Family-friendly policies make for higher fertility rates

On a recent ABC Insiders Programme, Treasurer Peter Costello said that the argument for maternity leave was not about boosting fertility rates, but for assisting women back into work after they've had a child.

In one sense he is right - maternity leave is a social justice issue. But policies that assist mothers to continue working are also likely to boost fertility. This is the conclusion from research in Europe which observed that developed countries with tax, welfare, labour market and equal opportunity policies favourable to high rates of married female employment have experienced the smallest declines in fertility rates, and now have rates about 0.5 children per female higher.

It is a recent phenomenon, reversing the position before 1970. Various reasons have been suggested for it. It seems women are no longer prepared to trust their own and their children's future wellbeing wholly to their partner.

If falling fertility is indeed a concern in Australia, it is worthwhile examining how friendly our tax, welfare and labour market policies are to women continuing to work after having children. It is an issue which rarely gets an airing in political debate, because both main parties believe it has dangerously divisive elements which are more likely to lose rather than gain votes.

The issue has become polarised between traditional family or "homemaker" lobby groups on one side and feminists on the other. For more than twenty years, the former have been persistent lobbyists for "homemakers'" allowances, income splitting tax systems and reducing government assistance to childcare.

With recent interest in declining fertility, these lobby groups have sought to imply that it is working married women who are responsible, while women who stay home have much larger families. In fact, family size for working women averages 2.06, versus an almost identical 2.11 for women at home.

The traditional family lobbyists found a willing ear with the Howard government. As a consequence it has significantly raised the bar for working married women with children. Their work has become more part time, more casual, even during the late stage of the business cycle; child care has got less affordable; while male breadwinner working hours have got longer.

The restructured employment service, the Jobs Network, excludes assistance to married jobseekers whose spouse is working, unlike the former CES. Most of all, the Howard government has restructured the tax system to spread significant disincentive effects over a much larger range of family incomes.

Australia has always had an income tax system based on individual assessment of husband and wife, unlike many counties which taxed on a family unit basis, either by adding incomes to be taxed as one (Britain, Sweden) or by adding and then allowing notional splitting to tax as two individual incomes (USA, Germany). Whichever system is used, the net effect is that the secondary earner in a couple (usually the woman) is effectively taxed at the primary earner's marginal rate. With progressive tax systems, such disincentive effects can be significant to secondary earners, but much less so to primary earners, as most economists now agree.

In recognition of these disincentive effects, many countries abandoned their family unit tax systems in the 1970s in favour of individual assessment, at least for incomes earned from personal exertion. The USA introduced separate, lower scales for individuals (and sole parents) while maintaining income splitting, resulting in a contentious "marriage" penalty where two-earner married couples would pay less tax if they were not married.

Under current income tax scales in Australia, a taxpayer on $60,000 per year with a non-earning spouse would pay $15,580 or 26 per cent tax (ignoring spouse tax offset, any family tax benefit, Medicare levy and GST). A two-earner couple earning $35,000 and $25,000 would pay $10,760 or 18 per cent tax on their combined incomes.

It is this difference that has been the focus of the traditional family lobby, arguing that as the couples' joint incomes are equal, fairness demands that each couple should pay the same tax, either by allowing income splitting, or by government provision of special homemaker's allowance to a spouse (read woman) who "chooses" to stay at home. As a "bumper sticker" piece of lobbying, it has been highly successful. But it is deeply flawed.