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The Budget 2015 ‘Child Hardship’ Package

Michael Fletcher

The Government deserves credit for increasing financial assistance to many families in its ‘child hardship package’. Those families will welcome the extra cash in hand. However, the package is rather less generous than it first appears. It will provide little for many low-income families, including many in the greatest hardship and its impact on child poverty rates is likely to be minimal. Ironically, the package further highlights the need for a thoroughgoing review of the level and structure of support we as a country want to provide to families with children and to each other during periods when we are reliant on welfare.

The package has five main elements. From 1 April next year the core benefit rate for beneficiaries with children will rise by $25 per week net. This applies to sole or couple parents on any benefit including Student Allowance and the Young Parent Payment. Second, the In-Work Tax Credit (IWTC) for non-beneficiary parents working the required minimum number of hours will rise by $12.50 to $72.50 per week per family while the abatement rate for the Working for Families tax credits will increase 1 percentage point to 22.5 percent. Third, the maximum rate of payment for the childcare and out-of-school care subsidy will increase by $1.00 to $5.00 per hour. The Minimum Family Tax Credit threshold will also rise as a flow-on consequence of the benefit increases. Finally, alongside these financial measures, are some stricter benefit-receipt conditions. A part-time work-test will in future apply to parents whose youngest child is age 3 or 4 (rather than at 5 years as now) and the definition of part-time for work-testing purposes will rise from 15 to 20 hours per week. Annual re-applications for benefit which currently apply to Job Seeker Support (JSS) recipients will also now apply to those on Sole Parent Support (SPS).

On an annual basis the increase in expenditure is modest – approximately $240 million pa once fully implemented. Roughly $125 million of this is for the benefit increases, $71 million for the Working for Families tax credits and $32 million for extra childcare assistance. By comparison, the large Working for Families package announced in the 2004 Budget increased expenditure by around $1.1 billion per annum.

What will the extra mean for families? Government estimates that approximately 110,000 benefit-recipient families and 200,000 non-beneficiary families will gain something from the package although only a quarter of this latter group will get the full $12.50 per week increase in the IWTC.[1] For many beneficiary families the actual weekly increase will be reduced by a reduction in their entitlement to Accommodation Supplement or Temporary Additional Support (TAS) payments. The size of the offsetting reduction will depend on their rent, where they live, their family size and the costs they are facing which determine their entitlement to TAS. State or social housing tenants on income-related rents will lose $6.25 per week of the extra in higher rents. Government estimates that the increase for beneficiary families with children will average out at $23 per week, although it will be somewhat less than that for many.

One of the most obvious problems in the package is that although it is explicitly targeted at reducing hardship among children most in need, the benefit increases are structured on a per-family, not a per-child, basis. The effect is that how much extra is available to a child depends crucially on how many brothers and sisters she or he has. This is despite the fact that Government had received advice that 79 percent of children in hardship live in households containing two or more children and almost half (46 percent) in households with three or more (Perry, 2015 p. 24). For those in the most ‘severe’ hardship category[2] the numbers are even greater – over half are in households with three or more children present and one quarter live in households with 4 or more children. That group of children will receive less than $5 per week each from the package if living in a benefit-receiving household, and less that $2.50 per week if in a non-beneficiary employed household. The effort to minimize cost by very tightly targeting on the least well off has resulted in the perverse outcome that children in larger families, who are at greater risk of hardship, receive very little from the package.

What is the likely impact of the policy on child poverty rates? Although official estimates have not been released publicly, it is clear that the effect is likely to be minimal. This can be illustrated using the example provided in the Budget Fact-sheets of a sole parent beneficiary with two children and data from MSD’s annual incomes report. If the extra $25pw had been back-dated to 2013 (the year the MSD data relate to), that family’s before-housing cost income[3] would rise from $453 pw to $478 pw, leaving them still $77 pw below the lowest threshold reported in Table E.2 of the incomes report (Perry, 2014 p.123). Even a one-child sole parent family will still be $22 pw below that threshold.

OECD data provides another indication of the inadequacy of the package and of New Zealand’s support for families on benefit more generally. These show that New Zealand comes nowhere near ensuring its benefit-dependent population reaches the 50%-of-median-income measure that the OECD uses as its standard poverty line. Including core benefits plus housing assistance and family tax credits, the equivalised in-the-pocket income of a New Zealand sole parent and couple beneficiary family with two children is 43 percent and 40 percent of median level respectively. After subtracting the $4.00 or so dollars lost in reduced Accommodation Supplement (more if in social housing), the remaining $21.00 is $7.00 pw for each person in the sole parent family and $5.25pw each for the couple with two children. On an equivalised income basis, taking into account of economies of scale families gain from sharing costs, these figures are unlikely to raise the OECD estimates by more than two or three percentage points at the most. For families with only one child the increase will be greater per person, for families with more children it will be less.

The Child Hardship package highlights the need for a much more comprehensive consideration of New Zealand’s social assistance regime and our support for families with children. Depending on the choice of measure, we have 200,000 or more children living in income poverty[4] and 17 percent of children in hardship as measured by MSD’s DEP-17 index.[5] Over half of all sole parent households and almost two-thirds of benefit-recipient households with no-one in employment fall below the poverty line. The level of support we provide for different size families and for people in different circumstances is increasingly uneven. Excessive use of income-targeting as a means to reduce fiscal cost has resulted in a complex, multi-tiered system that is generating its own inequalities and unfairnesses such as the impact on larger families in the Hardship package. More fundamentally, as increasing numbers of families rely on one and a half or two incomes to meet household costs, our system, because it is based on a joint income test, is failing to provide adequate coverage for a growing number of families.


 

References

Perry, B. (2014). Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2013. Wellington: Ministry of Social Development.

Perry, B. (2015). Measuring and monitoring material hardship for New Zealand children: MSD research and analysis used in advice for the Budget 2015 child hardship package. Wellington: Ministry of Social Development.


 

[1] A smaller number of families (approximately 4,000) will also get up to $12.00 pw more through the rise in the Minimum Family Tax Credit and some will receive up to $9.00 pw in extra Accommodation Assistance.

[2] That is to say the 6 percent of New Zealand children in households scoring 11 or higher in MSD’s 17-point ‘DEP-17’ deprivation scale.

[3] If an after-housing costs measure is used and assuming rent of $400pw as in the Budget factsheet, the family is considerably further below the poverty threshold.

[4] And approximately 130,000 in severe poverty below the 40% of income threshold after housing cost threshold.

[5] That is, with a DEP-17 score of 7 or greater (Perry, 2015 p24)

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Michael Fletcher
About the author

Michael Fletcher

Senior Researcher, The Policy Observatory
Michael Fletcher is a Senior Researcher with The Policy Observatory and Convenor of the Social Policy Network. He has extensive experience as an economic and social policy advisor, researcher and manager working for, or as a consultant to, various New Zealand government agencies such as the Treasury, the Departments of Labour and Education and the Ministry of Social Development. Michael was the group manager for the New Zealand Families Commission and a lead researcher for the Governments Maori Employment and Training Commission. He has published recently in the areas of social welfare, child poverty and child support and his current research interests are focused on the financial consequences of marital separation, child support, and welfare reform. Michael is the New Zealand Correspondent for the Max Planck Institute for Social Law and Social Policy in Munich.