Welfare payments Reform of family payments

Budget Review 2009-10 Index

Budget 2009 10: Welfare payments

Reform of family payments

Dale Daniels

The following changes to the indexation of family payment rates were announced in the Budget:

  • a longstanding linkage between the rate of Family Tax Benefit Part A (FTBA) and the rate of the pension will be removed so that FTBA will in future be increased in line with movements in the CPI and
  • the upper income thresholds for FTBA, Family Tax Benefit Part B (FTBB), Baby Bonus (BB), the Dependant Spouse Rebate (DSR) and other dependency rebates will be frozen at their present levels until July 2012 when normal indexation will resume.[1]

All of these changes require legislative amendments to the family assistance and tax legislation before they can be implemented.

The Government rationale for these changes centres on improving the sustainability of family assistance in the midst of a global recession; improving the targeting of assistance to lower and middle income families; and improving incentives to participate in the workforce in conjunction with changes to the Low Income Tax Offset.[2]

FTBA indexation

Indexation for family payments to movements in the Consumer Price Index (CPI) was introduced on 1 January 1990.  Rates were also benchmarked to a proportion of the pension rate.  The rate for a child aged 0 to 12 years was benchmarked to 15 per cent of the combined couple rate of the pension. The benchmark for 13 to 15 year olds was set at 20 per cent of the combined couple rate of the pension. These benchmarks were part of the Hawke Government policy announced in July 1987 to ensure that no child need live in poverty by 1990.[3]

This move ensured that ad hoc increases above normal indexation to the CPI in the pension rate provided by the Labor Government in 1990 and 1993 flowed through to family payments. These increases were delivered to keep the pension rate up with the 25 per cent of average weekly earnings benchmark originally announced by the Whitlam Government.

Under the Howard Government pension indexation was changed from 1998 so that this 25 per cent benchmark for pensions was included in the Social Security Act. The decade after this change saw accelerated growth in average earnings and a lower rate of increase for the CPI. Pension rates more often than not increased in line with movements in average earnings rather than the growth in the CPI. By 2008, the annual pension rate had increased by around $1500 more than would have been the case if indexed to movements in the CPI alone.[4]

Family payment rates also increased ahead of the growth in the CPI as a consequence of the benchmarks introduced in 1990. The benchmarks were updated with the introduction of the Family Tax Benefit in 2000. The benchmarks for 0 to 12 year olds and the 13 to 15 year olds increased to 16.6 per cent and 21.6 per cent of average earnings respectively. This ensured that the higher rates that came with FTBA were maintained.

Breaking the link with the pension is estimated to save over one billion dollars over the next four years. This estimate is based on the assumption that the CPI will grow less than average earnings. While this is probably a reasonable assumption in the short term, the history of these two measures by no means suggests that it will always be the case.

A freeze on upper income test thresholds

This measure effectively reduces the access of higher income families to a range of family payments and tax rebates. In this respect it furthers the government push to rein in ‘middle class welfare’. Those affected will be families with incomes close to or above twice average weekly earnings. Average weekly ordinary time earnings in the December quarter of 2008 were slightly over $60 000 per annum. The thresholds to be frozen are:

  • $150 000 per annum for FTBB and DSR
  • $75 000 in the six months after the birth of the child for BB and
  • $94 316 per annum for FTBA.

The first two thresholds are ‘sudden death’ thresholds. Those with income below get a payment and those above miss out. The FTBA threshold on the other hand is the point where the base rate of payment starts to be reduced by 30 cents per dollar of any income above the threshold. This effectively means that families on incomes above the threshold get a reduced payment up to income levels that vary according to the number and ages of the eligible children in the families. For example a family with two children aged under 18 years will get some payment up to an income of $111 082 per annum.

The income level at which FTBA ceases to be paid is determined by the threshold (now to be frozen) and the rate of payment (now to be indexed at a reduced rate). So both measures will work together to limit access to FTBA to higher income families.

This measure will save nearly $1.4 billion dollars over the next four years.

[1].    Australian Government, Budget measures: budget paper no.2: 2009–2010, Commonwealth of Australia, Canberra, 2009, pp. 238–239.

[2].    J Macklin ( Minister for Families, Housing, Community Services and Indigenous Affairs) and W Swan (Treasurer), Reform of Family Payments, media release, 12 May 2009, viewed 20 May 2009, http://www.jennymacklin.fahcsia.gov.au/internet/jennymacklin.nsf/

[3].    B Howe (Minister for Social Security), A Fair Deal for Families: Economic Statement April 1989, media release, 12 April 1989, p. 2.

[4].    Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), Annual Report, 2007–08, FaHCSIA, Canberra, 2008, p. 137.