Middle class welfare – are we hitting the target?

No more Baby Bonus: Labor has further tightened family payments to rein in expenditure, but the danger is low-income families will feel it most. AAP

When it comes to welfare spending in the budget, the federal government has given with one hand and taken with another.

Funding for support of disability services (NDIS) and schools the (Gonski reforms) has been locked in - partly at the expense of payments to families.

In this budget Labor has continuing tightening the criteria around family payments - often typified as “middle class welfare”.

Certainly middle income families have benefited from a generous system which was expanded by John Howard. But changes to the indexation of family payments may also have the effect of increasing child poverty in the longer run.

Not proceeding with promised increases in family payments foreshadowed in last year’s budget will save A$2.5 billion. Last night’s announcement abolishing the Baby Bonus and replacing it with a smaller, income tested payment, will save about A$1 billion over four years.

Continuing the 2007 indexation pause for family payment income limits and supplements will save an additional A$1.2 billion. Realignment of the time period for reconciliation of family payments will save over A$500 million.

The abolition of the Baby Bonus and continuing freeze on family payment income thresholds follows the restrictive trend which began in 2008 and winds back the largesse of the Howard government.

Income-tested family payments were extended by the Hawke and Keating governments in the 1980s and early 1990s. But in 2000, to partly compensate for the introduction of the GST, John Howard further increased the payments and reduced the targeting of benefits. The families who benefited most were the “Howard battlers” with family incomes between $40,000 and $60,000 a year. But less tight targeting meant that some of these benefits also went further up the income scale.

The consequence was a large increase in spending aimed at families. By 2004, after the introduction of the Baby Bonus, Australia was spending well over 2% of GDP on family allowances and other cash payments to families – one of the highest levels of expenditure in any OECD country.

More than four in five families received a payment, including substantial proportions in the middle income ranges (that is, in the fourth and fifth deciles of family income) paid less in income taxes than they received in cash payments.

Since then, Labor governments under both Kevin Rudd and Julia Gillard have engaged in a long term strategy to wind back “middle class welfare”. From 2008, eligibility for Family Tax Benefit Part B (FTB-B), reserved for families with only one earner, was restricted to families where the main earner earned less than $150,000 per year.

In 2009, indexation of FTB was switched from a more generous earnings index to a lower prices index, while some thresholds were frozen at their nominal rates. If these changes had not been made, the base rate would now be more than $10 a week higher, and the higher income test threshold would be over $100,000 a year rather than just over $94,000.

The projected effect of these reforms can be seen in part in successive Intergenerational Reports produced by Treasury, which project steadily declining public expenditure on Family Tax Benefit as a percentage of GDP.

It is therefore no surprise this progressive restriction of FTB to families on low incomes has continued in the current budget, even to the extent that this involves cancelling of previously announced increases to FTB that would have partially compensated for the cutbacks of previous years.

The SchoolKids bonus partly offsets these effects, although not for all families with children, and if the Coalition abolishes this payment if they win office in September, then a majority of families will fall further behind.

For those who value redistribution as a key function of the welfare state, there are considerable dangers in this move. While family payments are often seen as the epitome of “middle class welfare”, the fact is that Australia has one of the most targeted systems of support for children in the OECD, and also one of the most effective for reducing child poverty, particularly for low-income working families.

As fewer families find they are eligible to FTB, the system as a whole is likely to lose political support, especially if the government that succeeds the current one in September offers voters a “choice” of maintaining FTB or lower income taxes.

The result may be, as the Australian Council of Social Services (ACOSS) forewarned in 2009 when the indexation of FTB was changed from earnings to prices, increased child poverty and deprivation. As noted above, if the indexation of family payments had not been changed in 2009, the higher rate of payment - received by families on benefits and those in low paid work would now be more than $500 per child per year higher.

In the long run, indexing family payments only to the CPI will have the same effect on family payments as it has had on Newstart, now almost universally recognised as inadequate. At the moment, Australia can boast that child poverty did not appear to increase in the years following the Global Financial Crisis. But it may not be able to hold that boast for much longer.