A taxing brain-teaser; untangling the jumble in income assistance
Colin James's NZ Herald column for 9 December 2003
The big deal in next year's Budget -- and several Budgets after that -- is Steve Maharey's grand plan. It will be popular with Labour activists.
There are two dimensions to this plan. One is palliative: more money for low-to-middle-income families. The other is structural: tidying up the benefit and tax credit systems.
If you want to while away a weekend on a brain-teaser, the structural challenge would fit the bill. It has consumed forests of paper and megawatts of brainpower in the Ministry of Social Development (MSD) and the Inland Revenue Department.
First, there are welfare benefits -- a raft of them, including unemployment, domestic purposes, sickness and invalids. Then there are "tier two" add-ons, which include the accommodation supplement, disability assistance and child care help. And then "tier three" add-ons, including special needs benefits, emergency grants and loans.
Working out who should get what, when, keeps Work and Income staff at their computers and diverts them from getting beneficiaries into work.
And large numbers of beneficiaries don't get what they are entitled to. That sounds good fiscally -- except that it may short-change children and thereby store up fiscal costs or losses if, as a result, they go off the rails or don't realise their capabilities.
There is also a web of tax credits: family support, a child tax credit, a family tax credit (a top-up of income to $18,386 a year for a family in work) and a parental tax credit for the first 56 days after birth.
They are all income-tested, depending on the number of children in the family, and a simple palliative is to raise the thesholds. But that leaves bureaucrats the tangle of who should get what.
Sorting out this spaghetti is the task Michael Cullen and Maharey have set themselves for this Budget round. It is a very high priority -- but it is also very expensive.
That word "expensive" would normally stop a Treasurer in his tracks. But Cullen has harboured ambitions to sort this out since he was Welfare Minister in the late 1980s. Prime Minister Helen Clark, a fiscal conservative, is also said to be onside.
The ultimate aim is a drastic simplification, in which, on the benefit side, the "tier two" benefit add-ons are incorporated in a single basic benefit (with regional variations to allow for different accommodation costs) and a simplified arrangement for the tax credits.
"Ultimate" is the operative word. How much gets done how fast depends on the cash in Cullen's kitty. Present thinking, though still formative, is a four-year phased introduction -- but only if, at each stage, there is enough assured ongoing budgetary leeway.
One figure mooted is $500 million. But the whole hog will likely cost a lot more than that -- maybe the best part of $1 billion a year.
Tie this in with MSD's greater focus on getting beneficiaries into jobs and helping them stay there. Maharey has argued that is an "investment", which will in time lower benefit costs by cutting beneficiary numbers by enabling Work and Income staff to focus on case-managing beneficiaries into, and in, sustainable work.
There is some supporting evidence for this view from pilots but it is not conclusive. One clue, however, is that the Treasury has relaxed its habitual scepticism and is working cooperatively with MSD.
But why stop there?
If you are disabled by accident, you get more and faster rehabilitative care than if disabled by illness. ACC buys it to get you off its books.
ACC and Disability Issues Minister Ruth Dyson has been gradually gaining traction in her aim to get the illness-disabled similar rehabilitation treatment to that for ACC's disabled. Maharey mentioned one item -- buying prompt remedial treatment for those with job prospects -- to a select committee last week, to National's and ACT's approval.
Dyson has now got a working group developing advice for funding and operational changes to get "simple-to-access, seamless and equitable provision of disability supports" for invalid beneficiaries -- including job training without loss of income.
But why stop there?
ACC payments are a proportion of previous income. Benefit payments for the illness-disabled are flat rates. This illogical discrimination is an accident of history: ACC was a reform of adversarial law gone bad; benefits are social security.
Dyson has long-range ambitions to marry ACC and benefits, an option she says the original 1967 ACC report left open. "That way is still open and I am keen to progress it," she told a conference last Friday. She has got ACC working more like a department and with other departments.
A single system would logically make all payments initially income-related but declining over time to a flat rate. Simply making benefits fully income-related would be prohibitively costly.
But unions would go ape if ACC was reduced. So next year's grand plan looks like the lot for a while -- a long while. But if Labour stays around for a fourth, fifth, sixth term...?