Inside Story

Family assistance: what the changes really mean

The federal budget changes to family benefits will create a better-targeted system that more adequately covers the cost of raising children, writes Daniel Nethery

Daniel Nethery 20 May 2011 1150 words

Barnaby Wasson/Flickr

THIS month’s federal budget has sparked a heated debate about family assistance. Tony Abbott has painted a picture of the government’s pulling the family assistance rug out from under the feet of families already struggling with rising costs of living. The opposition leader went so far as to say that the reforms announced in the budget were not about middle-class welfare, but “class warfare.”

The government’s task of communicating what the budget will mean for family assistance has not been helped by the fact that the changes are difficult to explain, largely because the family assistance system itself is very complex. So the debate has tended to focus on whether a family on $150,000 is rich or not. What seems to have been neglected is serious discussion about whether the changes will help low-income families provide basic opportunities for their children, which, after all, is what family assistance is about.

The budget included three key measures affecting family assistance. The best way to make sense of what the changes mean is to look at how they will affect Family Tax Benefit Part A, or FTB-A, by far the largest component of the overall system, paid to some 1.8 million families.

The first measure introduces a pause in the indexation of the FTB-A supplement – the amount, currently worth around $725 per child, paid at the end of the financial year when a family reconciles its family assistance payments with its total income reported to the tax office. Pausing the indexation of this amount is an effective way of generating savings because all families forgo a relatively small increase in their entitlement. Fortnightly payments will still increase on 1 July as usual, but the supplement will stay at its current level, rather than increasing by around $18 per child per year. And this is the extent of the bad news for the overwhelming majority of FTB-A families: they will not receive an extra $18 per child at the end of the next financial year.

The second measure extends an already existing pause on the indexation of the so-called upper thresholds. There are several upper thresholds in the family assistance system. Most of them are set at $150,000 and act like cut-off points beyond which a family is no longer eligible for benefits like FTB Part B, the dependency tax offsets, the Baby Bonus or Paid Parenting Leave. But it is the indexation pause of the FTB-A upper thresholds – which have nothing to do with that magic number of $150,000 – that affects the greatest number of families.

The FTB-A upper thresholds are not eligibility cut-off points. Instead, they determine the income level at which a family starts to lose their entitlement. The government talks about thresholds rather than a threshold because they are worked out using the number of children in the family. To calculate the income level at which a family loses entitlement to FTB-A altogether, you therefore need to have a specific “family” in mind.

Take the case of a family – whether there is one parent or two, one income or two is irrelevant – with two teenage children aged thirteen and sixteen. Figure 1 shows how much FTB-A this hypothetical family would receive in the 2011–12 financial year were the budget measures not to come into force. The chart reveals the typical two-plateau structure of FTB-A. Starting from the left of the chart, low-income families receive what is called the maximum rate of payment, worth around $8450 per year. This starts to reduce when the family income exceeds $46,355 until it hits the second plateau, called the base rate. The upper threshold for this family, after which the base rate starts to reduce, is $100,740. The payment cuts out completely at a family income of just less than $115,000.

Figure 1: FTB-A entitlement for a family with two children aged thirteen and sixteen before the budget changes (2011–12)

In a well-designed system, families near the point where they lose FTB-A entirely would take little interest in whether they fell on one side of the cut-out point or the other. But this all changed when Kevin Rudd introduced the Education Tax Refund, a centrepiece of his 2007 election campaign. Most families can take advantage of the full value of the Education Tax Refund (currently around $800 for a secondary school student) provided that they earn at least one dollar of FTB-A. The same goes for other benefits like the Teen Dental Plan. But earn one dollar too much, and you lose the lot. This provides a very strong incentive for families to remain on FTB-A, even if the amount of FTB-A involved is very little.

The third budget measure represents a significant step towards improving the overall adequacy of FTB-A. The Henry tax review summarised research showing that family assistance adequately covers the cost of raising a child in a low-income family up until the age of fifteen. Once a child turns sixteen, the system falls woefully short. In fact, the annual payment made to a low-income family currently drops by over $4000 when a child turns sixteen, as shown by the “Status Quo” columns in Figure 2. The budget seeks to address this by harmonising the maximum payment rate for children aged thirteen to nineteen. This change also simplifies not only FTB-A, but its relationship to Youth Allowance as well.

Figure 2: FTB-A maximum rates by age (2011–12)

How does this reform affect our hypothetical family? The impact can be substantial, as shown in Figure 3. If the family receives the maximum rate of FTB-A, it will be $4172 better off next year, and all families on an income of up to $88,500 will see some increase in their payment. The changes will have other effects not shown on the chart. Provided that a family receives more than the base rate of FTB-A, it is eligible for rent assistance, and the children are entitled to a healthcare card, both potentially valuable forms of additional assistance.

Figure 3: Effect of budget reforms on the FTB-A entitlement of a family with two children aged thirteen and sixteen (2011–12)

The impact of all three budget measures and the trade-offs between them are captured quite nicely in Figure 3. First, low-income families with children aged sixteen to nineteen stand to benefit substantially. Second, pausing indexation of the supplement slightly reduces the entitlement of all FTB families (notice how the “Budget” base rate plateau sits slightly lower than the “Status Quo” base rate). Finally, extending the indexation pause on the upper thresholds means that our hypothetical family loses all entitlement to FTB-A when its income reaches $112,100, instead of $114,850.

Taken together, the three budget measures produce a better-targeted FTB-A system that more adequately covers the cost of raising children of all ages. This – rather than a pointless debate about whether a family on $150k is rich or not – is the message that should be reaching the public. •