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The case for a huge Covid-19 benefit reform

With mass unemployment coming, some existing benefit rules are going to exacerbate people’s problems.

The size and suddenness of the Covid-19 shock has highlighted just how far New Zealand has allowed its welfare system to run down. The government yesterday announced extensions to its wage subsidy scheme and that it is “expediting urgent work on new income support measures for all workers”. But the “urgent work” will need to be fundamental and very large to address the holes in our welfare system. It needs to look far beyond the immediate four-week lockdown period and should have three objectives:

  • Stimulating domestic demand by providing households with the spending power that will keep businesses going and people employed
  • Keeping workers linked to their employment as far as is possible
  • Ensuring the welfare system provides adequate income for all, especially those who lose jobs

Let’s look first at the likely employment and unemployment impacts of Covid-19. Even on the most optimistic scenario where the move to Level 4 prevents a rapid growth in coronavirus cases the employment impact will be large and long-lasting for many sectors of the economy. The causes and dynamics of the global financial crisis (GFC) were totally different so comparisons should be treated cautiously, but it seems inevitable that the rise in unemployment will be greater this time than then. It is quite possible we will see an increase in unemployment as large and as rapid as occurred in the late ’80s/early ’90s when the unemployment rate doubled to over 10% in little more than two years.

More importantly, the burden of recessions and unemployment is never shared equally. The aggregate unemployment rate peaked in the GFC at 6.4%. But for those aged 16-25 it reached 17%; for Māori, 14%; and for Pasifika 15%. At the height of the Rogernomics/Ruth Richardson-era, unemployment reached 11.4% nationally, but it was 21% for young people, 28% for Māori, and 30% for Pasifika. Given the heavy impact this time around on the hospitality and tourism sectors, it is likely that young people, who make up a disproportionate percentage of those sectors, will be especially hard hit by job losses.

The government’s extension of the wage subsidy scheme to large firms is welcome, but the design of the scheme must be changed. In fact, it is not a wage subsidy scheme at all, but a business subsidy scheme. In times like these, business subsidies are not a bad thing, and the money will help keep some businesses afloat. However the scheme’s linkage to employment is far too tenuous to describe it as a wage subsidy and its impact on the number of jobs saved is highly uncertain. At present an employer must promise “on their best endeavours” to keep staff on and they then receive the full eight-week payment upfront. It would be better to link it directly to the ongoing payment of wages. Administratively that is slightly more work, but the systems already exist through Inland Revenue to do it. Once linked to wage payments, there is a strong case for extending the duration well beyond the eight weeks, and possibly also raising the subsidy rate, which currently equates to 50% of average weekly earnings. That is considerably less, for example, than the UK scheme’s cap of £2,500 per employee per month.

At the same time, officials need to be working on something akin to the old Project Employment Programme, or PEP scheme, under which employers and community groups get a wage subsidy for setting up limited term projects of community value. Obviously this is not feasible during Level 4 lockdown, but it could be a valuable way of supporting employment after that.

Business and wage subsidy assistance can help keep people employed but the reality is many people will either lose their jobs or be unable to find work. So what should the government be doing as far as income protection goes? I suggest four urgent changes that could all be implemented immediately:

Increase all core benefit rates by at least 50%

If arch-Conservative Australian prime minister Scott Morrison thinks it is necessary to double benefit rates – adding an extra $225pw to all rates – we are way behind the game with a $25 increase that represents something between a 6.4 and 10% increase. Even a 50% increase would not prevent an increase in poverty rates, but it would go a long way. It would also act as a fiscal stabiliser boosting household spending, which will be critical especially after the initial four-week closedown. Implementation time: one week. MSD has systems to adjust rates each year from 1 April. They only need to be told what the new rates are to be.

Give the extra $72.50pw In-Work Tax Credit to benefit recipients

Thankfully, it looks like kids are spared from this disease, but they will not be spared from the poverty it causes. At the moment a family that has to go on benefit gets to keep their Family Tax Credit but loses the In-Work Tax Credit. Giving $72.50 a week less in Working for Families support to the poorest families because they are on benefit never made sense, but is completely crazy now. In the package last week Government dropped the minimum hours worked test for the In-Work Tax Credit but retained the ‘off-benefit’ rule. That should be removed too so that everyone eligible for Family Tax Credit gets the extra $72.50.

Implementation time: about 24 hours. These families already get the Family Tax Credit, all that is required is to add in the extra amount.

Individualise benefit entitlements, rather than assessing them on a couple-basis

Most low- and middle-income families rely on two incomes. In-work poverty among couples with children is low where there are two incomes, but high where the family only has one. The way our current benefit rules work, if one earner in a two-income couple loses their job they are entitled to little or no benefit because of the partner’s earnings. Over the coming months, we are going to see thousands of couple families lose at least one of their incomes. A more targeted way of doing this – and one which should be a permanent change – is to disregard the first $50,000 or so of a partner’s annual income for assessing entitlement. Disregarding the partner’s income up to the average wage is a simple, effective way of protecting these families.

Implementation time: one week for new applications, a few weeks to re-assess existing cases.

Cease applying the relationship status rules

Now is not the time for Work and Income to be cutting off people’s benefit on the grounds that they have entered a relationship. Frankly, if a person is helping cover a sole parent family’s living costs, they are doing no more than following the PM’s plea to ‘be kind’. It would be nonsensical to then cut the family’s benefit because they are deemed to be ‘financially interdependent’.

Implementation time: 5 minutes. Just stop doing it.

Not only would these changes help protect the incomes and living standards of those who lose employment, they would also provide a crucial fiscal stimulus helping support economic activity which, in turn, will help maintain jobs. Time will tell how much more will be necessary over the next 12 to 18 months, but the government’s urgent package to be announced in the next few days needs to include measures like these immediately if we are to mitigate some of the worst employment and welfare impacts Covid-19 will bring.


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