Heading in the wrong direction

The government has run up the white flag on the proposals to reform Family Tax Benefits from the 2014 Budget.

The most controversial part of those proposals was the one to restrict access to Family Tax Benefit Part B, designed for single parents and single earner couple families, to couple families whose youngest child is under the age of six.

That has now been changed to a restriction on couple families whose youngest child is under 13, and sweetened with an additional $1,000 for all single income families with children under 12 months. Single parents whose youngest child is over 13 will have their payments cut to $1,000.

Overall, this is good policy.

The changes to FTB Part A, however, are another matter. The government is proposing to completely phase out the end-of-year supplements over the next few years, and make up for this with an extra $10 per fortnight to each per-child payment.

But the supplements actually form a viable public policy purpose: if Centrelink accidentally overpays a FTB Part A entitlement because a family underestimates their income, that family is not in debt to the government. It can just be docked from the supplement. It’s an elegant way of settling accounts. These supplements should be reduced, but cutting them altogether seems like a poor priority.

By contrast, there is no evidence the FTB Part A per-child payments are inadequate. If anything, there is evidence they are too generous: the Commission of Audit proposed that per-child payments should be reduced for second and subsequent children to recognise the economies of scale involved, as subsequent children cost less than the first.

And this is without getting into the fact that the income tests for FTB Part A are quite generous – the base rate of the payment tapers by 30c in the dollar for each dollar above $94,316 currently. There is no good public policy reason to increase the payment further, which would change and possibly exacerbate effective marginal tax rates for the recipients of these payments.

The government should go back to the drawing board on its mooted change to Family Tax Benefit Part A.