The Inequality Blog

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The New Zealand Initiative has just released a report on inequality, following one on poverty earlier this year. I’ve already commented briefly on the report in the media; below are some more detailed comments.

While I welcome any contribution to the debate on inequality, this one is, unfortunately, a little selective in the evidence it deals with, and mistaken in some of its key conclusions. It also fails to deal with important issues such as discrimination, politics and power. These failings greatly reduce its value in the ongoing discussions around inequality.

In the Stuff story on the report, one of the report’s writers, Jenesa Jeram, says: “Income and wealth gaps are red herrings for what is really hurting those on the bottom rungs of the ladder. It is the cost of housing that is exacerbating inequality, so we need housing solutions,” she said.

This seems to me incorrect. Yes, housing costs are a big problem, particularly for lower earners. But one fifth of the population (on one standard measure) is in relative poverty even before housing costs are taken into account. And that poverty occurs in a wider context of how income is distributed and redistributed, of incomes barely increasing over 30 years for the poorest while doubling for the richest. To dismiss such widespread poverty and inequality as “a red herring” seems seriously mistaken.

Perhaps the most fundamental omission in the report, however, is its failure to deal in any significant way with the long-running consequences of widened inequality. It makes much play of the fact that the big increase in inequality happened in the 1980s and 1990s, and this seems to be a justification for downplaying the whole issue.

Nowhere do the report’s authors thoroughly address the point that, even if a big shift happened 20 years ago, it can have an incredibly damaging long-running consequences. Inequality has strong and internationally accepted impacts on things like social mobility, trust, health and social cohesion. A continuing high level of inequality implies that those things will continue to be damaged – a point that seems to entirely escape the authors.

(It doesn’t help that they wrongly think that works making such connections, such as The Spirit Level, have been “debunked” by peer review. In fact, most of the dissenting authors they cite have never, to my knowledge, published anything on The Spirit Level in a peer-reviewed journal, and the main peer review of the book, by Birmingham University’s Karen Rowlingson, broadly supported its conclusions.)

The authors are also selective about which research, and which parts of specific research, they cite. For instance, they cite Helen Roberts’s research when it shows New Zealand CEO salaries to be below international levels, but they don’t quote the overarching conclusion of her research, which is that high CEO salaries are very much the result of their “rigging” the system by influencing boards. That finding, of course, would have sat uneasily with the report’s claim that many inequalities are justified on merit.

When it comes to perceptions of inequality, the report cites work by Peter Skilling on attitudes towards specific inequality-reducing policies; but when it comes to discussing people’s knowledge of wealth inequality, they cite international research showing people overestimate wealth inequality, but entirely omit Skilling’s finding that people drastically underestimate it! Again, this would have inconvenienced their argument.

Similarly, the authors cite one piece of research, by Hyslop and Mare, arguing that changes in household structure (such as there being more sole parents) explain half of the increase in inequality in New Zealand, but they don’t notice the conclusion of a more recent paper by Stillman et al finding that increases in poverty 1983-2003 “are not explained by either changes in the characteristics of households over time or changes in household employment patterns” and that “the structural reforms undertaken in the 1980s led to permanent changes in the distribution of resources across households in New Zealand”.

Despite having an entire section on income mobility, the report rather bafflingly fails to mention one of the key bits of work in this area, Miles Corak’s research showing that low social mobility is a direct result of high income inequality. Since Corak is one of the key people in this field, and visited New Zealand recently, it is surprising that his work could escape the notice of anyone writing about inequality.

Some of the other, broader omissions are also striking. For instance, the courts have, in recent decisions (especially the Bartlett case), been unequivocal in finding that many women are poorly paid simply because they are women. Discrimination is a huge cause of income and therefore wealth inequality. But nowhere is this discussed.

Similarly, economic power is absent. The report fails to note recent research from the IMF showing a clear correlation (and plausible causation) between reduced union coverage and increased shares of income going to the richest 10th. The IMF found this effect to be stronger in New Zealand than in any other country they surveyed. And it is not hard to see why: weaker unions lead to reduced bargaining power for ordinary workers, which in turn makes it more likely that senior management will take a larger share of company income. Yet there is no discussion of this: it is as if power does not exist.

Another baffling omission concerns politics. The report does not seem to consider why inequality might have been flat or falling through the 2000s, but MSD’s Household Incomes Report (which the authors cite elsewhere) is clear: it was thanks to policies such as Working for Families and a higher minimum wage. By failing to discuss this, the report gives the impression that inequality somehow stopped rising of its own accord.

The report’s problems are epitomised by their handling of the thought of the political philosopher John Rawls. The report quotes his thinking (at some length) on just and unjust outcomes, and then argues that Rawls was concerned with absolute poverty, not inequality, and that his philosophy is about ensuring that institutions don’t impede upward mobility or meritocracy.

Both points are essentially incorrect. Rawls’s famous ‘different principle’ is explicitly about inequalities between rich and poor, and when they are justified (when they work to the advantage of the least well off, is his basic answer).

More fundamentally, Rawls’s beliefs about the meritocracy are exactly the opposite of those the authors espouse. They may not be aware of it, but in A Theory of Justice, Rawls goes on to argue that, even once social and economic barriers to success are removed, people’s rewards should not be based on “desert” or merit, because we do not deserve the talents we have inherited, not even our capacity for hard work, which is itself inherited or shaped by our environment.

Rawls, in fact, argues that people’s talents should be seen “a common asset” and their benefits (in increased salaries and the like) should be shared as widely as possible (consistent with the difference principle). That his views should be so contrary to what the authors are trying to argue is perhaps symptomatic of the problems that their report encounters throughout.

 

Last night the New Zealand initiative hosted a debate about whether the government should ban university graduates from marrying each other, as a way to reduce inequality.

I’m not sure it was the most helpful way to approach inequality, as it’s an obviously ludicrous proposal. The affirmative team, from Victoria University, did a spirited job of arguing that since the government already only recognises marriages it thinks appropriate – you can’t marry a tree, for instance – it could legitimately extend that policy and not recognise marriages that increase inequality by concentrating high earners in certain households. But of course it wasn’t ultimately convincing, and anyway it completely misses the point about these issues.

(Incidentally it’d be great if people could stop airbrushing the politics out of this debate. Inequality did rise most sharply in the 1980s and 1990s, it’s true – the developed world’s biggest increase in inequality at that time – but the only reason it fell in the 2000s is because of specific government policies, notably Working for Families and the higher minimum wage. The Household Incomes Report is very clear on this. And since the GFC, income increases have been greater for the rich than for the poor, potentially counteracting the gains of the 2000s. Arguing that inequality just stopped rising 15 years ago elides all these important points.)

High-earning people marrying each other in greater numbers is of course a problem, because it widens inequality and – as the initiative’s head of research, Eric Crampton, alluded to afterwards – because it’s part of an increasingly segregated society in which people lose all sense of how the other half lives. We stop being able to understand how the country works and how people are getting on, we lose empathy for and trust in other people, and ultimately democracy stops working as it should.

But in a way high-earning people marrying each other is only a symptom of an already divided world. Divisions between rich and poor start very early, as kids grow up in neighbourhoods with concentrations of wealthy and poverty. That’ll get fixed with housing developments that mix state housing in with affordable and standard market homes – not with worrying about who’s marrying whom.

The other point missing from this debate was that the problem of these kinds of marriage would disappear if graduates didn’t earn so much more than people in trades. If aged care workers earned more and lawyers less, lawyers marrying lawyers would have minimal effect on inequality. And morally it’s hard to see why the earnings difference should be so big, except to compensate for the years of foregone income spent studying.

Aged care workers are important people, of equal moral worth to lawyers (or greater, in many cases). You can make arguments about the rarity and productivity of lawyers as against aged care workers, but people aren’t economic inputs, they’re people, and you can argue that their basic humanity and contribution to society is what should determine their pay. Now that’s a moot I would like to have seen debated.

I’ve just been reading a Master’s thesis based around surveying and interviewing people who’ve recently come off benefits, and its conclusions are pretty bleak.

It shows that, even on its own merits, the government’s much-touted drive to get people off benefits is a failure, as the majority of people who do so don’t end up in full-time work. More importantly, the obsession with getting people into work – ignoring how bad that work might be, the damage done by a punitive welfare system, and the need to support everyone, in paid work or not – means that people’s interests aren’t actually at the heart of the process.

The situation is so ludicrous that one of the people interviewed was recommended for a bee-keeping position despite being more than eight months pregnant. In the words of the thesis’s author, VUW student Alicia Sudden, “wellbeing is being left out of the current welfare system”.

What Sudden did in her Master of Development Studies thesis, titled ‘Putting wellbeing back into welfare: Exploring social development in Aotearoa New Zealand from beneficiaries’ perspectives’, was to survey 234 people about what has happened to them since they came off the benefit, and do detailed follow-up interviews with six of them. This shows what has actually happened to their lives – something the current government doesn’t monitor.

As Sudden says, “These individuals are claimed to be markers of a successful system; however, the current lack of follow-up leaves this assumption unsubstantiated.”

For a start, the interview subjects report enormous stigma around being on a benefit, thanks to the repeated message that requiring the benefit is due to laziness and choice. Yet most of them had gone onto the benefit to have or look after a child or for health reasons. Most had been on the benefit for less than two years.

Sudden also challenges the idea that there is something wrong with depending on the state, noting the argument that “all citizens rely on the state in some way, whether it be for access to water, roadways or other taken-for-granted parts of modern life. Therefore in a moral sense there is nothing wrong with being reliant on the state.”

Indeed, as one of her interviewees, Rebecca, pointed out, we might all need the safety net to be there at some point:

I realised being home and being on the benefit or being really poor and not having support really for all of us are potentially only a few steps away if you happen to get into the wrong course in life… I worked very hard through my life not to ever be in a difficult position, but it still happened…You think you’re safe, but you might not be depending on what happens in life. And then the [2011 Christchurch] earthquakes… we realised you think you are really safe and stable but things can change, and then they all mount up and all of a sudden you are in this really vulnerable place.

Yet as the thesis points out, New Zealand has an increasingly punitive welfare system based around the idea that the main way to improve people’s lives is to punish them until they do what the state wants. “While assistance with benefit-to work transitions has long been one of the primary functions of the welfare system, this is no longer done through training or upskilling. Instead, transitions to work are currently pursued through punitive measures including sanctions, surveillance and increased obligations.”

In addition, life on the benefit can be miserable – over 80% of respondents said they were dissatisfied with their situation while on it. The basic unemployment benefit is just $210 a week – barely enough to survive on, let alone lead a decent life. People’s case managers constantly shift, making it difficult and stressful to deal with WINZ, and one respondent said of WINZ reception staff: “I have never met ruder people in my life.” The paperwork required for the benefit was described by one respondent, Rebecca, as “exhausting” and “very confusing”.

Despite all this, what got them off benefit was not generally the unpleasantness but “their own desire and/or as a way to improve wellbeing for themselves and their family”. Sudden’s findings suggest that “the current financial hardship forced on benefit recipients … only works to make the period of time on the benefit more difficult”.

Sudden found the low wellbeing of her research participants, during their time on the benefit, to be “incredibly disconcerting”. She adds: “It is incredibly troubling that the mechanism which theoretically provides an economic safety net for New Zealand citizens is not only failing to support them, but could even be attempting to not catch those in need in order to pursue shallow indicators of fiscal savings.”

What’s more, the efforts to get people back into work aren’t even working very well. Sudden’s survey (admittedly not a statistically complete one, but in line with other research) shows that, after coming off a benefit, just 37% of her respondents were in solid, full-time work, and 17% studying.  22% were in the growing world of precarious work – part-time, casual, shifting jobs with no guarantee of hours, pay or stability. 21% were back on benefits, and the remainder had no formal income source.

As Sudden notes, “This result significantly calls into question the use of off-the-benefit figures as indicators of successful off-the-benefit transitions [and] highlight that off-the-benefit figures are hiding the longer term costs to the welfare system of those who go back on the benefit.”

This follows earlier research showing, for instance, that only 29% of all those who transitioned from the benefit into work in 2001-02 had remained employed and off the benefit for a full two years.

As Sudden says, “Based on the data from survey respondents, which align with other New Zealand literature, it is clear that off-the-benefit figures do not correlate with benefit-to-work figures. This in itself breaks down the primary measure of success of welfare used by the current government.”

These findings, though worrying, aren’t surprising. We don’t live in a perfect world where people can just waltz into jobs. Many people have poor health, caring responsibilities and low skill levels, and are competing with hundreds of other people for every job. As Sudden notes,  “[interviewees] Rebecca, Sarah, and Nicole all said the jobs they applied for had 100s of applicants, making their search for work extremely difficult.”

Sometimes the jobs suggested are farcical. As mentioned above, at one point Stephanie was told by WINZ she should apply for a bee-keeping position when she was eight and a half months pregnant.

Even if you get a job, life can be unpleasant, especially for those on 90-day trial periods. Stephanie’s experience was especially gruelling:

I begged for six months for the job… when I did finally get the job, I had to work split shifts so that I could fit around everyone else… So at the start they had me sign on to the WINZ scheme that subsidises wages… It was supposed to be permanent. So I was thinking, ‘yay I don’t have to move! Yay cheap rent’. But that didn’t turn out. Two weeks before the end of the three months, they started making excuses as to why I shouldn’t stay – that I wasn’t up to scratch because I didn’t meet the standard that someone who had worked there for 12 years had, after two and a half months. They’ve written me a  reference that my customer service skills and my knowledge of the job were 110 percent sort of thing, but I think it was all just a bit of a scam on their part. And WINZ knows about them and they are continuing to do it.

She adds: “I loved that job, I love working in customer service… I suffer from depression anyway, but losing my job the way I did and a few other circumstances, it’s the worst patch I’ve ever gone through.”

Unsurprisingly, those in casual employment had a high rate of dissatisfaction, at 37.5%. Research cited by Sudden shows that, contrary to the idea that every job is a good job, being in low-paid precarious work can be extremely bad for your health.

Nor is the welfare system adapted to this new world of precarious work. Rebecca noted:

… I had a debt [to WINZ] because it was so hard and confusing to keep track of what I’d earnt. And, just the way the system worked, I wouldn’t know exactly how much I would be earning. They want you to estimate what you think you will earn per week. But that was impossible for me to do because of the nature of what I was doing. And I think that kind of casual work is so common now, and I have this really strong feeling that the benefit wasn’t keeping up with the reality of how most people in lower incomes work, which is casually, and often don’t know from week to week how much they are going to earn next week.

This shows, Sudden argues, that the New Zealand labour market “can no longer be assumed to provide the stability or financial support needed by individuals and families, or sufficient opportunities for employment”.

Finding employment was, Sudden accepts, “in many ways a positive factor in their [respondents’] lives. However, there was also high rates of financial hardship and insecurity that had adverse impacts on wellbeing. This is particularly problematic given that employment is touted as the only life course benefit recipients … should take.… Between the harsh reality of the current labour market and the employment-oriented residual welfare system, the wellbeing of citizens appears to be increasingly left out of social policies.”

This grated with Sudden’s respondents, one of whom, Nicole, drew a contrast with the welfare state the current prime minister grew up with:

It is really hard to sit back and see our government, unfortunately, not actually be there for Kiwi families… There are some things I actually do agree with John Key. But the majority, I think – where the fuck have you come from? His mother was a sole parent, and he talks about how he has turned out fine, but his mother got all the benefits, which were a lot better than what even I got as a teenager… That’s how his mother survived, being on the benefit and having all the rights in the world. The same as Paula Bennett. And now they are cutting all those things off from us.

Through its sanctions and punishments, and its failure to support people’s wellbeing while on benefit or give them proper training to get into work, the welfare system is failing people, Sudden concludes. “Rather than an entity of the state that aims to prevent poverty and progress social development, the welfare system itself is enabling poverty and making positive individual development and wellbeing increasingly difficult to obtain. The burden of support left by the welfare system is instead passed on to individuals, their families, private organisations and NGOs, and the increasingly harsh and unaccommodating labour market.”

Sudden calls for a welfare system – a wellbeing system, perhaps we should say – that treat its users with dignity. “Such a system would be able to provide a supportive space that aided individual’s employment or training aspirations, rather than contributing to the downward spiral of poverty.”

The system needs to be less punitive and “more people focused or more focused on building relationships”. She suggests ensuring that people have one WINZ case manager consistently, and that more be done to ease benefit-to-work transitions, especially for the growing number of people in precarious work.

Whatever happens – and those reforms and more are undoubtedly needed to the system – I hope Sudden’s thesis gets widely read. It documents one of the most worrying parts of New Zealand society: the treatment of beneficiaries, both rhetorically and in their day to day dealings with WINZ. They deserve better, and we all deserve a system that really prioritises our wellbeing.

I am not a New Zealand record holder in many areas of life, but I now believe I hold one title, at least as far as the public record goes: the instigator of the longest, most drawn-out complaint to the Ombudsman about government’s abuse of the Official Information Act.

A few weeks ago, I received a final opinion on a complaint that I lodged in September 2011. Nearly five years elapsed between instigation and completion. Whatever else has happened in this ludicrous affair, one thing is obvious: no result that takes five years can ever be satisfactory. The Ombudsman’s office is colossally under-funded and cannot deal with complaints at anything approaching an appropriate speed.

As to the substance of the complaint, it concerned the Department of Corrections’ decision to use a public-private partnership (PPP) to build the new prison at Wiri. Under a PPP, a private company designs, builds and operates a public facility for several decades.

There are many reasons to object to this method of providing new prisons.* One is that the final cost of the facility has often become greatly inflated, through the negotiation process, from the original cost of building it the normal way when government just tenders the construction part. This puts a big question mark over claims that PPPs provide value for money. I know this because I often wrote about them when I worked as a journalist in the UK.

Accordingly I asked in mid-2011, under the OIA, for Corrections to release to me the initial ‘business case’ for building the prison the normal way. They refused; I complained to Ombudsman.

I won’t go into all the ins and outs of the next five years, except to say that the usual pattern was that I would hear nothing for months, presumably because the Ombudsman was so over-worked; they would apologise and ask Corrections to release more information; the department would do so, but it would not go any further to answering my request; I would point this out to the Ombudsman; and then the cycle would repeat.

In the end, the Ombudsman forced Corrections to release a lot more information, but found in their favour on the key point, that they were right to refuse to say how much the prison would have cost as a straightforward building contract.

Corrections’ defence was that releasing that information would “prejudice or disadvantage the Department in future procurement negotiations in relation to upgrading existing prisons or building new capacity”. This is because, in future negotiations, “there was a real possibility that a tenderer, with knowledge of the component parts of the Departments’ estimates of costs … would pitch its tendered costings close to the Department’s”.

I think this is quite wrong, and hugely dangerous to the public interest. Surely the point about competition is that if any firm pitches its costs high in order to extract more profit, it will be undercut by another. If that doesn’t happen, there’s no genuine competition, only cartel-like behaviour, and other procurement methods have to be used. More importantly, the public’s right to know whether money is being wasted should trump all these concerns.

All this information is made available in other countries, like the UK, so it’s clearly not necessary to keep it private. The Ombudsman noted that I didn’t provide evidence that this is what happens in the UK, but – amazingly enough – after five years of this, and at a time when I have other projects occupying my energies, I wasn’t going to try to find reports based on files I no longer have and articles behind the paywall of a magazine for which I no longer work.

In any case, that’s the sort of work the Ombudsman’s office should be doing, if it were properly funded. And that fact – the lack of resources for a crucially important public office – is what really stands out from this sorry affair.

*Other reasons to be concerned about PPPs are as follows. Private companies pay more to borrow and have to make profits, so inherently have higher costs than the government does. Drawing up the contracts for such a complex deal costs a fortune – the procurement costs on Wiri alone were $21 million, a feast for the lawyers and other consultants. Even then not all eventualities can be predicted. But once the prison is up and running, the existence of a contract makes it very difficult, or expensive, for the government to change how it wants to run the facility. In the UK, for instance, PPP schools have closed owing to falling rolls but the government has had to keep paying for them, because that’s what the contract stipulated.

 

Data on pre-tax incomes for New Zealand in 2013 have just been uploaded to the World Wealth and Income Database. So what do they show?

In 2013, the richest 10% got about 30% of pre-tax income, and within that the richest 1% got 7.7%. In both cases that’s about the same as in 2008, or indeed 2000. That’s in line with other things I’ve written about recently. You have to go back to the mid-80s, when the richest tenth got around 25% and the 1% got 4.9%, to see when the increase occurred.

Of course, these figures – crucially – leave out capital gains, which to my mind are income and which probably go disproportionately to the rich (as they do in other countries). And pre-tax income doesn’t directly tell you about living standards, since post-tax incomes, after taxes and benefits are taken into account, are what really matters. New Zealand’s (developed) world record increase in inequality, mid-80s to mid-2000s, was in large measure spurred by cuts to taxes and benefits.

So you don’t want to make too many generalisations from these figures. But they certainly don’t show that the rich are grabbing an ever-larger slice of the pie, for pre-tax income at least. For the real verdict, on post-tax incomes, we’ll have to wait for the next Household Incomes Report.

The data also bear out the point sometimes made by the NZ Initiative’s Eric Crampton, that our inequality is nothing like as bad as America’s. There, the richest tenth get nearly half of all income, and their 1% get 18%.

I don’t think that in any way makes our problems less real, or that it allows us to ignore the cumulative impacts of at least twenty years of large income and wealth imbalances. But it does show that things could be worse.

Technical note: the data on the WWID are essentially the same ones I’ve written about in other posts, but the WWID team makes adjustments to them to standardise across countries, etc, so their appearance there constitutes a ‘new’ publication of data in the long-term series going back to 1921 and across many nations.

The news last night that Nigel Farage had resigned as leader of UKIP, having helped lead Britain out of the European Union, made me cast my mind back to the time we were briefly united through that most British of mediums, cricket, and he made a rather unpleasant impression on me.

About a decade ago, I was living in London and playing for a social team made up largely of journalists. One summer we went on a weekend tour to Yorkshire, the key fixture of which was a game in a village called Thixendale. It was a picture-postcard sort of place, nestled in amongst the dales, tiny, with a few streets, a pub and a very beautiful cricket ground, fringed with trees. It was, unusually for the UK, a hot summer, and I remember everything there as painted in the colours of green and gold, especially the bare, hazy hills.

The Thixendale cricket team was organised, as I recall, by Farage and his fellow UKIP member of the European Parliament, Godfrey Bloom. Bloom was a Yorkshire gent of the good old-fashioned sexist type, and had recently made headlines by somehow getting himself onto the women’s rights committee of the European Parliament and promptly declaring that one of the key issues for women was that they didn’t “clean behind the fridge enough”.

Farage himself didn’t play much part in the cricket match, but he did turn up wearing, all of things, a pith helmet. For those who don’t know, pith helmets are the solid white hats once worn by British explorers and colonialists in hot climates. It was an extraordinary sight, as if Farage had stepped right out of the last days of the British Raj in India. At any rate he soon went to sleep underneath said helmet.

His son, however, was playing for his team as a bowler, wearing a shirt with the crest of Dulwich College, the elite high school he attended. Farage senior had himself been a pupil there in the 80s, where, according to recent reports, he displayed at an early age “racist and neo-fascist views” and sang Hitler Youth songs.

Bloom, meanwhile, distinguished himself by shouting condescending remarks from the sidelines. His team had a woman playing for them who had previously been a British hockey representative, I think, and as she dispatched one of my deliveries to the cover fence I recall Bloom shouting out, “Good shot … for a girlie.”

Did I, at the time, have any inkling that Farage in particular would one day help lead Britain out of Europe and into its current state of leaderless chaos? Of course not. But some of the key  themes of his campaign could have been deduced from that day, in particular the nostalgia for the age when Britain really was ‘great’ – which is to say white, male-dominated, colonialist, and secure in its imperial place in the world.

As many people have already pointed out, much of the Brexit vote came from people who’ve been left behind by globalisation. It’s no surprise that they’re angry; I would be too if the industries in my area had been destroyed and there appeared to be no plan for how my region or class would ever recover, beyond some investment in training and a vague exhortation to work harder so as to compete with the millions of skilled workers coming out of India and China.

The European Union isn’t to blame for any of that, but when people are, quite reasonably, very angry, they’ll look for easy targets; and so they were open to Farage’s seductive, comforting message that everything would be right again if Britain ‘took back control’, that the country could somehow wind back time and keep out all those nasty foreigners.

I have no idea what’s going to happen next, or where the UK will end up. But it does need to find a better vision for controlling the forces of globalisation, including some new thinking about the role of government in shaping the economy. Otherwise it will continue to fall prey to people like Farage, whose only vision is a basically backwards-looking one, a picture of Britain as it perhaps once was but never should have been, and cannot be again.

The best label for this year’s announcement by Bill English might be the ‘Bare Minimum Budget’. It does the bare minimum to defuse potential political damage in a range of areas – homelessness and health are prime among them – but almost nothing to address the country’s most deep-rooted, systemic social problems.  Indeed the Budget hints that these problems may get worse 

There is, in the Finance Minister’s speech, the summary of new initiatives and the accompanying press releases, no mention that I can see of either poverty or inequality. The government clearly thinks it has dealt with the issue through last year’s $25 a week increase to beneficiary families, even though that will have only a marginal impact on the issue, since most people in poverty are $100-200 a week short of what they need.

The focus on growth – mentioned ten times in the Finance Minister’s speech – but not on inequality (which is not mentioned once) shows that the government essentially holds to the ‘trickle-down’ line from the 1980s, which is that you don’t need policies for distribution: all you need to do is generate growth and assume that it will somehow end up in the hands of people in poverty. Sadly experience tells us that that’s not how it works.

The government would object that the average wage is set to rise to $63,000 a year by 2020, a large jump on its 2008 figure. And that’s to be welcomed, although the median wage will be lower than an average pulled up by CEO salaries.

But figures for labour costs – a slightly technical area of measurement – show that the share of company profits that goes to wage and salary workers is set to decline in coming years. More of their share will be taken by the owners of capital: company owners, investors, banks and shareholders. Since those people are disproportionately well-off already, this is a recipe for growing inequality, and more people missing out on what they need for a decent life.

The government would also object that it’s announced a host of social measures, among which are:

    • $100m in capital funding for more housing in Auckland
    • $200m for more social housing in Auckland
    • $4.2m for low- and no-interest loans to low-income families
    • $111.5m to support people into employment, including $61m for the Youth Service to help 18yos and 19yos at risk of long term benefit use, $26m for targeted case management for 120,000 people on benefits, and $15m for a trial of programmes to improve the employment prospects of prisoners
    • $20m to help offenders reintegrate
    • $18m for the Warm Up insulation scheme aimed at 20,000 low-income tenants, and $18m for the Healthy Homes Initiative
    • $96m for legal aid
    • $200m for a new vulnerable children service
    • $50m to reduce barriers to employment especially for people with complex health who would otherwise be on benefits
    • $43m for children most at-risk of not achieving – 150,000 children with significant time spent in a benefit-dependent family
    • $50m for better data and evaluation

All of these are welcome, especially the help for offenders. But most only begin to scratch the surface of what’s needed. $200m will get you just another 750 social houses, when there are thousands on waiting lists and 34,000 people homeless in one form or another. $43m for 150,000 at-risk children amounts to $1.80 per child per week, according to PPTA calculations – and there’s no increase in general school budgets, meaning extra costs will be passed onto parents.

The health sector gets another $500m or so a year – but needs $700m a year just to keep up with inflation, according to the CTU’s analysis.

And most fundamentally, this Budget does nothing to tackle poverty and the scandal of over 200,000 children going without the things they need for a decent start in life. Not only is tackling that poverty important in itself, it would have major spillover effects: research shows that boosting family income by $1,000 improves kids’ school marks just as much as $1,000 spent on schools, since parents use the money to help their kids learn.

Instead of fully addressing these poverty-related needs, the government has decided to pay down debt early and float the prospect of tax cuts. The result is a budget that does the bare minimum for political survival, and deals with some of the consequences of social problems – but does little to address the causes of these things.

New data from the IRD shows that the share of taxable income going to the richest New Zealanders has not changed under National. However, that share is still very large, indicating significant income imbalances.

The IRD data shows that the richest tenth of taxpayers got one-third of all taxable income in both 2008 and 2014. Within that, the richest 1%, about 34,000 people, got over 8% of taxable income.

In contrast, the poorest tenth got just 0.4%.

The income shares are broadly the same in 2014 as they were in 2008. This would suggest that pre-tax inequality has not increased under National. However, the following must be taken into account:

    • taxes and welfare payments make a big difference to final levels of post-tax or disposable income inequality, which is the most important measure, and that appears to be rising under National; and
    • these figures exclude capital gains, which are not reported to the IRD because they are not taxed, and so the figures – in all likelihood – dramatically underestimate the amounts and shares of income going to the richest New Zealanders.

The graph below has more detail. The poorest tenth is decile 1 and the richest decile 10. The 1% are labelled as such.

% of income going to decile/percentile
Year 1 2 3 4 5 6 7 8 9 10 1%
2008 0.3 2.0 4.5 3.3 6.1 8.8 10.8 12.9 18.0 33.3 9.0
2014 0.4 2.1 4.7 3.5 5.9 8.2 10.6 13.4 17.6 33.6 8.4

 

Tax paid

The table below shows the share of income tax paid by the different deciles. It shows those shares have been stable 2008-14. The shares of tax paid by the richest 10% and 1% are large, as would be expected in a system in which they earn a disproportionately large share of income and taxes are modestly progressive (increasing with income). (The apparent change in shares for deciles 3-6 are largely an artefact of the calculation method and probably not significant.)

% of tax paid by decile/percentile
Year 1 2 3 4 5 6 7 8 9 10 1%
2008 0.1 1.1 1.5 3.9 3.6 7.2 8.4 12.3 17.4 44.5 13.1
2014 0.2 1.1 2.8 2.2 4 5.8 8 11.9 18.3 45.7 13.7

However, it is important to note that these figures are for income tax only, and do not include GST for instance, so they exaggerate the share of total tax paid by the richest New Zealanders. It is incorrect to say that the richest tenth pay 45% of all taxes.

The stability of tax paid seems surprising, given that the 2010 tax changes cut rates for the richest New Zealanders most dramatically. However, moves to crack down on tax avoidance, such as through loss-attributing qualifying companies, may have had some effect on the richest New Zealanders.

 

How much does it take to be in the 10%?

The table below shows how much you need to earn, pre-tax, to be in each decile or tenth of taxpayers. The top of decile 5, which is the middle of New Zealand, earns $28,000. To be in the richest tenth you need to have more than the top of decile 9, which is $81,000. To be in the richest 1% you need at least $205,000 a year.

Top of decile/percentile ($)
Year 1 2 3 4 5 6 7 8 9 1%
2008 3000 10000 14000 17000 23000 32000 40000 50000 67000 165000
2014 5000 12000 17000 21000 28000 38000 48000 61000 81000 205000

 

Sources

These figures come from the IRD and can be found at http://www.ird.govt.nz/aboutir/external-stats/revenue-refunds/income-distrib-individual-customers/income-distrib-individ-customers.html.

I thank CTU economist Bill Rosenberg for checking my calculations (and for doing the earlier work that inspired this piece of analysis), although any mistakes remain my responsibility. The 2014 data are provisional at this stage, though any changes are extremely unlikely to alter the high-level figures quoted above.

New data shows how the government’s Budget last year took a huge amount of heat out of inequality as a political issue – though it may not have changed the long-term pressure very much.

UMR - Inequality polling

A previously unpublished poll by UMR shows that the proportion of people listing poverty and inequality as ‘the most important problem facing this country’ fell from 30% just before the 2015 Budget to 20% by late last year – a fall of one third.

This is backed up by figures in the Roy Morgan issues tracker, which displays a similar fall.

This isn’t all the government’s doing: partly what this picks up is people getting more concerned about the state of the world economy, dairy prices and so on, and privileging that over inequality.

But the sharp fall also strongly reflects the way that the 2015 Budget’s key announcement, a $25 a week increase in benefits for households with children, has convinced a lot of people that the government is doing ‘something’ about the problem.

People who have spoken to ministers say they think they have now ‘defused’ the issue. The move may also explain why, as Brian Easton noted earlier this year, Stuff’s list of political issues to watch out for in 2016 ignored poverty and inequality. With the issue having receded so much by the end of last year, it would have been tempting to write it off.

But UMR’s polling shows concern about poverty and inequality picking up again since late last year and approaching previous heights. As indeed it might. While the $25 increase was welcome, most families in poverty are more like $100-200 a week short of what they need to afford a decent life for them and their children.

Experts such as Prof Jonathan Boston described the 2015 Budget move as having a ‘marginal’ impact on poverty, and this polling suggests the public may ultimately agree. The government’s move has protected them cleverly: it may even be enough to stop voters from deserting them on that issue. But such temporary inoculation doesn’t make the issue go away in the long-term. Defusing the issue now is not the same as defusing it for ever.

In news stories this week, senior Labour politicians have suggested they are open to a “debate” on the idea of a universal basic income, a no-strings-attached annual salary paid to everyone in the country.

The basic income has various rationales: increasing human dignity, giving people a base from which to be entrepreneurial, simplifying the benefits system, and, uppermost in Labour’s minds, preparing for a world in which people either change jobs rapidly (and need easy, seamless support between work) or simply can’t find employment because the robots have taken all their jobs.

But is Labour really going to go there? I think not. First, a basic income would be hugely expensive. If you paid each of the 3.5 million adults in this country even a minimal amount, say the $11,000 or so that people like Gareth Morgan have modelled, that would cost $38.5 billion a year, without even thinking about support for children. Paying the basic income at a rate that would keep people out of poverty – that is, at the level of New Zealand Superannuation, around $19,500 a year after tax – would cost $68 billion.

For comparison, we currently spend about $12 billion a year on pensions and $4.3 billion a year on other benefits. So the basic income would be a colossal amount. That’s not to say that it isn’t the right policy, or that there aren’t adjustments, offsets and tax increases you can use to make the cost manageable, but merely that to prepare middle New Zealand for such a policy shift and such spending would take, I think, years of work by a mainstream political party. And Labour has ruled out all the revenue-raising options, like  a capital gains tax, that would help fund such a scheme.

Second, you can do much of what Labour is talking about without a basic income. Andrew Little, in one of the stories this week, said: “The question is whether you have an income support system that means every time you stop work you have to go through the palaver of stand-down periods, more bureaucracy, more form filling at the same time as you’re trying to get into your next job.” But if that’s what you want, you could remove stand-down periods, modernise and shift online benefit processes, register everyone in the benefit system when they start work (so that they can move seamlessly from one to another), and so on. You don’t need a basic income.

Finally, another story on this supposed debate claims that the basic income is the same as “the social wage”, and goes on to say: “All Kiwis would be paid a flat income to replace existing social security like pensions and welfare benefits. If a person earns more than the social wage, they won’t get it.”

Now, this is pretty garbled, because the social wage is something quite different; crudely speaking, it’s the dollar value of the free public services people use (which is akin to a wage top-up, hence the term). But the idea that people wouldn’t get the basic income if they earned more than it hints at some kind of claw-back for higher earners.

Assuming that this story represents Labour’s intentions, it suggests that a more likely option is making the benefit system unconditional – that is, you don’t have to be seeking work to get the dole – but not paying the basic income to higher earners. You could argue that that’s a political disaster – since it’s boring, policy-wonk stuff that involves giving some people free money but without the excitement of a full-bore basic income – or smart thinking, since it looks clever and future-focussed without outraging people by giving millionaires ten grand a year.

But either way, it’s not a basic income, nor do I think – from what I hear, and what I feel is politically feasible – that Labour will implement one. I’m happy to be proven wrong, but if not, having a “debate” on something that won’t happen very much runs the risk of looking indecisive, and of raising people’s hopes only to let them down.