By KEVIN TAYLOR, political reporter

A new analysis of the Government's Budget shows that by 2007 the income gap between low- and middle-income families will have narrowed dramatically.

The impact of the number crunching - done by National and not challenged by the Government - is shown in a case comparing two one-income families with two parents and two young children living in South or West Auckland, one earning $38,000 gross and one earning $60,000 gross.

After tax and ACC levies are deducted, and family assistance and accommodation supplement payments are added, the gap between the net incomes of the two families now is $9266.


By 2007, when the Budget's measures are fully in place, the gap in net income between the two families will narrow to just $2376.

The family on $38,000 gross will actually earn $42,860 in the hand because of the boosted income assistance, while the family on $60,000 will get $45,236 in the hand.

The Budget boosted incomes of low- to middle-income families through measures such as increased family assistance, tax credits and accommodation supplements.

National's deputy finance spokesman, John Key, said the result of the Budget's Working for Families package was "communism by stealth" and the impact was much larger than he had expected.

But the Government said last night that National had offered no alternatives and essentially agreed with its approach.

Mr Key said the narrowing gap would discourage higher-income earners from working overtime and at weekends, and partners might not seek part-time work.

"They have lifted up the bottom ... but you don't get gains until you get way over $60,000 a year. Overtime's not going to get people from $42,000 to $82,000."

The shift has been created by effective marginal tax rates - the amount of additional tax paid for every dollar earned - of 90 per cent or even more in some cases.

Mr Key said such high rates were lunacy and National would "re-engineer" the system in government.

Social Development and Employment Minister Steve Maharey's response last night was: "So what?"

"It's a non-argument. Effective marginal tax rates are part and parcel of any targeted system anywhere in the world.

"Clearly there will be effective marginal tax rates that mean people on the margins of the system are going to be debating one way or the other whether they should take a pay rise or whatever."

But research worldwide showed people offered pay rises tended to take them.

Mr Maharey challenged National to offer an alternative to Labour's scheme.

He said National agreed with targeted systems after having "discovered" that tax cuts could not deliver the same gains.

Mr Key predicted the new system would have "huge behavioural outcomes" and he was concerned that employers would find workers refusing to do overtime or weekend work.

The effect of the Budget had been to push the disincentive far into middle New Zealand, he said.

"They've got the vast majority of people now trapped in a one-size-fits-all. We all pay one rate - it's communism by stealth.

"It didn't work very well for Eastern Europe and it won't work very well for New Zealand."