Is This a Healthy Budget for New Zealanders?

Presentation to a Post-budget Breakfast Seminar sponsored by the PHA (24 May)

Keywords: Distributional Economics; Social Policy

The Child Poverty Action Group is an Auckland based group committed to addressing the economic and associated difficulties that children and their families face. It is grateful for the invitation from the Public Health Association to speak to you. Susan St John, their economic adviser, who has a sterling record in this area, asked me to make a presentation on her behalf. I am going to briefly summarise some of Susan’s recent work, reported in a paper Financial Assistance for the Young: New Zealand’s incoherent welfare state. Then at the end of a short presentation on an enormous and very important topic, add a couple of comments of my own.

However, let me begin with a brief reference to the Wednesday interview Murray Horne, currently the chairman of the Business Roundtable. In contrast to their previous statements on such topics it seems to me to be fairly commonsensical. Horne says that the elimination of absolute poverty in New Zealand requires a higher growth rate and he emphasizes the invaluable role of getting people into paid employment and a better quality education. What strikes me is the similarity of the views to most of the people in this room. There are differences, and one could exaggerate them. But one has a feeling one could sit down with Horne and have a civilised discussion over the differences, rather than engage in an ideological shouting match. The shift from the past approach of the Business Roundtable is welcome, and for my part I am glad to see it joining the mainstream

To me the key element in Horne’s vision is summarised by his statement ‘There is a role for redistribution of wealth, but there had to be a focus on economic growth.’ So he does not rule out some economic redistribution in the fight against poverty, although he sees that as relatively limited compared to generating jobs and prosperity. I am comfortable with that approach,. But where is that limited redistribution absolutely necessary? I and the CPAG would argue that the single most important redistribution has to be towards children, or more precisely, the income of the households in which the children reside, because the jobs and prosperity strategy does not address their needs. There are three reasons for this.

First, any analysis of poverty shows that the single largest group of the poor are households with children – not beneficiary households, not solo parent households, not Maori or Pacific Island households, not households with the sick or invalided, or ones which have low quality or expensive housing. Certainly these households types have high incidences of poverty, but the largest group of the poor are those with children, many of whom are beneficiary, have only one adult, are Maori or Pacific Island, have members who are sick or invalided, and/or have unsatisfactory housing. But there are also poor households with two adults, dependent on wages, who may be Pakeha, live in modest to adequate housing, and in which everyone is reasonably well (although more prone to illness than more affluent households). So unless we address poverty in households with children we are going to miss these poor, and if we do address those households we will also relieve poverty in these other groups.

But is, as Horne puts it, ‘economic growth .. the tide which rises all boats’? As Susan St John’s work shows that wont apply to poor households with children, because they face very high effective marginal tax rates, so if their gross income goes up – perhaps because they have worked harder or longer – their disposable income will not rise to the same extent, because the limited family assistance they are entitled to is bled out at a high rate. The highest marginal tax rates are on the poor, although there is almost a conspiracy to ignore that fact. We have pro-rich commentators agonising over the rates they pay, how for every dollar they earn and cannot hide in a tax haven, they have taken 39 cents taken away, and how if the rate was lowered to 33 cents they would have an incentive to earn more money, despite their already having an increase in their income from the tax cuts. But nobody mentions that poor families often face double those tax rates. Personally, I would have no objection if a cut of the tax rates on the poor and the resulting increase in disposable income meant that some parents worked shorter hours and spent more time with their children, but the pro-rich tell us they will work longer, add to labour supply and benefit the economy this way too. And apparently they would do it more because they face far higher rates than the rich.

Susan has also shown that not only do the poor with children face high effective marginal tax rates, but the limited levels of support and thresholds have not been indexed for inflation or general movements in incomes. This generates a vicious poverty trap, because most of any additional earned income is clawed back by the government in lower family assitance. Even in a mildly inflationary environment it is possible for the poor to be worse off as result. The rising tide may actually sink the more water-logged boats.

A third point Susan makes is that of the incoherence of the various arrangements means that some families do not get even the little support the state offers them in principle, while other families are sufficiently confused by the incoherence to result in their not responding in the most effective way to the plethora of befuddling incentives.

To this I would add some work that Suzie Ballantyne and I am currently writing up, based on the household survey when it had some health status questions attached. The work is incomplete, but it confirms the high numbers of children among the poor, using a more rigorous statistical methodology than has been used in the past, and shows that poor children are more likely to be sick children. Now we cannot tell from this data base whether poverty causes illness or illness poverty, but we can say that if the sick are concentrated among the poor, then the welfare state is not functioning properly, although I add that the research does show that some measures to limit the spending of the sick appears to have a little success.

I am not in a position to tell you what the precise position of the CPAG is on the 2002 budget, but I would surmmise they would approve of a number of measures that have been announced both yesterday and over the last few years. However I am sure they are terribly disappointed that the inefficient and inadequate assistance to families has not been addressed, and as far as we know is not being addressed, with the caveat that the government has instituted a program to identify material hardship. In the interim child poverty, despite being widespread and having long run impacts on the welfare of the nation, is simply not high enough on the public policy agenda.

Getting it higher is one of the main tasks of the CPAG. And that is why I have been happy this morning to come here and speak on their behalf, and commend to you their efforts to make the welfare of children a national priority.

Susan StJohn’s website: Susan.StJohn