Abolishing the Baby Bonus

Budget Review 2013–14 Index

Michael Klapdor

In its 2013–14 Budget, the Labor Government has again looked to tighten access and levels of family assistance to find some significant savings. One of the standout measures is the abolition of the Baby Bonus. The Government proposes to replace the Baby Bonus with a smaller supplementary payment added to a families’ Family Tax Benefit Part A (FTB-A) entitlement. The measure is expected to save $1.1 billion over five years and will be implemented from 1 March 2014.[1]

The Baby Bonus is a payment intended to help families with the costs of a newborn baby or adopted child (under the age of 16). It is payable to families who have not received Paid Parental Leave and whose estimated combined adjusted taxable income (ATI) is $75,000 or less in the six months after their child is born or adopted.[2] It is payable to parents whose baby is stillborn. The amount of Baby Bonus currently payable is $5,000 per eligible child and it is made in 13 fortnightly instalments. The first instalment is paid at a higher rate of $846.20 and the other 12 fortnights are paid at a rate of $346.15. The Baby Bonus is paid at the same rate to all families considered eligible.

The proposed replacement payment will be come in the form of an additional loading on an eligible families’ FTB-A payment with an additional $2,000 for a firstborn child (and all multiple births) and $1,000 for any subsequent children. It will be paid as an initial upfront instalment of $500 with the remaining amount paid fortnightly over a three month period. FTB-A is intended to help families with the costs of raising children and is paid to eligible carers who meet residency requirements and meet the income test. The income test for FTB-A reduces a person’s payment when their ATI is over $47,815. The impact of the test varies depending on the number of children in the family and their age: large families can still receive some FTB-A even with an ATI above $228,000 a year. It is not clear how the new ‘additional loading’ will be treated under the income test (such as whether higher income families will receive the full amount of the new payment).

Background

The payment now known as Baby Bonus was introduced by the Howard Government in 2004. It was then called ‘Maternity Payment’ and was a non-means tested lump sum replacement of the First Child Tax Rebate and the Maternity Allowance. The introduction of this new form of assistance for newborns was seen as an alternative to the introduction of government-funded paid parental leave which, unlike the payments it replaced, would provide the same level of assistance to all parents. Maternity Payment was formally renamed the Baby Bonus in 2007. From 1 January 2009, the $75,000 income limit was applied to the payment and it switched from being paid as a lump sum to being paid in mandatory fortnightly instalments. The introduction of Paid Parental Leave (PPL) in January 2011 provided much more generous support to working parents with newborn or newly adopted children and around half of new parents are now receiving support through this scheme.[3] To be eligible for PPL, which provides up 18 weeks’ pay at the minimum wage, the parent needs to meet a work test and have an ATI of $150,000 or less in the year prior to the birth/adoption.

The budget measure was a recommendation of the Henry Tax Review. The review noted that government-funded research had found that the actual direct costs of children for low-income families were closer to $2,000 for a first child and $1,000 for a second child and that the current Baby Bonus rates covers much more than these costs.[4]

Baby Bonus has been a regular target for savings

The Labor Government has frequently targeted the Baby Bonus as a source of savings by changing or freezing indexation arrangements, introducing the income limit and reducing the rate of payment. The 2012–13 Mid-Year Economic and Fiscal Outlook proposed further cuts to the amount of Baby Bonus paid for second and subsequent children but the Bill to implement this measure is still before the Parliament.[5]  

Paying all eligible recipients the same $5,000 amount, regardless of relative differences in means and the actual cost of having children, means the Baby Bonus is a poorly targeted and, in many cases, particularly generous form of assistance compared to other family payments. The merging of the payment with FTB-A has benefits of reduced complexity and improved targeting. The new form of assistance will more closely reflect the costs of a new child for low-income families and, if FTB-A’s income test is applied, ensure a greater level of assistance goes to families with lesser means. The reduced rate of assistance compared to the Baby Bonus will, however, hurt those low-income and welfare-dependent families unable to access the PPL scheme.

Birth rates and early births

The behavioural impact of changes to Baby Bonus has been an ongoing issue. While it is unlikely that its abolition will have a significant impact on birth rates, there is a strong possibility that it will affect the timing of births, as occurred in 2004 when the payment began.[6] The timing and manner of the payment cut produces a financial incentive for a birth to occur earlier than it might otherwise. A gradual reduction in the rate of payment, a staged transition to the replacement payment, or a shortened time between announcement and implementation may have reduced this incentive.



[1].       J Macklin (Minister for Families, Community Services and Indigenous Affairs, Minister for Disability Reform), A more sustainable family payments system, media release, 14 May 2013, accessed 15 May 2013.

[2].       ATI includes taxable income, salary sacrificed into superannuation, employer provided fringe benefits, foreign income, negatively geared property or investment losses, tax free pensions/benefits but less any Child Support maintenance paid. 

[3].       For more information see M Klapdor, Family Assistance and Other Legislation Amendment Bill 2013, Bills digest, 88, 2012–13, Parliamentary Library, Canberra, 2013, accessed 15 May 2013.

[4].       Australia’s Future Tax System Review, Australia’s future tax system: final report: part 2: detailed analysis, (Henry Tax Review), Commonwealth of Australia, 2009, chapter F3-2, accessed 15 May 2013.

[5].       M Klapdor, op. cit.

[6].       See M Klapdor, op. cit., for discussion of these issues.

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