23 June 2012

Sole parents, public housing and that budget cut

Just before the Federal budget was released I wrote a post discussing one of the many leaks at the time - that some sole parents were going to lose their special parenting payment "grandfathered" status and would have to take up some other entitlement, typically Newstart Allowance.  The main point of the post was that the most substantial losses in disposable income would be experienced by those sole parents who are already working.  As it turns out this was indeed the case, and my calculations of the losses involved seem to have been backed up by DEEWR (I would link to the first article I read that had this, by Patricia Karvelas in The Australian on 2 June - Budget crackdown will penalise single working mums - but it's behind a paywall).

Since then there has been a pretty continuous series of media articles and press releases about the issue as the various lobby groups and concerned individuals agitate for a change.  One that caught my eye last week was by Stephanie Peatling.  It referred to findings that sole parents in public housing would be particularly badly affected.  So, let's look at that proposition.

For those who don't like reading more than a few paras, I'll cut to the chase:
  • Sole parents in public housing will typically not have as large a loss in disposable income as other sole parents
  • The grandfathering arrangement that some sole parents have, and for which there is pressure to retain, actually causes them to pay higher public housing rentals.
  • The return on working for these sole parents in public housing is worse than it will be for those on Newstart allowance in public housing over large income ranges (but better over others).
  • Sole parents in public housing who suffer an income loss as a result of the change will find it harder to make up that loss than those who are in private rental or are home-owners.
That is indeed a mixed bag of results!  So now I'll try and explain how this happens (or at least, my understanding of it).

First, the reduction in disposable income - why is it not as high in public housing?  The answer to this is actually buried in the Stephanie Peatling article.  Public housing rents are based on how much income a person has.  The more income you have, the higher the rent (up to the point where the rent equals the market rental for the property).  The opposite is also true: the less income you have, the less rent you pay.  So, if the change to the sole parent rules means that those affected have less income (and it certainly does), the rent they pay will fall.  That rent adjustment is not something that's going to happen to sole parents in private rental, or other accomodation.

Here's a picture of the difference in incomes between a sole parent on parenting payment and one on Newstart allowance in private rental (assumes $300 a week rent)

Chart 1

(click to enlarge)

Note: CEA means Clean Energy Advance; IS means income support.

You can see the reduction maxing out at about $6,000 a year where private income is around $22K.  Contrast this with the same family type in NSW public housing.

Chart 2

(click to enlarge)

Notice that although the amounts showing as reductions are the same in both charts, the public housing case has an extra item - the housing rebate - which is partially offsetting those reductions.  In fact, at the point where losses were greatest in Chart 1, the reduction in rent caused by the larger housing rebate has pared the reduction back to a little under $5,000 a year.  This is still a big reduction, but is substantially less than the $6,000 experienced by private renters.

The second issue I'll look at is the financial return sole parents in public housing get from working.  This is determined by a few things, but substantially by the effective tax rates in play when a person increases their private income.  We can broaden the concept of effective tax rates a little to include the change in public housing rental, and the result is shown in the following charts.  These represent the effective tax rate on a marginal change in income (the concept is typically expressed as the impact on the next dollar of income) and are EMTR charts.

First, the EMTR faced by a NSA recipient in NSW public housing (note that the NSA income test is the one that will apply to sole parents when the grandfathering arrangements for parenting payment are abolished).

Chart 3

You can see from the above that the increase in rent as private income rises is a significant addition to the EMTR othewise applying.  The substantial kick up at around $34K marks the point at which the NSW system begins to transition a person from paying (broadly) 25% of their income in rent, to 30%.  Those arrangements have the EMTR exceeding 90% from roughly $42K to $44K of private income.

However, things look worse still for parenting payment sole parents...

Chart 4

(click to enlarge)

Notable here is that the income range over which an EMTR of greater than 90% applies is much longer for the PP recipient than for NSA.  Overall, it appears that the EMTRs are worse for NSA at incomes below about $22,000, but worse for PP above that, at least in the NSW housing situation.

Both the NSA and PP results have higher EMTRs as a result of the public housing impacts than private renters or homeowners.  This is particularly significant in the context of the apparent purpose of the policy change - to increase workforce participation.   My earlier post on this subject had a chart which showed how much extra income a sole parent affected by the changed rules would have to earn in order to return to the same level of disposable income they had pre-change.  For those already working it was a substantial increase in working hours.  The higher EMTRs in public housing make this difficult undertaking even more problematic.  My final chart has the extra earnings required to return to the pre-change position for our NSW public housing sole parent.

Chart 5

(click to enlarge)

This is a stunning result, particularly if you consider that the people affected by this change are already required to be working at least 15 hours a week.  So, if we assume that a person is doing that (and I understand that many, if not most, are) and is getting the minimum wage they will be earning around $12,500 a year.  They will need to pretty much double their working hours to stay in the same place, financially.  But worse by a long way is the person earning around $25K (at the minimum wage, around 30 hours a week).  They need to earn another $21K to make up for the (slightly under) $5,000 they have lost.  That's another 25 to 26 hours a week - a total working week of around 55 hours is needed just to tread water!

To sum up, for sole parents in public housing, the budget change is not as bad as it is for those in private rental, unless they want to claw back their financial loss.  Then it's much tougher.

1 comment:

  1. This is awesome post. Sole parents in public lodgings who bear an income loss as a outcome of the change will find it harder to make up that loss than those who are in personal rental or are home-owners.

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