25 JUN 2012
Oxfam Calls on New Administration to Consider Subsidies for Poor Workers’ Families
Oxfam Hong Kong is recommending that the Hong Kong Government adopt a new subsidy scheme to support low-income workers and their families, as a means of alleviating poverty and reducing the huge income gap in the SAR. The recommendations are the result of extensive research on local poverty and on best practices adopted in other countries and regions to deal with similar socio-economic problems. They are laid out in our report Low-Income Working Family Subsidy.
Our research shows that the implementation of a minimum wage in May 2011 provided relief for some poor families. However, one year after this law was passed, 70% of working poor households remained below the poverty line. Besides, more than 550,000 people, or half the total poor population live under the poverty line in Hong Kong (1) . Meanwhile the recently released 2011 Gini coefficient, which measures income inequality, was 0.537 for Hong Kong, showing a widening gap between rich and poor over the past decade.
The government currently implements a number of poverty-alleviation schemes, including the minimum wage, the Comprehensive Social Security Allowance Scheme, the Work Incentive Transport Subsidy Scheme (WITS), the School Textbook Assistance (TA) Scheme, and others. Yet our research shows that the selective way in which these schemes target people and problems and their strict eligibility requirements limit their effectiveness. They do not benefit all working poor households.
As a means of comparison, Oxfam studied poverty-alleviation policies in six countries or regions. Both the United States and Britain offer tax credit programmes for poor working families – the Earned Income Tax Credit in the U.S. and the Working Tax Credit and Child Tax Credit schemes in Britain. These schemes share the following five characteristics: 1) they encourage employment by offering larger subsidies to those who work more; 2) they especially support working families with children; 3) they cover families living above but close to the poverty line; 4) they have no assets test; 5) welfare departments are not involved in screening applications or providing subsidies, and there is no stigma attached to receiving tax credits. These measures have effectively reduced poverty among low-income working households. The Earned Income Tax Credit in the United States is credited with lifting 7 million people out of poverty in 2010 (2) .
Oxfam suggests that Hong Kong’s new administration consider implementing Low Income Working Family Subsidy in two ways, either adopting an Earned Income Tax Credit (EITC) system based on the U.S. model, or enhancing its current Work Incentive Transport Subsidy Scheme (WITS).
The proposed EITC model would base its assessment only on family income, with no assets test. Families earning 80% or less of the median household income (3) (close to the income limit for public rental housing application) would be eligible for the scheme, which would be handled by the Inland Revenue Department. To provide a stronger incentive for low-income families to remain in the workforce, subsidies would increase with an increase in working hours or salary, up to a certain threshold. Families with children would enjoy higher subsidies (See Table 1).
The alternative model is derived from the current WITS, which we would suggest to transform to another Low-income Working Family Subsidy scheme. There are two proposed versions of this model. The first would be based on family income, with eligibility criteria matching those for public rental housing. Assets tests would be eliminated or relaxed to match those for public rental housing. Families with children would receive higher subsidies (Table 2), and working-hour eligibility would be defined in a four-tier system. The second model would also be based on family income, with eligibility determined by the income and assets limits currently applicable under the WITS. However, families with children would receive higher subsidies, and a multi-tier system would assign different subsidies to workers with different working hours.
Oxfam is optimistic about both proposals. Either one would ensure broad coverage among the working poor households, including the “three nothings” (4) and over 90% of working poor households that do not receive CSSA. Either proposal could potentially lift more than half of Hong Kong’s working poor households out of poverty, dropping the working poverty rate from 8.4 per cent to 3.7 per cent, and the overall poverty rate from 19.6 per cent to 15.8 per cent. Beneficiaries would include 60,000 working poor families with children and over half of the working poor tenants who live in subdivided flats, cubicle apartments or rented suites. Either proposal would immediately reduce poverty among 60% of the working poor families with four or more persons. Thus they would have a conspicuous impact on poverty reduction.
Oxfam believes that the government has sufficient fiscal surplus to implement the above suggestions. The EITC model would cost HK $4.75 billion annually, just 8.3% of the average financial surplus per year. The first version of the enhanced WITS model would cost HK $6.3 billion per year, or 11.1% of the average annual financial surplus. This model would provide strong support to families with children. Also, the government could implement this model through the existing administrative system, reducing administrative costs. The second version of the WITS model would be the least expensive at around HK $4.5 billion, or 7.9% of the average annual financial surplus. However, it would benefit the smaller number of low-income families.
Oxfam expects Chief Executive-elect Leung Chun-ying to keep the promise he made in his election campaign to tackle the wealth disparity in Hong Kong. Implementing a Low-income Working Family Subsidy would be a step toward this goal. We hope the government will study our policy proposals and adopt our plan to tackle poverty among low-income workers and their families. We hope this programme will be included in the Chief Executive’s Policy Address in October and in the work of the Commission on Poverty.
(1) Source: General Household Survey, Quarter 3, 2012, Census and Statistics Department. The study defines a “working poor household” as a household with at least one employed member (excluding foreign domestic helpers) and with household income less than 50% of the equivalised median household income for households of corresponding size.
(3)“Median household income” is equivalent to equivalised median household income. 80% of equivalised household income is close to the income limit for the public rental housing application. Taking tax credits in the United States, Britain and New Zealand as examples, the income limit for households with children is generally defined as between 70% and 90% of the equivalised household income.
(4)“Three-Nothings” refers to those who do not receive CSSA or old-age allowance, live in rented cubicle apartments or subdivided flats and do not pay tax.
APPENDIX (Chinese Only)
Oxfam is dedicated to fighting poverty and inequity worldwide. The international and independent development and humanitarian organisation tackles poverty in four main ways: sustainable development in poor communities, disaster relief, local and global advocacy, and education of Hong Kong youth. Established in Hong Kong in 1976, Oxfam Hong Kong is a founding member of Oxfam, an international confederation that has assisted poor people in 92 countries. Oxfam Hong Kong alone has supported poor people in over 70 countries/regions.