Poorest hit harder by inflation with benefit hikes now linked to average wage

Finance Minister Grant Robertson says some Government moves have kept inflation lower, even though it has hit a 31-year high.

A “huge gulf” between the poorest households and mainstream New Zealand will widen as a result of rising inflation, a leading researcher says, as the Government faces mounting pressure to cushion the blow for beneficiaries.

At last year’s Budget, Social Development Minister Carmel Sepuloni ​indexed main benefits to the average wage, because wages were rising faster than inflation. Under National, they were linked to the Consumer Price Index (CPI), which measures the changing price of goods and services.

The move was “well-intentioned” and came before beneficiaries were hit the hardest by skyrocketing costs for everyday items including food and fuel, Max Rashbrooke, a senior associate at the Institute for Governance and Policy Studies at Victoria University of Wellington, said.

Now inflation of 6.9% in the year to March is comfortably outstripping wages growth of 5.9% over the year to December – the latest available figures. Jobseeker support only increased between 8% and 18% in a year, from the past July to April 1.

“The move to index benefits to wages was extremely well-intentioned because, one of the really striking things that has happened to benefits, really since 1991 ... is that they have gradually fallen further and further behind the average wage,” Rashbrooke said.

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The cost for essential items, like fruit and vegetables, are increasing. (File photo)
The cost for essential items, like fruit and vegetables, are increasing. (File photo)

“This huge gulf has opened up, which means that the kind of lives beneficiaries can lead became more and more divorced from mainstream New Zealand, and so beneficiaries became more and more isolated and segregated.”

CPI figures released Thursday confirmed households had experienced the biggest squeeze for everyday items in more than 30 years.

Poorest households had experienced nearly 35% inflation over the past couple of decades while the richest groups had experienced 20%, Rashbrooke said, because they were more likely to spend their money on items impacted by inflation.

“The stats work on the different inflation rates of the different New Zealand experience shows very clearly that inflation is highest amongst those, ironically, who can least afford it.”

Benefits had been falling behind wages for nearly three decades, since National’s 1991 “Mother of all Budgets” made severe cuts to benefits and pushed many into poverty, Rashbrooke said.

Finance Minister Grant Roberston said the Labour Government’s 2021 “Wellbeing Budget” sought to undo “some of the damage done all those decades ago” when he introduced it last May. Core benefits are now about $90 more a week since Labour took office.

Max Rashbrooke says benefits have been falling further behind wages since the 1990s. (File photo)
Rosa Woods/Stuff
Max Rashbrooke says benefits have been falling further behind wages since the 1990s. (File photo)

Rashbrooke said this gain was “huge”, but fell short in the face of the “avalanche of need”.

“Its only gone a small part of the way to restoring benefits to where they were in 1990 in terms of how far they are below the average wage, so there is still a mountain to climb.”

The Government could look to the UK, Rashbrooke said, and index core benefits either against the CPI and average wage, depending on which was higher.

Sepuloni said net average wage growth had historically been higher than increases in the CPI and within the past year main benefits would have increased by between 13% and 30% – higher than the inflation rate.

But while benefits were this year indexed to the net average wage growth, they would be further increased on April 1 to levels recommended by the Welfare Expert Advisory Group, with an extra $15 per week per person, for families with children.

Sepuloni also signalled there was more the Government would do to ease pressure on the most hard-up families. Existing initiatives include the food in schools programme, clamping down on loan sharks, and making GP visits cheaper.

Rashbrooke said many of the crunch points in the increasing cost of living were the result of long-term issues, with housing costs the largest contributor to the spike in inflation along with transport, food and fuel.

“This is a long-term issue, but if you look at the areas where price increases have been greatest, they are also the areas where there is the least competition in those markets, and when there is not much competition its really easy to pass price increases onto consumers,” he said.