Address to the Wellington People’s Forum, 7 September 2002.
Keywords: Distributional Economics; Social Policy.
There is one main fact about poverty in New Zealand, which often gets lost behind a myriad of minor facts, which diverts us from the central issue. The consequence is that attempts to reduce poverty are at best inefficient, and at worst ineffective. That central fact is a substantial majority of the poor are children and their parents. This predominance of children and those who care for them is independent of the choice of poverty line. But to give an illustration, if we use the poverty line based on the deliberations of the 1972 Royal Commission on Social Security – the standard poverty line in the last thirty years – we find at least three-quarters of the poor are children and their parents. It is more than four fifth if we adjust for the more expensive housing that families with children face. Even those figures of 75 percent and 80 percent are under-estimates, if we note that in some households in which there are children there are adults other than their parents. The salient feature of poverty in New Zealand is that it is dominated by households with children in them.
The poor households are not just Maori or Pacific Island. Both ethnic groups have a higher proportion of their people in poverty, but the majority of the poor are Pakeha.
The poor households are not just single parent households. They too are more likely to be poor. But the majority of the poor are in two parent households.
The poor households are not just dependent on social security benefits. The majority of poor households have earnings.
The poor households are not just in state houses or even renting their households. Many poor households are paying off a mortgage.
We have known the salient fact – that poverty in New Zealand is primarily associated with children – for twenty-five years. On occasions there have been attempts to address child poverty: the family assistance packages in the mid 1980s, the package in 1996. But children remain the number one associate with poverty, because we keep forgetting that salient point that poverty is primarily about children, and keep being diverted by minor ones.
We have perhaps a unique opportunity in this parliamentary triennium. I do not doubt the sincerity of this Government when it says it would like to relieve pressure on families. But it has many priorities, and they all pressure it for attention. What makes the situation unusual is that the two flank parties on which the Government depends upon for parliamentary support – the Greens and United Future – both prioritised family policy in their election campaigns. Both, if they keep to their manifestos, will be pressing the government to do something for families. Hopefully the Government will make relieving family poverty one of its priorities.
It faces a severe fiscal problem to do so. I will not spend time today explaining why many of the solutions to the fiscal restraint, such as raiding the Superannuation Fund or reducing the budget surplus are not viable options, for such actions would compromise the growth of the economy. The great importance of growth is not the additional material output it produces, or even the extra funding the government has in hand to spend at the end of the day. Its greatest contribution is to create jobs. The New Zealanders who will benefit most from this job creation, are at the bottom of the income distribution. Economic growth, which requires a prudent fiscal stance, means job growth and that means less poverty.
However, not all New Zealanders will benefit so directly from this job growth. The largest group who will not benefit are poor children. That is why the government needs to actively redistribute some of the gains from growth to those who will not otherwise gain.
The current projections suggest that there will be about $2 billion in the 2005/6 year – three years out – for all the new policy spending over the period. There may be a little more, from improved efficiencies and elimination of ineffective programs. But the net additional spending is $2b (about 2 percent of GDP).
Some of that has to be spent on the health system, some on the education, some on industrial assistance, and some the myriad of other services which government spending promotes. The most which family assistance could possibly expect from the $2b is a quarter of the total, or $500m in the 2005/6 year, which can be phased in over the three years. That will involve it being placed very high on the government’s priorities – much higher than has been evident in recent years.
Given there are about one million New Zealanders who are under the age of 18, the sum of $500m amounts to about $10 per child per week if it was spent as a universal family benefit. I support universality, but the child poverty problem is so urgent and so unaddressed the little funding available has to be targeted. What I want to propose is that instead of a family benefit for everyone, the amount be targeted on the poor. In particular, it should be possible to give the 30 percent of children in the poorest households, the sum of $20 a week, and then to bleed the payment out so that the next 30 percent get a portion of that $20.
The basic policy change being advocated here is an additional spending on children of $500m by 2005/6, which is targeted, with the poorest getting an extra $20 a child a week. The design of the targeting is a bit technical because of the household income distribution, but it will not present the officials a major challenge. The fiscal assistance packages that Labour developed in the 1980s offer a good template for the design. (There is also a problem of phasing in the changes. Ideally the first changes should be announced in the 2003 budget, and the first phase be implemented in January 2004, with a full implementation in April of July 2005.)
The targeting needs to be seamless, so that the amount received is a function of family income and the number of children and not whether the family income is from benefits or earnings (so the reform needs to incorporate the family tax credit into it), or whether the family has one or two parents or what is their marital status. That is, we need to target the support on children, and not get diverted by other objectives. Ideally the assistance needs to be delivered via a negative income tax, so we can avoid the nonsense that tax cuts are good but benefit rises are not.
I now turn to some alternative policies, and explain why they are not the same priority for children:
First, what about rises in basic social security benefit levels? Their real value has not been increased since the benefit cuts of 1991, and no doubt they need review. But the priority has to be children, and this proposal will raise the income of every beneficiary who is caring for children. Many other beneficiaries have benefited from getting a job. In the last three years the economy has generated 134,000 jobs and that means many past beneficiaries are working full- or part-time to their, and the economy’s, benefit. Probably the most important reform at the moment is to reduce the heavy impositions from the abatement system whereby beneficiaries who earn face high effective tax rates. That will have to be reviewed as a part of the redesign of family assistance, and could lead to some gains for beneficiaries
It goes without saying there is a need to make effective the special benefit system. It is totally unacceptable that only 15 percent of those entitled to them get them (even if that is double the rate of three years ago). That is not a policy decision, but an operational implementation and the government needs to direct its officials to improve their performance rapidly. Once the system is properly administered, we may see ways in which we can integrate it better into the benefit, family assistance, and other support systems.
What about housing assistance? Housing is a problem, but its resolution is much more difficult than many people realise. The danger is that we spend a lot of available fiscal resources on poorly thought through interventions, and get stuck with something which is not very effective which proves to be an inefficient waste of the precious funds. Housing pressures will be relieved by the proper application of the special benefits system and by the $20 a week for the poorest children.
Should the the minium wage be raised? The trouble is that most recipients of the minimum wage are not in households with children. Whatever the case for increasing the minimum wage or not increasing it, changes will do little for child poverty.
Another proposal is for income-splitting for tax purposes, whereby a married couple average their income, and so pay less tax. My impression is that many people object to this on the basis of its account of family relations, while others support it for exactly the same reasons. However, what ever the merit or demerit of these arguments, income splitting makes the after tax income distribution more unequal. Consider a couple whose sole-earning husband is on the average wage of $36,000 p.a, and a similarly situated couple where the husband is earning double the average wage. The poorer couple get $11 a week from income splitting and the richer one get $103 a week extra in the hand – over nine times as much. So the rich do very well out of income-splitting. So income-splitting does very little for child poverty, while it uses scarce fiscal resources. I am sure the advocates of income splitting do not intend their policies to be pro-rich. They need to do is come up with a scheme which pursues their social objectives in a fairer way.
Is there room for significant income tax cuts? Average real wages have hardly risen in the last three years, in part because the extra created jobs have been at the lower wage end of the distribution. The pressure for real increases is likely to be substantial over the next three years. These can be ameliorated to some extent by income tax cuts, workers thus sharing in prosperity by lower income taxes (and a higher social wage) without compromising the growth strategy by excessive wage demands. The family assistance package proposed here is a tax cut, targeted at the poorest worker families – those with children. It is a start, but is not enough. Hopefully there will be room for some income tax cuts in the 2005 year, especially if the economy does better than we hope.
The social wage will also help. The free primary services to young children reduced the pressures on poor families with sick children – a policy which should be kept under review. And the government’s strategy of increased health prevention and promotion programs, may not immediately reduce the pressures, but will reduce child sickness in the longer run. On the education front the government has to catch up with a backlog of underspending in the 1990s, most immediately for teachers’ pay. But it would be great if it could find some means to reduce pressures on parents for school fees and expenses, especially if that could be targeted at the low decile schools. Another looming fiscal pressure is ameliorating tertiary student loans.
Finally, a word about the proposed Commission for the Family. The idea is rather vague at the moment although it is expected to be established next year. Let me make but two points. First I hope the Commission’s central remit will include the economic and financial status of families, for if family policy does not address family poverty, the financial pressures on the families of New Zealand will undermine all the other concerns of the Commission’s supporters. Second I hope the focus of the Commission will be holistic, looking across all families, and not pathological looking only at poorly functioning families and their problems. We get too obsessed with failure. By ignoring the whole picture we add to the pressures of families which are functioning reasonably well.
We do that in the poverty area. We look as some particular family form or situation which is under dire pressure, and propose poverty responses which ignoring all the other families that are under as great problems. Poor households are not just Maori or Pacific Island families, or single parent families, or families dependent on social security benefits, or those in tenancies. The issue is child poverty, and we must focus on children.
It has been said that this government has put no great emphasis on social reform over the next three years, for its focus will be on economic progress. while it remains severely fiscally constrained. The practical reason for keeping social reform on the back-burner, is that after two decades of stagnation in the social policy area, the nation has not got the capacity to initiate major reforms quickly.
However suppose the government addresses child poverty by a major increase in targeted family assistance. We have the capacity to carry out such a major family policy reform, and the integrating it with the welfare mess left over from the last two decades will enable us to build the capacity to do good social policy in a coherent way. The government will be able to go to the next election saying that it has tackled one of the core social policy issues. If the economy has also continued to created jobs (and given the sort of upskilling process it envisages), the poor in New Zealand will be experiencing a lot less stress. The gaps will have closed, because the Maori and Pacific Island households are more likely to be in poverty and so they will be proportionally greater beneficiaries.
But we cannot be sure that the government will give child poverty the priority it needs. Every government faces conflicting demands for its scarce resources, and it is always swayed by the various pressure groups and how vociferous they are in persuading the public of the justice of their cause – that is what democracy is about.
So who is to speak for children? Not the children themselves who hardly have a public voice (and certainly dont have a vote). Their parents are so hard pressed by the time children demand, compounded by the financial pressures they face, they have not been able to form an articulate public group to press their cause. That is a main reason why child poverty has persisted, despite researchers having identified it as a serious problem over a quarter of a century ago.
The response when the problem was recognised in Britain in the 1960s, they established a Child Poverty Action Group. There has been an active Child Poverty Action Group in Auckland for five years now. But there is no such organisation in Wellington. Is it not a time to remedy this failure?
That is a question I leave this audience to answer.
1. Pre-election Economic & Fiscal Update 2002, p. 37. The figures for individual years are:
2. The policy problem of the focusing on pathology rather than holistically is detailed in my papers Fences and Ambulances: An Economist Looks at Family Policy and Approaching Family Economic Issues: Holistically or Pathologically?
3. The expression ‘the welfare mess’ is due to Susan St John (latest reference?). ‘Entrenching the welfare mess’ forthcoming October 2002 ( with Keith Rankin) . Previous version Quantifying the welfare mess at http://www.geocities.com/nzwomen/SusanStJohn. Her latest contribution is Child Poverty for the Global Peace and Justice Auckland Forum, 2 September, 2002, which – among other things – sets out some of the complications in the current family assistance package.
Other articles on Family Policy on the website
Fences and Ambulances: An Economist Looks at Family Policy July 1992.
Approaching Family Economic Issues: Holistically or Pathologically? October, 1994.
Family Policy: Creative or Destructive? November, 1994.
The Economic Status and Health Project July 2000.
Poor Children February, 2001.