Working for Families Is Not a Trap, It’s a Run-Down House in Need of TLC

By Jeni Cartwright

People should be wary of recent criticism of Working for Families (WFF) tax credits as being a poverty trap. The problem is not the system itself, but the poor design from its inception.

It goes without saying that there are extra costs involved in raising children; Governments have recognised and supported this with child-related payments for decades. Our parents and grandparents have had the benefits of such payments long before my generation of 30-somethings began procreating!

The idea that families need extra income to support children is not new, and certainly not isolated to Working for Families or to New Zealand. Prior to WFF there has consistently been some form of state support for families raising children in Aotearoa-New Zealand, as has been the case in many other developed countries. In 1946, the Government first brought in the Universal Family Benefit, followed by a range of other tax-related credits, up until and including WFF. In its current state however, our system of tax credits doesn’t provide well enough to ensure that every child can flourish, and it needs a real overhaul for it to be successful.

The entrenched poverty we see today can be largely attributed to political changes since the 1970s, the impact of which included massive job losses as a result of market deregulation that forced many families onto welfare, families who then suffered the double blow of severe cuts to benefits under Ruth Richardson’s Mother of all Budgets in 1991. Working for Families tax credits were introduced in in 2005 to address increased levels of child poverty as well as to recognise the additional income needs of children for low-income families. They replaced and extended existing weekly child-related payments.

The problem now really comes down to high housing costs, alongside very low wages and benefits, which mean that low-income families are struggling more than ever to meet their needs financially, let alone to sustain an adequate standard of living. Badly-designed tax credits have been allowed to become worth less and less over time due to policy changes and a lack of proper annual indexation (yearly increases based on average cost increases and wage growth).

The parent in the article who got a $16K pay rise is doing better in her own right, having her had her skills and hard work recognised. But her children are still in need of additional income support and she still has costly child care to consider. This is why a plethora of changes across Working for Families and welfare needs to happen.

Working for Families tax credits will increase for some people on Sunday July 1 with the Government’s Families Package, which includes a new threshold for maximum WFF eligibility of $42,700 - up from a the current threshold of $36,350. This will mean more people will be eligible for the full amount. But once income reaches the new threshold WFF payments will reduce more sharply at a new rate of 25c per dollar over the threshold, increased from the current rate of 22.5c. This rate was increased from 20c by National in 2012.

It is important to keep in mind that Working for Families tax credits were intended to recognise the income needs of children, and to acknowledge that many families, whether their incomes are below the threshold or above it, are really in need of additional cash-flow to make ends meet.

The parent who still earns 34K, or is on a welfare benefit and cannot obtain a $16K pay rise for any number of perfectly good reasons really needs those tax credits for their children.

'Sue' got slammed on social media for calling out Working for Families as her crutch; and she related that she'd rather her child care subsidy remain in place than be 'dependent' upon tax credits to get by. It is definitely a flaw that her child care subsidy was swallowed up at the same time as her WFF was reduced. However, there's good reason for her to continue receiving Working for Families tax credits. 

While the system is evidently flawed and in need of repair, it is nevertheless needed and more so than ever. The changes on 1 July will be a good start - but we need to see a range of more significant changes that improve the lives of the 140,000 children who are experiencing severe hardship.  It’s up to our new Government to use its once-in-a-lifetime opportunity for more than just a quick fix-it.