In an exclusive two-part series, Max Rashbrooke assesses the Labour government’s record on key measures. Today: income inequality.
Read the first part in this series – on the two poverties – here.
Income inequality under this government has fallen dramatically. Yes, you read that right: the disparities between rich and poor, on one measure at least, have reduced. But how can this be, some will ask, given the constant media coverage of foodbank queues lengthening while actual bank profits soar, and given the belief among respected commentators like Bernard Hickey that Covid saw “the biggest widening of inequality in New Zealand history”? What is, in fact, going on?
First, some history. Contrary to its egalitarian self-image, New Zealand has always been an unequal place, at least since colonisation led to the widespread raupatu (confiscation) of indigenous land. In the 1890s, the wealthiest 1%, essentially a handful of male settlers, held a startling two-thirds of the country’s assets. A few decades later, the richest 1% had 18% of all pre-tax income. (The distinction here is that wealth is a stock of assets that people own, like houses and shares, while income is a flow of things that people earn, like salaries, wages and benefits. Wealth is always more unevenly distributed than income.)
In the first 80 years of the 20th century, these economic inequalities were diminished by the institutions of social democracy: the welfare state, strong trade unions, state house-building, inheritance taxes, and top income tax rates of up to 80%. Widespread discrimination notwithstanding, incomes for women and Māori, as a proportion of Pākehā male incomes, were rising strongly from the 1950s onwards. By the early 1980s, the top 1%’s share of wealth had fallen from 65% to perhaps 16%, and its share of pre-tax income from 18% to 6%. (Not that the make-up of the 1% is necessarily always the same: people can be asset-rich but cash-poor, and social mobility shuffles the deck.)
Then, in the shift towards a market-driven, individualistic view of the world, everything changed. From 1985 to 2005, New Zealand experienced the developed world’s largest increase in income disparities. The pillars of social democracy were all weakened, and progress on closing the income gap between Māori and Pākehā stalled (even as, culturally, many things changed for the better). The 1%’s share of wealth rose to 25-26% and its share of pre-tax income to 12%.
Little changed, in the bigger picture, between the early 2000s and 2017, although the Helen Clark government’s introduction of Working for Families slightly reduced income inequality, and John Key’s tax cuts and other policies slightly increased it. Then along came Jacinda Ardern.
What has happened in the last five years can be judged from something called the Gini coefficient: a measure that – in a crude sense – adds up each of a society’s divergences from a perfectly equal distribution and combines them into a single number. Zero represents total equality (everyone has the same income); 100 represents total inequality (one person has all the income). As can be seen below, this figure rose sharply in the 1980s and 1990s, plateaued for 15 years – and has now fallen noticeably, back to roughly its 1990 level. Astonishingly, half the damage of the “Rogernomics” era has – on the face of it – been undone.
Can this really be true? Can this be reconciled with what we see, or think we see, around us? Yes, up to a point. To take, firstly, the bottom and the middle of the distribution, Labour has poured an extra $16.5bn into the welfare system, through higher benefits, boosts to Working for Families, and the introduction of payments like Best Start. Minimum wages have also increased sharply.
While the situation for the very poorest – the 10,000 or so at the bottom of the ladder – may have worsened owing to the housing crisis, Covid and the cost of living, nonetheless another 115,000 people have been lifted above the poverty line. So it is plausible that, as the data shows, the bottom fifth of the population has increased its share of post-tax income from 6.6% in 2019 to 7.9% last year: not an epochal shift, and still well short of what it could be, but distinctly higher.
At the other end of the scale, interest and dividend income has been flat in recent years: the New Zealand stock market is still under its early-2020 mark and interest rates were, before their recent rise, at record lows. The richest New Zealanders’ self-employed income is slightly down, possibly because owners are retaining more money in their businesses to avoid Labour’s new 39% tax rate on income over $180,000. Again, it seems plausible that the richest fifth’s share of post-tax income fell from 40.1% to 37.8%.
If the government can really boast such achievements, though, it seems strange that it isn’t, well, boasting about them. This data was released in March to no fanfare whatsoever: readers of this article are among the first to discover it. Government sources say, however, that the Gini coefficient data may simply have been too technical to explain, and would certainly have been overshadowed by the simultaneous release of figures for child poverty, a subject on which the government has staked significant political capital.
The inequality data comes, in any case, with caveats. The government cannot claim credit for the stock market’s recent poor performance, which may well pick up again this year, and interest rates have risen rapidly as the Reserve Bank attempts to tackle inflation. The 2023 Gini coefficient may well be higher than the 2022 figure.
The data also captures only what New Zealand counts as income for tax purposes – and that famously excludes most of the capital gains people make from selling assets. That, in theory, doesn’t change the trend line, since such gains have always been excluded. But it could be argued that 2020-21 in particular saw record capital gains, given the unprecedented spike in house prices. And that is undoubtedly true up to a point.
On the other hand, people who sold and bought in the same market may be no better off overall, some of the house-price gains have unwound in the last year, and the brightline test presumably captures a growing proportion of investment property sales (although data there is scarce). Including capital gains would probably make the government’s performance look less stellar – but not reverse it entirely.
The housing market, of course, affects inequality on many fronts. As well as altering incomes, it is the primary source of wealth in Aotearoa, making up over half the country’s asset base. It was, in that sense, the core of the arguments that were made about pandemic-era increases in inequality.
There have, of course, been bigger wealth transfers in history: for instance, the 1890s Liberals’ dubious purchases of millions of acres of Māori land, which benefited Pākehā farmers; or the 1980s and 1990s sale of state assets at below-market rates, to the great enrichment of business tycoons and asset-strippers like Alan Gibbs and Fay and Richwhite. Nonetheless it certainly looked, in the heat of the pandemic, as if wealth disparities were opening wide. Bernard Hickey identified, among other things, a $600bn untaxed increase in house values, at the same time as home owners and businesses’ bank deposits boomed but beneficiaries’ debts ballooned.
Now, though, we can see that not only have some house-price gains been unwound, wages have also increased, if only to keep pace with inflation. As a result, the ratio of house prices to incomes has almost returned to its (still disastrously high) pre-pandemic level.
The graph below, meanwhile, shows the change in the value of New Zealand’s housing stock, including the pandemic spike, the subsequent fall, and the Treasury’s prediction of a further 4.6% decline this year. It also shows the average increase in the housing stock’s value from March 2002, when prices really started accelerating, to March 2020, just pre-pandemic. The two lines nearly intersect. If the Treasury’s expectation is correct, the government’s record on housing values may be much like that of its predecessors, all told.
This is not to defend that record whole-heartedly: the pre-pandemic rise in house values was a social disaster, and continuing that is no achievement. And while much of the “easy money” policy-making of 2020 was justified given the apocalyptic Treasury predictions of a collapsing economy and soaring unemployment, there were decisions – like removing loan-to-value ratios and creating the “funding for lending” programme that went straight into home lending – that looked like bad calls even at the time. But overall it does not seem as if the government has transferred wealth from renters to home-owners at a markedly different rate to its immediate predecessors.
The government can also point out that, on its watch, social housing places have risen by 12,000 and wider house-building has boomed – even if this only continues a trend that started in 2011 under National, and now appears to be going into reverse, as the industry repeats its eternal cycle of boom and bust.
Outside of housing, other apparent rises in pandemic-era inequality, such as the increased value of the shares held predominantly by the 1%, were driven partly by international stock market trends beyond this government’s control. And while the Covid wage subsidy should have come with tougher conditions, so that businesses that didn’t need it had to repay the money, it was still a massive anti-inequality measure. In New Zealand, people made redundant are, five years later, typically earning a fifth less than they did at their old work. There are few things better for warding off inequality than – very simply – keeping people in their jobs. The government’s Covid response could have been more egalitarian still: other countries temporarily doubled benefits or delivered “helicopter money” cheques to low- and middle-income households. But it was hardly an inegalitarian disaster.
For all these reasons, it is no surprise that the official figures on wealth inequality up to mid-2021, the latest date for which data is available, show no real change since 2018. The 1% continues to own around a quarter of all wealth, once the Rich List is included. But then housing is relatively unimportant to them (they hold much of their wealth in bonds and businesses), so a rising house market actually decreases their share and increases that of the middle classes. In doing so, of course, it widens the gap between home-owners and renters.
What, then, should we conclude from all of the above? There is no neat story to say that Labour has increased or decreased inequality, in toto – but then life is not much given to neat stories. Instead, a narrative can be pieced together from a few key strands.
First, income poverty has clearly decreased overall, thanks in large part to the billions poured into the welfare system, although life is probably worse for the very poorest. Second, income disparities between the rich and the rest have fallen, although perhaps less so if capital gains were included. Third, the Covid response was a mixed bag, inequality-wise.
And, fourth, the government has not, any more than its predecessors, managed to solve the problems of the housing market, with the consequence that wealth inequality has – at a minimum – not improved, and in some specific senses worsened. Labour’s record has been, in a word, imperfect – but also, in the round, rather better than most of its critics, and popular opinion, would currently allow.
Yesterday: The two poverties