Tough welfare laws loom this year

Social Development Minister Paula Bennett. Photo / Brett Phibbs

New laws to make sole parents look for work after their youngest children turn 6 will be phased in over several years, says Social Development Minister Paula Bennett.

Prime Minister John Key confirmed in Parliament yesterday that tough new welfare laws will be introduced this year, including "work and training expectations" for the 42,000 sole parents on domestic purposes benefits whose youngest children are 6 or older.

Ms Bennett said the reform bill would be tabled within two months and would go to a select committee. Most of the changes will take effect on October 1.

But she said the work requirement for sole parents would take effect gradually. "We will be staging this over a period of years because we can't handle thousands coming in at once," she said.

The proposal to make sole parents with children over 6 look for training or part-time work of at least 15 hours a week was announced in National's election policy in 2008, but was deferred last year because of the recession.

Beneficiary Advocacy Federation spokeswoman Kay Brereton yesterday questioned the sense in forcing sole parents into paid work even now, with unemployment at a 10-year high of 7.3 per cent.

"Who are they taking work from? Because the jobs are limited," she said.

Ms Bennett acknowledged that the policy would need to be phased in, both because of the lack of jobs and because Work and Income case managers were already fully occupied trying to cope with unemployment.

She said only "a small proportion" of the 42,000 sole parents who were the Government's ultimate target would be affected this year.

She said the phase-in would not be based on the age of children, such as starting with sole parents whose youngest children are, say, 12 or 14.

"It's around the capacity of both offices and individual staff," she said.

"We may have 'DPB champions'. I have case managers who just love working with DPB clients and getting them back into work. We may be setting goals - it will be numbers per office."

Mr Key said other changes would include "strict reapplication rules to prevent people languishing on an unemployment benefit for more than a short period between jobs".

Although Ms Bennett said final decisions had still not been signed off by Cabinet, this is expected to mean implementing National's election promise to make unemployed people reapply for the dole after a year and "do what it takes to secure employment".

"This may include practical training, attending a basic skills course or attending drug and alcohol rehabilitation," the policy said.

"After that, they will be required to actively look for a job, to go to any job interview they are referred to, and to accept any offer of suitable employment, whether fulltime, part-time, temporary or seasonal.

"If they do not comply with these obligations, they will have their benefit reduced in the first instance, then suspended and then cancelled."

Mr Key said criteria for the sickness benefit would be changed "to ensure it only goes to people who are genuinely too sick to work".

Sickness beneficiaries have almost doubled in the past decade, from 32,870 in 1999 to 59,158 at the end of last year - a rise which is only partly due to the ageing population.

Ms Bennett said the reform bill would implement National's policy to require medical assessments every four weeks for the first two months and compulsory second opinions from designated doctors for everyone who has been on the benefit for a year.

She said 16- and 17-year-olds on the independent youth benefit would be required to have "an absolute commitment to be in education first, and then training or work".

She expects to appoint an expert group within the next two months to find other ways to reduce long-term welfare dependency. The group will report back by the end of the year.

* The table at the top of this article is purely illustrative of the kind of tax changes the Government appears to be considering and is based on a large number of assumptions.

ASSUMPTIONS

1. Income tax changes as in the Tax Working Group's Scenario1B

Top tax rate above $70,000 cut from 38 per cent to 30 per cent
Tax on $48,000 to $70,000 and trust tax rate cut from 33 per cent to 30 per cent
Tax on $14,000 to $48,000 cut from 21 per cent to 19 per cent
Tax on first $14,000 cut from 12.5 per cent to 10.5 per cent

2. GST rises from 12.5 per cent to 15 per cent

3. ACC earner levy at 2 per cent (already announced to take effect from 1 April 2010).

4. All welfare benefits, NZ super and tax credit rates and income thresholds under Working for Families, including in-work tax credit, raised by 2.22 per cent. This is the adjustment used in the Tax Working Group scenarios and is based on the estimated effect on the CPI of raising GST to 15 per cent. With GST at 12.5 per cent, 0.125/1.125, or 11.11 per cent of every dollar spent goes in GST. Raising this by 20 per cent (from 0.125 to 0.15) raises consumers' costs by 20 per cent of 11.11 per cent, or 2.22 per cent.

5. Our table is based on a family with one fulltime earner and two preschool children. (The figures would be the same for both one- and two- parent families).

CALCULATIONS - example at $50,000

Part 1: Current situation

Gross income: $50,000 a year

Step 1: Income tax and ACC earner levy

Income 0 - $14,000 x 0.145 (12.5 per cent tax + 2 per cent ACC) = 2030
Income $14,000 to $48,000 x 0.23 (21 per cent tax + 2 per cent ACC) = 7820
Income $48,000 to $50,000 x 0.35 (33 per cent tax + 2 per cent ACC) = 700
Total tax + ACC 10,550

So net income is $(50,000 - 10,550) = $39,450.

Step 2: Working for Families (at current rates 1 April 2009 to 1 April 2010)

First child 0 to 15 years: $86.29 pw
Second child 0 to 12: $59.98 pw
In-work tax credit: $60.00 pw
Total $206.27 pw
x 52 = $10,726.04 a year

reduced by 20c for every dollar earned over the current threshold of $36,827 a year, i.e. by 0.2 x (50,000 - 36,827) = $2634.60

So net WFF is $(10,726.04 - 2634.60) = $8091.44

Step 3: Total net income

Total net income including WFF is $(39,450 + 8091.44) = $47,541.44 a year

Step 4: GST

GST calculations are based on Table 1-1 on page 20 of a Treasury background paper on GST produced for the Tax Working Group.

This table, taken from Statistics NZ's annual Household Economic Survey (HES), shows that all households in the bottom half of the income scale spend more than their disposable income (presumably by borrowing and running down savings), while all those in the top half spend less than they earn (presumably by saving). Treasury cautions that households taking part in the HES appear to consistently overstate their spending and understate their income when their estimates are matched against actual national economic data; however, the HES is the only available source that allows a breakdown by income decile.

Disposable income in Table 1-1 includes WFF income. Households in this illustrative example have therefore been assigned to the nearest decile in Table 1-1 according to their net income plus WFF. In the case of our family on gross income of $50,000, their net income + WFF is $47,541.44, which is closest to Decile 6 (where the average disposable household income from Table 1-1 is $48,223).

In Decile 6, the average household spends 95.4 per cent of their disposable income ($46,006 out of $48,223). We assume that our illustrative family therefore spends 95.4 per cent of their net income with WFF of $47,541.44, or $45,356 a year.

In Decile 6, 79.5 per cent of total spending ($36,589 out of $46,006) is on items subject to GST (the main items NOT subject to GST are rents and mortgage payments). We assume that our illustrative family therefore spends 79.5 per cent of $45,356, or $36,072 a year, on items subject to GST.

The GST included in spending of $36,062 is 11.11 per cent of $36,072, or $4008 a year. (As noted above, with GST at 12.5 per cent, 0.125/1.125, or 11.11 per cent of every dollar spent goes in GST).

Step 5: Net income after GST

Net income after GST = $47,541 (from Step 3) - $4008 (from Step 4) = $43,533 a year.

Part 2: Effect of illustrative tax changes

Gross income still $50,000 a year

Step 1: Income tax and ACC earner levy

Income 0 - $14,000 x 0.125 (10.5 per cent tax + 2 per cent ACC) = 1750
Income $14,000 - $48,000 x 0.21 (19 per cent tax + 2 per cent ACC) = 7140
Income $48,000 to $50,000 x 0.32 (30 per cent tax + 2 per cent ACC) = 640
Total income tax + ACC 9530

So net income is $(50,000 - 9530) = $40,470

Step 2: Working for Families

Current rates ($10,726.04 a year) assumed to rise by 2.22 per cent to ($10,726.04 x 1.0222) = $10,964

reduced by 20c for every dollar earned over a threshold which is also assumed to rise by 2.22 per cent to $37,645, i.e. by 0.2 x ($50,000 - 37,645) = $2471

So net WFF is $(10,964 - 2471) = $8493

Step 3: Total net income

Total net income including WFF is $(40,470 + 8493) = $48,963

Step 4: GST

Assuming the family keeps buying the same items as in Part 1, its GST of $4008 will increase by 20 per cent (1.15/1.125) to $(4008 x 1.2) = $4810

Step 5: Net income after GST

Net income after GST = $48,963 (from Step 3) - $4810 (from Step 4) - $44,153 a year.

Summary

Summary figures reported in the table in the Herald are extracted from these calculations as follows:

Gain from tax cut

Total net income (from Step 3) rises from $47,541 to $48,963, i.e. up $1422 a year = $27.35 a week.

GST increase

GST (from Step 4) rises from $4008 to $4810, i.e. up $802 a year = $15.42 a week.

Net gain

Net gain is $27.35 - $15.42 = $11.93 a week.