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BOOK EXTRACT: Incredible Luck – Inequality, child poverty and the Key government

This extract from Incredible Luck by Don Brash is reproduced with permission of the copyright holders, Don Brash and Troika Books. RRP $40

Increased income inequality appears to have been common throughout the world over the last three decades and is certainly not peculiar to New Zealand.

An article by well-known economist Henry Ergas in the Australian in March 2012 noted that between the mid-1980s and the late 2000s the incomes of the top 10% of income earners in six European countries – Denmark, Finland, Germany, the Netherlands, Norway and Sweden – increased by 2.1% annually, while those of the bottom 10% increased by only 0.7% annually, a difference of 1.4% annually.

He noted that the gap between the growth of incomes of the top and bottom deciles in the US over the same period had also been exactly 1.4% annually; while the comparable gap in Australia had been 1.5% annually.  In other words, there appears to have been a worldwide phenomenon over the last quarter of a century for the incomes of all groups to increase, but for the incomes of the highest paid groups to increase faster than those at the bottom of the distribution.

When figures for the distribution of income after tax and benefits are compared internationally, New Zealand certainly does not appear to be unusual in an international context. Measures of inequality are traditionally measured using so-called Gini coefficients: the Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income and everyone else has no income).

Measured this way, New Zealand’s income distribution in the “late 2000s”, after tax and transfers, was assessed as 0.330. This suggested that our income distribution at that time was more unequal than that in Norway (0.250), Sweden (0.259), and the Netherlands (0.294), but closely similar to that in Canada (0.324), Australia (0.336), and the United Kingdom (0.345), and less unequal than in the US (0.378).

And as the Minister of Finance noted in the middle of 2013, using estimated data for the tax year ending 31 March 2014, the 50% of all households earning less than $60,000 receive significantly more from the government in cash benefits of various kinds than they pay in income tax, while the 12% of households with taxable income of more than $150,000 will be paying a net 76% of all income tax less cash benefits.

When in-kind benefits such as health and education are taken into account, the redistributive impact of the New Zealand state is likely to be even more pronounced. Moreover, and contrary to the popular perception, the income tax system is even more redistributive today than it was before the income tax changes in 2010, with relatively more of the net income tax paid by those with incomes above $150,000 and relatively less paid by those with income below $60,000.

When figures for the distribution of wealth (as distinct from income) are compared, again using Gini coefficients, New Zealand had a coefficient of  0.651, suggesting New Zealand’s wealth distribution was slightly more unequal than Australia (0.622) and Norway (0.633), virtually identical to that in the Netherlands (0.650), somewhat more equal than that in Canada (0.688) and the United Kingdom (0.697), and markedly more equal than that in Sweden (0.742) and the US (0.801).

So New Zealand is not in any sense unusual when it comes to income inequality, or when it comes to wealth inequality.

Child poverty
But what about the alleged 270,000 children living in poverty? I have no doubt at all that there are far too many children in New Zealand who are enduring genuine hardship – who are undernourished, who have insufficient clothing, and who live in cold and poorly insulated houses.

But the figure is not 270,000, as the recent report of the Ministerial Committee on Poverty highlighted. In an interesting graph in an appendix to that report, it appears that the number of children living in circumstances of “low income and hardship” was nearer 150,000, though the raw data was not provided with the graph.

When poverty is defined as having income of less than 50% of “median equivalised [that is, adjusted for the number of people in the household] household income”, it appears that 12% of New Zealanders aged between birth and 18 years live in poverty – which is a slightly higher figure than in the Netherlands and the UK (10%), lower than in Japan (14%), Canada (15%) and the United States (22%), and exactly the same as in Australia. Twelve percent also happens to be exactly the median for young people living in poverty as so defined throughout the OECD countries.

Most children living in poverty are living with single parents dependent for most of their income on what used to be called the Domestic Purposes Benefit, now Sole Parent Support. Financial support provided to single parents in New Zealand appears to be closely similar (relative to median household income) to that provided in many other OECD countries – slightly above that provided in Canada, Norway, and Sweden, fractionally lower than that in Australia, Belgium and Finland.

Where New Zealand appears to be an outlier is in the low rate of sole parent employment as compared with most other OECD countries, and that is no doubt one of the factors which motivated the welfare reforms announced in the middle of 2013.

I certainly do not blame the Key Government for the unequal distribution of income in New Zealand. The tax and benefit system already results in very substantial redistribution of income towards those with low incomes, while the welfare reforms being driven by Paula Bennett aim to get more people off benefits into paid employment.

At the end of the day, getting into paid employment is crucially important for getting people out of poverty. New Zealand has actually been rather slower to insist that beneficiaries search for employment than many other countries. It was President Clinton’s Government in 1996 that started the United States along a journey that has only recently been joined by New Zealand.

Rating the Key Government
My overall assessment of the Key Government? Despite some worthwhile achievements and some individually outstanding Ministers, I’m very disappointed.

When National was able to form a Government with the support of the ACT Party after the 2008 election, New Zealand faced not one crisis but three – the Global Financial Crisis, the crisis arising from our steady drift backwards in terms of relative living standards, and the crisis arising from the ongoing increase in the country’s net international indebtedness.

Perhaps four crises, if the steady drift towards legal preferences given to people of Maori ethnicity is included. As it turned out, we were spared the worst of the Global Financial Crisis, partly because our banking system remained strong and stable (thank you Australia) and partly because export prices were some of the best in a generation (thank you China).

But five years on, there is absolutely no sign of any pick-up in the growth of per capita incomes; no sign of any reduction in our balance of payments deficits; and a continuing – and perhaps accelerating – trend towards special legal preferences for those of Maori ethnicity in clear breach of any reasonable interpretation of Article III of the Treaty.

I’m sometimes asked what’s the most important single thing the Government must do if we’re to give catching Australia our best shot, and I sometimes attempt an answer – usually with reference to fixing the Resource Management Act or cutting the corporate tax rate. But the reality is that we will never catch Australia in 15 years, or in 50 years, unless Government is willing to look at every policy, new and existing, through a growth lens. Does it help the boat go faster, or does it not?

New Zealand’s relative economic decline over the last half century is one of the steepest on record anywhere. Reversing that decline will not be easy. Of course, some will say these are just the comments of somebody disappointed that the Government has totally ignored the recommendations of the 2025 Taskforce.

Yes, I was disappointed that the recommendations of the Taskforce were ignored, but I would not have been in the least disappointed had I been able to see some alternative vision – some coherent and internally consistent set of policies commensurate with the enormous challenges we face as a country. But if there is such a vision, it is certainly not visible to this observer.

I’m not somebody who believes that governments create wealth: people and firms operating in vigorously competitive markets do. But government policy choices affect the environment all of us face, and therefore the ability of this country and its people to reach their potential. We need to get those choices right, and that sometimes involves asking hard questions and making difficult calls.

But we owe it to ourselves, to our children and to our grandchildren to do so. As is sometimes said in another context, we can’t settle for the soft bigotry of low expectations that says “ah yes, but New Zealand is a nice place to live.”

Of course it is, but we need to transform our economic destiny also, and give New Zealanders a reason to believe that we can once again offer a standard of living similar to that in other developed countries – as we had only 50 years ago.

Achieving this is in part a matter of getting back to basics. The National Party was built on some fundamental truths: vigorous competitive markets where people are largely free to make their own choices generate wealth; societies flourish best where civil society – family, voluntary groups, etc. – is free to flourish, not just as agents of the state but as the bedrock of the community.

Could John Key even now articulate a vision which might give us reason to hope that his Government knows how to deal with the challenges we face? He is certainly intelligent enough to do so but I fear that he still fails to recognise the seriousness of those challenges.

Nobody I know believes that the Left has what it takes to reverse New Zealand’s decline, and let me stress that point. Lest there be any misunderstanding – and I admit there should not be on the part of anybody who has read earlier chapters of this book! – I assuredly do not think that a party which wants to abandon the fundamental tenets of the Reserve Bank Act, to sharply increase the minimum wage, to oppose the sale of government-owned commercial businesses, to establish a government-owned insurance business, and to abolish the 90-day probationary period in employment contracts has the slightest clue about how to deal with the challenges New Zealand faces.

So unless John Key belatedly seizes the opportunity presented by the 2014 election to throw caution to the wind, and show New Zealanders how he proposes to deal with the challenges, the immediate future looks bleak. We will have to wait until after a National-led Government returns to power well into the future.

This extract from Incredible Luck by Don Brash is reproduced with permission of the copyright holders, Don Brash and Troika Books. RRP $40

Comments and questions
8

You have a good heart, Dr Brash, and could do with a different approach to your concerns about economic development and race relations.

Take race relations as an example. The government, in the form of the British Crown, acquired sovereign power over these islands in exchange for engagements to protect the property rights and interests of Maori, and to afford them the equal protection under law. Soon after making this bargain, it proceeded to expropriate Maori lands for government and European settler uses, and even to the point of using military force against unhappy Maori interests. Now that these breaches have been largely recognised, new deals are being struck, in compensation for such wrongs, providing special rights and considerations towards Maori organisations, trusts and tribal entities, leading to concerns that Maori are being given special favours and Maori organisations are being put into positions where they can use their influence to block various land, property and resource uses by using connections with government restrictive and regulatory powers, and using this as a means of extracting recognition, prestige and valuable resources for permission or acquiescence to such projects.

What do these two different concerns have in common? The government fails to work as most people expect it should work, i.e. it fails to protect property rights and afford equal treatment to Maori and non-Maori under the law.

If we want to progress as a society, and to resolve these kinds of issues we have to recognise the root cause: the rule of law is a myth, and the government is a vehicle for special interests to dominate or impose their wishes on others. When the dominant special interests were European settlers, they used the power of the state to confiscate Maori lands for European settlements. Of course they said this was consistent with the rule of law by portraying unhappy Maori interests as terrorists, rebels or the like, and the actions against Maori as law enforcement and as necessary to uphold the rule of law. Now that Maori interests are well enough organised and motivated to take part in seeking political influence they are using it to seek special favours. But of course they aren't portraying their quest as such, instead it is being portrayed as seeking justice and compensation for the wrongs of the past, and as building a partnership with the Crown to protect their interests from injustice in the future. Since the Crown doesn't want to pay full compensation for its past wrongs, it pays a small proportion of the losses as financial compensation, and the balance is offered in the form akin to tax farming: rights and interests and influence that can be used to get economic advantages in the future.

Of course there is no point articulating a problem without presenting a solution. The solution is for us to find, or more accurately rediscover, that we have the best form of social order, and the most peaceful and civilised way of life already in our own hands. Society provides its own institutions and solutions to problems and issues. The legal institutions that ground beneficial and willing cooperation and non-harmful interactions come from social customs and norms, nor from the government. The fundamentals of contract law and tort law under our common law system are customary in origin and nature. It is government that is the threat to social peace and social order, and to us as individuals and communities using established solutions and finding better solutions precisely because it is a vehicle of domination by some of the rest.

Customary law does not and cannot expropriate some for the benefit of others, nor can it elevate some into positions of special power or permission over the lives of the rest of the community. Customary law upholds the customs of the civilised community, i.e. respect for other people and their property and interests, and balance between the rights and interests of myriad individuals and groups in society, and practical and effective ways of dealing with conflicts and disputes and complaints.

If this problem and this solution are recognised, the focus and presentation of the programme for change is quite different. The message needs to be that procedure and process is as important as policies and outcomes. That procedure and process need to be as open and flexible as possible, and that we need to encourage and support direct negotiations between people most affected, and that those not directly affected should not be able to veto the outcomes or hijack the process. That officials power needs to be curtailed, that legislation needs to be repealed, and that court jurisdiction made optional.

Excellent writing and I agree wholeheartedly.

It is quite obvious that John Key & co have not lived up to our expectations in terms of there being no significant improvement in our economy.
They have proved adept at selling a "good news" story,but this helps no one but themselves.
Just like ancient Roman rulers who kept the masses quiet with Gladiators,Christians and Lions,our rulers feed our masses on a diet of Sport and Lotteries.
This keeps their popularity high and we all doze contentedly while our economy continues it's downwards slide.
What we need,although no such is in sight,is a government that has the guts to take actions that will put the economy on the right course.
Some of us hope that a newly re-vampted Act party will move government in the "right" direction.
We live in (faint) hope!
paleo martin

Dear Mr Brash.

I think the United Nations measure of child poverty is more accurate than your go at it above, which actually misquoted how they arrive at their figure and apply to countries.

The United Nations has no political motive to report anything but the truth, whereas the wealthy like yourself in New Zealand try to minimize such statistics. This is so New Zealand's upper middle classes and political elite can keep your head in the sand to the real issues confronting a massive number of New Zealand's children living in despair.

Go for a drive through South Auckland, Whagerai, Gisborne, Porirua, Aranui, Invercargil, and most of rural New Zealand. Incomes are very low and the poverty is real and widespread.

"The United Nations has no political motive to report anything but the truth."

You've got to laugh ....

The United Nations' measure is the percentage of children living below their national 'poverty line' - defined as 50 per cent of median disposable household income.

$85,000 is the median income in NZ. Take out rent / mortgage $15,000 per year, this leaves the "disposable income."

$42,500 - $15,000 = $27,500 disposable income.

I challenge you and your family to live on $27,500 per year, with utilities, school uniforms, food, medical, transport, car repairs, and then tell me if the UN's measure is correct or Mr Brash's far right rhetoric.

For all his failings, Don Brash weakness was that he spoke more truth than most. Unfortunately, this doesnt make for a good politician.

He is right in say Governments doing create wealth, but they should as hell know how to transfer it.

As his stats indicate, high wage earners salaries, in the past 30 years, have increased by more than 1.4% more than lower wages earners. Nothings changed with their jobs, so surely this is a good reason for the government to tax these high wages earners at a progressive rate.

High salaries dont guarantee profit, as this has been proven time and and again, and its not as though these employees are risking capital. If I was government, I'd be bringing in a progressive tax for the higher paid, because most arent worth it. Most business owners would agree.

And if they are any good, employees could have skin in the game instead. This would discourage short term management also.

It was a tragic shame that Don Brash,with his intellect and vast experience was cast out into the political wilderness.
We could have done with his input into government!
And perhaps we would be making some economic progress?
paleo