The government's $1.1 billion Working for Families (WFF) package announced in the 2004 Budget is poorly targeted, will do little to encourage moves from welfare to work, and creates high effective marginal tax rates over a wide income range. The money would have been better applied to cutting tax rates and more tightly targeting assistance to low income families.

These are the main conclusions of a study Dissecting the Working for Families Package by economic consultant Gregory Dwyer, released today by the New Zealand Business Roundtable.

The executive director of the Business Roundtable, Roger Kerr, said that the stated objectives of WFF are to "make work pay", to "ensure income adequacy" and to "achieve a social assistance system that supports people into work".

"Other than providing a one-off boost to family incomes, however, WFF largely fails in its objectives", Mr Kerr said.

The poorly targeted nature of WFF can be seen from the fact that a third of its cost arises from the provision of assistance to families earning over $35,000 a year after tax, including middle and upper income households. Significant amounts of money are recycled back to people who are taxed to provide it in the first place.

The package does little to reduce welfare dependency. The study reports a Treasury estimate that just 2 percent of sole parents will move off the Domestic Purposes Benefit and into work as a result of WFF. This represents a mere 2,160 beneficiaries (out of over 100,000 on the DPB), at an extraordinary cost of up to $84,600 per person.

The consequence of increasing assistance and income thresholds is to impose high effective marginal taxes (EMTRs) on many middle income earners. The EMTR of a single income earner of a working family with two children on an income between $38,000 and $60,000 will be 64.2 percent. The study reports an extreme case of a family with a main earner on a senior classroom teacher's salary of $52,000 losing 89.2 cents for every additional dollar earned as family income and housing assistance are abated. People will not generally be encouraged to work more, gain new skills or seek promotions when they stand to lose up to 90 cents of every dollar of increased earnings.

A key statistic calculated by the Treasury is that the package increases the mean EMTR of all taxpayers by 3.8 percent. The associated deadweight costs will reduce aggregate employment and economic growth.

"This outcome is inconsistent with the government's stated 'top priority' goal of increasing economic growth", Mr Kerr said. "WFF is essentially about income redistribution, not wealth creation, but redistribution can only make some people better off at the cost of making others worse off, and it reduces overall national output and income.

"Going forward, there is a strong case for modifying the WFF package to address its shortcomings, attacking welfare dependency by tightening the conditions for taxpayer support, and cutting taxes to reduce work disincentives and promote economic growth. The Australian government announced moves in this general direction in last week's budget and New Zealand would do well to follow suit", Mr Kerr concluded.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

Gregory Dwyer
Dwyer G Limited
Ph: +64 9 358 2796
Email: g.dwyer@clear.net.nz

Web: www.nzbr.org.nz