Presentation to the Wellington Statistics Group, 10 December, 2018

This year’s Child Poverty Reduction Act (CPRA) marks a major innovation in social policy. Politicians – here and overseas – have promised to eliminate child poverty at some date in the future. They never have and by the time the target date is reached the promisers have moved on and cannot be held to account.

This time the promise is embedded in an act of parliament. It does not actually say how the target will be attained but it proposes monitoring reductions in child poverty, regular reporting to parliament. It is not the first such act internationally. Britain passed a Child Poverty Act in 2010. There is a fascinating paper to be written comparing the two acts, especially as the British one has been running for eight years, But I leave that for another venue. This paper is about the underlying statistical base of the New Zealand act.

For, from a statistical perspective, it has some strange features Perhaps the oddest is that it does not discuss the concept of poverty despite it being central to the act.

It is true that there are numerous measures of poverty mentioned in the CPRA – I’ll come back to them – but a statistical measure is not a concept. Section 6 of the CPRA charges the Government Statistician with making decisions that define concepts and terms. It is extraordinary that Parliament has left a public official to define the most central issue in a piece of pioneering legislation.

There are difficulties defining the concept of poverty. In rich countries there are two quite different approaches. They are well illustrated by the 1972 Royal Commission on Social Security which identified the aims of the [social security] system as:

(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.

(Original’s italics.)

The first aim is consistent with a notion of an ‘absolute level of poverty’; the second aim defines a notion of ‘relative poverty’. (The third aim will come up as the presentation progresses.)

The Royal Commission saw the second aim of the system – that everyone should be 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 – as the basis of New Zealand social policy.

However, there are those who consider the first notion – of absolute poverty. with the state ensuring there is just enough to to sustain life and health – as the appropriate notion. This view appears regularly in the right wing blogosphere – imported from their US compatriots, I think. But it is also embedded in our existing social policy.

Recall that in the 1990 attack on the welfare state, the base social security benefit was cut from the level set by the Royal Commission to a much lower one. Except for a single lift in core benefits where there were children in 2014, its value adjusted for inflation has not been increased in the following 27 years. The clear implication is that subsequent governments have thought the level was adequate to sustain life and health while the recipients should not share in the benefits from rising prosperity. It enshrines an absolute poverty level.

In contrast, the level of New Zealand Superannuation was not cut in 1990 and its real level has been increased in line with rising real wages so that the elderly are expected to share the rising prosperity of the nation. This more European approach underpins relative poverty.

Probably the CPRA is intended to promote relative poverty. Yet there are some very ingenious people – like those who advised Ruth Richardson and Jenny Shipley – who could reinterpret the act’s undefined poverty line to an absolute poverty one. Certainly the act does not proscribe them from doing so and at various points it could be said to be introducing an absolute poverty notion as I’ll mention.

I am not going on to develop an elaborate definition of relative poverty here but instead talk about some of the treacherous issues arising when measuring poverty. I shall not do this by critiquing the CPRA, but by recalling my journey in research on poverty. What I am recounting here is set out in more detail in a memoir I am writing: Poverty, Inequality and Policy.

What definition of poverty am I using? In simple terms it is the 1972 Royal Commission’s approach of relative poverty with its crucial notion that people should be able to enjoy a standard of living much like that of the rest of the community, and able to feel a sense of participation in and belonging to the community. I have elaborated this notion in various ways, most importantly anchoring it in the philosophies of John Rawles and Amartya Sen.

Beginnings

When I returned from teaching in England in 1970 I chose distributional economics as my research topic, combining my interests in economic theory and statistical application.

It was a neglected field but had considerable practical applications. It was a huge field and I burrowed away. The question of poverty nagged at me. Almost all the useful income data was about individuals but poverty was a household phenomenon. Eventually I hit paydirt. The Department of Statistics ran a survey of household incomes and expenditure in 1973/4. It was the first such comprehensive data base.

Each household in the sample is asked to record its expenditures and income over the year, giving a ‘unit record’ for the household.

The income in the unit record is before tax, so I adjusted to an after-tax income including benefits. The disposable income is now transformed to an ‘adjusted equivalent income’ enabling the material standard of living of different size households to be compared, (I have more to say about this later;)

Next, we sneak in an important assumption: that the household shares its spending fairly. That is probably not quite true – for instance. Mothers will sacrifice their own wellbeing in order to support their children’s.

We then rank all the individuals in the sample, from those who have the lowest adjusted equivalent income to those who have the highest.

There is a detail here that is sometimes overlooked. The ranking is by individuals, not households. Ranking households can be misleading. For instance, it was recently mentioned to me that 40 percent of the poor were sole-parents and their children. Except they were counting households not individuals. Solo parent households are smaller than two-parent ones and there are many more poor individuals in two-parent households than in solo parent households.

We can now answer the following question. Suppose the poverty line is set at $X a year, then what proportion of the individuals are below that poverty line? Observe that if one has some characteristics of the individuals – say whether they are children – a poverty count can be done for the subgroup.

Couple of points for statisticians here. First sample sizes of some sub-groups in the Household Economic Survey means that there is high sampling variation and the estimates can jump around from year to year. That is the reason why the 2018 MSD report does not cover some subgroups which were considered in earlier reports. There is a need for the HES to over-sample some key groups.

Second, the method is essentially working with the cumulative frequency distribution of equivalent household incomes. The curve is steep in the range where the poverty lines fall. So even in the unlikely event of the commutative curve being accurately estimated, small changes in the choice of poverty line can result in large jumps of the numbers in poverty.

Despite these effects, known at the time, this method is broadly what I did, except I did not have access to the unit records. So I had to apply an estimated average tax rate in each category to get the disposable income; there was no alternative.

The relative poverty line I used was that judged by the Royal Commission on Social Security as the minimum to meet its second aim. (I called it the ‘Pensioner Datum Level’.) So I was not imposing my assessment of the poverty line but using an external and eminent social judgement.

My basic conclusion was that the following fell below the PDL

– 20 percent of persons over the age of 60, or 75,000 people;

– 25 percent of children, or  250,000 people;

– 20 percent of their parents, or  190,000 people;

– 5 percent of other adults, or  35,000 people;

a total of

– 18 percent of the population, or 550,000 people.

The estimate of over half a million below the chosen poverty line may be called a ‘Gee-whiz’ figure. It is great for headlines and shocking people but only offers some broad insights.

There was one salient conclusion. According to the RCSS judgement, poverty in New Zealand was a significant issue for a large number of people. There was no inherent reason why the figure was not lower, say 55,000, which perhaps the complacent would have thought reasonable. What the gee-whiz figure suggested was that New Zealand could not be complacent; that around one in five New Zealanders did not have an acceptable living standard. This was published in 1976; we are getting there.

As well as the conclusion that relative poverty was a major problem in New Zealand there were two other major takeaways. First, it was a pioneering approach in New Zealand. I was told in 1980 that New Zealand was in front of the international research effort, a lead we soon lost.

The approach was taken up by the Department of Statistics who developed a computer model based on the unit records I never had access to. The model, with improving quality of the data, has evolved into the standard workhorse for evaluating the household income distribution. The MSD annual report on households incomes uses this approach.

The second critical takeaway was that it refocused on who were poor. The conventional wisdom was that the poor were either beneficiaries or those unable to provide fully for their families because of special circumstances. What this estimate, based on survey evidence, showed was that the poor in New Zealand were (and are) mainly children and their parents, and that many of those parents were in households which were in receipt of near- and above-average wages. It would take a long time for this to become the conventional wisdom. This year’s legislation is surely the official imprimatur – 40 years later.

Household Equivalence Scales

The above account has skipped over some issues of interest to statisticians.

Recall that it is necessary to compare the effective spending power of different households. In practice, our households are compared by the numbers of adults and children. Importantly, we do not allow for the age of children though obviously their needs vary. For instance, an adolescent girl needs more food than her father; I do not discuss clothing allowances.

The studies use a Household Equivalence Scale. In principle it is a table which sets out the relative needs of a household with, say, A adults and C children, compared to a reference household of, say, two adults. In practice the table can be summarised by a simple mathematical function involving a couple of parameters. One parameter gives the relativity between the average adult and the average child; the other measures the household economies of scale, since a household with more people can make some savings compared to people living in separate households.

The immediate reaction of a statistician is that we could estimate the parameters, but that is not what happened. Rather, the standard HES we use. reflects a personal judgement for which there appears to be no systematic empirical evidence. The parameters were first set in 1978 and then changed in a 1988 for no clear reason. The 1988 household equivalence scale is the one used by the Ministry of Social Development and most poverty commentators, although the annual MSD report provides estimates for some other scales but they were not estimated either.

There is no guidance given in the current legislation about the choice of Household Equivalence Scale. The impression is that the drafters of the statute were not even aware there was a problem.

Fortunately, there have been empirical attempts to estimate an HES based on evidence. Stalwart statisticians included Harry Smith and Srikanta Chatterjee but the best New Zealand work was by Claudio Michelini of Massey University.

When I was working with Suzie Ballantyne on a short-lived HRC grant I had planned to estimate HESs. Fortunately Claudio took over the hard grind, estimating scientifically based equivalence scales from ‘preference-consistent extended linear expenditure systems’. Thus Claudio (and other econometricians) derived HESs from actual data – from the evidence of how people behave. Claudio and I discussed how his scale could be improved. He was keen to do so but, alas, he was struck down with a brain tumour in the middle of his project and so his work was never completed.

Does it matter? Many people see little difference when they look at the scales. But the small differences can matter a lot. For instance, if you used the Michelini scale rather than the official MSD scale, the relativity between those in single households and couples changes quite markedly.

You might think that by using the same Household Equivalence Scales as other economies gives them some integrity. Exactly wrong! Institutional arrangements matter. To see this, consider what would happen if the government abandoned free education and give each household the cash equivalent. Since their income would go up, each family would be less likely to be measured as in poverty. The paradox arises because the household equivalence scale should be adjusted for the additional schooling charges the household faces.

So arrangements in public supply of services, such as education and health, matter. Price changes, including the cost of servicing a mortgage, matter. It would be a miracle if a household equivalence scale which was correct in 1988 was as true thirty years later.

The different HESs give different estimates for the numbers below the poverty line – generally the Michelini numbers of poor are higher. The composition of the poor is also affected – the Michelini HES finds more poor children and their parents in multiple adult households than does the official MSD one.

Looking at the evidence makes me pretty sure that the assumed economies of scale effect is too strong. That would mean that the poverty line (and therefore recommended support) for large families is too low and any count of the poor in large households is underestimated. It gives policy an incentive to address poverty in small households, ignoring it in large ones where it is more serious.

Housing

Spending on accommodation is always a difficult issue. The problem arises because a family in exactly the same house may have quite different outgoings: they may be paying the market rent, or their rent may be subsidised, or they may own the house freehold and their outgoings may be just rates, insurance and maintenance, or they may own it with a mortgage so that on top of the freeholder’s outgoings there will be the debt servicing, and there are those who pay next to nothing because the house goes with the job or there is some family or trust arrangement.

The counsel of perfection is that the difference between outgoings and the market rent should be treated as additional income (or perhaps negative income). Applying the counsel is tricky. Suzie and I made good econometric progress and the indications were that it improved the statistical results. But Claudio did not stay around long enough to apply our approach to his HESs.

The alternatives have been either to ignore the housing outlay problem or to deduct the housing outlays from income. Both are proposed in the new CPRA.

The argument for ignoring it may be that income support should be adjusted for housing outlays as is done to some extent (e.g. via the accommodation supplement or subsidised state housing). At the aggregate level it is assumed that the impact of the heterogeneity will average out so the total in poverty is not affected. That is unlikely but the overall effect may be small. Even so, it is likely to lead to an undercount of those with heavy mortgage outgoings. Conversely, some of those who have lower outgoings may appear to be below the poverty line when they are actually a little better off.

Deducting housing costs from income might seem to be a good idea, although an economist bridles at deducting a spending flow from an income flow – it is like subtracting apples from oranges. Fastidiousness aside, the next step by the orthodoxy is astonishing: the same household equivalence scale is applied to income less housing costs as the one applied to total income.

But the standard HES, used where housing costs are included, has strong economies of scale arising from the cost savings that large households have in their housing bills. If the HES is correct for total income, it must be wrong for income less housing costs where there are not the same economies of scale. The consequence is that once more the incidence of poverty is under-represented in larger households. (The 2018 MSD reports uses a different OECD scale when adjusted housing costs are deducted, with lower economies of scale. It is not empirically based.)

In conclusion using the current arbitrary Household Equivalence Scale probably underestimates the poverty line and the numbers in poverty of the following:

– those in larger households

– those in households with adolescent children

– those with high housing costs arising from high mortgages or high rents

– those in households with workers with employment costs.

Choosing a Relative Poverty Line

Back in the mid-1970s, the Royal Commission judgement as to the relative poverty line, based on listening to the evidence submitted to it, was the best we had. With time, we try to find a better estimate.

In the 1990s, the Poverty Measurement Project asked focus groups of relatively poor people what they thought was the minimum adequate household expenditure for their households.

Unfortunately, the results were nonsensical – they seemed to suggest an individual adult would be satisfied with a negative income.

Eventually the Project abandoned the focus group approach and settled on a proportion of median equivalised household incomes. Where they got the notion from is unclear, although it is used in international comparisons, perhaps because it is tricky to calculate the top and the bottom of the income distribution. The median benchmark is central to the poverty indicators in the CPRA.

The median is the middle of the income distribution with as many above it as below it. Advocates argue over whether the percentage should be 50 or 60 of the median income. They do not provide much evidence for their opinions.

The weakness of a median income benchmark is illustrated by the following paradox. A median-income-based poverty line makes it possible for measured poverty to be reduced by taking income from those in the middle of the income distribution and giving it to those at the top. The income of the middle household falls and so does a median-income-based poverty line. Thus numbers of those measured in poverty are reduced even though there is no change in the living standards of the poor.

Suppose the median (middle) income is 100 units, and we use the 50 percent of median income poverty line, so anyone in a household below 50 units is in poverty. Now suppose the government rejigs the tax system in favour of the rich by raising taxes on those in the middle and using the proceeds to cut taxes at the top. Suppose the higher taxes on the middle reduced median income to 90 units from 100 units. The measured poverty level falls to 45 units and all the people in the 45 units to 50 units income range are no longer deemed to be in poverty.

This is not just a meticulous scholar-statistician generating a theoretical paradox. This actually happened when in the early 1990s, when the government redistribution transferred income to the rich. The Poverty Measurement Project reported the numbers in poverty fell. Any objective observer at the time saw plenty of evidence of rising deprivation. Yet the faulty poverty measure showed exactly the opposite. Both the Treasury and a right-wing think-tank, the Business Round Table, trumpeted the success of their pro-rich redistributive policies at reducing poverty.

It is not hard to switch to a mean benchmark: 60 percent of the median is would be 49 percent of the mean today. Before 1990 it would have been 54 percent. In effect the pro-rich tax changes in the late 1980s cut the relative poverty line by 10 percent if it was benchmarked by the median.

Not only is the mean easier to understand, has better statistical properties and is harder to manipulate, but it is also easier to forecast. A statistician is left bewildered when we use the median benchmark.

The 50 percent median seems too low, at least in terms of one case study in which I was involved. In 2012 I had the task of offering guidance to the Social Security Appeal Authority as to the income which would be sufficient to enable a particular family of Meg and her early-teenage daughter, Stacey, to attain an adequate standard of living. Since this involves judgement, I estimated ten different rates. One – based on American standards – was clearly too high but eight clustered around $540 p.w. In contrast, the family’s actual income was about $470 a week, so they needed a 15 percent boost (plus more for exceptional expenses).

There was a lower outlier, well away from the other eight estimates. It was the 50 percent median figure of $455 p.w. – much the same as what the family was actually receiving.

But the amount the family was receiving was clearly inadequate. There is an uninformed view that all the poor really need is financial advice. This family had gone to the local budget advisory service. The budget it prepared for them provided for food, housing, electricity, medical and educational costs, transport and phone. It left them with just $19 a week for everything else: clothing and footwear, entertainment, recreation, dental care, consumer durables, insurance, haircuts, presents, school trips and pets.

It was hard to conclude from the budget that the family had an adequate standard of living which would enable them to belong to and participate in society. The conclusion is reinforced by two instances.

To eke out their inadequate income the two skipped some of their medical needs, but the big saving was on food, usually only $40 to $80 a week, well below the level of $130 for the simple but nutritious meals recommended by the University of Otago Department of Human Nutrition. Meg and Stacey depended on chips. They knew it was not healthy but chips are the cheapest way to fill one’s belly, putting off hunger and leaving some cash for other necessities.

Second, not only was Stacey’s health compromised by poor nutrition, unhealthy housing and skipping some healthcare but she was excluded by not being able to afford to participate with her school friends in social events (while I was there she missed out on going with them to a gig). These compromised her education, as did the lack of funds for the ongoing charges schools place on today’s children. Stacey’s adulthood prospects were not good.

One concludes that a 50-percent-of-median poverty line is far below any relative poverty line the Royal Commission might have envisaged. Yet it is included among the indicators in the CPRA. But even were it to be struck out, the reference to a median benchmark remains treacherous.

Instructively, the British Child Poverty Act does not contemplate a 50 percent median poverty measure, mentioning only the 60 percent one. One has an uneasy feeling that the New Zealand legislation enables us to sneak back to an absolute poverty line, if a government wants.

Non-Income Measures of Poverty

The paradigm used in the CPRS was developed in the 1970s; can we progress? Then I used income because I did not have any other measure. In any case, supplementing income is the main means of dealing with poverty (although, as the Royal Commission’s third aim mentions, there are others).

In fact, back in the early 1970s there had been an attempt at an alternative approach. In 1974 David Ferguson led a DSW study of the living standards of the elderly, which was used to calibrate an appropriate public pension level for them. It is implicit in the analysis I did of Meg and Stacey.

From 2001 the MSD has been constructing a scale based on non-monetary indicators which will measure economic living standards. (Its acronym is ELSI). It was an early innovation in the now fashionable international effort to better measure wellbeing.

Essentially it involves asking a sample of households some 40 questions that relate to

– possessions (personal and household items),

– social participation activities (interaction with family and friends, holidays),

– degree of economising – including having no need for economising – across many areas (food, clothing, recreation, use of medical services),

and

– self-ratings (of the respondent’s standard of living, satisfaction with standard of living, and adequacy of current income to meet basic everyday needs).

From these are constructed the ELSI scale.

In principle the ELSI scale could be used as a measure for individual poverty identification but, practically, misleading responses to the questions could raise the amount one was entitled to. Essentially the ELSI is a research tool. (The MSD have moved onto a Material Wellbeing Index (MWI) and a deprivation index (DEP-17).)

Currently the MSD reports on the ELSI each year separately from its income report, but with attention to the relationship between the two. In principle one could use the ELSI scale to set a poverty line. Perhaps the CPRA refers to the ELSI in various places. But it still involves a judgement.

(Incidentally, there has been little serious statistical investigation of the data bases in either he Household Survey, the ELSI (or SOFIE discussed below) despite each having a rich statistical base. Fundamentally this is because an unwillingness to fund serious research into household incomes and poverty (although limited access to unit records has not helped.)

When I look at the set of questions I wonder whether they are over-dependent upon choices by middle-income middle-aged males. As far as I know, there has been no attempt to do a pre-survey asking people what they think should be asked.

I mention – this became very evident as I wrote my memoir – that one of the constant challenges I have had in my research work has been to ensure the distinctive features of women’s experience are recognised – a particularly important issue since more women than men are in poverty.

This is not an uninformed rant against male statisticians; rather it is a wish that there were more top-quality women social statisticians. There have been numerous places where I had to recognise women were different, but another example has arisen recently – period poverty. There is no relevant question in the ELSI questionnaire. How should it handle an issue which is clearly vital to some but not to everyone?

The same is true for children even if the poverty focus is on them. Earlier I mentioned mothers who make sacrifices to enhance their children’s wellbeing. Perhaps sometimes children do the same to protect the rest of the family.

An even bigger problem is that, as I mentioned with Stacey, deprivation now may affect future life chances. Here we are suing a wider conception based on, say, the RCSS’ notion, or that of Rawles or of Amartya Sen’s notion of ‘capabilities’ – which is a development – inhibition of life chances is clearly a serious part of the concept of poverty.

Sadly there is not a lot of data which enables the assessment of life chances. The New Zealand longitudinal studies did not collect a lot of economic material on the families involved. The recently reported MSD study which was interpreted by some to show that poverty caused criminality, It is based on evidence about families with nine month children. The confidence interval for prospects two decades out must be huge.

Just to complete the dynamics story, I mention the Survey of Family, Income and Employment (SOFIE) which enabled tracking household incomes over seven years. It showed many experience ups and downs which may mean they are below the income poverty line for only part of the time. However, some households remained recalcitrantly below the line through all seven years. Sadly, but as you might expect given the sad state of our social analysis, the valuable survey has been ended.

Conclusion

We conclude that the new legislation aiming to reduce child poverty has a poor quality statistical base but it is going in the right direction. Does it matter?

While low quality analysis is irritating to a professional statistician, the system envisaged in the CPRA can also be corrupted. Recall Gilling’s Law which states that the way the game is scored shapes the way the game is played. What if the scoring system is distorted?

Even if the poverty reduction game is played by people of goodwill, distorted outcomes are going to happen. I have mentioned how the system seems to be biased against households with more children. An even more egregious possibility is that, as I have explained, on some poverty measures one can get a reduction in measured poverty by tax cuts which favour the rich with no effect on the living standards of the poor. If one is competent, it is easy to think of many more ways of corrupting the outcome. I wont describe them; I am not applying for that job.

As in the case of the bias against large families, the poor quality outcomes may occur unintentionally. Consider the minister looking at various policy options each of which has the measured poverty reduction. The minister is likely to choose the one which gives the greatest measured reduction. Except it may not have the greatest impact on reducing poverty.

I regret having to come to such a sad conclusion. One wonders how we have ended up with such a mess. The answer may be the poor statistical skills of the social policy community.

The government has embarked upon a courageous course to reduce child poverty. The Child Poverty Reduction Act is a mix of visionary political leadership with inept social policy and analysis. Let us hope that leadership outweighs the inept.

Note that some of the original submission proved redundant. For ease of presentation they have been removed. An explanation of what happened is set out here. (I have not changed the numbering.)

Introduction

My name is Brian Easton. I have a doctorate of science from the University of Canterbury and hold other qualifications in economics, mathematics and statistics. I hold honorary positions in six New Zealand universities including an adjunct chair at the Auckland University of Technology.

I was among the first to recognise that the largest group of New Zealand’s poor was children and their guardians/parents. My first published paper on poverty was more than forty years ago. Since then, when resources have allowed, I have extended my research on the measurement of poverty and inequality and its implications. My very long publications list on the topic of the bill can be supplied on request.

This submission is on my behalf but it also reflects the views and interests of those in the inequality research community

Summary

This submission broadly supports the Child Poverty Reduction Bill, setting it in a wider context.

It is in four parts.

Part I points out that the Child Poverty Reduction Bill is an extension of the Fiscal Responsibility Act (now incorporated into the Public Finance Act) but that it also represents a different vision of the role of the Government.

Part II explains that a poverty line is a measure of inequality and one which is consistent with earlier New Zealand social policy thinking.

Part III argues that the current measures of poverty in New Zealand can be improved and that it is imperative to do so if we want the reduction the bill promises to succeed.

Part IV discusses changes necessary to the Bill to implement the findings of the earlier part.

The submission concludes with a summary of this submission’s recommendations, including suggestions on how the bill should be amended.

The overall conclusion of this submission is that the Bill should be proceeded with, but that it should be amended as follows:.

1. That all references to absolute poverty be eliminated from the Bill and that it be clear that the notion referred to in the Bill is relative poverty, perhaps as implicitly defined by the 1972 Royal Commission on Social Security.
2. That the current processes of setting targets in the Bill be replaced as follows:

2a.       That each incoming government be required to table in the House a set of targets for poverty reduction.

2b.       That the government establish an independent technical committee to provide measures of the wellbeing of children and other New Zealanders.

2c.       That the government establish an independent representative committee to use the measures provided by the technical committee to make recommendations on a suite of poverty lines which the government may use is setting its targets.

Part I: The Child Poverty Reduction Bill and the fiscal responsibility approach.

1.1.      Both past New Zealand governments and some overseas ones have promised to eliminate child poverty or substantially reduce current levels. Necessarily this requires time but the target date mentioned in the promise has always been so far out that the politician or government making the promise will not be in power. Thus they have not been accountable for achieving the target and have not been held to account. Practically, such promises have been valueless.

1.2       This bill also makes such a promise, but the effect of the statute is that it holds every government between today’s and that at the target date accountable to Parliament in particular and the public in general. As such it has parallels to the 1991 Fiscal Responsibility Act (now incorporated into the Public Finance Act).

1.3       In 1994 the New Zealand Parliament enacted a Fiscal Responsibility Act, which required the government to set future targets for government debt. The government chooses the actual benchmarks but it is required to publish them. There is no legislated penalty for a failure to meet the debt targets – it is accepted that events outside the control of the government can impact on the outcome. Instead it is left to public opinion and parliament to assess the government’s success or otherwise in meeting its targets.

1.4       The parallels with the Child Poverty Reduction Bill are obvious. Again the government is required to set future targets but this time for numbers of children below a poverty level. Again the government chooses and publishes the benchmarks. There is no penalty for a failure to meet the targets for again, events outside the control of the government can impact on the outcome. Again, it is left for public opinion and parliament to assess the government’s success or otherwise in meeting its poverty reduction targets.

1.5       The Bill introduces a further explicit concern for fiscal policy. The 1994 Act was in the (neoliberal) framework of the government budget administered as if it were a household. This had represented a winding back from the earlier tradition that fiscal policy was concerned with wider social ends. (I can elaborate this if requested.) The effect of the Child Poverty Reduction Bill is to direct that fiscal policy must be concerned with wider social issues and not just ‘balancing the budget’. In particular it introduces inequality as an explicit policy objective.

1.6       Recently there has been concern among the public about the degree of inequality in New Zealand. In my opinion that concern has been sufficiently widespread for Parliament to be concerned with the issue. Not to be concerned would amount to its failing to represent the people of New Zealand.

1.7       The public concern about economic inequality has not been carefully analysed. As best as I can judge there are three major public threads (in addition to the personal belief that the individual is not getting an adequate share of total national income):

(i) There is a concern that the existing income (and wealth) distribution is not fair. This is essentially an ethical concern but also reflects a vision of the sort of society which New Zealand should be.

(ii) There is a concern that the existing income (and wealth) distribution threatens social coherence and hence social stability.

(iii) There is a concern that poverty among children (the largest group of the poor in New Zealand) affects their opportunity and life choices by compromising their health and educational attainment. This is not only detrimental to them (that is, it is not fair) but it results in poorer future economic performance (from the loss of human skills and from the higher social costs of dealing with the consequences of the earlier failure) and, ultimately, the long-term social coherence and viability of the nation. (I am reluctant to comment on the impact of poverty on criminal behaviour as the research evidence I know of is limited.)

1.8       Enacting the Child Poverty Reduction Bill would show Parliament taking up this challenge of inequality, especially in regard to the third concern mentioned in the previous paragraph.

1.9       Poverty and economic inequality are inextricably linked. The next part of this submission elaborates the linkage.

Part II: The relationship between measured poverty line and measured inequality.

2.1       Public discussion assumes that inequality is a well-defined notion which may be readily measured by a single indicator. (The Gini Coefficient is often cited, frequently by people who could not define it.)

2.2       The research is clear: there is no simple notion of inequality nor measure of it. This might be illustrated by the way in which on occasions various measures of inequality can be in conflict with each other, some suggesting it is increasing, some that it is decreasing and some showing no change. I can provide a lecture (or a course) on this topic, but perhaps a single illustration will suffice. In the mid-1990s some measures based on median incomes concluded that the transfer of income from the middle of the distribution to those with top incomes reduced poverty. (Median income fell, and therefore the poverty line base on median incomes fell so the numbers below the line fell.) This was despite an evident rise in hardship well attested by those working with the poor (for instance the number of food parcels distributed increased). In fact most other measures of poverty and inequality rose despite income inequality on most measures increasing. Casual use of measures of inequality and poverty can be treacherous.

2.3       However, if the shift in the income distribution is sufficiently large (as it was between 1985 and 1995), all sensible indicators of inequality will show a shift in the same direction. It is where the distribution shifts are small and short term that the indicators can be contradictory.

2.4       The niceties of research precision are not always helpful for those involved in policy implementation, even though they should be kept in mind. Practically, though, policy may have to choose a particular measure (or a suite of measures) of inequality and poverty. What the research says is that the choice requires a value judgement which cannot be objectively provided. However, research can help the subjective decision-makers to make an informed choice.

2.5       By proposing poverty lines, the Child Poverty Reduction Bill proposes a particular measure of inequality. If the select committee decides it wants to look at alternative measures, I am willing to assist it. However a poverty line has a logic derived from older social policy traditions which were abandoned in about 1990.

2.6       While the 1972 Royal Commission on Social Security was nominally concerned with the social security system, it actually presented perhaps the most comprehensive view of the economic foundations of social policy of any official New Zealand body. In particular it said (original’s underlining)

The aims of the system, 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.

(2.7      The Royal Commission used the term ‘participation in and belonging to’. The second part of the expression has sometimes been omitted. The reason for doing so is not always made clear but a possible one is that it is redundant – that participation in a community means one belongs to it. In deference to the original formulation this paper uses the full expression.)

2.8       The first aim of the Royal Commission is consistent with a notion of maintaining everybody at or above an absolute level of poverty; its second aim defines a notion of relative poverty. The rest of this submission has much to say about this distinction. The Royal Commission saw the second notion as the basis of New Zealand social policy.

(2.9      We will not pursue in detail here the third aim although it is very relevant for social policy. For instance, no amount of income will resolve poor access to a building for those with mobility challenges.)

2.10     Instructively, the Royal Commission did not say anything about the top of the income distribution. Perhaps it was because that lay outside the terms of reference of the enquiry but there may have been a deeper reason.

2.11     In 1971, about the time that the Royal Commission was completing its report, American philosopher John Rawls published his seminal Theory of Justice. He argued for ‘justice as fairness’, recommending equal basic rights, equality of opportunity, and the promotion of the interests of the least advantaged members of society. In particular he proposed a ‘maximin’ principle – that the system should be designed to maximize the position of those who will be worst off in it – which he derived by individuals choosing to improve the position of the worst off in society with the possibility they might find themselves in that position.

2.12     There is no evidence that the Royal Commission had access to Rawls’ thinking but there is an uncanny parallel between its conclusions and those of The Theory of Justice. Had the book’s arguments been presented to it, it seems likely that the Royal Commission would have comfortably and seamlessly incorporated the Rawlsian principles into its report.

2.13     In particular, the Royal Commission’s second aim of the system – that everyone should be 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 – is a reformulation of the ‘maximin’ principle. Note that Rawls does not say much about the top of the income distribution. His focus is on the providing an income floor.

2.14     So it is completely in keeping with New Zealand’s traditional social policy objectives to focus on providing a minimum income floor – in effect a poverty line – without too much attention to further up the distribution (other than as funders of the floor).

2.15     Thus the focus of the Child Poverty Reduction Bill on a poverty line is consistent with both New Zealand’s traditional approach to social policy and reputable philosophical thinking.

2.16     Given the size of child poverty – the exact numbers of those defined being in poverty depend on the choice of the poverty line (to the numbers should be added their guardians/parents) – I am confident that a significant reduction in the numbers below any sensible poverty line will show a reduction in overall income inequality on any other sensible measure.

(2.17    While well over half of the poor are children and their guardians/parents there remain others who do not belong to this category and are unlikely to be affected by any policy changes which reduce child poverty. Should their needs be addressed? For many of them – including the sick and the disabled – the answer is ‘yes’; it is to be hoped that their needs will be considered in due course. However, the RCSS/Rawls approach does not place an obligation to ensure that everyone below the poverty line should receive more income assistance. Aside from those for whom employment is a more appropriate solution, there are also those who choose low income life styles as the best way they can participate in and belong to their community.)

Part III: Setting a Poverty Line.

3.1       The way that the numbers in poverty are usually counted is as follows. An indicator of living standards is identified and measured for each household.[1] Most often this has been disposable income – market income plus benefit income less direct taxes paid – which will be used here to illustrate the measurement principles. Then the aggregate indicator (disposable income) is adjusted for household composition. (It is easiest to think of this in the case of being converted to per capita income but in practice children are weighted less than adults and there is an allowance for economies of scale.) The resulting aggregate ‘equivalised’ income is attributed to each member of the household (this assumes that the income/expenditure of the household is shared equally – it may not be). A poverty line which is an income level is chosen and the number of people (or children or whatever) living in households below the poverty level is the poverty count.

3.2       To summarise schematically for a household:

Market Income

plus

Benefit Income

less

Direct Taxes paid

equals

Household Disposable Income

adjust for

household composition (typically using ‘equivalence scales’)

equals

Equivalised Household Disposable Income (EHDI)

choose

a poverty line

count

the numbers in households whose EHDI is below poverty line

which gives

the poverty count

3.3       The method was devised in the 1970s based upon research overseas. It has hardly changed since, despite a number of obvious weaknesses. Most were known in the 1970s, but the data available was limited so that it was not possible to address the problems then. What is disappointing is that there has been hardly any improvement in the subsequent 40 years even as better data comes available. Here are some examples of the weakness of the method.

3.4       Is disposable income the right measure? For instance, if the government was to eliminate school fees it would make no difference to the poverty count, despite families being under less financial stress. On the other hand, if the subsidies to primary health care were withdrawn it would place families under greater stress but, again it would make no change to the poverty count. Childcare costs are not deducted from income; a family may be impoverished by them as a consequence of earning income, but it is treated in poverty count terms exactly the same as family which gets free childcare or does not incur such costs. The costs of housing raises a series of problems – contrast the family in their own mortgage-free home with one paying an onerous amount for their rent. (Deducting housing costs from income is obviously wrong, since it is subtracting an expenditure from income – apples from oranges.)

3.5       The equivalence scales used to adjust for housing composition are problematic. For instance it would appear that the household economies of scale which are typically assumed (the equivalence scales usually used are not estimated but invented) overestimate the effective income of large households and underestimate it for small households, affecting the composition of the poor (but probably not the poverty count by much).

3.6       These measurement failures in no way affect the actual poverty. They mean that our estimates are distorted and it seems likely that any consequent measures to reduce poverty are less effective – more expensive – than they need be.

3.7       The choice of poverty line is also deeply problematic when, as typically occurs, it is based on opinion with little empirical underpinning. The original level used was the one implicitly proposed by the 1972 Royal Commission on Social Security which was presented with considerable evidence of family economic circumstances. As emphasised earlier, choosing a poverty line involves judgment but, compared to today’s proposed levels, the Royal Commission’s was informed by actual evidence.

3.8       Given the unsatisfactory theoretical and empirical bases of the available poverty lines, including those mentioned in the Bill (Part 2), it may be wondered whether they are of any use or when policy weight should be placed upon them. The short answer is that they are the best we have got, and will have to do in the interim until we have a better one.

3.9       In order to overcome some of the weaknesses of the current measures and to enable easier comparisons as better measures are introduced, the published targets should be in terms of proportional reductions (e.g. half on the chosen measure by the given date) rather than a reduction in numbers.

3.10     Note that poor quality poverty measures will lead to inefficient targeting, especially of the wrong groups. An even greater fear is that they can be abused for policy purposes. For instance, reducing or restraining those on middle incomes reduces poverty according to measures based on the median income without necessarily having any effect on the living circumstances of the poor (as unintentionally occurred in the early 1990s). Raising the costs of school fees or health care will not effect the measured number of the poor although they will be in greater hardship. Changes in housing policy and circumstances are likely to have an erratic impact on the measures even if they reduce hardship. While this may not be the intention of this government, the legislation needs to ensure a less benign government cannot manipulate the faulty measures to avoid addressing actual poverty.

3.11     How might we construct and implement the monitoring of better poverty measures in the future?

Part IV: Setting a Better Poverty Line.

4.1       It is indicative of how superficial are current poverty lines that most commentators do not link the measure to any fundamental notion of poverty. The bill does attempt to do this.

4.2       But it does so by focusing on material hardship. This, in fact, is a notion of absolute poverty. For as the country prospers, a material hardship-based poverty line need not be adjusted. We would be consolidating the 1990 ‘Redesigning the Welfare State’ approach which has been to index benefit levels to consumer inflation only.

4.3       However the proposed poverty measures seem to be based on the notion of relative poverty given that they imply that as prosperity rises so does the poverty line. I leave others to reconcile the contradictions.

4.4       The following explains how a less opinionated, more evidence-based poverty level might be derived. Without resiling from the earlier point that there has to be a value judgement, it suggests how the judgement can be considerably more informed than is the current practice.

4.5       This submission takes as its fundamental notion of poverty that set out by the 1972 Royal Commission on Social Security of those in (relative) poverty having an inadequate standard of living unlike that of the rest of the community to the extent that they are unable to feel a sense of participation in or belong to the community.

4.6       Observe that such poverty compromises the opportunity for the child to develop as set out by the Fraser-Beeby principle (updated, as Clarence Beeby would wish, to be gender neutral with the key notion underlined):

The government’s objective, broadly expressed, is that every person, whatever her or his level of academic ability, whether he or she be rich or poor, whether he or she live in country or town, has a right, as a citizen, to a free education of the kind for which he or she is best fitted and to the fullest extent of her or his power.

4.7       It would be possible to ask people to what extent they felt they were able to participate in and belong to their community. As far as I know, that has never been done systematically and, in any case, the response would be subjective and consequently subject to all the problems of policy using subjective measures.

4.8       Instead there are objective measures of standards of living. In particular New Zealand has a Living Standards Research program. The 2016 Household Economic Survey asked about 20 child-specific items as follows:

Does the household or child have

two pairs good shoes for each child

two sets of warm winter clothes for each child

waterproof coat for each child

all the uniform required by the schools

a separate bed for each child

fresh fruit and vegetables daily

a meal with meat, fish or chicken (or vegetarian equivalent) at least each second day

a range of books at home suitable for their ages

a suitable place at home to do school homework

friends around to play and eat from time to time

friends around for a birthday party

good access at home to a computer and internet for homework

mobile phone if aged 11+?

In order to keep down costs to help in paying for (other) basic items (not just to be thrifty or to save for a trip or other non-essential) has the household taken the following economising actions:

postponed visits to doctor

postponed visits to dentist

unable to pay for school trips/events for each child

had to limit children’s involvement in sport

            children had to go without music, dance, kapa haka, art, swimming or other special interest lessons

children continued wearing worn out/wrong size clothes and shoes

made do with very limited space to study or play?

4.9       These items could be used to construct a wellbeing index for children. The index could be compared with the household income to help form a poverty line.

4.10     For instance, suppose it was decided that without at least two pairs of good shoes a child would have considerable difficulties participating in and belonging to their community and it was found that standard households (say two adults and two children) which had disposable incomes below $X per week lacked two pairs of shoes for each child. There follows a strong case for setting the poverty line at $X per week (or higher) for this household type. (Shoes here are the first item on the list and used only as an illustration. Historically, researchers used as an indicator when families did not take their children to their doctor because of financial hardship. This ‘economising action’ was a last or desperate resort. Such thinking has been a major factor behind the policy of higher subsidies for children visiting their GP. )

4.11     The exercise is more complicated than this, because all 20 items should be used (at least to some extent).[2] But in principle what can be done is that a tabulation could be constructed which gave the probability of a household being below each income level. An appropriate panel could then identify an income level below which they judged that the household was so deprived that the children were suffering poverty, thereby setting a poverty line. Observe that there is still a judgement to be made but that it would be an informed judgement and not just uninformed opinion.

4.12     This approach requires a major change to the monitoring and report sections in the Bill. First, it is necessary to define poverty more carefully. The bill defines it as ‘material hardship’ but there are other hardships. For example, being unable to invite friends around for a birthday party – reciprocating invitations to friends’ parties – is not material hardship, it is a humiliation. It can also be development threatening. If a schoolgirl cannot go with her friends to, say, a significant gig, it not only makes her an outsider in the class but is likely to turn her away from that community and undermine her educational performance. (That is why teachers have been known to provide the means to participate with the group for a promising pupil from their own pocket.)

4.13     The poverty targets need to be articulate in relationship to a coherent definition of poverty. The above illustrates how that could be done with a particular definition, but the method and process is quite general and could be applied for any other definition (providing the data was available).

4.14     While the current Bill makes no provision for a technical group or an advisory group to assist with the judgement this should be provided for in the revised Bill. Setting poverty targets requires greater technical skills than are currently in the public service (although there are some public servants whose work in the area is to be greatly admired).

4.15     Public servants are not well paced to advise directly on judging the poverty line without the intermediation of a consultative committee. In particular it puts the Government Statistician into an invidious position of making judgements which are not technical. In order to maintain the integrity of the statistical base the Government Statistician should be shielded from controversial decisions. The proper function of the Government Statistician in this context is as an adviser to ministers and the executive. It is a conflict of interest to have her or him also advising Parliament which is concerned with keeping the government accountable.

4.16     In any case the poverty targets should be shifted out of the main Bill to a schedule to the Bill. The government should have the option of revising the schedule, tabling the revision to Parliament for debate, as better measures become available. There should also be a requirement that an incoming government should submit its own (revised) schedule within six months of taking office.

Summary

6.1       The proposed Child Poverty Reduction Bill enables the people of New Zealand, especially through its representatives in Parliament, to hold the government to account in regard to two important issues:

(i) the level of economic inequality in New Zealand;

(ii) the hardship among children and their families not only effects their wellbeing but compromises the long-term development of New Zealand.

It should be proceeded with following the amendments set below.

6.2       The Bill adds a further responsibility to fiscal policy in addition to the (now merged) 1994 Fiscal Responsibility Act by explicitly adding a dimension of social wellbeing to narrower budget concerns. As such, it formally broadens the notion of fiscal responsibility.

6.3       Setting a target for reducing poverty among New Zealand’s children makes sense because:

(i) given its size and extent, child poverty is almost certainly the most serious issue of wellbeing in New Zealand;

(ii) reducing child poverty will have long-term benefits to New Zealand including improving the nation’s economic and social performance and its sustainability;

(iii) substantially reducing child poverty will also substantially reduce economic inequality in New Zealand.

Even so, the needs of smaller groups who are also in poverty through no fault of their own – such as from disability and sickness – should not be ignored.

6.4       The Bill is currently ambiguous as to whether it is concerned with absolute poverty – that is, individuals are in material hardship – or relative poverty, that is, whether they have sufficient to participate in and belong to their community and able to share in its progress. The Bill should make it clear that it is the second notion with which it is concerned.

6.5       The current measures of poverty levels and the numbers they report are imperfect. While they are useful for public discussion they are not robust for public policy or research. As such they need to be improved.

6.6       In the interim the flawed measures will have to be used for targeting purposes. It makes sense to choose a suite of targets, not only to reduce the inadequacy of each measure but to limit the ability of any government to manipulate policies to attain the particularities of the individual targets while ignoring the spirit of the exercise to improve the wellbeing of children. .

6.7       In order to replace the flawed measures with higher-quality ones the government should establish a working group of technically competent researchers. They should prepare improved measures (although they will be limited by data availability). However, the research working group should not make recommendations on the precise poverty line.

6.8       Instead, there should be established an advisory group to assess the research findings and recommend to Parliament and the government a suite of robust poverty lines. The advisory group should be representative by such social characteristics as age, ethnicity, family experience and gender. (However the chair of the research working group may be appointed to it in order give the lay group better access to the research findings.) Given a commitment, the work program and the decisions which evolve out of it should enable the incoming government in 2020 to set out revised poverty targets.

6.9       The import of these recommendations is that Parliament should not only pass the Child Poverty Reduction Bill, albeit with some improvements in the evaluation, monitoring and reporting, but it should also ensure that the measures necessary to implement it effectively are taken (including ensuring that there is enough funding to enable the research working group to work quickly and efficiently).

Recommend Changes to the Bill

7..1      The drafting of statutes involves specialist skills which I do not have. The following are intended to guide the those drafting the revised bill..

7..2      That all references to absolute poverty be eliminated from the Bill and that it be clear that notion is relative poverty perhaps as implicitly defined by the 1972 Royal Commission on Social Security.

7..3      That the current processes of setting targets in the Bill be replaced as follows;

7..3a    That each incoming government be required to table in Parliament a set of targets for poverty reduction.

7..3b    That the Government establish an independent technical committee to provide measures of the wellbeing of children and other New Zealanders.

7..3c    That the Government establish an independent representative committee to use the measures provided by the technical committee to make recommendations on a suite of poverty lines which the Government may use when setting its targets. .

Endnotes

[1] Typically, the data source is the Household Economic Survey. This or other surveys are smallish samples and so the results are subject to error. Another source of error is that the income variables, in particular, are usually self-reported. And may not be very accurate.

[2] The construction of high-quality statistically robust indexes is a technical challenge. Currently all that is available are rather primitive versions. This is because of an unwillingness to provide the resources to do the analysis; New Zealand certainly has the statistical expertise to do better if the resources were available.