Avoiding the poverty trap
Greater targeting of Family Assistance on the number and ages of children in families, rather than on hours of work or income, may help families avoid the poverty trap, research by Linkages-funded PhD student Patrick Nolan suggests.
The work is part of Patrick’s evaluation of the design of family and employment tax credits, and is the first comprehensive evaluation since 1992 of the poverty traps in the social security system in New Zealand.
“Reforms to family and employment tax credits have been at the heart of social security reforms throughout the Anglo-American world. In New Zealand, reform to the Family Assistance Tax Credits is a central feature of the Working for Families reforms, which will collectively account for an additional $1.1 billion of new expenditure in the social security system when fully implemented in 2007-2008,” Patrick says.
“I’m focusing on how the shift in New Zealand’s social security system since the mid-1980s towards tax credits targeted on the basis of income and work effort has had an impact on a number of public policy outcomes. These include financial incentives to work; the incidence of poverty; spillover to people with higher incomes; administration and compliance costs; and fiscal costs to the government.
“I’m also looking at whether the impact of these programmes on public policy outcomes would improve if there were changes to the bases for the targeting of these programmes. In particular, I’m looking at whether greater targeting based on the number and ages of children in the household – as opposed to hours of work or income – would have a positive effect on public policy outcomes.
“Increasingly targeting supplementary assistance on the ages and numbers of children could allow simplification of the social security system and reduce the extent that families face the withdrawal of assistance when their incomes increase. These bases for targeting may also be a relatively accurate proxy for need, as families with children face additional costs to families without children and family incomes tend to be relatively low in the years when they are bringing up young children.”
Patrick says a key finding of his research is that single-income low-wage families with children (with both sole and partnered caregivers) are the family types most likely to face poverty traps in the social security system. “Poverty traps occur when people receive little or no increase in income in the hand when they increase their hours of work. These poverty traps have implications for a wide range of policy issues, including the labour supply of primary and secondary earners, the demand for childcare assistance, and the formation and stability of family structures.”
Although reforms to family and employment tax credits have been central to social security reforms throughout the Anglo-American world, there has been relatively little comparative public policy research on these reforms.
“My study compares the experiences with these programmes in five Anglo-American countries (New Zealand, Australia, Canada, the United Kingdom and the United States). Even after the Working for Families reforms, New Zealand emerges from this international comparison as an extreme version of targeting by income, with relatively little assistance provided for families not categorised as having low incomes,” Patrick says.
For more information, contact Patrick.Nolan@vuw.ac.nz
