The Growing Gap Between Rich and Poor

The gap between rich and poor is a big problem for New Zealand, showing up in poverty – particularly hitting children – and affecting health, education and other social and economic outcomes. Between one in four and one in five children live in poverty according to the Ministry of Social Development.  International comparisons show New Zealand has one of the widest income gaps in the OECD. Income inequality rose the fastest of any OECD country in the 1980s and ’90s, then levelled off in the 2000s – but remains at around 7th highest in the OECD.

Income gaps can be measured before tax (“market income”), after tax and benefits including Working for Families (“disposable income”), and after receiving the services such as health and education provided by the state (“final income”). In the mid 2000s, New Zealand had high inequalities on the first two – both were 7th highest in the OECD – and the last is not often measured internationally.

Housing is a huge part of many households’ costs which has to be paid before they can buy other essentials, and has a big effect on effective inequality. That is why state and local government housing and income-related rents are so important.

How do the National Government’s policies affect this already grave situation?

Market income (before tax)

The income gap for “market income” has been made worse by two years of only 25 cent per hour increases in the minimum wage. Minimum wages help those on the lowest incomes and also push up wages for low income people near to the minimum wage.

The value of wages has been reduced by the 20 percent increase in GST, which hits low income people hardest.

Market incomes are determined in part by productivity but also by employees’ bargaining power. Attacks on our rights at work – such as giving employers the power to sack someone within their first 90 days for no justified reason – and attacks on unions who represent us, weaken employees’ bargaining power. It is no wonder wage increases fell well behind productivity increases during the 1990s under the anti-union Employment Contracts Act. Low bargaining power in the US has been identified as a reason for the hugely increased income gap there – which some economists consider was a significant cause of the financial crisis.

Disposable income (after tax)

Tax cuts between December 2008 and December 2010 mean that a person on $30,000 a year would be paying $16.15 less tax a week in December 2010 than in December 2008, whereas someone on $150,000 would be paying $151.73 less. So the different in their take home pay has increased by over $135 a week. The top 10 percent of taxable income earners received three out of every seven dollars of the cuts and the top 1 percent received one dollar in every eight – more than the bottom 50 percent.

The cuts the National Government will make to Working for Families if it is re-elected will slash its value by a third over the next seven years after increasing costs of living are taken into account. This programme was one of the most significant contributors to halting the rise of inequality during the 2000s. Is it unaffordable? Look at it as a tax cut mainly benefiting lower income families. It costs $2.8 billion a year. The tax cuts mainly benefiting the top 10 percent of households are costing over $5 billion a year. The design of Working for Families could be improved – it still leaves many welfare beneficiaries in poverty – but affordability is not the issue: priorities are.

Final income (after government services are included)

A recent Treasury report¹ showed that lower income households gain much more from our public social services than higher income households. The 50 percent of lowest income households were receiving $25,000-$35,000 worth of public services in the year to March 2007 – for some, probably doubling their effective incomes. Health, education and other services as well as programmes such as Working for Families, national superannuation and benefits are all part of this “social income”. Meanwhile the highest income households were receiving only $10,000 worth. So cuts in public services or increased charges for services are likely to hit low income households hardest yet again, unless they are tightly targeted – in which case there is a high risk of low income people being trapped in poverty, and reduced support for public services from high income people.

But there’s more

Between June 2008 and June 2010, the average weekly income from wages for Maori barely changed while it fell sharply for Pacific peoples, even before the rising cost of living is taken into account. Their unemployment rates are more than double those of other New Zealanders.

The wealth gap is even larger than the income gap. The most recent data is for 2004 and shows that the wealthiest 1% of the population owns 1 in every 6 dollars (16%) worth of the wealth in the country,  the wealthiest 5% own more than a third of the wealth (38%), the wealthiest 10% own over half the wealth (52%) – and the poorest half of the population own just 1 in 20 dollars worth (5%) of New Zealand’s assets.

Notes

1 “Government and economic growth: Does size matter?”, Treasury Paper 11/01, April 2011, Figure 16, p.34. The data is from before KiwiSaver was under way, and before a significant increase in Working for Families.