Paper for the AGM of the Auckland Child Poverty Action Group, 19 July, 2004
Keywords: Social Policy;
The government has at last attempted to address child poverty. And not a year too soon, for 2004 is also the 30th anniversary of the major research paper, Poverty in New Zealand which pointed out that poverty was mainly in households with children. That one main fact about poverty in New Zealand, often gets lost behind a myriad of minor facts. The consequence is that attempts to reduce poverty are at best inefficient, and at worst ineffective. That primary fact is that a substantial majority of the poor are children and their parents and we need to target on their needs.
This predominance of children and those who care for them is independent of the choice of poverty line. At least three-quarters of the poor are children and their parents. It is more than four-fifths if we adjust for the more expensive housing that families with children face. Even those figures of 75 percent and 80 percent are under-estimates, since some children’s households have adults additional to their parents.
Poor households are not just Maori or Pacific Island. Both ethnic groups have a higher proportion of their people in poverty, but the majority of the poor are Pakeha. In one study, Suzie Ballantyne and I found 58.5 percent of all poor households were described as ‘Pakeha’.
The poor households are not just single parent households. They too are more likely to be poor. But the majority of the poor are in two parent households. In our study 65.8 percent of households had two parents.
The poor households are not just dependent on social security benefits. The majority of poor households have labour earnings.
The poor households are not just in state houses or even renting their households. Many poor households are paying off a mortgage. The study found 52.3 percent of households owning their homes with or without a mortgage. (This was after adjustment for the costs of housing, so the figure allows for those who own their homes without mortgage having lower outgoings.)
Additionally while children and their parents who are in fair or poor health are more likely to be in the lowest income households, the majority in those households are in good health.
This research does not say that the typical poor households is pakeha, with two adults, living in their mortgaged house depending on wages, in good health. There is no typical poor household – with one exception. The typical poor household has children.
We have known this for thirty years. In the three decades children have been born, lived in poverty, become taxpayers, and become parents themselves. Probably in that time children have been through nine million years of living below the poverty line. At last we are taking their plight seriously.
Not all of us. After the Budget there were politicians who said that the family assistance package was an electoral bribe. If it was a bribe, it was an inefficient one, because children dont vote. A far more efficient bribe in terms of votes per dollar comes from reducing income taxes in the middle range, as some political parties have noticed.
So was the government incompetent, bribing the wrong people? I suggest a fairer judgement is that it was not seeking the efficiency of narrow political calculations but was looking to political justice: to the development of a New Zealand community in which everyone can belong to and participate in, as the 1972 Royal Commission on Social Security enjoined upon us. And that ‘everyone’ includes children. It will be a sad day when social justice objectives are classified as bribery.
Some will emphasise the economic efficiency gains from ensuring children are not in poverty, even if there are not political bribery gains. They say that children out of poverty are less likely to be sick, less likely to die, less likely to experience the stress of family breakdown, less likely to get into crime and other sociably disruptive activities. These children in economically comfortable families are more likely to get a better education and life career. That is all probably true, although there is not enough research evidence for us to be sure. (Why is there not enough evidence? Because we would rather run social policy based on prejudice than evidence, so we have lamentably failed to do the research. That is why it has been possible to ignore that ‘poverty (mainly) equals children’ equation for thirty years.)
But even were there no economic and health benefits from eliminating child poverty, there would remain a strong case in justice. A society which ignores economic justice – as New Zealand has largely done over most of the last two decades – eventually faces the danger of a lack of social cohesion which will result in social and economic failure. Most people get a rough sort of economic justice from the raw market – although even we have to intervene for some of them. Children get no justice from the raw market, there is no trickle down for them. That is why we have to take positive action to protect and promote our children, the sort of action which was in the 2004 Budget.
However, as much as we may applaud the 2004 Budget’s concern for children in poverty, it is deserving of a critical review. Sadly however, some of the critics have been quite misleading. Trying to deal with the false prophets would make this a very messy and long paper, so I shall to focus on the budget proposals as they are.
I do not criticise the government for its parsimony, at least this budget addressed a problem which earlier ones ignored. There was not a lot of fiscal room for increases in family assistance. In any year the government has about an extra one billion dollars to spend from increases in revenue from economic growth and from fiscal drag (the effect of tax-payers moving up into higher tax brackets). About half of that amount is used for the political priorities of educational and health services, and some more is used for such things as industry assistance and the Auckland motorway system. So without a tax increase there is not a lot of money to spend on family assistance.
You may wonder whether the government surplus could be raided. A figure of around $6b which is widely quoted – it is called OBERAC – is an accounting measure which does not tell us how much the government has to spend. Much of that surplus is used for funding investment in schools, hospitals, roads, government trading enterprises, and for student loans, so it cant be spent on something else.
Why not, you may ask, have the government borrowing to fund such investments and using the freed-up cash for children? Leaving aside the prudential reasons for funding from internal sources (for no business or household funds its investment entirely by borrowing), and leaving aside that the measure would be a step on the way to privatisation of education, health and the government trading enterprises, the extra pressure on the economy from this extra borrowing would be unhealthy, because it would push up the exchange rate, screw the export sector, and stagnate the economy, as well as adding to the debt servicing burden for children when they grow up.
I have had to go through these macroeconomic arguments quickly – I have written about them extensively elsewhere – and they are complicated. The point is that they must be taken into consideration. If they are not, the resulting policies will do considerable damage to the economy. It is irresponsible to use the OBERAC figure, without understanding it or the implications of spending money that is already spent or is not there.
So the amount of money available for the family assistance package was relatively limited. That was one reason the government decided to phase it in over three years – to make the small amount appear bigger by the end.
There was a second reason for the phasing. The government was constrained by the implementation times. Institutional logistics means that there may be a considerable lag between a policy announcement and its execution.
There is also a lag from the decision to pursue a policy to its announcement. To outsiders, a year’s preparation may seem sufficient to institute a major policy reform such as the child assistance package that the government promised a year ago, However practical logistics mean there was only time to put in what amounts – broadly – to increasing existing levels of assistance, rather than a radical reform. Particularly important was that there was not time to institute a new delivery system. Apparently a major consideration was that officials thought, and the government concurred, that radical innovations take time to implement safely. Rapid implementation of untested systems risks an administrative foul up or overlooking difficult or special cases.
Unfortunately the system which the 2004 measures were improving was not particularly coherent. The savage cuts to the welfare state of the early 1990s has led to a plethora of ad hoc one-off measures to moderate their most brutal impacts. So the post-2004 system lacks this coherence too.
To the tightness of funding and the shortness of time for full reconstruction was added the requirement that no family should appear to be worse off. The government did not want its friends or its enemies identifying even one household which would be pointed to as suffering from the reform, no matter how many people would benefit. There is a ‘grandmothering’, in which anyone who is made worse off retains their previous rights until their situation changes for the better, but it was hardly worth doing in the sort of hurried incrementalist circumstances that pertained in this case. Without it, the package became very complicated. In effect everybody in receipt of family assistance today had a veto over the package, and the inevitable outcome was a clumsy scheme.
The incrementalism is evident in the erratic pattern of the effective marginal tax rates. I shall return to their high levels shortly, but the point I want to make now is that given the constraints of only a little funding phased in over a period, of a short development lead time, and the no-one worse off requirement, there is not going to be an elegant coherent reform.
In drawing attention to these limitations I do not join the churlish who have complained for years the government has done little for children, and when the government does something they claim it is not enough, or that it omits one of their pet schemes. Of course it is not enough. But let us credit the government for doing something, even if we believe the government can do better – something which the government itself believes too. The issue is how to get it to do better,
The next major assistance package needs a longer lead time. I would like the government to tell its advisers that they are planning on a major reform of family assistance in the 2006 or 2007 budget, and they are to start work on it right now. Over the next year they are to do a complete review of the current system, with the aim to replace it with something more effective. My guess is that the new package will have some of the following characteristics.
At its centre will be a new delivery mechanism probably through the tax system. The current tax system assumes we are all lone adults, and bolts on children as an afterthought. The option is either that children are treated separately, which is probably not practical if we aim to supplement according to the household income, or that the responsible adult or adults will have a tax code which will reflect their responsibilities to children. Any new child oriented tax system will probably have some negative income tax or tax credit, so that low earning households will take home more than they earn. I know the Minister of Finance favours a universal social security benefit – he tried to introduce it in 1990 when he was Minister of Social Welfare. The aim will be to develop a seamless transition between the benefit and earning.
To jump from the current incoherent system will require some grandmothering.
It is unlikely the new system will not be based upon a universal family benefit. Ideally it should, but that very expensive if it is to eliminate child poverty. Today, universality cannot address the needs of poor children. Unfortunately, selectivity requires the bleeding out of assistance, and that raises effective marginal tax rates (EMTRs). I have just criticised the existing scheme because of the erratic levels. I now need to say something about why they will be high.
There is a vigorous campaign to reduce income tax rates on the rich. The argument that it will increase economic efficiency is not very compelling. Such research there is on the impact of tax levels on the economy is inconclusive or flawed. One might point out that the major tax cuts of 1988 were followed by six years of falling per capita production. But to say stagnation this is due to the tax cuts would be the classic fallacy of ‘post hoc ergo prompter hoc’: just because event B follows event A it does not mean A caused B. Yet that logic is typical of those who advocate tax cuts for themselves.
Arguing for lower taxes is arguing that the beneficiaries of the cut should get a greater share of national income and expenditure. They are understandably silent as to who is to get a lesser share. The sort of tax cuts being proposed by the most extreme, say to halve the maximum rate of 20 percent, will cause widespread cuts to government spending, to social security benefits and family assistance, and increased privatisation including, probably, of education and health (plus, probably, higher GST). The OBERAC surplus is as inaccessible to the rich for their tax cuts as it si to the poor for benefit hikes.
What the tax-cutters are offering is a quite different New Zealand from the one we have today. This being a democracy one welcomes such debates. The pro-rich are entitled to argue the case for reducing taxes on themselves and cutting government spending and the incomes of others. But let us debate it honestly with full disclosure of the downsides.
One of the less comfortable sides of this debate is that while there is a considerable outcry by the rich of the dreadful effects they claim that a 39 percent tax rate imposed upon them, they are almost silent on the effects of the very high effective marginal tax rates faced by those on low incomes. Frequently those rates are more than double the 39 percent the rich face. In some cases they are 100 percent, so all additional income earned is taxed and abated away.
There was some outcry from the pro-poor about these high effective marginal tax rates on the poor following the 2004 budget, although they existed before then. The bad news is high rates are inherent in any system which offers significant support to the poorest. There is a simple economic theorem which says that if the guaranteed minimum income is set at X percent of the average income, then the average effective marginal tax rate has to be X percent too. Suppose then GMI was 60 percent of average income, then the average income tax rate is going to have to be 60 percent. Since the top rate on the rich is 39 percent somewhere someone is going to have to be taxed at above 60 percent.
Consider the proposition that the maximum income tax rate should be 20 percent: that means the highest level of the Guaranteed Minimum Income is also not more than 20 percent of average income. This is not just theoretical. Recall that the income tax cuts on the rich in 1988 were partly funded by raising taxes on the poor and middle incomes by reducing their exemptions and increasing GST, but that still left a fiscal deficit which was initially bridged by the funds from privatisation and then, in 1991, there were savage benefit and government expenditure cuts.
The implication is that if we want to offer people a decent minimum standard of living, somewhere in the system there is going to have to be high effective marginal tax rates. The high EMTRs reflect this. Of course, were we to raise taxes on the rich the high EMTRs on the poor could come down. Those who object to the high EMTRs are either arguing for higher general levels of taxation or lower benefit levels. The pro-benefit lobby needs to be cautious over their objection to high EMTRs – they may build up a political dynamic which resolves their concerns by cutting the income of beneficiaries.
I have found only one resolution to the high EMTR problem (other than raising tax levels generally). Suppose that some people’s guaranteed minimum income was zero. That would bring down the average GMI for the nation as a whole and the average tax rate could also be lowered.
Now it may seem harsh to set some people’s benefit GMI at zero, but that was the way that the traditional welfare state worked. Most people had a zero entitlement. Instead they were guaranteed a job, for that is what full employment meant. With the ending of full employment that particular strategy has become less effective because there are people on the unemployment benefit. We have been struggling with that problem ever since. The solution has been 100 percent EMTRs on the unemployed – once they get a job they lose the benefit, although that is easier said than done.
I do not propose to further pursue this policy problem here, because there is an even more pertinent one for those concerned with child poverty, a problem so large and difficult that we have been unable to find any public consensus on its resolution.
In the traditional welfare state a substantial proportion of working age adults were neither entitled to a minimum income nor were they expected to get an income earning job. Typically they were the wives of wage and salary earners, who stayed home looking after children and doing housework, neither of which generate market income and therefore is not taxed. We treat such activities as private transactions between the earner and the rest of the household.
That situation has broken down. Many people live by themselves or hire home help, so popular nostrums such as income splitting would compound the injustices. More complicating is that many of the women whose mothers stayed at home go out to work, even when they have children, and they still do the housework.
Meanwhile there is a sense in that many of the mothers who were once supported by husbands are now supported by the state through the DPB. My point here is not to judge whether this is right or wrong, but to indicate there has been a shift in the burden of welfare from the private household to the state and that this has complicated the funding and structure of the welfare state. It also raises the question why should some caring parents get state support and others get only private support?
Add further complications of people who chose to work only part-time, while others are often in particular employment phases for short times so their income fluctuates, and we have a world which is very different from that upon which the traditional welfare state was based.
How are we to build all this into social policy and family assistance? I am not going to answer this, because it requires some social consensus about when a mother or spouse should work and when she (or he) should not. No consensus exists. Without it we hover between income distributional policy being based on a one income family or it being based on a two income family.
Deciding one way or the other is not as straight forward as one might think. For instance, suppose we decided policy should be predicated on a one income household. The logic is then that the benefit structure should also be based on one income families, which would involves a reduction in benefit levels. But lots of women spouses go out to work, so they tell us, because a one income household does not generate a high enough standard of living. So should we not base the policy on a two income household? In which case what should we do about spouses who do not go out to work.
These are not just theoretical issues, They were at the heart of the workings of the family assistance package. My understanding is that it was concluded that it was not possible to find a socially acceptable compromise. The resulting incrementalism (‘ muddle on through’) was a continuation of a family assistance system which is clumsy and almost certainly inefficient in terms of reducing poverty relative to the revenue that was available.
I have had to deal with this and other issues rather superficially because of time limitations. They are really difficulty problems. Those of us who work in the area often despair at finding any practical resolution to them. Finding one which might be an acceptable social consensus is even more impossible.
The best I have been able to do is a social policy which assumes every working age adult is an earner, although some may chose not to take up that option. The approach goes on that child care, whether it is at home or in a formal institution, should be an earning activity, to which the state should contribute, at least by treating it as a cost of employment and allowing paid child care to be tax deductable (up to a certain level reflecting the situation of the children). My thinking is a long way from an implementable policy, but it has the advantage of explaining why child poverty is a major problem in society, and it is seamless between one and two adult households and child care.
In setting out a simplified account of some of the issues which face those who would end child policy, I am saying no more than to every complex policy problem there is a simple, direct, easily understood solution – which does not work. The child poverty elimination movement has to eschew such solutions, but what can it do usefully? Here is my list of its salient responsibilities.
1. The Movement can be a public advocate for children in economically unsatisfactory circumstances. Children cannot advocate for themselves, nor can they pay others to advocate on their behalf.
2. The Movement can press the government to keep its promises, and insist other political parties make promises to reduce and eliminate child poverty. In particular it should demand of this government that not later than 2007 there should be a major reform of levels and delivery of family assistance. An incoming government would find it harder to meet the deadline, so the realistic demand is that the opposition parties should be committed to the reform not later than the 2008 election.
3. The Movement should identify specific measures which would alleviate distress in children, especially those which are not amenable to treatment by a family assistance package. The Auckland CPAG has an excellent record of doing this in the health area.
4. Each year the Movement should publish a set of priorities which the government can take into account during its budget round. The priorities should be realistic in the sense of keeping with the general budget policy framework.
5. The Movement should actively draw attention to policies which are to the detriment of children, including to those policies for which the downsides on children are not mentioned. This applies to both government and opposition policies, and to others promoted by lobby groups and debated in the general community.
6. Where possible the Movement should commission, endorse, and promote high quality empirical research and closely argued papers whose aim is to develop a public consensus on principles that have to underlie an family assistance framework. It should encourage public debate upon them.
7. The Movement also needs to maintain a capacity to challenge those policy proposals, sometimes even promoted by people of goodwill towards children, which are of the simple, direct, easily understood, variety and which do not work
Despite brevity of this list, it represents a big task. I must say, however, that it is a task which the Auckland CPAG already has a creditable record in pursuing. Had you not persisted over the years it is doubtful, that the 2004 budget would have been so forthcoming. Perhaps there would have been tax cuts for the rich instead.
After all the rich can advocate tax cuts for themselves and pay others to do speak on their behalf. Children can not. Someone should. One welcomes the CPAG saying ‘we should’. I hope many other will join you. It would be dreadful if in another 30 years – and another nine million years of child poverty – the problem of economic stress by children are still there in 2037.