Budget 2011–12: Family assistance retargeted
The changes to family assistance in the 2011–12 Budget should be seen as a continuation of well established reform directions that have been followed in the Labor Government’s first term. They combine a return of the Hawke/Keating Government’s emphasis on targeting payments to those most in need with a newer emphasis on ensuring that family assistance supports young people in education and skills development at a time of skill shortages and few unskilled jobs. The total family assistance package will deliver savings of $2.8 billion, part of which will be redirected to these new priorities in family assistance.
The main measure that addresses targeting of family assistance in the Budget is the continuation for two extra years of the indexation freeze introduced in the 2009–10 Budget for the following income test thresholds:
- the Family Tax Benefit part B (FTBB) primary earner income threshold of $150 000 per annum
- the Dependency Tax Offsets (DTO) income limit of $150 000 per annum
- the Baby Bonus (BB) income eligibility limit of $75 000 in the six months following the birth or adoption of a child and
- the higher income test free threshold for Family Tax Benefit part A (FTBA) of $94 316 plus $3 796 per annum per additional child after the first.
In addition, indexation of the primary carer income limit in the newly introduced Paid Parental Leave (PPL) scheme will be frozen.
FTBB, the Dependency Tax Offsets, Baby Bonus and Paid Parental Leave all have ‘sudden death’ income tests. That means that once the threshold is reached, the entitlement can go from full payment to nothing. So at any time (with or without the freeze) the impact on families whose income moves above the limit is quite significant. The impact of these measures will, however, be restricted only to those families with incomes in the few thousands of dollars above the frozen thresholds, who would have retained access to payment if indexation of the threshold had gone ahead. In the case of FTBB, about 11 400 families would lose their entitlement in 2013–14, due to the indexation freeze. They represent only about one percent of estimated FTBB families at that time.
The freeze on the higher income threshold for FTBA will affect families with incomes between the threshold and the point where payments cease altogether. That income range will vary according to how many children are involved and their ages. It is estimated that about 39 000 families who would have received a part rate payment with indexation will cease to receive FTBA in 2013–14. They represent about 2.6 per cent of estimated FTBA families at that time.
This level of income test tightening is relatively mild compared to that which occurred after the implementation of the income testing measures in the 2008 Budget. That was when upper income thresholds were introduced for FTBB and Baby Bonus and the definition of income under the income test was tightened. After those changes the proportion of all families with dependent children aged under 16 years receiving FTB was about 75 per cent (1.87 million), a proportion similar to that which applied back in 1998 before the introduction of FTB.
The most recently published income distribution data for FTBA families being paid by instalments fortnightly, indicates that in 2008–09 their average adjusted taxable income was $49 768. Therefore, even with this tighter targeting of FTB, families close to the upper income test thresholds who will be affected by the indexation freeze are on incomes two and three times greater than the average income of those receiving FTBA.
Other budget measures which fit with this policy direction are:
- the phasing out of the dependent spouse rebate (DSR), which is currently only available to spouses not caring for children, by limiting eligibility to taxpayers with a dependent spouse born before 1 July 1971 and
- the reduction in the upper age limit for FTBA from 24 years to 21 years.
Both of these changes remove somewhat anachronistic and poorly targeted provisions that do not sit well with current policy settings. The DSR adds to workforce disincentives by contributing to effective marginal tax rates for dependent spouses returning to work, and has lost its reason for existence now that participation of women in the paid workforce is the norm. The DSR will be retained for spouses with disabilities, who are carers or who are eligible for zone or overseas tax offsets. The age qualification will shield those presently over forty years of age but allow a gradual phase out of the DSR. This is a mechanism used in the past when phasing out dependency based payments in the social security system such as the widow pension.
Improving the targeting of assistance to low income people has been viewed by many as tackling ’middle class welfare’. There has always been a tension in family assistance policy between two equity objectives in a climate of limited resources. On the one hand, assisting low income families and tackling child poverty is best done with payments for the poorest only. On the other hand, family assistance policies have additional objectives such as assisting families with the high costs associated with raising children, and aiding women making the transition between the workforce and the raising of children (and back again). For some, this implies the need for more universally available family assistance—in particular, one that avoids barriers to participation in the workforce as a result of high effective marginal tax rates. The balance between these two approaches continually shifts as government priorities change and economic circumstances fluctuate. This Budget is not the first and it is unlikely to be the last to contribute to the quest for the right balance in family assistance policy.
Another feature of the family assistance measures in the Budget is cost cutting to make the system more sustainable. While some measures (such as those above) may be justified on policy as well as savings grounds, another budget measure would appear to be primarily about savings to pay for the enhancements to family assistance mentioned below. That measure is the freezing of the indexation of the FTBA and FTBB supplements for three years. It is indicative of the size of the FTB program (an estimated $18.1 billion in 2011–12) that stopping the growth of these supplements by quite small amounts (about $20 per child per annum for the FTBA supplement for example) can realise savings of $803.2 million over the coming four years. 
Enhancements to family assistance
The biggest spending measure in the family assistance area in this Budget is the increase in FTBA maximum rates for 16 to 19 years old full-time students to match that paid to 13 to 15 year olds (currently $6 161.20 per annum). The rate will increase by $3741, for 16 and 17 year olds, and by $4208 for 18 and 19 year olds. While this has been funded in the Budget, it is not a new measure. It was promised in the 2010 election campaign and legislation to implement the measure is currently before the Senate.. The objective of this change is to encourage teenagers to stay in school and it complements changes to FTBA eligibility for this group introduced from 1 July 2010. From that date, 16 to 20 year olds without a year 12 qualification needed to be studying full-time towards gaining one, in order to qualify for FTBA. An estimated 650 000 teenagers turning 16 over the next five years are expected to attract the increased rate. These changes are estimated to cost $771.9 million over five years
The other family assistance spending measure in the Budget improves the system of advance payments of FTBA.