What Fair Work Australia giveth...

This is just a short post prompted by Friday's National Minimum Wage decision by Fair Work Australia.  If you missed it, the minimum wage was increased by $17.10 a week and will be $606.40 a week from July this year.

I'm going to resist the temptation to brag about predicting the increase correctly (in an earlier post I suggested it would be between $8 and $150 a week - spot on as it turns out).  Instead, I thought it would be interesting to look at whether our tax-transfer system allows the increase to actually flow through to its intended recipients.

To cut to the chase, if you are in a household where both the minimum wage and the income support system are in play, you aren't going to get much out of the increase.  Here's a little chart showing a few household types and the percentage of the wage increase they look like retaining after tax-transfer system imposts have had their bite.  They are all full-time workers, by the way.

The "base case" here is a single person.  They get to keep almost 80% of their pay rise.  Interestingly, a single parent who is not in the income support system (eg, those on the post 2006 arrangements for sole parents) keeps a little more than that - around 81%.  Their fellow sole parents who are in the so-called "grandfathered" group (protected from the 2006 changes) do quite a bit worse, keeping around 32% of the wage rise. 

Why do the grandfathered group do so poorly compared to the non-grandfathered sole parents?  Simply because the former are still in the income support system and so are subject to tax imposts and income support withdrawals.

The worst group (of those depicted here at least) is a single income couple without children.  They retain only 16% of the increase.   As I've noted in earlier posts, this group is really in the cross-hairs at the moment!

Just how much jumping for joy there should be after the minimum wage announcement presumably depends on just where each of the estimated 1.3 million affected households is placed in the tax-transfer system.  The effective marginal tax rate (EMTR) they face on the wage increase will determine the net outcome.  However, if there a lot of them exposed to high EMTRs, it might go some way to explaining a question I saw posed in a plaintive Twitter tweet - something to the effect of why doesn't the minimum wage decision get a lot more coverage.

I guess if you get bugger all out of it, there's not much to get excited about.

As an aside, here's an offer.  If you are interested in these results, but I haven't covered a household type you would have liked to have seen, let me know in the comments.  I'll see if I can do one up for you, and post it as a follow up blog item (or maybe append it to this one).  I'm not expecting a rush, given the fairly low numbers who visit here!

ADDENDUM
Matt Cowgill has pointed out that the ACTU covered this issue in their submissions to FWA.  A wider range of households than I covered is here (see para 126 onward), using the tax-transfer parameters as at February 2012.  (This is probably as good a place as any to mention that my figures are at July 2012 - not that they are substantially different, I just failed to include that important bit of information originally!)

Single parents and the budget leak

This morning's papers (4 May 2012) had coverage of yet another leaked budget measure.  This one was about removing the special arrangements for those remaining recipients of parenting payment whose youngest child is aged at least 8 (for single parents), or 6 (for partnered parents).  These parents are still getting parenting payment and have been since before July 2006 when the current age limits (8 and 6) were introduced.

At the moment this "special" group continues to have the pre-July 2006 age limit of 16 years applied to them.  The significance of the age limit is that parenting payment is not paid unless a parent has a child younger than these cutoff ages.  When the youngest child hits the cutoff age the parent has to apply for some other type of assistance, typically Newstart allowance.  You know - the allowance that's been getting quite a bit of media attention lately because many people consider it's not enough to live on.

For partnered parents it's not much of a change, simply because the partnered rates of parenting payment and Newstart allowance are the same.  For single parents it's a bigger issue because the single rate of parenting payment is rather more than the single rate of Newstart allowance.  For them, moving to Newstart allowance means a reduction in disposable income.  So, let's look first at how much of a reduction is involved.

The newspaper items I read said the change was to start in January, but didn't give a year.  They did say it was supposed to produce around $700 million savings over 4 years, so I've assumed this means January 2013 is the start date.  I don't have a model of how the tax-transfer system might look in January 2013, but I do have a partly completed version for July 2012 and the charts below are taken from that.  (Note that I modified it a bit to take into account the proposed relaxation of the Newstart allowance income test for single parents with a child under 16 that is supposed to apply from January 2013.)

The chart below shows how much disposable income would change if a single-rate parenting payment recipient with one child aged, say, 15 lost entitlement and took up Newstart allowance instead.  It breaks this up into the various components of the tax-transfer system that change as a result.

You can see that at zero private income (in other words, people getting the maximum rate of parenting payment who then move to the maximum rate of Newstart allowance) the reduction in disposable income is a little over $3,000 a year.  However, for those single parents who have earnings the loss increases, peaking at around $5,500 for those earning a little under $22,500.  Most of the reduction in income comes from the difference in income support payments (parenting payment versus Newstart allowance), but there's a considerable contribution from an extra tax liability arising from a loss of access to (what will be) the seniors and pensioner tax offset.  It's a similar deal with the medicare levy.

Now, the media coverage has suggested that one objective of this change is to increase workforce participation.  (It's perhaps unfortunate then that the largest losses go to those who are actually doing just that.)  So, another obvious thing to examine is how much single parents who lose parenting payment would have to increase their earnings to get back to their original disposable incomes.  The next chart shows just that.

Here, the red line shows the gross extra earnings required to regain the former income.  For example, the parent already earning around $22,500 loses around $5,500 (as detailed in chart 1), but to regain that lost $5,500 they have to earn around an additional $11,800.  That's a total wage of around $34,300.  For someone working at the minimum wage, that actually requires more hours than than a full-time job.

As difficult as this may seem, it's actually less onerous (if that's the right word) than what occurs under the current arrangement for these "special" single parents.  Recall that they still have the old rule applying, whereby the transition to Newstart allowance occurs when the youngest child turns 16.  That transition involves moving to a Newstart allowance that is at a slightly lower rate and has a tougher income test than modelled above.  It looks like this:

Under the arrangement that the media reckons is being removed, the age-16 transition can produce losses of over $9,000 a year.  The tougher income test means it's harder to regain lost income, with a worst case of over $15,800 extra earnings needed to retain the same level of disposable income.

These bigger losses are not exclusive to the special group.   Single parents under the "new" rules experience an age 8 transition, which, from January 2013, will have the effects shown in chart 2, and, later, an age 16 transition from the "relaxed" Newstart to the standard flavour.  The final position is as shown in the age 16 chart - it just takes 8 years and two changes to get there, instead of instantly at age 16.  The change outlined by the media effectively makes the special (also known as grandfathered) group subject to a transition equivalent to the age 8 change all single parents who have come on to parenting payment since July 2006 experience.  It's replacing one lump with two.

Of course, the coverage of the leak may have some factual errors, and so the above might be useless speculation.  I guess we'll see on Tuesday.

Austudy payment and the half-built income test

Over the last few months you'd have been hard-pressed to miss the ongoing discussion about whether the rate of Newstart allowance is too low.  Occasionally those discussions have also referred to the rates of youth allowance and Austudy payment.  I'm going to have a bit of a look at Austudy in this post, mainly because it's about to get a new income test that seems to be a bit...unusual.  Broken, even.  But there's still a link in this to the rate of payment issue, which I'll get to at the end.

First up a background note: with some minor exceptions, the rate of Austudy is lower than Newstart (NSA).  Perhaps to make up for that handicap, Austudy recipients can have more income than NSA recipients before they start to have their payment reduced.  At the moment Austudy recipients have an income test free amount of $236 a fortnight, compared to $62 for NSA.  Under the new income test, this amount will increase to $400 from 1 July, and, unusually for this type of payment, the income test free amount will be indexed each year.

This new arrangement has the potential to make Austudy recipients who earn while studying considerably better off financially than their NSA counterparts.  The message in the design (assuming there is one) seems to be that Austudy recipients should work while studying.

Unfortunately, when it comes to couples where one or both is an Austudy recipient this income test arrangement only half works.  It's a bit hard to explain so I'll show you instead with some charts.

First off, lets look at a couple where one partner is an Austudy recipient and the other gets NSA.  We'll assume the NSA recipient is the one who gets work and the Austudy recipient is ...studying.

Chart 1: NSA & Austudy couple - disposable income 

 Note: CEA refers to the Clean Energy Advance; DI is Disposable Income

You'll notice that the NSA rate decreases as private income increases.  Once NSA has disappeared altogether Austudy starts to reduce.  This reflects a type of income test where the reductions in a couple's payments are done in a specific sequence - first the earner's payment is reduced, then the partner.  Perhaps a little unimaginatively, this is called a sequential income test.

A key element of sequential testing is that a person's payment is not reduced by partner income until that partner has first exhausted their own entitlement. In other words, only income that exceeds the partner's income test cutout amount is taken into account.  At least, that's the theory.

There is a bit of a logical problem here though, which we can see if we consider our couple above at the point where they first claim payments from Centrelink.  Imagine that Partner 1 (who we'll call Randolph) is already working, earning $25,000 a year, and Partner 2 (Angela) is studying and wants to claim Austudy.   Looking at Chart 1, we can see Randolph obviously earns to much to get any NSA, so how do we work out how much of his income should reduce Angela's payment?  The answer is that we assume that a person who isn't on a payment would have had NSA if their income wasn't so high, and so we use the NSA income test cutout even if they have never applied for it.

So far, so good.  The transition from reducing one partner's payment to the next is smooth.

Next, lets look at two Austudy recipients.  Here's their version of Chart 1, cunningly called Chart 2.

Chart 2: Austudy & Austudy couple - disposable income

What new devilry is this?  There's a sudden and substantial fall in income at the point where Randolph, who is working and studying, exits payment due to income.   This happens because from that income point upwards, Randolph is not an Austudy recipient.  And what's the rule for working out how much income should be taken into account for Angela?  Treat Randolph as if he would have been eligible for NSA.  The generosity of the new Austudy test is lost when Randolph exits payment, despite Angela being an Austudy recipient.

Here are the disposable income results from charts 1 and 2 together:

Chart 3: disposable incomes compared

Here you can see that the new test does improve the couple's disposable income compared to the NSA-Austudy result, but falls in a heap at about $27,000.  In this example, Randolph and Angela are better off financially if he keeps his income below the cutout.  If he exceeds it, he needs to earn over $40,000 a year just to get the couple back to where it was.  That's an income range of over $13,000 a year in which the household can be worse off having an increase in income which takes Randolph off Austudy.

The sequential income test, as currently implemented, is only half built.  By falling back to NSA income test cutouts as the "default" position it denies couples the benefit of measures like the income test changes for Austudy.

This is not a criticism of the July change per-se.  The couple problem in sequential income testing has existed since the scheme was introduced in 1995.  However, the substantial increase in the individual income test free area will exacerbate the problem, and indexation will just make it worse.

So, is there some way this links back to my opening claim that this is tied up with NSA rates?  Well, if the NSA rate is increased then, barring some offsetting change elsewhere, the income test cutout for NSA will increase too.  And that means less income will be counted for cases like Angela's when Randolph goes from being an actual Austudy recipient to a person with a notional NSA cutout.

So, even those not on NSA might benefit from an increase in its rate, especially if they are called Angela.

Addendum

When I wrote this post almost 11 months ago now, I was fully expecting that there would be an increase in the partner income free area for Newstart allowance as a result of the implementation of the clean energy supplement.  Perhaps I was channelling a fortune teller though; for some reason I put in the words "...barring some offsetting change elsewhere...".  Well, it seems there has been an offsetting change which means the increase won't occur.  It's outlined in this post.

Increase the minimum wage by...$8? $149?

This has been another of those times when several topics come together and prompt another.  In this case it was the combination of reading a number of blogs on the theme of things in Australia being pretty fine (all things considered), numerous references to the "fiscal consolidation" we are undergoing at the moment and the fact that the national minimum wage setting process is about to get underway for this year.

In my previous post I had a chart which showed that for single people on incomes that had stayed the same in real (ie, CPI adjusted) terms, disposable income had been slowly but surely declining since 1 July 2010.  This reflected the absence of tax cuts (in fact there were tax increases in the period) and shows a tax-transfer outcomes aspect of fiscal consolidation.  What the chart did not show was the effect of wages growth.

Stephen Koukoulas is one of a number of bloggers who has referred to sustained periods of above-CPI wages growth in the context of continually improving standards of living (at least in longer run periods - eg a decade or so).  Certainly through much of the Howard era, and the Rudd-Gillard first term, the tax transfer system and wages growth were pushing up average disposable incomes.  However, this has arguably changed over the term of the current Government, with tax-transfer changes (or a lack of them on the tax cut side) pulling disposable incomes down.

This trend raises the question of just how much wages have to increase to offset the tax-transfer tightening.  One way to look at this is to calculate disposable incomes at 1 July 2010 (the tax-transfer system settings "inherited" by the current government), and then convert these to January 2012 equivalent values.  These can be compared with disposable incomes at 1 January 2012 (the start date for the current tax-transfer settings, at least as I model them) assuming that no increase in wages has  occurred.  It's then possible to work out how much extra has to be earned to return the current (January 2012) disposable income to the July 2010 equivalent value.

My first chart shows two things.  First, how much a single person's disposable income would have fallen from July 2010 to January 2012 in real terms if they did not have a wage increase in that period.  Second, how much gross wages would need to increase (in % terms) to return the person to their July 2010 position.

This suggests that for singles under 55 with July 2010 earnings of $20,000 or more, gross wages need to have increased by a little over 5% in 18 months to maintain the status quo.  The wide variations at incomes under $20,000 reflect interactions with the lower single rate of Newstart allowance.

Of course, the results will differ depending on the household type.  At the other extreme (maybe) is the single income couple (and yes, I know I've been banging on about them in earlier posts, but they are an intriguing example of a marked shift in policy settings in a short period).  The same type of chart for them looks like this:





This is an amazingly higher requirement, and far exceeds average wages growth in the period.  The reason is that we are not just looking at the erosion of value caused by inflation, but a deliberate policy shift in tax-transfer outcomes.  In this case it's the abolition of the dependent spouse tax offset.

These two quite disparate results provide a segue into the minimum wage issue.  Imagine trying to come up with a minimum wage decision that provides a "safety net" when the goalposts move about like this.  But that's what is required by 1 July, when the new minimum wage is supposed to come into effect.  1 July itself confuses the issue because that is also the start of the new tax scales and household assistance measures associated with pricing carbon.

Just as a teaser though, here's a tip for the minimum wage increase.  Based on the charts above, at this stage (ie, January  2012 parameters) an increase in the minimum wage of just $8.09 a week will keep a single person at the 1 July 2010 standard (this takes account of the increase already provided in July 2011).  For a single income couple though, the increase needs to be more like $149 a week!

So, my tip is that the increase will be somewhere between $8 and $150 a week.  Bet I'm right!

Income inequality and Newstart allowance

Over the last couple of months I seem to have kept bumping into a couple of topics - an OECD report that, among other things, discusses the growth of inequality in Australia, and criticism of the rate of Newstart allowance (NSA).  The OECD's specific country notes for Australia are here and there's a quick summary of the overall report at Matt Cowgill's blog.  Coverage of the NSA rate was all over the place, but this Club Troppo blog gives a brief rundown, with links, including the widespread nature of the complaints.

On the inequality side, the OECD reckoned one of the drivers to be changes to the tax transfer system that have reduced its redistributive effect.  There are others too, but the tax-transfer bit was always going to catch my attention.  So, below is a picture that deals with the way the tax transfer system has treated single people on various levels of private income over the 10 year period ending in the September quarter 2011. I chose these dates because the September quarter is, at the time of writing, the latest one for which CPI data is available.

NSA fits into this via the simple notion that the person with zero private income will have a disposable income of the NSA rate.  Importantly for this approach, the NSA rate is adjusted every 6 months by reference to upward movements in the CPI.  This means it can be viewed as a reference base against which the other disposable income results can be compared.

Just to be clear, the gross private income levels are the same in CPI adjusted terms at all points and are expressed in September 2011 values.

A short summary of this is that in the last 10 years tax cuts (from July 2004) were greater than required to simply maintain the relative positions of single taxpayers at these various private income levels.  This process continued until July 2010 (note the whopper increase in 2006!).  Since July 2010 the trend has reversed.

Taxes actually increased at higher incomes from July 2011 due to the imposition of the flood and cyclone levy.  This is a one-off effect for the 2011-12 year only.

For single people at least, changes in the last decade did indeed reduce the redistributive effect of the tax-transfer system due to what had begun to seem like an eternal springtime of tax cuts.  Whether the cessation of this bounty has been apparent to those who have had above CPI wages growth is a moot point.  For those whose private income has increased by CPI or less since the tap was turned off, this must surely be a felt effect by now.  The impact of upcoming changes - amongst them the carbon pricing related tax cuts and household assistance (for some) and associated price effects (for all), and the (proposed) increase in the medicare levy surcharge/ reduction in the private health insurance rebates - will be interesting to see.

The song of the single income couple

This is kind of a continuation of my last post, which looked at a single income couple with children.  Single income couples are interesting in that they are a family type which appears to be falling out of favour, at least from the perspective of their treatment by the tax-transfer system.  This is perhaps most obvious when looking at single income couples without children.

The first chart shows the % change in disposable income since last year's election for single income couples without children, where both partners are in the age range 21 to 40.  As with the earlier posts, the comparison is between similarly constituted households at different points in time, not the change for a particular household.

Here we can clearly see the impact of the removal of the dependent spouse tax offset (DSTO) from  July 2011.  With some exceptions, that change applies in respect of partners born on or after 1 July 1971.  The complete removal of the DSTO for the affected group builds on the earlier introduction of a household income test (the $150,000 upper limit) which removed the DSTO (and Family Tax Benefit Part B) from higher income households.

The message apparently embedded in the tax-transfer system for these households (or the non-working partner at least) echos Paul Keating's famous 1995 jibe "Get a job...".

It's a simple message but, as so often happens with the tax-transfer system, a change in one part has flow-ons to another.  In this case one effect has been a consequential increase in marginal tax rates on the earner in these couples, particularly at lower incomes.  Here's how the effective marginal tax rate for the earner looked at the time of last year's election.

Here's how it looks now

Notice the increase in the EMTR in the income range (very roughly) $20,000 to $40,000.  This is now sitting at 80% or more in a range where the National Minimum Wage resides.  For these households a very large part of any wage case pay increase will be consumed by tax-transfer effects.

On the bright side, it's probable that there aren't an awful lot of single income couples who would have the right mix of circumstances to be affected by this change (eg, no children; young-ish partner who is not obviously precluded from working for one reason or another).  For those who are, just listen to the sweet siren song the system is singing you.  And probably in Paul's voice, no less.

150,000 stories

I'd been wondering what kind of household to look at following my inaugural single person outing when I was rescued by a story in the Telegraph about a 3-child couple, which I came across via a blog posting in Crikey!.  It's about families who will not receive household compensation when the newly-enacted carbon pricing arrangments come into effect next year.  It uses the Samuelson family to illustrate its impact on a single income couple earning $150,000 a year.  Apparently, they will go backwards financially by about $700 a year.

The Telegraph article is here.

Perhaps more entertaining than the article are the responses posted by hundreds of readers to both the Crikey and Telegraph stories.  They cover a wide range of positions but one fairly common attribute is an over-enthusiastic assumption about the disposable income (ie, after tax and transfer payment imposts) of a Samuelson type household.  The silliest of them is perhaps the claim from a few posters that they'll now have to make do with $149,300.

Before looking more closely at the disposable income issue, here's how the tax-transfer system has altered the disposable incomes of 3 child, single income couples in the private income range $0 to $200,000.

As with the single person in my last blog post, it's backwards most of the way.  The main contributors are the non-indexation of the tax thresholds, plus the flood levy, and the freeze applied to various bits of the family tax benefit.  At $150,000 the fall has been roughly 1%. 

As an aside, it's interesting that the Telegraph's Samuelson family are at exactly $150,000 - any more and they would not get family tax benefit part B.  The choice of this family does, I suspect, increase the likelihood of robust discussion in on-line comments, combining as it does a high income (relative to average and median earners in Australia) with the receipt of a transfer payment.

So, let's look briefly at the issue of comparative disposable incomes.  I'm not going to look at how $150,000 earnings compares to the earnings of a typical Aussie.  That's been canvassed in depth on other blogs (for example, Matt Cowgill has a nice article here).  Instead, let's use a simple (I hope not simplistic) measure to compare households - in this case our 3 child single income couples.

At zero private income such a household would get the maximum assistance that the transfer system provides.  Using that as a baseline, how does disposable income in the range $0 to $200,000 compare?  In the chart below, the disposable income is shown as a multiple of the baseline.  For example, if private income is $50,000 the households disposable income is about one and a half times the baseline.  In other words, getting a job earning $50,000 would increase the unemployed household's income by 50%.

So, the Samuelson type houshold, at $150,000, gets 2.6 (two point six, not twenty six) times the income of the baseline unemployed household.  You can draw you own conclusions from this, but I hope it helps in making a more appropriately sized choice of violin or rocket when pitching a response to the Telegraph article.