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Why Abbott's PPL scheme is a policy for dummies

Matthew Taylor | Business Spectator | 16 June 2014

Social Services Minister Kevin Andrews last week announced that the Abbott government’s proposed paid parental leave scheme marks "the redefinition of PPL as a workplace entitlement", and that there is "widespread support for the new PPL scheme to strengthen the link between working mothers and their employers".

Despite the Minister’s claims, a number of government senators have indicated that they may not vote for the PPL legislation, which suggests that the scheme has more support among employer groups who would like the government to subsidise their workplace conditions than it does within the ranks of the government.

If the government is able to legislate the reforms, expenditure on PPL in 2015-16 is likely to increase to approximately $4 billion, considerably more than the $2bn that would be spent under current policy settings. It is highly unlikely that this will be offset by increased tax revenue from a rise in labour force participation or in hours worked by parents who receive the payments.

The increase in expenditure would arise from lifting the rate of payment from the full-time minimum wage to the primary carer’s wage up to a cap of $100,000, and an increase in the maximum leave period from 18 to 26 weeks.

By instituting highly regressive income transfers from the taxpayer to high-income families -- many of whom already have access to private PPL workplace entitlements -- the scheme represents a break from Australia’s existing norms that family payments be targeted to those in greatest need.

It would appear to much of the electorate that family payments are being cut for many low and middle-income families, while being dramatically increased for those on higher incomes who are having a baby.

The government has always maintained that its PPL scheme is a 'productivity measure' to increase the labour force participation of parents with young children -- an investment in the productive capacity of the economy rather than a cost like other family payments. In fact, the Treasurer is so confident of the economic benefits of the government’s PPL proposal, he has said it will not only pay for itself but also for "the pensions of tomorrow".

The architects of the existing PPL scheme at the Productivity Commission were clear about how they thought the labour force participation of parents would be enhanced by a PPL scheme that provided payments at the full-time minimum wage. The commission’s report to the Rudd government argued that this "would create good incentives to work for lower income females, since the payment is significantly more than the value of income support for women working in the unpaid sector".

Australia’s current taxpayer funded PPL scheme pays parents the full-time minimum wage for a maximum of 18 weeks, about $11,198 when the primary carer takes the full 18 weeks. This is considerably more than the money parents who do not work would receive in income support. The maximum rate of Parenting Payment Single is $6,419 for 18 weeks, and $4,148 for those on Parenting Payment Partnered.

To be eligible for the PPL payment, primary carers need to fulfil the work test by working just over one day a week for 10 months. It is the increase in income that PPL represents, over that of Parenting Payments, that creates an incentive for parents who would not otherwise work to work at least one day a week in order to become eligible. From their perspective, PPL increases the overall level of income that they would receive from work and is similar to a wage increase in that regard.

Despite the additional expense, the Coalition’s scheme does not provide any additional labour force participation incentives for parents who earn above the full-time minimum wage; those who will be receiving the higher PPL payments. These parents are already in the workforce and will receive no more income from work than they would in the absence of Abbott’s scheme.

If wage replacement PPL is going to have any impact on the labour supply of parents, it will be through hours worked. It will be primarily parents who currently work part-time between births that will have an incentive to increase their hours to become eligible for higher PPL payments.

This relies on parents being able to find additional childcare and being willing to leave their young children in care for longer. Even then the tax revenue from additional hours worked will be offset by increases in expenditure on childcare subsidies. The increase in hours worked in the year prior to birth will have to be significant to offset the reduction in hours that will result from increasing the maximum leave period from 18 to 26 weeks -- a full two months.

If Abbott’s PPL scheme does not increase labour supply to the point that the scheme pays for itself, it is not a productivity measure. It is a transfer of income from taxpayers to families, just like any other family payment. Worse, it is a highly regressive family payment that provides greater support for those on higher incomes than for those on low incomes.

Matthew Taylor is a research fellow at The Centre for Independent Studies.