Inequality and poverty: a summary of the 2019 Household Incomes in New Zealand report

The Ministry of Social Development’s key annual report, ‘Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2018’, by Bryan Perry, makes for depressing if not surprising reading.

Economic inequality remains at the very high level the country was left with in the late 1990s following 15 years of market-based reforms. Very modest progress under subsequent Labour-led government appears to have been undone by National-led governments.

Poverty rates for the general population and children remain high. Relative poverty rates virtually all increased 2008-17. In contrast, material deprivation decreased. Nonetheless, the overall story is the continuing absence of substantial action against economic inequality and poverty, both of which damage individuals and the social fabric alike.

The following document highlights key points from the 300-page household incomes report, focusing on inequality and to some extent poverty, with some material from the companion ‘non-incomes report’. To assess the record of the last National government, this document looks at the changes between 2009 (i.e. data gathered between mid-2008 and mid-2009, the last year in which people were essentially ‘living’ with Helen Clark’s policies) and 2018. Page numbers from the incomes report serve as references.

Income inequality

Looking at the share of income going to the various fifths (quintiles) of the population, New Zealand is now slightly more unequal than the supposedly class-ridden UK, with its poorest fifth taking less, and its richest fifth taking more, than their British counterparts (p.50). (NB: On other measures the UK remains more unequal.)

Table B.9  Shares of total income by quintiles (fifths) of disposable household income (%): international comparisons for c 2016

In terms of the New Zealand trend, the household incomes report notes the sharp increase in inequality between the mid-1980s and the late 1990s (the largest in the developed world). Since then, it notes “perhaps … a slight fall in the early to mid 2000s and a slight rise since, back to where it was in the mid1990s” (p.240). This fall and rise corresponds broadly to the periods in office of the recent Labour and National governments. This result should not be overstated, however, as some of it may be driven by fluctuations in the number of very rich people taking part in the relevant surveys. The report is not definitive on this point. (Note that in the Gini coefficient measure below, 0 = income evenly shared, and 100 = all income going to one person. So a higher number represents an increase in inequality.)

Figure K.6 Inequality in New Zealand and the OECD trend: the Gini coefficient

When it comes to international comparisons, the latest rankings put New Zealand at 22nd out of 34 OECD countries, on the edge of the poorest-performing one-third of rich countries. New Zealand’s Gini coefficient, at 33, is noticeably higher than the OECD average of 31.

Figure K.5 Income inequality across the OECD: Gini coefficients c 2014

User-friendly income inequality measures

Most income inequality measures are extremely difficult for ordinary people to understand. Using the household incomes report data, I have calculated two further measures.

The first shows how much someone in the richest tenth of New Zealand makes compared to someone in the poorest tenth. In the 1980s, someone in the richest tenth typically made 5-6 times as much as someone in the poorest tenth. That ratio is now over 9 times. (These figures are for people’s disposable income – that is, after tax.) (Appendix 9.2)

Using the same data, the second graph shows the changes in income since the 1980s for three groups: the poorest tenth, the average person, and the richest tenth. (These figures are again for people’s disposable income.)

The after-tax income of someone in the poorest tenth has increased roughly 30% (adjusting for inflation) since 1982. For the ‘typical’ middle New Zealander, that figure is roughly 40%. But for someone in the richest tenth, their income has doubled.

Wealth inequality

Wealth inequality is slightly higher in New Zealand than in many other developed countries, again a challenging finding for a supposedly egalitarian nation (p.266). Note that the figures below are for households; the share held by the wealthiest tenth of individuals is nearer 60%.

Table M.2  Wealth inequality: shares of total wealth held by the top tenth (%)

Poverty

‘P10’ denotes the people on the boundary of the poorest tenth of the population. In 2017 and 2018, their income (after housing costs) finally surpassed its 1986 level, hitting $11,900 and $11,800 respectively, compared to $11,600 back then. In short, 30 years of significant economic growth has almost entirely bypassed a full one-tenth of the population (p.88).

Inflation-adjusted household incomes (AHC): tenths (decile) boundaries

In absolute terms, the poor are getting richer. The proportion of people who have less than half of 2007’s average (median) income has fallen from 10% in 2007 to 6% in 2018. In relative terms, however, they are getting poorer: incomes have grown more slowly for poorer households than they have for other families. The proportion of people living on less than half of the contemporary average income (that is, the average income in the relevant year) has risen from 8% in 2009 to 10% in 2018. Likewise, the proportion living on less than 60% of the average income in a given year has risen from 17% to 20% (p.134).

The above figures are for people’s incomes before housing costs are included. Figures after housing costs are included tell a similar story, with increases in the proportion living on less than 40% of average income (9% to 11%), less than half average income (15% to 16%), and less than 60% of average income (22% to 23%) (p.135).

In my personal view, the poverty measures looking at how many people have less than an amount fixed in time (50% of the 2007 average income, for instance) are not the most important, though they are useful. After all, everyone in modern day New Zealand has more than half of the average income in 1907. The most important measures (in the long-term) are the ones looking at how much people have compared to the current average income, because that measures the extent to which poor households are falling behind others and will become increasingly unable to afford the things that others take for granted. Looking, therefore, at New Zealand’s progress on those numbers gives the following result (based on pp.134-35). Note: BHC is before housing costs; AHC is after housing costs.

Percentage of the population below selected poverty lines

50% BHC       60% BHC     50% AHC   60% AHC

1986            6             8             13 15

2009            8                 17                   15              22             

2018           10                 20                  16              23          

On all measures, poverty is higher now than it was in 1986 or in 2009.

Material hardship

In contrast, rates of ‘material hardship’ have fallen consistently since 2009. (The data only go back to 2007, so longer comparisons are impossible.) The distinction here is that the ‘poverty’ numbers above are based on people reporting their income (and how far it is below the average), whereas the ‘material hardship’ numbers are based on people reporting how many basic items (like being able to afford decent clothes or heat their home) they have to go without. The table below essentially shows how many people (measured as the whole population, children, and retirees) say they have to go without 6 or more of 17 basic items (non-incomes report, p.71).

Table G.1A  Material hardship trends (rate %), 2007 to 2018

How can it be that poor families appear to be doing better even while (as above) their incomes fall further behind those of others? Well, there are very different experiences among those living in poverty, or close to it. The report suggests the falling hardship rates are driven by increased work, work hours and minimum wages for those at the bottom end of salary scales. It is a story, crudely speaking, of working people. However, because benefits have not been linked to wages, those who are out of work continue to see their incomes fall behind those of others, an effect which at least partly explains the increased poverty rates. It is a story, crudely speaking, of beneficiary families. All this is a good reminder that poverty is extremely complex, and hard to reduce to a single, neat story.

Child poverty

Unsurprisingly, the story for child poverty is similar to that for the whole population. Absolute poverty has declined: fewer children now live in households with less than half of the 2007 average income than was the case in 2007. As the graph immediately above shows, material hardship rates for children have declined strongly in the last decade. But relative poverty has increased, as the following table shows (based on pp.140-41):

Percentage of the child population (0-17) below selected poverty lines

50% BHC        60% BHC      50% AHC    60% AHC

1986           10                    19                12                   21          

2009           10                    20           21                   29    

2018           15                    24                21                   31     

Again, child poverty is higher now than it was in 1986 and 2009.

It remains the case that (on a conservative estimate) four in every 10 children in poverty have a parent in full-time work. (As a side note, among two-parent families, the proportion with both parents in full-time work has increased from 30% in 1982 to 46% in 2018 (p.174).)

In terms of international comparisons, New Zealand is among the worst half of developed countries. Its child poverty rate (defined here as children in households with less than half average income, before housing costs) is 14%, some 4-5 times the rate of the best performer, Denmark (p.232).

Table K.3  Child poverty rates (%) in the OECD-35, c 2014: 50% of median threshold (BHC)