Gap between rich and poor a muddy margin

16:00, Jan 29 2014

Income inequality has become one of the big issues of the day across the political spectrum.

The Economist this week asks: "Why aren't the poor storming the barricades?", while the Unite union's PR team puts out at least one press statement a week asserting inequality is "the" big issue at the election this year.

The Labour Party and the Greens agree, and the Government is on the back-foot on the issue. It has done little to challenge the widely held belief that the gap between rich and poor is growing, while pursuing income tax cuts and partial privatisations that demonstrably favour those who have wealth already.

However, the data is less supportive of the prevailing view than you might think. It is true New Zealand has become more unequal over the past 30 years but not so true in the past 15 years. The gap between rich and poor widened radically between the early 1980s and the late 1990s, taking New Zealand from around 20th most unequal in the Organisation for Economic Co-operation and Development - the club of 34 rich countries - to about ninth today.

But recently, those differences have barely changed, although it does seem there is something cultural about the phenomenon. English-speaking countries generally rank higher than other OECD nations for inequality.

Australia is less equal than New Zealand. Don't take my word for it, or the word of Brian Perry, the researcher at the Ministry of Social Development who has crunched the relevant data and produced the most definitive account of income inequality in a publication called Household Incomes in New Zealand.


Don't even take the word of the team of researchers put together by journalist Max Rashbrooke for his book Inequality: A New Zealand Crisis, which has been extensively toured since publication last year to raise awareness of the issue.

Instead, take the word of Brian Easton, one of neo-liberal economics' most long-standing critics, who has penned a handy compendium of the available data, titled: Inequality in New Zealand - A User's Guide.

Easton appears to have been miffed that, after a lifetime's work in this area, he was not approached to contribute to the Rashbrooke tome. He sniffily dismisses its analysis as being reminiscent of "the drunk who uses a lamp-post for support rather than illumination", unlike the "marvellously detailed" work by Perry.

The user's guide effectively reduces Perry's 242-page work to digestible size, while stopping short of "tediously correcting or elaborating a plethora of statements" in the Rashbrooke book.

In short, Easton's summary shows that total personal income was relatively stable between 1926 and the 1950s, after which equality improved through to the mid-1980s.

That period covers both the golden age of prosperity in New Zealand and the onset of economic decline in the 1970s, to which first protectionism and then Rogernomics were the broad policy responses.

Between the mid-1980s and mid-1990s, Rogernomics cut a swath through traditional, subsidised industries; income tax cuts and GST were instituted, which hit the poor rather than the rich; and then the Ruth Richardson welfare cuts of the early 1990s completed a sharp decline in equality.

"The trend after the mid-1990s is more ambiguous," Easton said.

"The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades."

During that time, however, the share of income earned by the top 1 per cent of adults rose from six to 10 times the adult average, with most of that shift happening in the early years of the Clark Labour Government, between 1998 and 2003. In 2004, Labour introduced the Working for Families income support package, and from then on, income inequality has stabilised at a so-called Gini co-efficient of about 2.8, compared with about 2.4 before Rogernomics kicked in. That is consistent with National preserving Working for Families once elected, despite initially describing it as "communism by stealth".

The lowest fifth of incomes rose in the 1990s but their share of total income shrank, probably reflecting benefit rates tied to prices rather than wages, Easton suggested. However, he also concluded that New Zealand's lack of a large banking and finance industry helped avoid the extremes of inequality seen in some other developed economies.

It is also one of the reasons New Zealand did not go down the plughole in the global financial crisis in the way that the "financially sophisticated" societies of the United States, Britain and Europe did.

Importantly, these statistics do not try to measure inequality by relative stocks of wealth. The statistics are not good enough to do that but they would probably show a more unequal society for much longer than the past 30 years.

That said, "the vast majority of the adult population had little physical and financial wealth"; Pakeha are wealthier on average than Maori; and about a seventh of total wealth is owned by 1 per cent of the adult population.

What to make of all this?

Clearly, New Zealand has income inequality that has got worse and then stabilised. Political parties of all stripes know that and are responding in various ways, to varying extents.

National's social housing foray and its retention of benefits and family assistance through the post-GFC recession are proof that Tories worry about inequality, albeit with less hand-wringing than the Left and with greater willingness to reward wealth creators disproportionately. How we respond as a nation is one of the most important things our politics can do.

But let's start with the facts about inequality, which are not as clear-cut as many have thought.