Inflation eats gains from Labour’s Working for Families package, pushing families out of support

Inflation is eroding the incomes of the hundreds of thousands of families who receive Working for Families tax credits, leaving them with less support in some cases than when the Government introduced the families package in its first 100 days.

High wage inflation is pushing families above the income thresholds at which the tax credits are withdrawn, despite the fact those thresholds were drawn up in 2017 and implemented in 2018, when the cost of living was lower and money went further.

Families can receive thousands of dollars in tax credits based on their family circumstances under the Working for Families scheme.

These tax credits are slowly withdrawn once that family reaches an income threshold, through a process called “abatement”.

In 2017, the incoming Government lifted the abatement threshold from $36,350 to $42,700, meaning that families who once saw their tax credits diminish once their incomes hit $36,350 were able to keep their full entitlement until they earned $42,700.

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Six years of strong wage growth has meant that many of these families will be earning incomes well above the $42,700 threshold. Adjusted for wage inflation, the threshold would be just shy of $52,000.

This would be good news if it weren’t for the fact that wage inflation has been roughly matched by high price inflation, meaning $52,000 today is not equal to $52,000 when the thresholds were set. In 2017 dollars, $52,000 is worth about $43,000.

Making matters worse is that families earning this amount will have lost their tax credits at a faster rate than prior previously. A family on $52,000 will have seen about $2500 of their Working for Families support abate, which would not have been the case had the threshold been adjusted. This is a faster rate of abatement relative to prior to when the families package was introduced.

Labour has made multiple increases to the abatement rate, hiking it from 22.5 per cent to 25 per cent in 2018 and to 27 per cent in 2021. This means that Working for Families support now vanishes faster once income thresholds are reached.

On top of those changes, families earning $52,000 could face incredibly high effective rates of tax on their income.

If the household has a sole earner, they will pay 30 per cent tax on each dollar earned above $48,000, as well as a 27 per cent abatement on their Working for Families tax credit.

This means for some of this person’s income, they will face an effective marginal tax rate of 57 per cent on income earned above $48,000.

They may also have a student loan, paid back at 12 cents on every dollar, and an accommodation supplement, abating at 25 cents in the dollar.

An Official Information Act response showed that in a Budget 2020 bid, ministers proposed lifting the threshold to $48,000.

It was estimated to cost $220 million then and would benefit about 183,000 families to the tune of $23 a week on average.

Advocates are calling on the Government to urgently lift the abatement threshold before more families are lifted above the threshold at which the Government pays tax credits to support them.

Social Development Minister Carmel Sepuloni said the Government was considering further changes to the system as part of its long-running review into Working for Families.

Social Development Minister Carmel Sepuloni. Photo / Mark Mitchell

“Further changes to improve Working for Families will be considered as part of the Working for Families review which is still under active consideration. We will release more details of it in due course,” Sepuloni said.

“As the first step of the review of Working for Families, we have already implemented changes that mean 346,000 families will be better off by an average of $20 per week, and we lifted it even further on 1 April this year.”

Auckland University Professor Susan St John said she supported indexing abatement thresholds in the way superannuation payments are indexed to CPI inflation or wages.

“We’ve always advocated for a wage link and more or less the same as they’re doing for New Zealand Super,” St John said.

This would mean that the threshold at which the benefit was reduced would move up with inflation rather than being fixed.

Green Party social development spokesperson Ricardo Menéndez March said the Government clearly recognised that inflation was hitting people receiving income support because it included an increase to main benefits, adjusting them by inflation, rather than wages, which is what benefits had been indexed to in Budget 2021.

Menéndez March said it was a shame that this did not extend to the “broader system”.

“This Budget was a missed opportunity to look at the broader system and ensure that people were not falling behind.

“The abatement rates for Working for Families was an area that was overlooked by the Government.”

Menéndez March supported indexing the thresholds and said the level of payment should also be increased.

“The policy was also to reduce poverty, not just, not just relentlessly put people into employment,” he said.

National’s social development spokesperson Louise Upston did not say whether National would increase the thresholds.

“As it stands, National’s top priority is tax relief. This is to allow hard-working Kiwis financial relief through the adjustment of income tax thresholds,” Upston said.

“This will provide someone on a typical income of $60,000 to keep $800 more every year, for instance.”

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Lifting the abatement threshold to $52,000 would provide about $2511 in additional support, significantly more than the $612 they would get under National’s proposal to re-index tax brackets for inflation.

Modelling released in the Child Poverty Report said the Government was on track to hit two child poverty reduction targets, although in one case Treasury advised caution in saying the target would definitely be met, “given the uncertainties in the projections”.