Sibling rivalry: Baby Bonus and Paid Parental Leave

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Sibling rivalry: Baby Bonus and Paid Parental Leave

Posted 1/12/2011 by Luke Buckmaster

The Government has announced as part of the Mid Year Economic and Fiscal Outlook (MYEFO) that it will reduce the Baby Bonus to $5000 and freeze indexation of the payment for three years. Currently, the Baby Bonus is $5437 and indexed in line with changes to the Consumer Price Index (CPI) on 1 July each year.

The decision has been criticised by some as discriminating against 'stay at home' mothers because the Government did not also take savings from the Paid Parental Leave scheme. This post attempts to clarify the issues involved by briefly looking at the relationship between Baby Bonus and Paid Parental Leave.

Baby Bonus in its original form was introduced by the Howard Government in 2002. It is currently paid to primary carers or their partners in order to assist with the extra costs arising from a new birth or adoption. Eligibility is restricted to those who have an adjusted taxable income of less than or equal to $75 000 for the period in the six months following the child’s entry into their primary care. Baby Bonus is paid per eligible child in 13 fortnightly installments. Baby Bonus is not taxable income.

Paid Parental Leave was introduced by the Rudd-Gillard Government in 2010 and is paid to working parents of children born or adopted from 1 January 2011. To be eligible, a person must be a primary carer and have an income of $150 000 or less. Those eligible are paid for 18 weeks at the National Minimum Wage (currently $589.40 a week before tax). Paid Parental Leave is taxable income.

Parents are not able to receive both Paid Parental Leave and Baby Bonus for the same child. Rather, they must choose one or the other depending on which best suits their financial circumstances.

It is widely thought that Baby Bonus was primarily introduced as an incentive to increase Australia's birth rate. However, this is at best a small part of the story. It is more likely that Baby Bonus was introduced in response to growing demands for paid maternity leave but in a way that would allow non-working mothers to access it. Indeed, one commentator has described Baby Bonus as 'a badly designed sop to women when Howard refused to introduce paid maternity leave'.

The First Child Tax Refund (also known at the time as Baby Bonus) was a 2001 Howard Government election commitment. It provided tax refunds of up to $2500 per annum for five years for mothers after the birth of their first child born on or after 1 July 2001. During the election campaign, Howard described the First Child Tax Refund as a measure aimed at taking the financial pressure off families with new children 'when typically the family ...  loses one of its two incomes for a period of time during which the mother or father gives up or reduces paid employment to care for the child'.

Importantly, the scheme also made provision for non-working primary carers by guaranteeing a minimum payment of $500 for each full year for a parent who earns less than $25 000 in the relevant assessment year.

In other words, Baby Bonus I was to some extent similar to a paid parental leave scheme in that it sought to compensate families for the absence of one parent from the workforce, though not expressed as a workplace entitlement. On the other hand, it also sought to ensure that primary carers not in the paid workforce would also benefit, though to a lesser extent.

First Child Tax Refund was replaced by Maternity Payment in 2004 (renamed Baby Bonus in 2007). This change was to address lower than expected take-up of the policy (due to having to claim as a tax rebate at the end of the financial year, rather than a payment when it was needed). Maternity Payment was paid as a lump sum of $3000 for each newborn child and each child adopted at less than 26 week of age. No means test applied. The rate of payment was scheduled to increase to $4000 in July 2006, $5000 in July 2008 and indexed annually to CPI, thereafter.

The objective of increasing the population appears to have played little part in the Government's public rationale for the policy. In his 2004 Budget speech, then Treasurer, Peter Costello said that the Maternity Payment recognised 'the cost of a new child and will assist all mothers many of whom leave the workforce and leave paid work at the time of the birth of their child'. Again, the Government was explicitly seeking to highlight the role of Baby Bonus in compensating for the loss of one parent from the workforce. However, Baby Bonus II also quite specifically included primary carers not in the paid workforce, thereby eroding the extent to which it could be considered a paid parental leave scheme. The Labor Government subsequently made several changes to Baby Bonus, including income testing and payment in fortnightly installments instead of a lump sum.

Given that Baby Bonus in many ways resembles paid parental leave (payments made in installments to primary carers that can function as compensation for time out of the workforce) why did Labor feel the need to introduce a separate, formal Paid Parental Leave scheme?

Essentially, the creation of a separate scheme is intended as recognition that such leave is a workplace entitlement. The entitlement to Paid Parental Leave is also connected with objectives such as encouraging women to remain in the workforce and to take leave at a crucial stage of childhood development.

This is also the basis of the much more generous scheme proposed by the Coalition which proposes to provide new mothers with 26 weeks paid leave at their full wage or salary capped at an income level of $150 000. These approaches can be contrasted with Baby Bonus which is intended as a form of short term income support to assist with the costs of newborn or adopted children.

These differences have been to some extent obscured by the design of the Paid Parental Leave scheme, which is funded entirely from general taxation revenue and provided by the Government, rather than employers (though will be paid through the employer once fully implemented). Further, it has no direct relationship with actual leave available to women in their workplaces in that it does not provide a statutory entitlement to 18 weeks leave for new mothers. As such, one commentator has described the scheme as 'pretending to be a leave scheme when, in fact, it is a baby bonus with a work test'. It is also clear that Baby Bonus ('stay at home mums') and Paid Parental Leave ('working mums') have each come to be popularly associated with opposite sides in what have been called the 'mummy wars'.

Nevertheless, while Baby Bonus and Paid Parental Leave have elements in common and a somewhat intertwined and controversial history they are sufficiently different in purpose that a change to one need not be seen as inferring the need for a similar change in the other.

As noted above, while there may be some confusion resulting from its design, Paid Parental Leave is supposed to be a workplace entitlement specifically enabling primary carers a period of time with their child whilst remaining engaged with the workforce. There is no reason why a change in Baby Bonus should necessitate a similar change in Paid Parental Leave. 

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