The real state of household income

by Patrick Nolan

There is growing concern that more households are struggling to make ends meet. These financial pressures facing households are often associated with increases in the prices for household budget items, such as fuel (transport), power, accommodation, and food, and the failure to increase tax thresholds with inflation.

Yet not all data points to the income of the typical Kiwi household slipping backwards, with the increasing per capita real gross national disposable income indicating that the average income available to New Zealanders is increasing.

Further, based on the Labour Cost Index, since March 2000 average gross wages and salaries have increased by close to 23 percent. Salary and wages in the public sector have grown faster than in the private sector (25.5 per cent compared to 21.9 per cent).

It is thus necessary to reconcile growing concern with pressure on household budgets with those measures showing increasing average incomes. To do this, this article moves away from looking at average households and instead investigates whether some households’ incomes have kept pace with rising costs while some have not.

Working for Families and fiscal drag

While an increase in gross wages will raise a household’s gross income, the change in take home pay (net income) is less clear, being subject to a complex set of income tax and family income assistance programmes. Since the beginning of the century, the two major changes to the income tax and family income assistance systems in New Zealand have been the Working for Families reforms and fiscal drag in the personal income tax scale.

Working for Families increased the expenditure on tax credits to households from $1 billion in 2000 to $2.2 billion in 2007, with 371,300 families getting credits during the year ending March 2007.

In contrast, failure to adjust personal income tax thresholds for inflation has meant that taxpayers are now paying a conservatively estimated $1.2 billion more in personal income taxes than in 2000.
To show the effect of Working for Families and fiscal drag on households’ incomes in the hand, in its May 2008 edition of Quarterly Predictions the NZIER calculated the effect of changes in the income tax and family income assistance systems on a range of household types at different income levels (assuming average income growth). This included calculating their changes in income taxes, ACC levy, abated main welfare benefits, and abated Working for Families Tax Credits over this century.

The main results of this modelling were that:

• Low to middle-income households with children were the clear winners of changes to the income tax and family income assistance system since 2000. For example, although they faced additional abatement of the main benefit and increased personal taxes due to fiscal drag, the large increase in the Working for Families tax credits meant that the nominal net income of a sole parent earning $12,500 and with two young children increased by around 26 per cent since 2000. This increased to 35 per cent for such a household on $50,000. For a partnered parent earning $50,000 and with children of the same age, their nominal net income also increased by around 35 per cent.

• Partnered and single people without children fared less well due to fiscal drag through the personal income tax scale and failure to increase the thresholds at which main benefits begin to abate.
The nominal net income of a single person on $12,500 and without dependents increased by around 13 per cent over this period, and a partnered person in similar circumstances by around 14 per cent.

The NZIER also developed a calculator (www.nzier.org.nz) that individual households can use to estimate the effect of Working for Families and fiscal drag on their incomes in the hand since 2000 (along with how their incomes would change should they migrate to Australia).

Increasing household costs

These increases in net wages should be seen in the light of changes in households’ costs since 2000 and which can be shown by changes to the Consumer Price Index (CPI). Since March 2000 the CPI over all groups has risen by 23.8 per cent.

If it is assumed that households’ costs increased in line with the CPI, households without children and with average growth in gross incomes are worse off in real terms in 2008 than in 2000. Households on $75,000 (both with and without children) are also no better off in real terms than in 2000. In contrast, households with children, particularly those around the $50,000 income level, make up the main group of people who have gained in real terms.

Households whose wages grew slower or costs grew faster than average are less likely to be better off in real terms. In this context it can be noted that since 2000 the minimum wage has increased by 59 per cent (from $7.55 to $12.00), which is faster than the overall growth in the Labour Cost Index.

Who have fared best?

For some households the average increases in wages and salaries since 2000 and the introduction of the Working for Families reforms have failed to offset average cost increases. This can help explain changing pressures on household budgets and slowing growth in private consumption.

Those households with the greatest falls in consumption power are households without children. In the 2006 Census these households accounted for around 49 per cent of all households.

This decline in private consumption power is not only important for these households directly, but also has implications for the economy more broadly. In particular, should this decline in consumption power lead to demand for wage growth to exceed output growth, this would in turn lead to pressure on inflation and interest rates (a potential wage-price spiral).

Targeted government spending to address this decline in consumption power would also run the risk of increasing inflationary pressure in the economy.

This also illustrates that, based on cases where gross incomes and costs grew at average rates, arguments that family income assistance reform this century has left beneficiary families with children out in the cold are not completely accurate.

While there are problems with the presence of poverty traps and marriage penalties in the family income assistance system (and declines in the effectiveness with which assistance is targeted to those in need), Working for Families can be seen to have protected much of the consumption power of low to middle-income households with children.