Working for families: the impact on child poverty.

• Author: Perry, Bryan

Abstract

The Working for Families (WFF) benefit reform package was the centrepiece of the 2004 Budget announcements of the Labour-led coalition government in New Zealand. The package is targeted at low-to-middle-income families with dependent children. One of its core goals is to improve income adequacy for these families as one of the key means of reducing child poverty over the next three years. In this regard, it is an example of the government implementing many of the poverty alleviation strategies outlined in the 2002 Agenda for Children, which committed to eliminating child poverty.

This paper gives an account of a modelling and analysis exercise that provides estimates of the likely impact of the WFF reforms on income poverty through to 2007, with a major focus on the impact of the Family Income Assistance (FIA) component of the WFF on child poverty. It uses two internationally recognised poverty thresholds of 50% and 60% of the median equivalised income of households. The impact analysis finds that, when the WFF reforms are fully implemented in 2007, child poverty can be expected to have been reduced by the FIA by around 70% and 30% respectively at these two thresholds. A distinctive feature of the paper is the extensive sensitivity testing regarding the possible effect on the impact estimates of different assumptions and parameter settings that go into the construction of the poverty measures.

INTRODUCTION

Child poverty is back on centre stage in the economically developed nations. The renewed focus is driven in part by the mounting evidence that childhood disadvantage increases the chances of poor outcomes later in life. One of the most common aspects of childhood disadvantage is low family income and there is good evidence of the negative impact on future outcomes of low family income during childhood, even when other related influences are accounted for. This makes child poverty an issue for all citizens as "many of the most serious problems facing today's advanced industrialised nations have roots in the denial and deprivation that mark the childhoods of so many of their future citizens" (UNICEF 2000:3).

However, concern about child poverty does not depend only on the impact of childhood poverty on later life. Child poverty is also about suffering, deprivation and limited opportunity for poor children in the present.

The pledge by Tony Blair in 1999 to eradicate child poverty in the United Kingdom within a generation has focused public and political attention on the matter both within the United Kingdom and further afield. The United Kingdom has followed through on the pledge with a specific commitment to halve child poverty by 2010 and has put in place an official measurement regime to support the commitment (Department for Work and Pensions 2003).

In June 2002, the New Zealand Government made a commitment to eliminate child poverty, articulated in the Agenda for Children public report (Ministry of Social Development 2002). (2) The Working for Families (WFF) benefit reform package, which was the centrepiece of the 2004 Budget, represents the Government's implementation of many of the poverty alleviation strategies outlined in the Agenda for Children.

The WFF package is targeted at low-to-middle-income families with dependent children and will build to $1.1 billion of new money in 2007. Its key goals are: to "make work pay"; to improve income adequacy for families with dependent children, especially as a means of tackling child poverty; and to improve take-up rates of social assistance. The package has several elements, including measures to better assist with accommodation and childcare costs. However, the bulk of the new money is applied to the Family Income Assistance (FIA) element through increases to Family Support (FS) and more substantial tax credits for working families through an In-Work Payment (IWP). The package will be phased in over the next three years with the IWP becoming available in 2006 and the final FS increases in April 2007. (3)

This paper has two purposes. Its first is to give an account of a modelling and analysis exercise that gives estimates of the likely impact of the WFF reforms on income poverty through to 2007, with a major focus on the impact on child poverty.

The paper's second purpose is to promote a wider understanding of some of the key issues involved in poverty measurement in a practical setting, so that users of the results from this paper and similar studies are better informed and better able to discuss and assess the issues for themselves, whatever their background.

It is also important to note what the paper does not aim to do. The paper's focus is on the proportional change in poverty rates after full implementation, and while this requires estimating the rates before and after, the focus is not usually on the poverty rates per se. A range of rates is reported, depending on the specific assumptions in the poverty measure that is used. Nor does the paper attempt to make an assessment of the various measures or recommend a preferred measure or set of measures, although the analysis reported here may assist in reaching a view on these questions.

A distinctive feature of the study is its extensive sensitivity testing regarding the possible effect on the impact estimates of the different assumptions and parameter settings that go into the construction of the poverty measures.

The data for the analysis are drawn in the main from a policy simulation using TAXMOD, a tax-benefit micro-simulation model constructed and maintained by the New Zealand Treasury and based on Statistics New Zealand's Household Economic Survey (HES). (4) TAXMOD models only the FIA components of the WFF package so, technically, the impact analysis in this paper is only about those aspects of the package. However, as the new FIA money accounts for 90% of the new expenditure at full implementation, this is not a serious limitation of TAXMOD for the purposes of this study, and the paper will speak more colloquially of the impact of the WFF package. (5)

The body of the paper has four main sections.

It starts with a background section that outlines some key concepts and definitions and gives a graph-based description of the impact of the reforms on the income distribution for families with dependent children. This section is particularly for those who use income poverty statistics but do not have great familiarity with the area.

The second section outlines and discusses the analytical approach adopted by the paper.

The third section reports the estimated impact of the reforms on measured poverty, especially child poverty, relative to what could have been expected without any policy change. It compares the expected post-reform rates with those of the last 15 years in New Zealand and with recent measures among the richer nations.

A fourth section reports sensitivity analysis regarding the choice of income sharing unit for the analysis. In New Zealand, both the household and the benefit eligibility unit (also known as the economic family unit) are used for reporting on poverty. The two approaches give different estimates of poverty rates, which raises the question of whether the impact findings are also dependent on which approach is adopted. (6)

BACKGROUND

This section outlines some key concepts and definitions that are used in the subsequent analysis ("poverty", income sharing unit and equivalised income), and gives a graph-based description of the impact of the reforms on the income distribution for families with dependent children.

Poverty?

In the economically developed nations, poverty is now almost universally conceptualised in relative rather than "absolute" or subsistence terms. It is defined and assessed vis-a-vis the living standards of the society in question. Poverty is understood as exclusion from the minimum acceptable way of life in one's own society because of inadequate resources. The definition is explicitly relative, and includes both input and outcome elements.

Poverty is not just any limited social functioning, but specifically isolation that stems from the lack of economic resources. (Kangas and Ritakallio 1998:175) The most common approach to measuring poverty on the "input" dimension is to limit resources to economic or financial resources and often to current income. As the aim of the modelling and analysis is to estimate the expected impact of the WFF reforms on "measured income poverty", the income approach is what is required for this paper. (7)

The majority of income poverty studies use one of two main approaches in establishing a poverty line or low-income threshold. (8) A very common method is the proportion-of-median approach, which typically uses 50% or 60% of the median of an equivalised household or family income distribution. Alternatively a minimum reasonable budget can be determined by using experts to produce "budget standards" or by using focus groups of ordinary citizens, especially those who are in the low-income group and so have a practical expertise. This dollar value can be used in its own right or converted to a proportion of the median and used for other times and places. (9) Both approaches are consistent with the relative conceptualisation of poverty in that anything less in income terms means that there is a very high chance of exclusion--the inability to participate in one's own society in a reasonable way. This paper uses the proportion-of-median approach for establishing the poverty line(s).

Taking an outcome or more direct living standards approach can also identify a group "in poverty" (Krishnan et al. 2002). However this group is usually not the same group identified as poor on an income basis. It is well established that the overlap between the groups identified as "poor" by the two approaches is often only around 50-60% (Nolan and Whelan 1995, Bradshaw and Finch 2002, Perry 2002). In other words, a sizeable portion of...