Benefit Reduction

This post is by PaulL, a regular commentor and occasional contributor. It is the fourteenth post in a series on the financial incentives to work and the impacts of our tax and transfer system on household formation, and the seventh post on the “what could we do” subsection. The index to all posts in the series can be found here.

This post picks up a comment that many people have made. Reducing the benefit level would give the ability to reduce abatement rates without costing more or increasing the income levels at which people receive welfare.

If we reduce the benefit by 30% we can also reduce the abatement rate from 70% to 40% and still have the benefit cut out at about $40,000, about where it was before.  We can also reduce the family tax credits by 30%, and the abatement rate on those to 18% instead of 27%.

This makes the incentives to work below 20 hours very clear. The EMTR is 51% and after including the costs of working the net return to working is 47c in the dollar.

Childcare costs remain a problem after 20 hours of work.  If we again moved to a free child care package, and also pushed the abatement on accommodation supplement down to 15% (instead of 25%), and on family tax credits pushed abatement down to 15%, then we get the following graph.

We get a reasonable curve, with EMTR as high as 60% above 30 hours as the family tax credits and accommodation supplement abate.

As with some of the other analysis, accommodation supplement is a problem because it’s abating over the same income range as the family tax credits are, giving high marginal rates for those in receipt of accommodation supplement.

This is largely a reduction, and whilst we’ve adjusted abatement rates it is unlikely to offset that reduction. Therefore this would be net positive to the government budget, perhaps by $0.5 billion a year or more.

The problem is that we also reduced household income for this family substantially. When entirely benefit supported they’ve gone down from $703 a week to $564 a week, a reduction of 20% per week.

The current political discourse has substantial focus on children living in poverty. The government benefit package in February 2022 claimed to lift 66,000 children out of poverty.

This change would more than reverse that package. Logically, therefore, it would put at least 66,000 children back into poverty. 

In my opinion, a) I don’t think that’s a good idea, and b) I don’t believe that would be politically feasible for any party. In short if any party were to take this policy to the election my prediction is that they would be unable to win a majority, and that it would be remembered for at least 10 years, preventing them from getting elected for at least that long.