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