Coming out against the baby bonus

Today, several more economists have come out against the baby bonus. As I have written previously (most recently here), the baby bonus is a public expenditure sink with no economic rationale. As reported in The Australian, it appears that Professors Ross Guest and Bob Gregory agree with me.

Last financial year, it cost the government $1.16 billion, a figure that will climb as it increases to $5000. With more women having their first babies in their 30s, and richer women having more children, the baby bonus is increasingly ending up in the hands of wealthier families.

Despite Treasury’s concerns, Wayne Swan this week ruled out any change to the baby bonus and said Australia’s middle class did not receive too much welfare.

But economist Professor Gregory said the baby bonus remained an inefficient means of improving fertility and the Government should consider treating all family welfare measures as “a whole”.

“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,” said Professor Gregory.

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.

17 thoughts on “Coming out against the baby bonus”

  1. Josh,

    I have never understood why the baby bonus is a fixed sum regardless of whether you are having your first child or your 8th. Surely if the purpose of the bonus is to increase a woman’s total fertility (number of children she will have during her reproductive years), and given that lots of people will have one child anyway, shouldn’t you start with a very small payment for the first child, and then increase the amount for each subsequent child?

    On the other hand, evidence seems to suggest that the numebr of children a woman will have is highly determinant on when she has her first ch8ild – those who start young will typically have more children than those who start later, so maybe a payemnt based on age of mother, or income, is the better way to go.

    Not sure, I admit it is a complicated area.

    On a side note (and being an economist), I have always thought that the efficient number of children is 3. There are quite a few fixed costs with having the first child, such as car seats, toys, cots, prams, etc. However, for children 2 and 3 these costs are defrayed somewhat by hand-me-downs.

    However, once a family has 2 parents and 4 children, then it is much more complicated. Average sized houses will easily accomodate a family of 5, but 6 almost requires a bigger house. And a bigger car. And most ‘family’ passes to anything will be for 2 adults and three children.

    So there is a high marginal cost in having 4 children.

    Do you agree? Any thoughts on this Josh?

    Greg

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  2. Well, the fact that the bonus is for each and every child a family has a dead give-a-way that it was never about fertility. Other countries like Singapore stand out in marked contrast on this front.

    In terms of the optimal number of children, there is no more optimal number than there is an optimal amount a sugar in coffee; it depends too much on taste.

    In terms of the minimum average cost of a child, then the optimum is probably 0 or 2 (depending on housing). 0 because you can stay in a small house and 2 because the fixed costs associated with children have a ‘2 child’ life in terms of depreciation. At 3, the car issue becomes a cost sink (it is not just transporting a family but logistical issues when you have to transport other people).

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  3. It would be great if the Rudd Government did away with all these slews of bulk cash payments masquerading as policy left behind by the Coalition. The pessimist in me suggests that it isn’t going to happen though.

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  4. The male attitude to baby bonus’s to increase fertility is outrageous. The necessity to offset the loss of a second income is constantly demonstrated. I hope these males either do their own turn at baby minding or at least support paid maternity leave of at least 14 weeks. And if the nation needs competent workers then adequate and available child care must be paid for by governments. We cant rely on dodgy private childcare like ABC

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  5. I didn’t think it was about fertility, but about the marginal value of extra children to the government; and they’re all valued equally!

    Now that I’ve had my kids, I want the baby bonus removed. Immediately. We should be importing labour because it’s cheaper than locally produced labour.

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  6. While I am concerned about the economics of this, as a long standing worker in child protection, I am also concerned about the SOCIAL costs.
    Not many people have more babies because of the Bonus, except those who are least able to parent.
    The Bonus actually is a REAL incentive for dysfunctional families to produce more babies and so to increase the propotion of disadvantaged babies being born.

    $4000 is a lot of money for people living on Social Security or a 16 year old. I cannot tell you how many of my child protection clients talk of having another baby to get what seems to them to be a fortune. We are also aware of many cases where unscupulous”partners” leave as soon as the money comes through and they purloin it. As well lots of it goes up into people’s arms while we get increasing reports of those same babies not having enough supplies of food or clothes which then authorities must provide. (Though it could be argued that this is no worse than the rich using their bonus for a luxury weekend away)
    However those of us who work in Child Protection know that this is about the worst social decision of the last decade for vulnerable children.
    However to say so out loud, is not politically correct.
    Talk about clever country……..the more babies born to parents who cant care for them, the greater the hospital costs(Neonatal Intensive Care Wards are these days full of withdrawing babies or those born prematurely because their mother’s Speed use increases the risk of this), Docs interventions, educational costs for babies who have developmental Delay due to early neglect and all the other costs involved when children are abused and neglected .
    So it is not just the year to year cost in the budget. The long term cost to our country is enormous in terms mental health , legal costs and substance abuse. GEnerally little babies who are neglected and abused do not grow into happy people.

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  7. It’s a little odd to point out that the baby bonus is regressive and not attack a far more regressive policy about fertlity: paid maternity leave. Highly paid women get paid more – sometimes much more – to have kids than low paid ones. What exactly is the case for that?

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  8. Quebec also had a graduated baby bonus system. One political party there has recently been talking about reintroducing it.

    Jeremy, is there paid mat leave in Australia? There is in Canada, via the unemployment insurance system, but that’s got a fixed cap to it. Some workers also have paid mat leave as a condition of employment, but then that can be considered part of an overall compensation package, blah blah blah. So not sure it’s all that regressive ?

    And just for Jennifer: speaking as a female, my attitude to baby bonuses is that they are ridiculous. The Gans/Leigh and now Gregory (and honestly, lots of others too, some of whom are even female!) position is more accurately described as the economist’s position rather than the male position. You might also want to be a bit careful about making generalisations on male contributions to child care on this blog.

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  9. As these posts indicate, this issue is an absolute political minefield for the Government. This program was never introduced to address declining fertility. It was introduced to head off growing political pressure, including from some moderate Coalition MPs, for paid maternity leave (given that Australia was one of the few developed places that didn’t have it). The population boosting thing was just a bit of Costello spin to tie in with his ageing population package, things that helped define him as a future-focused leader in a tired Government.

    It was a neat political trick though, and hence difficult to unravel, because it satisfied key constituencies: business groups who didn’t like the idea of paid maternity leave, mums who wanted some sort of paid maternity leave and stay-at-home mums who don’t pay tax. Mums on income support got included as a consequence, but probably weren’t the focus. It was very easy to sell this structure to the voting public because everyone got the cash and Labor, commendably, didn’t dogwhistle about the morals of the poor.

    The Rudd Government is never going to simply get rid of it. It would be very damaging, even if they didn’t think it would be wrong. The Government would only ever replace it with something that broadly satisfied working mums, stay-at-home mums and mums on income support. Politically, there’s just no chance one of these groups gets left out. That’s the policy challenge I think.

    Toni, the dogwhistling reference above wasn’t directed at you either. I work a bit in community welfare in a highly disadvantaged area and there is definitely a consensus among local social workers that the bonus is having some of the effects you describe. And they’re progressive people, not the usual suspects who would be saying things like this. But I don’t think you can completely leave out women on income support. It would penalise the vast majority of low income women who don’t deserve another poke in the eye, and further disadvantage their kids compared to others’. Maybe there are ways it could be structured better though.

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  10. Molesworth what a tangled web we weave.

    One way of unravelling the mess is to remove people voluntarily from the system. Here is a suggestion.

    Work out another system that is “fair” and simple. One suggestion is a social wage and a flat tax on all other income that is available for consumption versus investment.(some might call it a prepaid GST:)

    Allow people to choose which system they wish to stay in – the existing one or the new one(s). This is not too difficult to do as we do it all the time with other information systems. Have rules associated with time limits on switching systems (we do it with mobile phone plans so why not with community support services)

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  11. I am a mother of a 14 month old girl and have another on the way. I find it very insulting how the general media can consider canceling the baby bonus. If it wasn’t for the baby bonus my child would not have a bed to sleep in or the majority of the clothes she wears. I do on the other had personally believe that 5000 is far to much, I believe that 4000 is a safe balance to stay at. i did not fall pregnant to receive the baby bonus, the pill merely didn’t work for me and my moral beliefs lead me to keeping my children. I did prepare for my children my buying as much necessities as i could and unfortunately i only could afford the prams. the baby bonus helped me out with the expenses of bearing a child, if it was to be cut off the unborn children of those who are pregnant now will suffer greatly because these days prices of the necessities are just to high. If you wish to cut the baby bonus off i plead that u make the necessitates for children more affordable for those who are on a low income who are struggling. i plan to be a teacher, if i was one now i would probably see it your way but because of my plans for the future i have to save and put money away to become one and if the baby bonus wasn’t there my savings for a career would go to the baby and i would be stuck on centerlink payments for ever

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  12. I think all women should be treated fairly in relation to receiving money from the government when having a baby whether they are on a high, medium or low wage. people of higher incomes pay more tax, therefore support more of the country and in my opinion have more of a right to get some of this precious commodity back when they need it most. A maternity leave payment would be a better option. I have just found out that I am pregnant and am really scared that this assistance wont be available to me! Just because you have a higher income doesn’t necessarily mean you have any more expendible income than someone on a lower income. If I choose to make a career for myself over someone who doesn’t why should they be entitled to a “hand out” and me the hard worker not entitled to anything, therefore this should not be means tested. If anything, if a woman is on a higher income then it is going to be a much greater burdon to give up this money to raise a child. I am in the top 1% of income earners but due to my husbands previous marriage (child support commitments) we do not have any more funds available to us than a medium income earner but I wont get any government assistance. In addition, the child care rebate – why does this only go to low income earners? I will get $20.50 per week back yet my sister in law who is lazy and chooses not to work will get more than 50% back and uses child care 4 days a week whilst she sits and watches day time TV. I am sick and throwing up due to morning sickness but I have to work to pay my $945 in income tax each week to pay for these handouts.
    So long as it is a periodic payment (to stop young people breeding for the money) and not means tested then I would love to see this bonus continue.
    I have just discovered that even with private health insurance (which I am forced to pay for due to have a higher income) I will be out of pocket about $3000 for medical bills. I can’t use the public facilities for free like low income earners can so any bonus will merely cover my medical expenses!!

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  13. well, i’m glad that now certain people already have their children they are happy for the baby bonus to go. The baby bonus is a great help especially to low income earners to provide the essentials for their child. If it is taken away, there would be far fewer children born into low income families (at least in those where the parents have half a brain). While I think this bonus is highly useful for low income earners, i believe high income earners would not need the bonus. But, it would be unfair to separate women for the bonus. And apparently, it costs more to means test everyone having a baby than it would cost just to give them the bonus.

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  14. I just wanted to say that I appreciate the convenience of the baby bonus. I gave birth to my first child in April, and found the baby bonus a god sent as my employer did not give me any paid maternity leave, while $4000 isn’t a fortune it did enable me to take time off work without worrying that our new family would be struggling on one income right from the start.
    I honestly do not know how I would have coped without the help of the baby bonus, if it is to be cancelled then I hope everyone pushes for it to be compulsery for all work place to give paid maternity leave.

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