<
>In the course of an appeal to the <
>Social Security Appeal Authority I was asked to prepare an estimate of the income that the appealing family would require. Here follows my affidavit. The aim has been to keep the text in full, including those necessary for a court document. However there are a few changes made for simplification. In addition the authority directed that the family appealing should be anonymous. I am very comfortable with that direction (in any case would have disguised the family details). Their names reflect common ones of the period. Ms ‘Smith’ is an<
> invalid’s beneficiary; her daughter ‘Emma’ in in her early teens.

 

Keywords: Distributional Economics; Social Policy; Statistics;

Introduction

 

I, Brian Henry Easton swear:

 

1          I am an independent scholar based in Wellington, working in the areas of economics, statistics, public policy and history. A summary of my qualifications and experience is set out in paragraphs 9 to 11 of this affidavit.

2          I have been asked to assist the Social Security Appeal Authority by providing expert evidence on a matter affecting the exercise of a discretion by the Chief Executive and Authority. The discretion is in deciding whether steps should be taken to recover a debt owing to the Ministry of Social Development by Ms Smith. Both the Chief Executive and the Authority have held that the debt should be recovered.

3          On appeal the High Court has remitted the matter back to the Authority for a reconsideration of that decision. This is because the Authority made its decision without regard to New Zealand’s international human rights commitments to ensure an adequate standard of living.

4          I am instructed the commitments are in relation to both ICESCR (International Covenant on Economic, Social and Cultural Rights and UNCROC (United Nations Convention on the Rights of the Child). Under ICESCR the government has committed to provide its citizens with an adequate standard of living, including adequate food, clothing and housing and the continuous improvement of living conditions.  As part of its commitment the government is also obligated not to take retrogressive measures unless they are in pursuit of a pressing goal, they are strictly necessary, and there are no alternate or less restrictive measures available.

5          The government has also specifically committed under UNCROC to take measures to provide an adequate standard of living for its children to the maximum extent of its available resources:

Every child has a right to a standard of living adequate for the child’s physical, mental, spiritual, moral and social development. (art 27.1). The parents have the primary responsibility to secure the conditions necessary for the child’s development but state parties are obligated to take appropriate measures to assist parents, in accordance with national conditions, and to provide material assistance and support particularly in regard to nutrition, clothing and housing.

 

6          My evidence concerns the minimum weekly income needed by Ms Smith to provide an adequate standard of living for her and her dependent daughter, Emma, who is now 15.

7          This is an affidavit to a tribunal. I am Fellow of the Royal Statistical Society and a member of the Royal Society of New Zealand, both of which have codes of professional ethics to which I adhere. These codes complement the Code of Conduct for expert witnesses of the High Court, which I also follow.

 

My conclusion

8.         My conclusion is summarised at the end. It recommends ‘a rate near $540 per week be the benchmark income when judging whether Ms Smith and her daughter have an adequate standard of living. In addition exceptional expenses of $108 per week may have to be added.  However, the state of her consumer durables should not be overlooked.’ (para 144).

 

My background relevant to the evidence I am giving

9          Over the years I have worked in many of the areas which are relevant to this evidence, as will become evident as I report New Zealand social research relevant to this affidavit. Indeed I was one of the New Zealand pioneers of these matters some forty years ago. I shall build on this research to assist the Authority.

10        I have degrees in mathematics and economics from the University of Canterbury and in economics from Victoria University of Wellington. My senior degree is a D.Sc. in economics from the University of Canterbury. I am a Fellow of the Royal Statistical Society, a Charted Statistician and a Distinguished Fellow of the New Zealand Association of Economists. My CV elaborates these and other formal qualifications and relevant experiences.

11        Before I was an independent scholar, I was Director of the N. Z. Institute of Economic Research when it was the premier centre of applied economics in New Zealand. I have also held teaching or research positions at the Auckland University of Technology, the Central Institute of Technology, Georgetown University, Harvard University, the Institute of Development Studies at Brighton, Massey University, the National Institute of Economic and Social Research, the University of Auckland, the University of Canterbury, the University of Melbourne, the University of Sussex, the University of Waikato and Victoria University of Wellington.

12        I am currently an adjunct professor of the Centre for Public Policy at the Auckland University of Technology, an associate of the Stout Research Centre at Victoria University of Wellington, an honorary fellow of Social and Health Outcomes, Research and Evaluation (SHORE) at Massey University, an honorary research fellow of the National Institute for Demographic and Economic Analysis (NIDEA) at the University of Waikato and an honorary research fellow of the Wellington School of Medicine of the University of Otago. Not all of these are directly relevant to this affidavit but they are indicative of my standing in the social science research community and of my experience.

Ms Smith

13        I have read the affidavit of Smith dated 24 August 2012.  I have also met with her and her daughter in her home and discussed her evidence in detail with them. This was to ensure that I did not overlook any relevant aspect of her current living circumstances.

14        The focus of this affidavit is to provide guidance about what is a minimum income to provide an adequate standard of living for her and her daughter today. Ms Smith’s history does not directly affect my task, other than that prolonged income deprivation  will mean she and her daughter have inadequate household durables, stock, clothing and other assets together with – sometimes – debts. Ms Smith has been continuously on a benefit for about the past 8 years.

15        Ms Smith’s circumstances include difficult health problems. …

16        Exhibit D of Ms Smith’s affidavit reports that in August 2012 her weekly rate of Income Support was $469.78. (She received $350.78 in the hand after deductions for her house rent and to repay a WINZ loan for her washing machine.) To repeat the conclusion of my evidence: this amount is substantially below that which seems necessary to maintain her and her daughter at an adequate standard of living.

Some Methodological Preliminaries

17        The calculations refer to weekly rates in mid-2012. Unless otherwise stated I have used the Consumer Price Index to convert older dollar amounts into mid-2012 levels. Unless otherwise stated, all incomes are reported net of tax.

18        Many of the comparisons made in this report involve very long periods, over which the statistical series used are rarely comparable. Therefore the estimates are unlikely to be precise, but they are likely to be in the right order of magnitude.

19        I shall initially make two assumptions. The first is that Ms Smith does not have unusual health problems; the second is that if she has not suffered a long period of income deprivation her and her daughter’s stocks of household durables, stocks and clothing are likely to be adequate. I will later explain the adjustments needed to take these into account.

Assessing an Adequate Standard of Living

20        In order to assist the Authority I set out a number of different ways to estimate an adequate standard of living for the family based on the New Zealand research program over the last four decades.

21        One thing which will soon be evident is that there is a considerable amount of judgement in determining an adequate standard of living, especially if one wants a precise number. That is because fundamentally it is a community judgement. There is no scientific estimate of an adequate standard of living.

22        However, what will be clear from the research is that Ms Smith and her daughter are substantially below any level which the New Zealand community would judge as reasonable.

The 1972 Royal Commission on Social Security

23        The 1972 Royal Commission on Social Security stated:

(e)          The aims of the [social security] system [and income-maintenance policy] should be

(i)         First, to enable everyone to sustain life and health;

(ii)        Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community;

(iii)       Third, where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available. (Para 3/42 – original’s italics)

 

24        What is crucial in the Royal Commission’s statements of aims is that while sub-paragraph (e.i) says that the system should maintain life and health, sub-paragraph (e.ii) says that is not by itself enough. The social security system in a civilised society such as New Zealand aims to ‘ensure … that everyone is able to enjoy a standard of living much like that of the rest of the community’ and the test for that is they are ‘able to feel a sense of participation in and belonging to the community’.

25        The Royal Commission defined belonging and participation as:

no-one is … so poor that they cannot eat the sort of food that New Zealanders usually eat, wear the same sort of clothes, [and] take a moderate part in those activities which the ordinary New Zealander takes part in as a matter of course. The goal is to enable any citizen to meet and mix with other New Zealanders as one of them, as a full member of society – in brief, to belong. (Para 3/32 – original’s italics)

 

26        In the poverty literature this is frequently interpreted as meaning that a society is not concerned merely with an absolute level of income (i.e. enough to ‘maintain life and health’) but a relative level enabling one to exist in a community whose average standard of living is somewhat above this absolute minimum (although of course there are societies whose average is close to the minimum). The UN conventions imply this relative notion when they state that appropriate measures are ‘in accordance with national conditions’.

27        The Royal Commission said that a policy objective based on a relative standard of living does not require everyone ‘to have substantially the same standard of living as everyone else’. (Para 3/32) According to it there was little public demand for such an ‘equality’ goal. (Para 3/34) Aside from that being impossible to assess (since everybody is different), an economist would add such an equalitarian society would not be a high income one since differences in income levels provide incentives for effort and innovation. The aim of an egalitarian society is to produce high standards of wellbeing for everyone, while celebrating diversity and difference and enabling all to participate and belong. This is consistent with the widely held approach to social justice set down in Theory of Justice, written by the outstanding twentieth century philosopher, John Rawls. (The book was published in 1971, and so was not submitted in evidence to the Royal Commission. Had that been possible, the Commission would certainly have been comfortable with Rawls’ approach and smoothly incorporated it into its own thinking.)

 

The 1988 Royal Commission on Social Policy

28        In much the same spirit, the 1988 Royal Commission on Social Policy reported that people required ‘access to a sufficient share of income and other resources to allow them to participate in society with genuine opportunity to achieve their potential and to live lives they find fulfilling.’ (The April Report – Report of the Royal Commission on Social Policy, Volume 1, p 731)

The Participation Aim in Public Policy

29        Forty years after the Royal Commission on Social Security’s deliberations the ‘participate and belong’ phrase is still used in social policy discussions although it tends to get contracted to being able to ‘participate in the community’. A phrase like it is, for instance, widely used in discussions on setting a poverty line.

30        It also appears in various Ministry of Social Development documents reporting on the framework for government policy. Examples are

(i)         Older People in the Tairawhiti District are able to participate as full and equal members of society and enjoy a sustainable quality of life.” (Tairawhiti Positive Ageing Strategy: 2009 to 2014, p.6 – original is in italics)

(ii)        Compared with many countries, New Zealand has done a lot to ensure that disabled people are able to fully participate in and contribute to society.” (Achieving an independence for disabled New Zealanders: Briefing to the Minister, 2012, opening sentence of the Executive Summary, p3.) Later the phrase ‘greater participation and inclusion’ is used.

(iii)       … ensuring that families and whanau can participate fully in society today, including in the modern economy, are critical features of planning for the future in New Zealand.” (Every Child Thrives, Belongs Achieves – the Green Paper for Vulnerable Children. p.3) The same paragraph interprets the third article of the Treaty of Waitangi as ‘participation’. The exact English text of article the third of the Treaty is “In consideration thereof Her Majesty the Queen of England extends to the Natives of New Zealand Her royal protection and imparts to them all the Rights and Privileges of British Subjects.”

(iv)       In this report poverty is understood as exclusion from the minimum acceptable way of life in one’s own society because of inadequate resources.  The definition is explicitly relative, and includes both resources and outcome elements. (Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2011, p.111.)

 

31        It is evident that the notion of ‘participation’ is an integral part of public policy in New Zealand. The most appropriate way of assessing Ms Smith and her daughter’s adequate standard of living is to ask whether they are able to adequately participate.

The Economic Circumstances of the Smith Family

32        A useful way of examining the Smith family economic circumstances is to begin with the Budget Worksheet prepared in July 2012 for the Smith household by an advisor in the Central Districts Budgeting Services.

33        It begins with the $350 p.w. cash in hand following the deduction of household rent ($104) and the loan repayment ($10).  I have added them back to make comparisons easier. The following tabulation summarises their worksheet.

34        The third column is based on comparable outgoings of the average household in the 2010 Household Survey which are scaled so that there are the same outlays on food, and other outlays are in the same proportion. This gives some notion of the relative magnitude of the Smith outlays.

WEEKLY OUTLAYS:

Expense Item	Smith Budget Worksheet	Household Survey Comparison	Notes
Food	$130.00	$130.00	Set at the same level
Housing	$104.00	$153.48	Rent vs Total Outlays
Lawn	$15.00		Household Survey figure NA.
Household energy	$40.38	$31.60
Clothing &  footwear	$10.00	$22.31
Transport	$97.12	$95.91
Medical	$40.00	$17.78
Education	$12.50	$12.29	Only 27.3% of households outlay on education.
Bank fees	$5.00	$3.80	May not be comparable
Communications		$26.04	Smith household is funded separately
Other	$10.00	$254.67	Excludes savings.
TOTAL	$464.00	$747.88

 

35        We now compare item by item. (Note there may be fixed costs and economies of scale for the survey household which  would make the comparison the Smith household spending effectiveness is greater than it actually is.)

Food:

36        The Budget and Survey expenditures are set at a level approximately corresponding to that recommended by the University of Otago’s Department of Human Nutrition which is discussed below.

37        We mention here that, not untypically, food for the Smith family is a residual expenditure, that if there is an income shortage, they spend less on food. For instance, it would appear that when last year counselling sessions were required for Ms Smith at a cost of $60 a week, the family cut back its food outlays to pay for them.

38        In the past the family has had, on occasions, supplements to its food budgets from other sources, including food banks …

Housing (and lawn care and Power)

39        The Smith family pays $104 p.w. for its housing. The equivalent in the Household Survey would be $153.48. Not reported in the latter is the ‘imputed rent’, that is, many households benefit from living in a mortgage free house.

40        The Smiths are fortunate to be living in relatively cheap housing provided by the Housing Corporation of New Zealand; it may well be subsidised. However the accommodation is not of high quality; I would venture it is below average.

41        Additionally it has two large grass lawns which have to be maintained. The Smith budget sets aside $15.00 a week for this purpose. I think this is not unreasonable. As an adolescent I (hand) mowed the family lawns which were probably a third in size of those of the Smith section. I am sure I would have objected to having mow such a large area as this one. In effect then, the lawn charge is an offset to the low rental, and will be treated as such in the subsequent discussion so that the effective rent is $119.

42        A similar phenomenon may apply to household energy. Ms Smith does not seem to be extravagant, and yet she spends more than the comparable figure in the household survey. ($40.38 p.w. to $31.60). This may partly reflect that she does not have an efficient energy delivery system, but it probably also reflects that the difficulty of heating the house. Again one can argue that the additional expenditure is, in effect, offset by the low rental.

43        There is no provision in the Smith budget for house or contents insurance.

Clothing and Footwear

44        The Smith budget provides for clothing and footwear outlays slightly less than half the Survey comparable budget. ($10.00 p.w. to $22.31 p.w.) Cutting back on this item is a typical measure the poor use to eke out funds, making do, and, as Ms Smith mentions, obtaining second-hand and gifted clothing.

Transport

45        The provision for transport outlays is much the same. ($97.12 p.w. for the Smith budget compared to $95.91 p.w. for the Survey comparable budget.) I was struck however, when discussing her spending that Ms Smith is very concerned with petrol costs and I wonder if she actually spends $80 p.w. on petrol as budgeted. (I observe she has no vehicle insurance, again a typical saving by those facing financial stress.)

46        Relatively high transport costs may reflect a poor location of the dwelling, which offers a low rent. I make no judgement on this in the case of the Smith household as I do not know the area well enough.

Medical

47        Given the particular medical challenges that the Smith household faces compared to the typical one, the comparison of medical expenses is hardly useful. ($6.00 p.w. against $17.78 p.w., which will include dental care). From the evidence in Ms Smith’s affidavit the $6.00 pw is almost certainly an underestimate.

Education

48        A comparison of the two educational outlays is misleading.($12.50 p.w. to $12.29 p.w.) Only 27.3% of households outlay on education (most do not have children). The comparable figure for households with children would be $65.13 p.w. That includes outlays on early childcare, tertiary and private school fees and private after school activities (such as ballet lessons).

Bank Fees

49        These are small and may not be comparable.

Communications

50        There was no provision in the Smith household budget for communications such as house phone, mobile phones and internet. This is because an adult child pays for them on behalf of his mother. The comparable budget figure is $26.04 a week. This may be misleading because of fixed costs and economies of scale.

Other

51        The only provision for other expenditures in the Smith budget is $10, the amount she pays WINZ for the loan on her washing machine. In the Survey comparable budget there is $254.67 of other expenditure (excluding savings).

52        There are two indications of what those other spendings cover. First, the Smith budget has zero provision for the following items:

Life assurance

Dental care

Stationery/uniform

Pet expenses

Recreation

Presents

Haircuts/personal products

Personal cash

Children’s pocket money

Children’s education (trips)

Donations (church/charity/koha)

Outlays on consumer durables.

53        Second, the Household Survey mentions the following items in the ‘other outlays’ category:

Household contents and services

Furniture, furnishings and floor coverings

Household textiles

Household appliances

Glassware, tableware and household utensils

Tools and equipment for house and garden

Other household supplies and services

Recreation and culture

Audio-visual and computing equipment

Major recreational and cultural equipment

Other recreational equipment and supplies

Recreational and cultural services

Newspapers, books and stationery

Package holidays

Miscellaneous domestic holiday costs

Miscellaneous goods and service

Personal care

Personal effects nec

Insurance

Credit services

Other miscellaneous services

Alcoholic beverages, tobacco

 

54        One might conclude that the Smith budget, prepared by a reputable budget advisory service, meets (or almost meets[1]) Royal Commission’s first aim of sufficient to sustain life and health. It certainly does not attain the Royal Commission’s second aim of being able to enjoy a standard of living much like that of the rest of the community, and thus able to feel a sense of participation in and belonging to the community.

Ms Smith’s Ability to Participate

55        Ms Smith’s affidavit throws considerable light on her limitations. In a paragraph which was written before I drew her attention to this aspect of public policy she wrote

The debt is a millstone for me and my family. It casts its long shadow over our household and very much affects Emma, whose whole life now is about living without. There are so many things that would go to help her to be healthier and develop her potential and be able to participate in society when she is an adult … (Para 10)

 

56        The extract illustrates a phenomenon which is common in my experience. Mothers define the inadequate standard of living in terms of the impact on their children, often disregarding its impact on themselves (even when that will indirectly compromise the quality of life of the child). That mothers make such sacrifices for their children may be noble, but it is not always wise if the long term effect is to undermine their ability to function as a parent.

57        In Ms Smith’s case any such impact is worsened by her health. The Royal Commission included the caveat that it may not be possible for someone to fully participate and belong because of ‘limitations which may be imposed by physical or other disabilities’. It added ‘where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available’.

58        What the previous section has demonstrated, and which is confirmed by illustrations in the affidavit, is that given the current income available to the Smith family, in all sorts of way neither Ms Smith nor her daughter are able to participate in the communities to which they belong as intended by the 1972 Royal Commission on Social Security when it described the aims of the New Zealand social security system and of income-maintenance policy generally.

59        While my purpose of visiting the Smith household was to ensure that the factual basis of this affidavit was as accurate and comprehensive as I could make it, I came away with the observation that whatever Ms Smith’s past misdemeanors have been – I am in no position to assess them – I am certain that the family’s current economic situation is severely compromising her daughter’s future.

Assessing an Adequate Standard of Living

60        The gold standard for assessing an adequate standard of living would be a close inspection of the person’s ability to participate in society (an inspection which might however be judged overly intrusive) compared to the typical person’s ability to do so (which would require a huge and complicated survey of the population as a whole and would probably also be considered overly intrusive).

61        Lacking this data base, the New Zealand research community has tended to focus on estimating an income which appears to provide an adequate standard of income. The next part of the paper explores some of the efforts to do this. In particular the following approaches are considered:

(1)        Comprehensive Budget Standard;

(2)        Food Budget Standard (Only);

(3)        Multiplying up a Food Budget Standard;

(4)        Expert Panel Assessment;

(5)        Lay Panel Assessment;

(6)        Poverty Lines;

(7)        A Composite Approach.

 

Estimating Income Necessary for an Adequate Standard of Living

 (1)       Comprehensive Budget Standard

Concept

62        The basic idea of a budget list is that there is a list of commodities deemed to be necessary for an adequate standard of living, which are priced to give the income necessary to purchase those commodities.

Example

63        The only detailed New Zealand example I know of came from a family budget standard provided by the Community Council of Greater New York whose purpose was to provide ‘representative lists of annual purchases need to maintain current standards of adequate consumption at moderate cost.’[2] I converted each item from its New York price to a 1973 New Zealand price and tallied them up. [3]

Advantages and Disadvantages

64        The advantage of this approach is that it is simple to understand and very transparent. (For instance, it is precise about alcohol and tobacco consumption.) It can also be adapted to different circumstances. For instance, it discriminates between the needs of children by age, and recognises that those working outside the home may have additional costs.

65        A major disadvantage is that it requires judgements which may be contentious. For instance, it provides for two nighties a year for an income-earning woman but only one if she is not earning.

66        A particular disadvantage is that this figure is based on 1970 consumption standards – and an American one at that. It is not only a matter that numerous items of expenditure have entered the market. (For instance, today’s adolescent student has to have access to a computer terminal and the internet.) Since the standard was set in 1970, the average per capita consumption has risen about 57 percent in real terms.

Application

67        Assuming a family in standard – and not exceptional – circumstances, the approach suggested  would require an income of $460 a week (in 2012 prices) to obtain the 1970 New York family budget standard for a woman not employed in the market work-force, with a teenage daughter and a car.

68        If the relativity with average consumption were to be maintained, the adequate income would be about $723 a week. However the New York standard seems to be a modest rather than minimum income for an adequate standard of living of those times (and, in any case, New York standards might be relatively higher than New Zealand ones).

Conclusion

69        The figure calculated here is indicative of a method, rather than definitive, especially as it is based on consumption patterns which are 40 years out of date.

(2)        Food Budget Standard

Concept

70        This approach is intermediate between the comprehensive budget standard (approach 1) and the multiple of the food budget standard (approach 3). It is treated separately here because it leads to a useful conclusion. The idea is similar to that of the comprehensive budget standard but the list of items applies only to food items, typically selected by an expert team of nutritionists.

Example

71        For over 40 years the Department of Human Nutrition and its predecessors at the University of Otago has been compiling a measure of food costs. They advise that:

most healthy families or individuals will meet their nutritional requirements needs when spending the amount of money specified as the basic costs. .. However, spending less than this amount increases the risk of not getting all the necessary nutrients. Many people will not lack energy or nutrients when spending less than this amount on food if they make careful management choices. However, the chances of consuming an inadequate diet increase as the amount spent to purchase food falls below the basic costs. [4]

72        The estimates are based on detailed calculation of quantities and prices. Weekly meat and poultry requirements are set at 900gms a day for a woman and adolescent girl (men and adolescent boys are 1150gms), and there is additional protein provision from fish, eggs, cheese and legumes. There is also an indication of the sorts of meats which can be purchased (such as mince, corned silverside, hogget leg, mutton and pork chops sausages, saveloys, various categories of chicken and luncheon meat for a basic diet). As indicated quantities are set for men and women, adolescent boys and girls, and also for younger children of four age groups. Prices are obtained from four supermarkets in each of the five main centres.

Advantages and Disadvantages

73        Those who chose the quantities are skilled nutritionists; the normal household purchaser may not make such good choices. [5] On the other hand the household may be able to supply some of their fruit and vegetables (3.5 kgs a week for an adult, 4kg for an adolescent girl) from a home or neighbour’s garden. There may be some economies of scale for larger families.

74        The Department of Human Nutrition estimates the basic food costs in Auckland for a woman is $63 per week and $70 per week for an adolescent girl. That is, a total food budget for the Smith household of $133 per week. In her affidavit Ms Smith says ‘[l]ast year I would have spent been spending only $40 – $80 a week’. (Para 18). The estimated basic food costs for 2011 for a woman and adolescent girl were $129 – between one-and-a-half and three times what Ms Smith was spending.

75        While she describes ways in which she adds to their diets one is left with the impression that her health and that of her (growing) daughter was compromised by an inadequate diet, and that they probably lacked normal energy. It would appear that when she gave up counseling, she used the $60 p.w. on additional food (indicative of how food is a residual expenditure item).

Conclusion

76        Within its limitations the food budget approach is one of the most satisfactory approaches available. However it is not comprehensive. The main limitation of the food budget approach is that it covers only about a fifth of household outlays. (But see the next approach – multiple of food budgets.)

77        In regard to Ms Smith’s circumstance we might conclude that she is struggling to spend an adequate amount on food. Under current circumstances (based on her 2011 experience) when she goes back to counseling or  has to outlay of a similar magnitude  the household needs at least another $70 a week, assuming that she can afford an average of $60 a week for food and that the food budget recommends $133 a week for the two. If she can afford only $80 a week (the maximum payment she recalls) then the extra is $50 per week. The reason this is a minimum is that she may also be skimping on other items (say clothing or heating). Were she given only $50 a week she might – quite prudently – divert some of the additional money to these more urgent items, so the household may remain underfed.

(3)        Multiplying up a Food Budget Standard

Concept

78        Molly Orshansky, an American economist and statistician, applied a multiplier to the cost of a nutritionally adequate diet to derive a set of poverty thresholds, which are in effect minimum adequate income levels. Very occasionally the method has been used, or discussed in New Zealand.

Example

79        In the early 1990s Edith Brashares, an American economist temporarily working in the New Zealand Treasury, applied the Orshansky method to New Zealand. She multiplied a nutritionally adequate diet (set out by a predecessor of the Department of Human Nutrition) by three, four and five to obtain estimates of minimum adequate incomes. [6] (She also looked at some other measures implicit in those used below).

Advantages and Disadvantages

80        The method is simple. However it depends on the choice of the multiplier. A change of 10 percentage points (say to 4.0 to 4.1) changes the level by $13 a week in the case of the Smith household. Yet there is considerable uncertainty as to its level, indicated by the Brashares analysis using a variety of multipliers.

81        The method also leads to paradoxes. If the multiplier is fixed there will be an automatic change over time in line with changes in food prices. However these may not generally track the prices of non-food items. Another paradox is that budget standard food costs are higher for a man than a woman, reflecting his higher nutritional demand on average. (They are also higher for an adolescent boy or girl than for a man.) The application of an inflexible multiplier suggests that a man needs a higher income to attain the same adequate standard of living as a woman. This seems unlikely.

82        Brashares avoids the paradox by using the multiplier on a family of four only. She then calculates the relative income for other household compositions by using a Household Equivalence Scale.

83        Brathshares seems to be unaware that twenty years earlier the 1972 Royal Commission on Social Security considered the Orshansky method and rejected it. [7]

Household Equivalence Scales

84        Since households differ in composition some means are necessary to convert their income to the same standard. This is commonly done by a household equivalence scale. The simplest method would be to convert them onto a per capita basis. However it is generally assumed that children cost less than adults to reach a given living standard (and there may be differences by age, including among adults [8]) and that for some items there are strong economies of scale (especially for housing and other durables; a house does not need a toilet for each inhabitant).

85        While these are well-researched measures they, like the food budget multipliers, are subject to considerable uncertainty. [9]It is sometimes claimed that the scales are all much the same. However the different scales give quite different compositions of those in poverty. The most commonly used scale, the Jensen Scale, is particularly problematic because it is biased against children relative to the other scales. In a review of those which were available in New Zealand, I recommended that they should be avoided if a better statistical method could be found. [10])

Applications

86        Brathshares estimated minimum adequate incomes levels for a one adult, one (average age) child family at $195, $260 and $326 per week in 2012 prices, according to the 3, 4 or 5 multiplier. The level would be higher for a household with a child in her early adolescence. It makes no allowance for any general increase in prosperity since 1988/9.

87        If we apply the multipliers to the current Department of Human Nutrition we derive estimates of the income required for a minimum standard of living of $399, $532 and $665 a week. (The reason why the two sets of numbers are badly out of line is that Brathshares used the Jensen Household Equivalence Scale and because the Smith family has an older child.)

Conclusion

88        The food budget multiplier method as applied here is too mechanical and too reliant on arbitrary assumptions to be of any practical use. The standard based on a multiplier of 3 is almost certainly too low and I have not further used it. (A multiplier of three would seem to be too low in New Zealand where, compared to America, food prices are relatively lower.)  I have also not used the standard based on a multiplier of 5 to avoid the possibility that the earlier deletion creates a bias in the conclusions.

(4)        Expert Panel

Concept

89        An expert panel looks at typical expenditures and incomes in the community and uses that evidence to assess what would be the minimum required to enable a particular household to participate and belong in the community.

Example

90        The 1972 Royal Commission on Social Security considered a wide range of evidence submitted to it together with the available economic statistics, including many of the approaches discussed here, and recommended a social security rate for a couple, and a single beneficiary without children.

91        In particular it recommended that:

(4)        For the purposes of establishing the level of adequacy of benefits at this time the ruling rate of wages paid to building and engineering labourers and the lower quartile level of adult male earnings be regarded as the major reference points.

(5)          (a) The married benefit rate be set close to 60 percent of the designated earnings levels after payment of income tax (set at $33 per week at September 1971);

(b)          The unmarried benefit rate be set at 60 percent of the married rate (say at $20 a week at September 1971). (Recommendations, Chapter 19)

 

92        It then considered how to set rates for families with children. To simplify another complicated discussion it set the benefit level (including the family benefit) for a solo parent with one dependent child (age unspecified) as equal to that for the married couple. (Recommendations, Chapter 21).  It also stated:

We again wish to make it clear that we are not suggesting that benefit levels should be irrevocably tied to the formulae alone. What we are suggesting for the future is that if (after considering all the information which is or may later become available about consumption patterns, living costs and prices, wages productivity, and taxation) the benefit levels decided upon approximated those above the method of analysis, the test of adequacy according to the ‘belonging’ aim is likely to have been met reasonably well. (Para 19.23)

Advantages and Disadvantages

93        Clearly there is much merit in a weighed judgment by experts although it is costly to produce and requires an updating mechanism. Over times circumstances change. For instance the discussion of the Royal Commission is dominated by the notion of the single income family. Relating the benefit level to male wages only would mean a growing gap between beneficiary standards of living and two-income families.

94        Some would object that the expert panel is likely to have little real experience of the living circumstances of those whose income they are recommending. There is a sense that the Royal Commission demonstrated this need not be a decisive criticism by the soundness and compassion of its recommendations, following careful consideration of the evidence submitted to it.[11]

95        However, as mentioned in the opening remarks of this affidavit, the judgements are social and not scientific, and others might come to different – perhaps only slightly different – recommendations. As the Royal Commission said of itself:

we readily concede that this is only a rule of thumb formula, but from the information we have, we believe that it is an adequate and reasonable arrangement (para 21.54)

 

96        A difficulty in interpreting the Royal Commission’s recommendations is that in fact it is recommending a number of different ways of setting the appropriate adequate standard of living and in other circumstances they might diverge. This is evident from the next subsection when they are applied today.

Applications

97        The recommended rate for a solo parent with one dependent child (age unspecified) is $428.99 in 2012 prices. However the average level of consumption has risen about 50 percent. If the Royal Commission’s recommendation were to be scaled by this amount to maintain a parity, the rate for a solo parent with one dependent child would be about $630 in today’s prices.

98        The designated wage measures no longer exist in the exact form used by the Royal Commission. The average weekly wage in the middle of 1971 was $46.81 net on average (at 1971 prices)[12]; so that the recommended rate for a married couple (and hence the solo parent with one child) was 70 percent of the after-tax average wage. A similar wage rate in early 2102 was $817.38. [13] Applying the 70 percent of 1971 might suggest that the Royal Commission today might have recommended around $572.22 per week (net) as the rate for the minimum adequate income for a solo parent and child.

99        Another comparison the Royal Commission proposed was that the solo parent and child got the same income as a couple on New Zealand Superannuation. The net rate in mid 2012 was $536.80 per week (net).

Conclusion

100      Were the Royal Commission to be reconvened it might well recommend a level of around $530-580 per week (net), or $100 a week or so more than Ms Smith is currently getting, even if we ignore her exceptional needs.

(5)        Lay Panel

Concept

101      Just as an expert panel may deliberate and recommend a minimum adequate income, a panel of lay people with no particular expertise other than their living experiences may also propose an income sufficient to meet a minimum adequate living standard.

Example

102      The New Zealand Poverty Measurement Project (NZPMP) asked focus groups made up of people on low incomes to assess minimum adequate household expenditures for two household types. [14]

Advantages and Disadvantages

103      In contrast to an expert panel, a panel of low income people has personal experiences of the situation they are assessing. However the assessment requires some care, which is not evident in the work of the New Zealand Poverty Measurement Project. Do the focus groups have a realistic assessment of the typical household expenditure patterns? They were not asked. Are the focus group’s assessments consistent?

104      We can test the second question by considering one example of focus group deliberations that the NZPMP published. It thought a minimum adequate income for two adults and three children was $475 per week (in 2012 prices) and $374 per week for one adult and two children. [15] Even to the inexpert, the relativity seems wrong. The Jensen equivalence scale, which the NZPMP used, suggests it should be $475 to $274.

105      So compared to the two adult, three child household the one adult, two child household had a standard of living somewhat higher. It is similar to what the group assesses as ‘fair with adequate participation’; the focus group was more generous to solo parents than to couples with children. [16]

Application

106      The NZPMP chose the focus group’s assessment for two adults and three children as the minimum adequate income (which they set as a poverty line – approach 6). Had it chosen their assessment for one adult and two children the poverty line would have been 36 percent higher. The former rate is equal to about 60 percent of the median equivalent household disposable income (approach 6).

107      The minimum adequate income rate for a solo parent and one child based on the NZPMP choice of a level for two adults and three children was $423.35 per week in 2012 prices. If this is increased in line with the rise in per capita consumption it would be $616.40 per week.

Conclusion

108      Consulting lay groups seems promising. However, given the huge divergence between the recommended standards of living of the two household types, these estimates should be used with caution. (In any case the NZPMP moved onto the next approach of 60 percent of the median equivalent household disposable income measure.)

109      I note that the New Zealand cabinet revised social security benefit levels for April 1991 down sharply below the levels proposed by the 1972 Royal Commission on Social Security. Subsequent practice is to increase them in line with inflation only. Whether the cabinet is an expert or lay panel may be a matter of definition. Since there is no documentary evidence why the particular levels were chosen – although they look a bit like a food budget standard with a multiplier of four – they cannot be evaluated in this affidavit.

(6)        Poverty Lines Based on Income Distribution

Concept

110      Given the central notion of the poverty line (or the minimum adequate income) being a relative notion, one approach has been to set the line relative to the overall (household) income distribution.

Example

111      Although there is no official poverty line for New Zealand the rates of 50 percent and 60 percent of median household income are used so widely – including within government – that they might be said to have a semi-official status. For instance, the Ministry of Social Development social monitoring program regularly produces estimates of trends in indicators of inequality and hardship which use these measures. [17]

112      I note that the Human Rights Commission uses 60 percent median income after housing costs as a measure of the extent of child poverty. [18]

Advantages and Disadvantages

113      Directly connecting the income for the minimum adequate of standard of living to the actual income distribution is obviously in the spirit of the notion. Moreover as incomes change the measure will change over time too. However, it is still necessary to make a judgment as to what is the appropriate relativity. Is it 50 percent or 60 percent or some other proportion?

114      There is also an issue of proportion of what reference point? The New Zealand poverty lines use the median (or middle) household income (after it has been equivalised by, say, the Jensen scale). While a measure of the middle of the income distribution is an obvious reference point, the median can result in paradoxes. For instance, if income is shifted from middle income households to high income ones (e.g by raising taxes on those in the middle and lowering them on the rich), the median will fall, and so will the poverty line even though the poor have had no change in their income. This actually happened in the late 1980s and early 1990s when hardship was manifestly rising but poverty (on this measure) was falling. [19]

115      A further complication which has been hardly addressed is the choice of equivalence scale. There has been a tendency to use the Jensen Scale without any sensitivity that it is not empirically founded but based on assumptions which may – but probably do not – reflect actual household experience. [20]

116      An illustration of just how mechanical the adoption of the scale has been is that there is a discussion about whether income should be measured before or after housing costs are deducted. [21] Following the decision, the same equivalence scale is used irrespective of whether housing expenditure is deducted. But housing expenditure is a major component of any economies of scale, so if the scale was right before housing costs are deducted it was wrong after, and vice versa.

117      Expenditure on housing is given this exceptional treatment because spending on it is erratic, depending on whether the house is rented or owned and, if it owned, the terms of the mortgage if any. Nor do housing rent prices quickly equilibrate to a market average so individual rents may be far from the market equilibrium rate, while publicly provided housing may be subsidised relative to rental housing. Housing is also the expenditure item where there are likely to be large regional differences.[22])

Application

118      The latest estimates for the 50 percent and 60 percent of median income are based on the 2009/10 Household Expenditure Survey. The median equivalised (disposable) income was $890 per week in 2012 prices. At 60 percent of the median income the recommended adequate income would be $534 per week; at 50 percent it would be $445 per week.

Conclusion

 

119      While the use of the household income distribution necessarily links the set income standard to those of the community as a whole (and allows for developments such as multiple income households), it still requires an element of judgement. The current dependence on household equivalence scales adds another dimension to the caution at the approach’s use.

120      A recent development, although the initial work goes back to the mid-1970s, has been to assess the actual indicators of material wellbeing of households. [23] The use of material wellbeing measures which are linked to incomes has the prospect of reducing the degree of judgment although not abandoning it. This is work-in-progress and the indicators are yet to be linked to actual incomes.

(7)        A Composite Approach

Concept

121      The approach is to use some of the previous approaches sensitive to their limitations. One might think of it as a family budget standard which uses a multiplier method to fill in for those items which detailed spending is not assessed.

Example