Baby Bonus in Crikey

Following on from my recent writing on this blog, over the fold is a piece that appeared in Crikey today.

Time for a baby bonus rebirthing

Crikey, 14th March, 2008

Economics professor Joshua Gans, who blogs at economics.com.au, writes:

The baby bonus is a public expenditure sink with no economic rationale (as I have written previously). It appears that Professors Ross Guest and Bob Gregory, reported in The Australian, agree with me.

Baby bonus payments already drain $1.16 billion per year and will get another $250 million bump next year when the bonus climbs to $5,000.

At its best, the baby bonus was just a vote buying exercise and a failed one at that. At its worst, it is an attempt to increase the population; something that is misplaced because there is a cheaper alternative — immigration. Moreover, even if fertility were an appropriate rationale, given that the same amount is paid regardless of whether the baby is a first, second, third or beyond child, it is hardly a stimulus to that.

As Bob Gregory told The Australian, "if it was put in place to get more children, then it’s unbelievably expensive. Every new mother gets it, but you might only get a few extra babies that wouldn’t have been born regardless." Finally, as it is paid for all babies, it is not the sort of thing designed to target and help low income households.

The previous Coalition government put in the baby bonus but it is now the current government’s responsibility. Thus far, it appears not to be moving on the payment. I must admit that I can’t for the life of me imagine a Labor government slashing public sector jobs while at the same time keeping and increasing the baby bonus.

Leave aside the obvious disruption that is going to occur in maternity hospitals in the last week of June and first week of July, the increment to the baby bonus is unjustified. My hope is that, at the very least, it will be frozen in the May budget.

Of course, just eliminating the baby bonus may create distortions to birth timing and so it would need to be done with care. I suggest the following:

(i) the government cancels the rise in the baby bonus for 1st July, 2008 and instead lowers it back from $4,187 to $4,000. That will save around $250m per year.

(ii) the government moves the bonus as a tax rebate rather than a straight out payment.

(iii) then the government puts a gradient on the baby bonus based on income level reducing it to $3,000 for the highest income earners (on the same basis as other child-based payouts) with a straight line based on income back to $4,000 for those paying no tax;

(iv) then, from 1st July, 2009, it starts reducing the income threshold.

Or, at least something like this. My point is that we can eliminate the baby bonus without too much, if any, political cost.

Joshua Gans is an economics professor at the Melbourne Business School. He blogs on these issues at economics.com.au.