Horizontal equity in the design of Australian family payments for newborns

Abstract

Equity and efficiency are important evaluative criteria in tax and transfer policy. While matters of vertical equity receive more attention, horizontal equity is widely regarded as an important design principle. This is especially true in the design of family payments and has traditionally been interpreted as requiring universal – rather than targeted – payments to families on the basis the number, and ages, of dependent children. The focus of this paper is the horizontal equity of Australian family payments made specifically to the families of newborns. Under current policy, these families may receive maternity payments (the Newborn Supplement and Newborn Upfront Payment) or Parental Leave Pay (PLP), the former, a means‐tested birth grant; and the latter, a government‐funded paid maternity leave payment. Eligibility for PLP is largely contingent upon the birth mother providing a specific level of pre‐birth labour supply known as the “work test”. This paper uses microsimulation modelling to demonstrate the variation in the level of payment provided by the Australian Government under both programmes. It finds significant variation in the level of payment made both within and between families where the mother meets the PLP work test and finds higher levels of payment flowing to families where the mother is eligible for PLP. It concludes with a discussion of Australia's retreat from the provision of family payments on a universal basis with an emphasis on the equity–efficiency trade‐offs inherent to the PLP work test.