Clawbacks hit family earnings but economist says Labour's scheme could raise fertility

Labour's $60-a-week child payment scheme may produce less work and more babies, economists say.

The scheme, announced on Monday, may put some average wage-earners off working more hours because they will lose two-thirds of every extra dollar they earn through a combination of reduced child payments, tax, ACC and KiwiSaver payments.

But Canterbury University economist Dr Eric Crampton said it would also raise New Zealand's fertility rate.

"Some people will be thinking, can we afford to have another kid, and just deciding at the margin, no we can't," he said. "This extra bit could be enough to do it."


He said economists calculated that a similar "baby bonus" in Quebec cost about $15,000 for every extra child born.

"Is that value-for-money?" he asked. "Depends what you think a child is worth.

Labour leader David Cunliffe has set out a policy to give most parents of new born babies a payment of $60 a week until that baby turns one, while those on middle and lower incomes will continue to receive the payment until the child turns three.

"I think life is worth at least that much to each of the children who wouldn't otherwise be born, and that New Zealand is so far below optimal population size that it would be a bargain, if results here were similar."

Labour's scheme would pay $60 a week to the parents of all newborn babies for their first year.

The only exceptions would be the 5 per cent of parents still earning over $150,000 a year after the baby is born, and the 40 per cent of parents who get paid parental leave - they would get paid leave for six months and $60 a week for the second six months.

The scheme would keep paying $60 a week for toddlers aged 1 and 2, but at those ages the payment would be clawed back at the rate of 30c for every dollar of extra income above $50,000 a year. The payment would stop at age 3, when Labour would make children eligible for 25 hours a week of free preschool education.

Single-income families earning around the average wage of $1,050 a week ($54,600 a year) already lose more than half of every extra dollar earned as existing family tax credits are abated at 21.25¢ in the dollar on top of income tax of 30¢, the ACC levy of 1.7¢ and a KiwiSaver contribution of 3¢ for many workers - a total of 55.95¢ in the dollar.

That total clawback rate would rise under Labour to 64.7¢ in the dollar on incomes of $50,000 to $70,000 and 67.7¢ above $70,000, where the tax rate goes up to 33¢.

Although the tax rate would be lower for mothers returning to work on lower part-time incomes, Dr Crampton said the combination of a high clawback rate and extra money would encourage some mothers to stay out of the paid workforce for longer.

He said more time out of the workforce reduced the chances of women coming back on salaries as high as they earned before having a baby, and so reduced the family's lifetime total income.

However Auckland University economist Dr Susan St John said it might be better for the children to have a parent at home with them for longer.

"This whole business of having to incentivise work - it's not the only thing in life."

"It's likely there will be a change but not to 26 weeks," he said.

Ms Moroney's bill if passed would make extended paid parental leave available from July this year. Mr Key said his Government would "have a look" at a policy of its own that would take effect by that date.

Finance Minister Bill English said National had always been interested in extending paid parental leave when there was enough money to do so, but it would balance that up with other urgent needs for the most vulnerable children such as lifting immunisation rates, lifting educational achievement and protecting the most vulnerable children from violence.

He said National expected to continue discussions with Labour over Ms Moroney's bill when it was reported back from the select committee next month. Ms Moroney said National had assured her that if it did come up with a proposal to extend paid parental leave, it would be done through her bill.

Last year Mr English said the Government could use its financial veto to block the bill if it passed and yesterday repeated that warning.

Christchurch mother Eran James said an extension to paid parental leave - preferably 26 weeks - could not come soon enough.

Mrs James had her first child, Xavier, at the end of 2012.

She was on paid parental leave for 3 months then went a month with no income, before finally being forced back to work 25 hours per week.

She and her husband Ron were buying a house and could not cope with the loss in income.

Mrs James said the current level of paid parental leave was not good enough for young mothers.

Helen Connors, Plunket manager of service development, said the proposed extension of paid parental leave would ease the pressure on mothers to return to work.

- Additional reporting: Ben Irwin