The Greens new “Mending the Safety Net” policy has lots of good news for the poorest members of our society. However, much of the package is the stale stuff we heard from Labour. It’s hardly “fresh thinking”, and could end up harming the very people they are trying to help.
The Good - Removing Witch Hunt Welfare
The best element of the Greens package is the removal of witch-hunt welfare. The tangle of financial penalties and sanctions that have crept into our benefit regime only serves to stigmatise beneficiaries as well as punish people who are already in a difficult situation, leading to more poverty and more problems down the road. Of course administering and enforcing these conditions also requires employing an army of bureaucrats.
In particular we like the changes the Greens are making to Working for Families, removing the eligibility criteria for the In Work Tax Credit. This change will remove a whole bunch of complicated administration and will give families that need it an extra $72 a week.
Nice work Greens, we agree with this policy 100% which is why it is already part of our Thriving Families Package.
The Bad – Increased Poverty Trap
Increasing benefits will certainly help to reduce poverty, but the trouble with all targeted benefits is that they have to be taken off people as they earn more. These ‘abatements’ mean that for beneficiaries it often isn’t worth the bother of working (especially when you include stand down periods).
The Greens are trying to take the edge off this problem by increasing the amount people can earn without abatement to $200 per week (at the moment it is $80pw), and reducing the abatement to 30% for people out to $400 per week (at the moment it is 70%). After that point the abatement rises to the current level of 70%.
This is certainly more generous than the current benefit settings, but it still creates the same problems as we see now – at some point people lose their benefit and are no better off from working. By the time you add in the abatement rates of student loans, working for families and housing, people are often worse off from working more. This is the poverty trap and is the problem with all targeted benefit regimes.
The other side effect of the Greens policy is it creates a massive increase in number of the working population who could potentially qualify for a benefit. For example at the moment someone earning minimum wage ($15.75) and working 25 hours per week will no longer qualify for the unemployment benefit. Under the Greens policy this person would still be receiving $150 in benefits. In fact, under the Greens proposed system, someone working full time on the minimum wage (even if it were raised to $17.75 per hour) would still be eligible to receive some benefit. It would be interesting to know if the Greens have factored that into their costings.
There are ways to help people without all these problems – you make it universal. That is the approach behind our Thriving Families policy, which gives all parents with a child under 3, $200 per week. We will still need targeted benefits, but universal payments help the working poor as much as beneficiaries, without any risk of poverty traps.
The Ugly – Tax and Minimum Wage Changes
Of course there is nothing wrong with paying people more, nor with getting rich people to pay more tax. TOP agrees 100% with that goal. Unfortunately the solutions put forward by the Greens are based on old-fashioned ideas that may appeal to their voter base, but are far from the best way forward.
For starters, increasing the top tax rate will only exacerbate the existing tax loophole around housing. If you offer people the choice between paying no tax and paying a higher rate of tax, what do you think they will do? The Greens capital gains tax (excluding the family home) doesn’t deal with the loophole at the core of the housing issue – the tax-free status of imputed rental. So even if their capital gains tax were implemented we would expect to see more money heading for the tax-sheltered status of housing as a result of this income tax hike.
Besides, hiking income taxes won’t hit the really rich. We already know that 1/3 of our wealthiest citizens don’t pay the top rate of income tax; under the Greens tax policy you can expect that number to increase. We need to start taxing wealth – that is the way to make our tax system more progressive. That is what TOP is proposing with our Fair Tax Reform, but the Greens appear to be taking the easy road that will appeal to old-fashioned left-wingers. We don’t call that approach ‘progressive’.
Finally, their approach to hiking the minimum wage is very risky. While we all want higher wages, particularly for those at the bottom end, regulation isn’t the best way to achieve it. The risk is that businesses become even less willing to hire young people, so we end up with higher unemployment as we see in Europe. Remember New Zealand’s minimum wage is already very high (relative to the median wage) by developed country comparison. The Greens are doing nobody any favours by hiking it further, if the outcome is fewer jobs. We certainly need to deal with poverty, but we need a multi-pronged approach to do so – including reducing the cost of housing, curbing low skilled immigration and making our tax and welfare system fairer.