Newman On-Line: ‘Working for Families’ just an inflation adjustment

This week, Newman Online looks at the Labour Party’s election year spin, which taxpayers are being forced to spend $17 million to help promote, is that the ‘Working for Families’ package is the biggest innovation since Michael Joseph Savage created the welfare state.

What has typified the analysis and commentary to date is a comparison between what a family received last week with what they are entitled to next week. The problem is that this type of analysis doesn’t tell the whole story. Such comparisons will always show a big increase from last week to next week.

With the biggest taxpayer-funded advertising campaign ever launched and clever marketing, the introduction of the package is intended to portray a generous and benevolent government. But isn’t it important to look beneath the spin in order to ascertain exactly what the extra spending amounts to over time and to determine whether or not this so-called “monumental piece of social policy” is in fact nothing more that a simple inflation adjustment?

In order to do this, it’s necessary to examine how the forecast spending on families in 2008 compares with spending in 1999, and how much of the package simply makes up for Labour’s slow erosion of family assistance spending since 1999?

Firstly, it needs to be recognised that it will have taken Labour almost a decade to instigate the package, from 1999 when they were first elected, to 2008 when working for families will be fully implemented.

Secondly, it’s important to examine the various means by which a useful comparison of aggregate government assistance to families over that time can be calculated.

The simplest measure is the proportion of total government spending devoted to family assistance measures, including family support, tax credits and the accommodation supplement.

In 1999 the Government spent $1.9 billion - or 5.6 percent of total government spending - on these forms of assistance. By 2004, this expenditure had been cut to $1.7 billion or 4 percent. Last year’s budget projections on working for families show that by 2008, the package will restore the level of spending on families to 5.6 percent. While that will equate to $2.9 billion, it is important to remember that over that period, the core crown budget will increase to $53 billion, almost $20 billion more than in 1999.

So, using the percentage of government spending devoted to family assistance as a measure, it is apparent that Working for Families does not increase the level of government spending on family assistance beyond that inherited by Labour in 1999 – it simply restores it to those 1999 levels.

A second measure that could be used is the inflation-adjusted per capita spending on family assistance. This would show - in today’s dollar terms - how much the government spends per person on family assistance measures.

In 2004, the spending per capita was $410, while in 1999 the spending (in 2004 dollar terms) was $566 per capita. That means that over the last five years, Labour has cut the real per capita spending on family assistance by $156 or 28 percent. Once fully implemented, it is expected that the Working for Families package will increase the per capita spending (in 2004 dollar terms) to $633. While this is significantly higher than 2004 levels, it is only marginally higher than 1999 levels.

So, using real per capita spending on family assistance as a measure, it is apparent that 70 percent of the cost of the Working for Families package goes towards restoring and maintaining 1999 levels of spending. Over two-thirds of the package is nothing more than an inflation-adjustment.

A third measure that can be used is to look at the net position of a family on the average wage - after taxes and family assistance – in order to see how this has changed over time.

The OECD publishes readily available annual data on the ‘tax wedge’ for these families. Finance Minister Michael Cullen gleefully quoted that, according to Inland Revenue forecasts, the tax wedge of 20.7 percent on the one-earner couple with two children on the average wage would be slashed to just 12.3 percent by 2008.

What Dr Cullen neglected to mention is that this tax wedge has been steadily increasing every year since he became Finance Minister. In 1999, he inherited a system of tax and family support that meant the same family faced a tax wedge of just 14.1 percent. Over five years, his failure to adjust tax and assistance rates has seen this climb to 20.7 percent. This explains why such families have been feeling squeezed, and why the major adjustments involved in the Working for Families package are necessary.

Using the tax wedge on the family with two kids as a measure, 80 percent of the package is simply a restoration of the 1999 position after tax and benefits.

In conclusion, depending which way you look at it, between 70 and 100 percent of Working for Families is simply a belated inflation adjustment. Unlike the benefit and pension adjustments which happen every April, families have had to wait about six years for theirs.

Labour has touted this package as its centrepiece of social policy. In reality, they should be explaining why families have had to wait so long for an inflation adjustment. They should also be explaining why taxpayers are paying $17 million for an advertising campaign to tell families they are finally getting an inflation adjustment. After all, they don’t spend $17 million to tell pensioners their pension is going up each April in line with inflation, nor do they tell consumers that the tax on alcohol and cigarettes is going up each year in line with inflation either!

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