Clark V. Woodhouse | Issue 21

Clark V. Woodhouse | Issue 21

Is Growing Inequality in New Zealand Inevitable?

David Clark

Inequalities have grown faster in New Zealand since the 1980s than elsewhere. Growth in inequality happens because the choices made by successive Governments hold our country back. Rich-country think-tank the OECD released a report showing that growing inequalities have held back New Zealand’s economic growth, more than other OECD countries, in recent decades. 

Helen Clark’s Labour Government is the only one to have held the line, temporarily stopping the growth in income inequalities in New Zealand. They pulled 130,000 children out of poverty through the Working for Families programme, beefed up social housing provision, and introduced income related rents. Perhaps more importantly, they grew the economy and shared the benefits of this growth across the board. Governments can choose to do that.

The current Government isn’t choosing to do that. In 2010 they borrowed offshore to introduce a tax package which disproportionately favoured the very well off.  Top earners ended up with a lot more in their pockets. At the same time, John Key broke a pre-election promise by increasing GST—a tax that hits low and modest earners the hardest. This tax ‘switch’—which grew the gap between the wealthiest New Zealanders and the rest of us—was National’s top priority in their first term. 

National believes there is no problem. Despite numerous international reports highlighting growing inequalities, and the lowest home ownership rates in New Zealand since 1951, the current Government baldly states that inequalities are not growing.  

Kids who go to school hungry won’t achieve their potential, and that affects us all. They are less likely to earn well and pay generous taxes, and are more likely to bring the cost of preventable illnesses into our health system. Believing the system is against them (and it probably is)—their chances of ending up in the criminal justice system are increased too. 

Growing inequalities can seem inevitable once things get too far out of whack. In countries with high inequalities the ultra-wealthy grow to have a disproportionate influence on Government; those countries tend to underinvest in infrastructure like schools, hospitals and roads since the ultra-wealthy access private education and healthcare, and can always buy a Hummer to cope with potholes.  

We need a Government that stands up for the interests of most New Zealanders rather than the interests of a few ultra-wealthy individuals. For New Zealand to get ahead, we need every citizen to be maximising their individual potential.

Michael Woodhouse

Inequality is a term often used by social scientists to measure the degree to which income, wealth or opportunity is equitably distributed and, in particular, whether we have become more or less equal over time.  It is also used by politicians to paint their parties in the most favourable light and their opponents use inequality data to attack the Government. In reality inequality is more complex than the political rhetoric and is a function of a number of things including tax rates, the changing job market, the number of two-income households and the growth of retirement-aged New Zealanders.  

I have no doubt David Clark will talk about GINI coefficients and breathlessly state that inequality is higher under my Government than it’s ever been. That is simply not true. When it comes to income inequality the best evidence indicates that income inequality rose in the 1980s and 1990s (and most sharply under the fourth Labour Government), was stable under the Clark Labour Government and has reduced slightly under the Key Government.

Faced with this reality the Government’s opponents may look to wealth inequality and point to data suggesting that has grown on our watch. What has changed is houses are more affordable when considering after-tax income growing strongly ahead of inflation, significant reductions in interest rates and the availability of the Kiwisaver Homestart grants and withdrawal arrangements. It might not feel like it given the focus on Auckland’s median house prices but that’s the reality.

Of course if inequality is such a bad thing the obvious solution would be to have everyone on the same income and asset base right? Well no, and actually few people promote that as the socialist utopia to which we should aspire. That’s where equality of opportunity comes in. Some call it social mobility. Whatever the terms used, the important challenge is to ensure every New Zealander has the chance to work hard, better themselves and reap the reward for their efforts. Education is the key to that mobility and the Government has invested heavily in ensuring improvements in NCEA qualifications, particularly for Maori and Pasifika students.

While there is always going to be a degree of difference in incomes according to skill and labour supply and demand, it is not correct to say that growing inequality is inevitable. New Zealand is heading in the right direction, handing families the tools to succeed and increasing the incomes and net worth.

This article first appeared in Issue 21, 2016.
Posted 11:56am Sunday 4th September 2016 by David Clark and Michael Woodhouse.