Spending the Public Growth Dividend: Why Was There So Little for Children?

Presentation to a post-Budget breakfast organised by the Child Poverty Action Group and the Public Health Association, 16 May, 2003.

Keywords: social policy;

I am not going to say much about how disappointing the 2003 budget was to the Child Poverty Lobby insofar as it did little to relieve the financial pressures on family. One could go through each expenditure item and examine how much of it was directed towards children, including praising the small improvements to family assistance – I am sure someone from the government will. The spokesperson will also recall the government promise that ‘improvements in family income assistance … will be a major theme of the 2004 Budget’. The Lobby will remind us of the caveat that these improvements are promised providing ‘present fiscal indicators prove accurate’ – they wont of course – and ask why it has taken five years

Instead, I want to reflect on why there has been so little for family assistance over the years. To do this I want to introduce the notion of the Public Growth Dividend, the amount available each year for public purposes as a result of the growth of the economy, because the government has more revenue at its disposal to address those things which the private market does not automatically benefit. Some of that public spending is unavoidable – for instance there is an acute need for increased outlays on bio-security and anti-terrorism. After it has done that, the government has between half a billion and a billion dollars additional spending above its previous year. This figure is far smaller than the posted budget surplus of $4b, but for various reasons most of this sum is not available for spending. It is easy, when in opposition, to pretend the government has got money it has not got and advocate it be spent. More responsibly, those in government can argue over the exact size of the Public Growth Dividend, but it is definitely less than 1 percent of GDP.

Sometimes the government will cut income taxes converting some of Public Growth Dividend into the Private Growth Dividend, which is the additional private incomes and jobs that economic growth generates. There are some political parties which advocate converting all, or most, of the Public Growth Dividend into a private one, but this government has stoutly maintained that it should be used for public purposes.

But the demands for public spending are enormous. The government has to allocate its small Public Growth Dividend among these fiercely competing demands. It has chosen to give priority to spending on the public health system and the education system. The government’s argument is that both were under-funded in the previous decade and there is a huge backlog to catch up. It spent almost half of the available Public Growth Dividend on health this year, and has committed similar additional amounts of spending in the future. It has also spend a quarter of the Dividend on Education. That left about $250m of additional spending this year for the rest of the public sector. About $60m has gone on the growth and innovation policies – investing to generate a bigger Growth Dividend in the future. (May I say the additional spending on infrastructure is disappointing – perhaps that indicates just how tight public spending is.) About another extra $60m was spent justice and security and about the same amount is to spent extra on the environment and identity. The remaining big ticket item was social welfare itself just under an additional $60m, around a quarter of which went to the family assistance package.

It is thought there will be about $500m available next year after additional health and education spending. The government has said that it will give priority to family assistance – perhaps there might be $300m, or six times that which was made available this year. The government says the technical work has still not yet been done so it does not know how it will spend it. One must be disappointed that it has taken four years to get even this far. But that reflects in part a failure of some of the welfare lobbyists, who have talked about poverty, but very often they have misled the public and the policy makers as to whom are poor in New Zealand. Let me remind you that:
– Over 80 percent of the poor are children and their parents;
– Over half of the poor live in two parent households; less than half in one parent households;
– Over half of the poor depend upon wages; less than half depend on social security benefits;
– Over half of the poor live in their own homes; less than half live in rental homes;
– Over half of the poor are Pakeha; less than half are Maori, Pacific Island, and Asian;
– Most of the poor are moderately well rather than desperately sick.

The implication is that it is more helpful to think of the poor as a Pakeha family with children and two parents, depending on wages, living in their own home (probably with a mortgage), and moderately well. It is true that one parent households, rental households, those on welfare benefits, the sick and ethnic minorities are more likely to be in poverty. But their total numbers are relatively small.

In other words the lobbyists looked at those groups which have a high incidence of poverty, but failed to noticed that these groups are not a large proportion of the population, and so are not the majority of the poor. The consequence has been that much of income support policy has been misdirected – indeed some of the previous government spending has been wasted, insofar as it has been inefficient in attaining the government’s aims. Obviously we dont want that to happen next year, and that means that the policy is going to have to depend less on prejudice and more on research and analysis.

Let me finish by drawing attention to an opportunity. The government is going to spend $28m over four years on the Family Commission. In principle that involves a massive increase in spending on family research. Let us make sure that the spending is used wisely. And let us hope that a good part of that research will be on the economic circumstances of children. Indeed I hope that one of the commissioners will be an economist, expert in family economics. I am happy to nominate her.