Michael Fletcher is a senior researcher at Victoria University of Wellington’s School of Government. He has worked as an economic and social policy advisor, researcher and manager working across numerous New Zealand government agencies.

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Budget moves not nearly enough to meet child poverty targets

The indexation changes in the Wellbeing Budget will help the Government get closer to its child poverty reduction targets, but base benefits need to rise and Working For Families tax credits need a boost to really address child poverty, says Victoria University of Wellington researcher Michael Fletcher.

This is the first Budget under the new Child Poverty Reduction Act rules. The Act is perhaps one of the most concrete and far-reaching changes the Government has introduced. From 2019 on, the Minister of Finance must report each year on progress towards preannounced three-year and ten-year child poverty reduction targets.

So how did Grant Robertson go first time out? How much progress towards cutting poverty was there actually in the Budget? The short answer is a bit, but almost certainly not enough to meet all three short-term targets by the deadline of June 2021.

The big Budget announcement was to index main benefit rates to changes in average wages rather than just the Consumer Price Index. It’s a great move, one which the Welfare Experts Advisory Group, and many other commentators in the field have called for. It means that part of the welfare system will keep pace with growth in wages instead of slipping further and further behind. There are two important ‘buts’ though.

The small print behind the big splash

First, main benefits are just one part of the income support package beneficiaries rely on and neither the Working for Families tax credits nor the Accommodation Supplement (AS) have been similarly indexed. Most beneficiaries will, therefore, continue to fall behind. To give an example, the main benefit is only 40.0 percent of the income support paid to a sole parent with two children living in Auckland and receiving maximum AS; the remainder is WFF (24 percent) and AS (36 percent).

Second, indexation alone provides very little extra cash in the short term. If Treasury’s CPI and wage forecasts are correct, then for single people (who are 63 percent of all beneficiaries) it means about $3.30 per week extra as from April 2020; less if they are under 25 years old. For a sole parent family it means about $5.00 per week extra.

By comparison, the Welfare Experts Advisory Group estimated minimum family budgets and found shortfalls in beneficiary family incomes ranging from about $60 per week to over $300 per week for a couple with three children. Those findings correlate closely with other researchers’ working showing how far below the poverty thresholds many benefit families (and single people) are.

Other Budget 2019 changes will also have small effects. The increase in the earnings threshold before the benefit is reduced will mean that, next year, a beneficiary can earn and extra $5.00 per week before abatement. Previously that would have been abated at 70 percent for a person without children or 30 percent for a sole parent – so that is an extra $2 or $3 per week. For 24,000 sole parents, the $22/$28 penalty per child for not naming the other parent will be a significant boost.

The incentive payment for decile 1 – 7 schools to drop ‘voluntary’ donations will be appreciated by many low-income and beneficiary families. But its poverty impact will be small and depends on just how many families below the poverty line were actually paying school donations and how much they paid. Likewise, removing NCEA fees addresses one barrier to education for students in low-income families, but it will have little overall effect on poverty rates.

Slow progress towards the targets

The weakness of the child poverty impact is evident in Treasury’s forecasts in the Budget Child Poverty Report of progress towards the targets. By their estimates the Government is on track to reach the target on one measure: cutting the after-housing costs poverty rate to no more than 18.8 percent of children. But this is a ‘fixed-line’ measure adjusted only for inflation, so is relatively easier to achieve. Even then, the Treasury projections must be at risk that rent increases for low-income families will prove higher than assumed.

So, we have one measure on track, one with no data, and one that looks unlikely to be met.

The second measure, 50 percent of median income before-housing costs, is a relative poverty threshold. Because it is relative to the median growth in average earnings will make it harder to achieve. The Government’s target is to reduce this measure by six percentage points to no more than 10.5 percent by 2020/21. Treasury’s projections are for a mid-point of 11.4 percent with a margin of error around that of between 10.1 and 12.7 percent. In other words, on current policy the chances are it will not be achieved.

The third target is a material hardship measure which Treasury is currently unable to make projections of. So, we have one measure on track, one with no data, and one that looks unlikely to be met.

Approximately 55 percent of children in poverty live in households reliant on benefit as their main source of income. Indexation of the benefit to wages is an important long-term change, but indexation to inadequate basic rates is not enough. It will simply not be feasible to address child poverty without either (or both) raising benefit rates or the Working for Families tax credits paid to parents on benefit. We did not see either of these in this first Wellbeing Budget.