Time to break open NZ’s decades-long poverty trap

30 May 2017
Head and torso portrait.
Associate Professor Susan St John

Government financial policies have had a negative impact on working New Zealand families for almost three decades, writes University of Auckland Associate Professor Susan St John.

My life as a researcher into family incomes began in the 1980s when the Rogernomics revolution was just stirring. The justification of this radical new direction was that lower wages would make us more competitive, lower taxes and benefits would encourage work effort, and ordinary people would be better off through the trickle-down effect.

The underlying “tough love” ideology was that people should stand on their own two feet and not expect the state to cushion them. The means to achieve this transformation were the loosening of union power, employment contracts, low flat tax, small government, user pays, and social assistance of all kinds to be paid "only to the poor".

The imagery of “middle class capture” drove an ever-tighter targeting of social provision, so that those who could pay, would pay. The welfare state was no longer about social security. Nor was it social insurance to protect middle income people from the many vicissitudes of life that private insurance could never meet.

But there was a fly in the ointment. If social assistance is to be confined to the poor, how is it to be reduced as people earn extra income to prevent it going to the rich? The implication of tight targeting worried Treasury greatly because overlapping clawbacks can leave almost nothing in the hand.

The sum of tax and other losses as a fraction of the extra dollar earned is the Effective Marginal Tax Rate (EMTR). The EMTR for those who live at the margins of benefit thresholds can be over 80 percent. For low income “working” families the EMTR can be far higher than the top tax rate paid by the well-off. Throw in commuting costs and childcare, and it is not worth taking on any extra work to get ahead.

The 'welfare only for the poor' policy reached fever point in the 1991 Budget, which promised the nasty side-effects of high EMTRs would be cured. Social welfare benefits were cut, and families were going to have all their social provision managed by the use of smart cards. The family’s income was to be aggregated (somehow) on the card and social provision like student allowances, family payments and healthcare reduced at a constant rate per dollar when they earned extra income. 

As a young researcher I was deeply troubled by this grand design and not surprised when the technocratic ‘solution’ of the smart card proved unworkable and was abandoned. But what was shocking was that the reforms of low tax, low benefits and tight targeting were never revisited. Instead we were left with vicious EMTRs that trap people in poverty.

Many ‘working’ families are now repaying large student debts at 12 percent of earnings above a low unindexed threshold of just $19,084. That already makes their tax rate 30 per cent. For income above $36,350, they lose Working for Families at 22.5 percent, making their tax rate 52.5 percent, or 64.5 percent if they earn over $48,000. They may also lose their accommodation supplement at a rate of 25 percent, and there may be other losses such as child care subsidies and child support to pay, leaving very little for all the extra effort.

Over time, poor families use up their assets and go into debt to feed and clothe their children. At the other end of the scale wealth compounds. We see the end result in wide wealth disparities, social erosion and ever-higher social costs.

Policy makers of the early 1990s need to own their delusion that smart card technology would solve the perverse cumulative effect of tight targeting policies. It was obvious the 1991 Budget was the recipe for a divided nation. It gives me no pleasure now, 26 years on, to see how the problems have intensified under today’s relentless focus on ‘target efficiency’.

Many families, including even those in full time work, are in dire circumstances as indicators such as trends in third world diseases, dental extractions for children under three, suicides, use of foodbanks and homelessness attest. In Auckland one of the key barometers of social distress is the demand for food parcels at the Auckland City Mission. Since the early 1990s the growth has been steadily upwards doubling over the past seven years.

To live happily in New Zealand people must have enough money and enough time. The older population do manage better than young families. The supportive programmes for the old such as wage-linked universal NZ Super, and the gold card are successful and laudable. Today’s policies for families are absolutely not.

Budget 2017 has provided some catch-up spending for some families but has intensified the tight targeting that will make it harder for low income working families to earn their way out of poverty.

The monumental task ahead, for the next government, is to unpick the underlying ideology and reverse its detrimental impact.

 

Associate Professor Susan St John is co-director of the University of Auckland's Retirement Policy and Research Centre, in the Business School.

Used with permission from Newsroom, Time to break open NZ’s decades-long poverty trap published on Tuesday 30 May 2017.