Growth V Distribution

What the electoral economic debate is really about.

Listener: 9 August 2008.

Keywords: Distributional Economics; Growth & Innovation;

Although the rhetoric of economic debate is about accelerating economic growth, the reality of politics is mainly about redistributing income.

Merrill Lynch told the Australian insurance industry it would make a $200 million profit if ACC was privatised. PricewaterhouseCoopers said there would be no major gains from ACC’s privatisation. To illustrate the opening point, let’s assume that there are gains of $50 million. If we privatise ACC, the insurance industry makes $200 million, so everybody else makes a loss of $150 million in higher levies, lower benefits and poorer coverage. Yet the insurance industry has an enormous incentive to promote ACC privatisation, waxing lyrically on the benefits even though the rest of the community would be worse off.

This is almost exactly what happened under Rogernomics. (I include here the extension of the policies under the following National Government.) Although the macroeconomic policies badly contracted the economy (by about 15% relative to the rest of the world), the tax cuts to those at the top of the income distribution offset the negligible growth, so their real incomes grew. Those below suffered twice: from the poorer economic performance (including higher unemployment) and from having to pay higher taxes or take benefit and public expenditure cuts to pay for tax breaks for the rich.

This conclusion has been underlined by a recent Ministry of Social Development report, “Household Incomes in New Zealand: 1982 to 2007”.

Its data shows the disposable (after-tax earnings and benefit) income of the top quintile (fifth) of New Zealanders rose in most years between 1984 and 2007. (Personal incomes here are measured on a household basis, adjusted for household composition.) However, the incomes of the bottom four quintiles (80%) fell and were lower in the 1996 year than they had been 12 years earlier. Indeed, those in the poorest two quintiles did not recover their 1984 level until after 2004; the second and third quintiles got back to their 1984 level by 2001.

The situation is complicated by individuals moving between quintiles over their lifetimes, so a university student may be poor when young, in the highest quintile when earning and drop into the middle following retirement. But basically those at the top have been favourably disposed to the policies of the past two decades, while most of the population has not.

The situation has been different in recent years when Rogernomic principles were not so dominant in economic policy. The top quintile still experienced rising real incomes – by about 14.7% (after inflation) between 1998 and 2007. But the middle three quintiles have all had bigger proportional increases. This is because of the major increase in jobs and Government distributional policies being tilted towards them (even though the Working for Families package had not kicked in fully by 2007, and the Budget’s announced tax cuts are yet to become operative). Notice that although the bottom quintile has done much better than in the preceding two decades, it has increased its real incomes only 11.5%. That is because this group is the most dependent on social security benefits, which have not been increased in real terms since 1991. (Note: calculations do not include the cheaper health costs for the poor, nor the reductions in the impositions from student loans.)


Not surprisingly, those in the top quintile are more likely to grumble about recent policies, even though they have got the biggest increases in absolute dollar terms. But the interesting group politically is the second-to-top quintile that includes many swing voters. (Although the numbers below this group are large, they include non-voters and children who can’t vote. In New Zealand, children and their parents dominate the poor.)

Those just below the top have done well in recent years compared with during the Roger-nomics regime, but they might complain others have done better. (We won’t know the effects of the proposed tax cuts until about 2010.)

In New Zealand, the economic rhetoric in elections is about improving the economy; the economic dog whistles are about what is in it for the voters.

The following table shows the data the column uses.

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