The Generosity of New Zealand's Assistance to Families with Dependent Children

The Generosity of New Zealand's Assistance to Families with Dependent Children

the generosity of new zealand's assistancetofamilieswithdependentchildren:
aneighteencountry comparison

Robert Stephens

Senior Lecturer, Public Policy and Economics

VictoriaUniversity of Wellington

and

Jonathan Bradshaw

Professor of Social Policy

University of York, England

introduction

Parents generally bear the dominant share of the direct and financial responsibility for bringing up their children. However, the State also provides significant assistance to families with dependent children, ranging from the payment of cash benefits, through the provision of education, health care and community services, to the regulation and prohibition of activities such as child work and violence against children. The extent to which parents and the State share the burden of responsibility varies between countries; within a country over time; and at different standards of living. Wynn (1970) provided the rationale for this shared responsibility with her observation that "children are a stake in the future of their parents, and for those who are not their parents" (p.32). Children are an investment in the future of society as well as adding to current expenditures by both parents and the State.

Koopman-Boyden and Scott (1984) argued that "current arrangements for sharing responsibilities for the care of dependent children among the family, community and the State suggest that New Zealand families are now more dependent than their predecessors on various forms of Government and community assistance" (p.3). Since then, there has been considerable change in the form, level and content of state assistance given to families with dependent children.

In general, over the last decade, New Zealand has changed from the provision of universal benefits, to assistance targeted on the basis of family income. The universal Family Benefit was abolished in 1991 and in 1986 the Family Support tax credit and Guaranteed Minimum Family Income were introduced for low-income families and beneficiaries, replacing a low income family tax rebate (and short-lived family care)[1]. Health care and student tertiary allowances are now both targeted on the basis of family income; and market rents for state housing are related to income, family size and regional rent costs for matched accommodation.

The purpose of this article is not to provide a history of policy changes towards the family in New Zealand [(Koopman-Boyden and Scott (1984) and Beaglehole (1993) provide a useful summary)], nor to question whether New Zealand should have moved from a more universal to a more targeted social policy regime (Boston 1992), but instead to use international comparisons to investigate how generous New Zealand's assistance is towards children. New Zealand has been added (along with Sweden and Japan), with permissions from the original authors, to any already published study on Support for Children: A comparison of arrangements in fifteen countries written for the UK Department of Social Security by Bradshaw, Ditch, Holmes and Whiteford (1993)[2]. The approach used is "model families", which means that attention is focused on the comparability of the results rather than their representativeness.

The objective of the study is to find out how horizontally redistributive different countries are, in the context of the additional real disposable income that families with children get, compared to those without children, given similar gross earnings. Not all countries will have structured their child support package in a way that is designed to offset the costs of child-rearing: New Zealand is primarily concerned with poverty relief, which means that vertical redistribution, or targeting, predominates in the structure of the package. Other countries have pro-natalist objectives, or employment objectives which are achieved by enabling unemployment benefits to be paid at a reasonable level through payments based on family size, without undermining work incentives, thus supplementing low wages, and reducing demands for wage increases (Bradshaw et al. 1994). The paper starts by considering the methods used in the study, then examines the generosity of New Zealand in relation to each component part of the package, before assessing the overall impact of the total degree of assistance to children.

METHOD ANDDATA

The study used informants from each of the original 15 countries, working to a pre-determined format and range of assumptions, using a variety of model family types. Since then, Japan, Sweden and now New Zealand have been added. The approach is descriptive, but the information is up-to-date, being based on policies as at 1 May, 1992[3]. The approach is to assess the comparability of a pre-determined standard package of taxes, benefits and social policies which applies to all countries in the study. Generosity of the package can be determined in both absolute terms, by comparing the level of assistance, in pounds sterling adjusted by purchasing power parities, and relatively, by comparison with the net disposable resources of a couple without children, within each particular country.

The limitations of the approach are, first, that it provides a description of how the system should work, rather than actually does work – for example, it assumes 100% take-up rates of income-tested benefits, whereas estimates of the take-up rate for Family Support for those in the full-time workforce, for instance, vary between 30% (Prebble and Rebstock 1992), and 70% (Fourbister 1990). However, it is appropriate to concentrate on the intended impact of policy when one is seeking to evaluate and compare government policies, rather than their actual impact. Second, the circumstances of the model families may not be representative of the range of actual families within a country – Māori and Pacific Island extended families and people flatting together are ignored in the analysis, and the assumption of state housing rental accommodation is at variance with New Zealand's predominate home ownership. But the model families are illustrative of a range of experiences, especially given the wide range of family types and income levels, and thus provide comparability between families in a variety of circumstances in different countries.

The assumptions made are described below:

Family Types

Lone parent and two-parent families are included in the study, each having from one to four children[4]. The ages of the children vary, ranging from under three years in order to assess the costs of pre-school care (and the value of government assistance to offset that cost); to seven years or primary school; and 14 years or secondary school. Single people and couples without children are also included to provide the benchmark for comparing the value of the child support package.

Employment Status and Earnings Levels

In many countries, including New Zealand, the value of the child benefit package varies with level of family income. Eight cases were chosen, with different combinations of average gross earnings for full-time production workers in the manufacturing sector (thereby avoiding comparability problems from different agriculture / manufacturing employment and wage rate shares). For New Zealand, average male earnings at 1 May 1992 were $33082, and average female earnings were $25,326[5] (Statistics New Zealand 1993). The following permutations[6] were selected:

  • Case 1:One earner, 0.5 average male earnings.
  • Case 2:One earner, average male earnings.
  • Case 3:One earner, 1.5 average male earnings.
  • Case 4:Two earners, 0.5 average male and 0.66 average female earnings.
  • Case 5:Two earners, average male and 0.66 average female earnings.
  • Case 6:Two earners, 1.5 average male and 0.66 average female earnings.
  • Case 7:One earner, average male earnings, partner unemployed and receiving insurance benefits if entitled.
  • Case 8:Family, no earners, long-term unemployed, on social assistance.

For the international comparison, purchasing power parities rather than exchange rates were used[7]. This makes a large difference for New Zealand as the exchange rate at 1 May 1992 was UK£1.00 = NZ$3.15 whilst purchasing power parity (PPP) (OECD 1992) was UK£1.00 = NZ$2.41. As a result, New Zealand average male earnings using PPPs are UK£13272, compared to UK£10502 with exchange rates. If PPPs are used, then New Zealand has the twelfth highest (out of 18 countries) male earnings and ninth highest female earnings, but fourteenth for both males and females using exchange rates.

Using PPPs for all countries, New Zealand has average male earnings slightly greater than Italy, just below Ireland and Netherlands, with the UK on £14500 and Australia £15000. Interestingly, France and Sweden, with greater per capita GDP, have average earnings substantially lower than New Zealand. France's position seems to be due to the economic incidence of the employer's social security contributions falling upon the employee in the form of lower wages. The PPP for Sweden is much higher than the exchange rate, due to its extensive welfare state, and its financing, distorting relative prices of tradeable commodities. Using PPPs for New Zealand increases the relative generosity of the child support package compared to the use of exchange rates.

Direct Child Cash Benefits

Information on both universal child benefit payments and income related payments were provided. In New Zealand, with the abolition of the universal Family Benefit in April 1991, this was restricted to just the Family Support tax credit, of $42 per week for the first child, and $22 for second and subsequent children, payable to both beneficiaries and low-income workers with dependent children[8]. Family Support abates at 18% with income (of both partners where applicable) over $17,500, and at 30% over $26,000.

The only countries not providing a universal family benefit, in addition to New Zealand, are Italy, Spain, USA, and Japan[9]. In some countries, the universal benefit is more generous for the first (UK) or younger children (Denmark), in others for older children (France, Benelux) and larger families (France, Greece). Norway pays the most generous universal family allowances to small families with young children and to lone parents, while the Benelux countries are more generous for couples with more and older children.

Characteristics of income-related family allowances also vary significantly. In New Zealand, Australia and Germany, the allowance is paid to larger families on average earnings, whereas in France and Italy benefits are still paid at one and a half average earnings, whilst the generous USA AFDC scheme is tightly targeted at low-income levels. Lone parents receive more in Australia, UK and Norway; in France, Australia (and from October 1993 in New Zealand), payment varies with age of child, though from 1989 all dependent children aged 16 to 18 received the larger allowance for the first child. Benefit payments increase with number of children, with New Zealand and the UK paying more to the first child, while France and Greece pay more to larger families.

Table 1 shows the large degree of variation in the relative value of combined universal and income-related family allowances, depending on income level, type of family and number and age of children. At half average earnings for couples with a three year old, USA, UK, Australia, Norway and France are slightly more generous than New Zealand, and they are far more generous to a lone parent. At this income level, for large family sizes, New Zealand is far less generous, providing just over a half of the assistance that Australia and UK do, and a third of that of USA. At average male earnings, New Zealand only provides assistance to three and four child families, whilst all other countries, except Spain and USA provide assistance. At one and a half average male earnings, the lack of universal allowances is noticeable in Spain, USA, Italy and New Zealand.

The Benelux countries target benefits by number of children, while New Zealand and USA are noticeable by the way that they have targeted their allowances on the basis of income. Proponents of targeting argue it is a cost-effective way of using social security to alleviate poverty, reducing total expenditure whilst providing greater benefits to low income earners (Shipley 1991). However, Saunders (1994) contends that while targeting may be efficient, the relatively few people covered by the programme results in a lack of political support, producing a low level of benefit and little poverty relief. This would appear to be the case in New Zealand, where the value of family support was not increased between 1986 and 1992, despite inflation reducing its real value by over 60%.10

Personal Income Tax

Liability for personal income tax has been calculated from the tax schedule, including any tax allowances, credits and rebates applicable to the individual or dependents. Except for the targeted Guaranteed Minimum Family Income (GMFI), New Zealand does not provide any tax assistance to families to offset the cost of children (the Family Support tax credit could have been included here rather than the previous section). GMFI is a tax credit paid to families with dependent children whose income is less than $18,363 gross (or $16,640 net), with at least one parent working for at least 30 hours per week for a couple, or 20 hours for a one parent. Family support is paid in addition to GMFI.

Denmark, Sweden and the Netherlands make no adjustment in the tax system for the cost of children, while the UK has an allowance for lone parents and Australia for a non-working dependent spouse. In the USA, Germany, Belgium, Luxembourg and France, tax allowances for children are relatively large, and tend to increase in value with both number of children and income level, while the allowance in other countries is fairly small.

Offsetting these tax allowances are employees' social security contributions. Contributions are least important in New Zealand (ACC levies), Australia, Sweden and Denmark, and highest in Netherlands, France and Germany, with a range from less than 1% in Australia and New Zealand to 26% of gross earnings in the Netherlands. Table 2 combines the information on tax an social security contributions, showing them as a proportion of gross income for Cases 1, 2 and 3. At half average male earnings, New Zealand's effective average tax rate is relatively high for a couple, though still below Netherlands, Sweden and Denmark, and about average for families with dependent children, whilst at one and a half average male earnings, New Zealand's tax rate is relatively modest. By international standards, New Zealand's tax system is not very progressive, though France, Greece and Luxembourg are less progressive when social security contributions are added to income tax liabilities.

The degree of support for children can be found by comparing the average tax rates for couples with and without children. At half average male earnings, there is no difference in tax paid in ten countries, with New Zealand having a substantial difference due to GMFI, whilst in Cases 2 and 3, only Denmark, Sweden, Netherlands, UK, Australia and New Zealand had tax rates the same for couples with and without children. The differences were substantial in Belgium, Germany, Luxembourg, Norway and the USA, with the difference increasing with the number of children.

In addition to these direct allowances to offset the cost of children, expenditures on health care, education and housing are all influenced by the presence of children, with the State, to a certain extent, offsetting the cost through subsidies or direct provision and financing (see St John and Heynes (1993) for details of the policy parameters in New Zealand). No account is taken of the differences in quality of these services.

Table 1: Level of Universal and Income-Related Family Allowances, per month. Purchasing Power parities (£).

By Income Level and Number of Children

Belgium / Denmark / France / Germany / Greece / Ireland / Italy / Luxemb / Netherl / Portugal / Spain / UK / Austral / Norway / USA / NZ / Japan / Sweden
Half average male earnings – Case 1
Cpl+1age 3 / 35 / 45 / 88 / 41 / 38 / 35 / 61 / 32 / 29 / 12 / 0 / 95 / 86 / 86 / 104 / 76 / 103 / 50
LP+1age 3 / 35 / 137 / 200 / 21 / 7 / 35 / 39 / 32 / 29 / 12 / 0 / 120 / 180 / 215 / 55 / 76 / 70 / 135
Cpl+2age 3,7 / 124 / 80 / 153 / 148 / 46 / 89 / 88 / 107 / 85 / 24 / 34 / 174 / 172 / 149 / 180 / 115 / 84 / 100
LP+2age 3,7 / 124 / 245 / 309 / 61 / 20 / 89 / 70 / 107 / 85 / 24 / 34 / 199 / 278 / 352 / 117 / 115 / 176 / 259
Cpl+4age 3,7,8,14 / 385 / 149 / 398 / 303 / 128 / 226 / 158 / 355 / 218 / 61 / 68 / 361 / 376 / 294 / 559 / 194 / 105 / 274
LP+4age 3,7,8,14 / 385 / 458 / 641 / 265 / 112 / 226 / 131 / 355 / 218 / 61 / 68 / 387 / 507 / 635 / 413 / 194 / 212 / 583
Average male earnings – Case 2
Cpl+1age 3 / 35 / 45 / 88 / 21 / 69 / 16 / 9 / 32 / 29 / 12 / 0 / 42 / 22 / 86 / 0 / 0 / 70 / 50
LP+1age 3 / 35 / 137 / 202 / 21 / 6 / 16 / 0 / 32 / 29 / 12 / 0 / 67 / 22 / 215 / 0 / 0 / 15 / 135
Cpl+2age 3,7 / 124 / 80 / 153 / 43 / 74 / 31 / 35 / 107 / 85 / 24 / 0 / 76 / 44 / 149 / 0 / 0 / 84 / 100
LP+2age 3,7 / 124 / 245 / 311 / 43 / 16 / 31 / 22 / 107 / 85 / 24 / 0 / 101 / 44 / 352 / 0 / 0 / 28 / 259
Cpl+4age 3,7,8,14 / 385 / 149 / 398 / 201 / 151 / 68 / 131 / 355 / 218 / 48 / 0 / 143 / 181 / 294 / 0 / 72 / 105 / 274
LP+4age 3,7,8,14 / 385 / 458 / 643 / 201 / 103 / 68 / 88 / 355 / 218 / 48 / 0 / 169 / 181 / 635 / 0 / 72 / 169 / 583
One and a half average male earnings – Case 3
Cpl+1age 3 / 35 / 45 / 0 / 21 / 101 / 16 / 0 / 32 / 29 / 12 / 0 / 42 / 22 / 86 / 0 / 0 / 70 / 50
LP+1age 3 / 35 / 137 / 203 / 21 / 6 / 16 / 0 / 32 / 29 / 12 / 0 / 67 / 22 / 215 / 0 / 0 / 15 / 135
Cpl+2age 3,7 / 124 / 80 / 68 / 43 / 106 / 31 / 0 / 107 / 85 / 24 / 0 / 76 / 44 / 149 / 0 / 0 / 84 / 100
LP+2age 3,7 / 124 / 245 / 315 / 43 / 16 / 31 / 0 / 107 / 85 / 24 / 0 / 101 / 44 / 352 / 0 / 0 / 28 / 259
Cpl+4age 3,7,8,14 / 385 / 149 / 313 / 128 / 183 / 68 / 44 / 355 / 218 / 48 / 0 / 143 / 94 / 294 / 0 / 0 / 105 / 274
LP+4age 3,7,8,14 / 385 / 458 / 647 / 128 / 103 / 68 / 9 / 355 / 218 / 48 / 0 / 169 / 94 / 635 / 0 / 0 / 50 / 583


Table 2: Income Tax and Social Security Contributions as a Proportion of Gross Income

Couples with Children, Cases 1, 2, and 3

Belgium / Denmark / France / Germany / Greece / Ireland / Italy / Luxemb / Netherl / Portugal / Spain / UK / Austral / Norway / USA / NZ / Japan / Sweden
Half average male earnings – Case 1
Couple / 17 / 27 / 19 / 24 / 14 / 10 / 18 / 12 / 26 / 11 / 5 / 12 / 6 / 19 / 12 / 20 / 12 / 23
Couple + 1 / 15 / 27 / 19 / 21 / 14 / 8 / 16 / 12 / 26 / 11 / 5 / 12 / 4 / 17 / 9 / 13 / 12 / 23
Couple + 2 / 13 / 27 / 19 / 18 / 14 / 8 / 15 / 12 / 26 / 11 / 5 / 12 / 4 / 15 / 8 / 13 / 12 / 23
Couple + 3 / 13 / 27 / 19 / 18 / 14 / 8 / 14 / 12 / 26 / 11 / 5 / 12 / 4 / 13 / 8 / 13 / 12 / 23
Couple + 4 / 13 / 27 / 19 / 18 / 14 / 8 / 13 / 12 / 26 / 11 / 5 / 12 / 4 / 12 / 8 / 13 / 12 / 23
Average male earnings – Case 2
Couple / 28 / 39 / 29 / 31 / 16 / 25 / 27 / 16 / 35 / 19 / 14 / 23 / 20 / 26 / 17 / 25 / 15 / 26
Couple + 1 / 27 / 39 / 19 / 29 / 15 / 24 / 26 / 13 / 36 / 18 / 14 / 23 / 19 / 25 / 16 / 25 / 14 / 26
Couple + 2 / 25 / 39 / 19 / 27 / 14 / 24 / 26 / 12 / 36 / 17 / 13 / 23 / 19 / 25 / 15 / 25 / 14 / 26
Couple + 3 / 21 / 39 / 19 / 26 / 14 / 23 / 25 / 12 / 36 / 16 / 12 / 23 / 19 / 24 / 14 / 25 / 13 / 26
Couple + 4 / 15 / 39 / 19 / 24 / 14 / 22 / 25 / 12 / 36 / 15 / 11 / 23 / 19 / 23 / 12 / 25 / 12 / 26
One and a half average male earnings – Case 3
Couple / 35 / 31 / 24 / 35 / 18 / 28 / 32 / 22 / 41 / 23 / 18 / 26 / 28 / 32 / 19 / 27 / 17 / 32
Couple + 1 / 34 / 31 / 22 / 33 / 18 / 28 / 31 / 18 / 41 / 22 / 18 / 26 / 28 / 32 / 18 / 27 / 16 / 32
Couple + 2 / 33 / 30 / 21 / 31 / 17 / 27 / 31 / 14 / 41 / 21 / 17 / 26 / 28 / 31 / 17 / 27 / 16 / 32
Couple + 3 / 30 / 30 / 18 / 30 / 15 / 27 / 30 / 12 / 41 / 21 / 17 / 26 / 28 / 31 / 17 / 27 / 15 / 32
Couple + 4 / 26 / 48 / 18 / 28 / 14 / 26 / 30 / 12 / 41 / 20 / 16 / 26 / 28 / 30 / 16 / 27 / 15 / 32