work requirements.
The main credits are the family tax credit (FTC) of $136.94 a week for qualifying families, with an additional $111.60 a week for every subsequent child.
On top of this, there is the IWTC of $72.50 a week for families with one to three children (with an extra $15 a week for each fourth and following child).
Beneficiary families therefore get the FTC but not the IWTC.
These credits are withdrawn as families earn more money. Once a family’s income (and remember this is family income, rather than individual income) hits the “abatement threshold” of $42,700, the Government claws back 27 cents of the credit for every dollar earned above the threshold. Once the family tax credit reduces to $0, the IWTC gets reduced, again at 27 cents for each dollar earned.
About 350,000 families were getting WWF credits in 2021. Most get the FTC, some get the IWTC.
Neither the payment level nor the abatement threshold of WFF credits are properly indexed to inflation.
The level of FTC only gets an inflation-adjusted top-up if CPI inflation breaches 5 per cent, which means, ironically, the last couple of years have not been terrible at lifting payment rates. However, when inflation falls to normal levels, as it is forecast to do in the next Parliament, the payments do not increase, and slowly lose their purchasing power.
The IWTC was last adjusted in 2016 and has been frozen since.
This means the scheme relies on the generosity of Governments to adjust it so that it keeps up with the rising cost of living. Over time, payments have struggled to keep up with inflation, and thresholds too.
The Green Party is promising to fix this. It wants to replace WFF with a new scheme and lift the abatement threshold from where it is now ($42,700) to $60,000.
This sounds like a lot, but it is actually only where it would be had it been properly inflation-adjusted. It was last adjusted for inflation in 2008 (National stopped inflation adjustments in 2010). The Greens are also promising a single payment for caregivers of $215 every week for the first child, and $135 a week for every other child, replacing both the FTC and the IWTC.
One thing the major parties are not talking about, but probably should be, is dialling down the rate at which the tax credits abate. Currently, families lose tax credits at 27 cents for every dollar earned above the abatement threshold.
Labour has actually increased this rate dramatically, meaning people lose their credits faster than before.
This was first increased from 22.5 per cent and then to 25 per cent and now to 27 per cent. Under the fifth Labour Government the abatement rate was just 20 per cent, meaning families kept more of their credits for longer. It is a sneaky money-saving device that means families lose payments quickly and makes the scheme less costly for government.
Neither Labour nor National is talking about fixing this. The Greens want to reduce the abatement rate to 18 per cent, along with lifting the threshold to $60,000. This means that while the Greens want substantially more generous payments, and to end the way the scheme discriminates between people on a benefit and people in work, the parameters of the scheme are only marginally more generous than what the Helen Clark Government left behind in 2008.
Labour came out with its WFF policy first, which National unexpectedly matched when it introduced its own tax policy.
This means both will use the IWTC to boost incomes, the tax credit available to families in work. They are promising to lift this by $25 a week come April 1 next year. That means about 160,000 moderateincome families will get a boost.
Then, in 2026, both will dramatically hike the abatement threshold from $42,700 to $50,000. This means that instead of starting to lose their tax credits once their incomes hit $42,700, families will only begin to lose the credits at $50,000 . The change will mean families keeping about $2000 if they earn above the threshold.
One challenge neither of the major parties is addressing is the fact that the system relies upon governments to make the political decision to raise both the payment levels and the threshold at which payments abate. This means that for years at a time, payments erode due to inflation, until a government finally lifts them.
This makes it quite unlike main benefits and superannuation, which rise as wages rise. It would be unthinkable if these payments were frozen each year until governments chose to unfreeze them.
University of Auckland associate professor Susan St John said New Zealand should “look at what happens in Australia”, where they annually index their thresholds to keep up with inflation.
“Keeping it fixed at $42,700 has just been criminal,” she said.
Over time, inflation means WFF has fallen behind. This is particularly the case with the abatement thresholds. In 2011, 410,000 families received WFF, now the number is around 350,000, despite significant population growth. What that shows is that families are inflating themselves out of the scheme. Few are better off in real terms.
Labour’s and National’s changes will not account for the inflation that has taken place since the last time the abatement threshold was increased in 2018, with Labour’s families package.
The abatement rate would need to be lifted by twice as much as Labour and National are currently promising, all the way to $57,000 in 2026, to keep pace with inflation since the threshold was last lifted in Labour’s 2018 families package.
St John thinks the tax credit that Labour and National have chosen to increase is the wrong one. Both have opted to increase the IWTC for families in work rather than the FTC, which goes to all low-income families.
She thinks a better thing to do would be to take the increase both parties are promising and instead increase the $127.72 FTC by $25 a week. To fund this, you could also take away $25 from the IWTC. That would mean no family would be worse off, but the thousands of families who receive the FTC but not the IWTC would be $25 a week better off.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
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