Rising interest rates are hitting the 122,000 mid-income households who have a mortgage. Photo / 123RF
Rising interest rates are hitting the 122,000 mid-income households who have a mortgage. Photo / 123RF
OPINION:
You could call it National's corset strategy — talk a lot about the forgotten "squeezed middle" and portray its tax cuts policy as especially valuable to them.
National's finance spokesperson Nicola Willis describes them as "workers and families who earn too much to qualify for government assistance andyet are really struggling as the cost of living crisis bites" — the people who are going backwards fast because of rising inflation and interest rates.
So what can the statisticians tell us about the people and households to whom the term "squeezed middle" might plausibly be applied?
Let's start with households. Every three months Statistics NZ publishes household living-costs price indices (HLPIs). The HLPIs take the results of the most recent consumers price index (CPI) and re-weight the 650 items in it to better reflect average spending patterns for subsets of households.
When they rank households by income and then look at the middle quintile or fifth of them — about 351,000 households — some basic average facts about them emerge.
There are more people per household — an average of three — than for any other quintile; the average for all households is 2.7 people.
And they are the youngest quintile, with an average age of 33.8 years, three years younger than the average for all households.
Those two demographic features might suggest a higher proportion of dependent children. And that, in turn, would mean the abatement rates for Working for Families tax credits are pretty relevant, not just income tax rates.
Some 60 per cent of the middle fifth are owner-occupiers, including 34.6 per cent who have a mortgage. That leaves 40 per cent who are paying rent.
In the March 2022 quarter, rent took 15.9 per cent of income for middle-quintile households as a group. That implies that for those middle-quintile households who do pay rent, it takes nearly 40 per cent of their income.
Would they be well served by National's plan to reinstate landlords' ability to deduct interest, on the pretext that people only invest in rental properties for the taxable rental income, and not for highly leveraged capital gains? Might that not reignite house price inflation?
Meanwhile, swiftly rising food and fuel prices must hurt when 19.1 per cent of the middle fifth of households' income goes on food and 12.1 per cent on transport.
Overall, the cost of living for those households rose 6.8 per cent in the year to March 2022, up from just 0.6 per cent the year before.
Why such a steep increase from such a low base a year ago? Mortgage rates.
An important difference between the CPI and HLPIs is the treatment of housing, Statistics NZ explains. The CPI captures the cost of building a new house — although that is an expense few households experience directly in any given year — while the HLPI captures mortgage interest payments and the CPI ignores them.
"In the HLPIs interest payments increased 13 per cent for the average household in the year ended March 2022, while [in the CPI] the cost of building a new house increased 18 per cent," it says.
To be fair, buried deep in any release of the CPI is a series called all groups plus interest, which adds interest costs to the normal CPI basket. The latest read for that indicator for the year to March 2022 was a rise 6.4 per cent, up from just 0.2 per cent the year before.
In other words, in the March 2021 year the effect of the monetary easing by the Reserve Bank in response to Covid-19, as it flowed through to mortgage rates, was enough to almost entirely offset the rise in consumer prices.
But that was then and this is now. Since last October the bank has raised the official cash rate 1.75 percentage points and has pencilled in another 2 percentage points by the middle of next year — a period during which an awful lot of fixed-rate mortgage debt will come up for refixing.
So the squeeze on the 122,000 middle-quintile households who are owner-occupiers with a mortgage is set to get a lot tighter.
Turning from households to individuals, the most timely indicator of the median wage, derived from PAYE payday data, puts it at $1167 a week or just over $60,000 a year.
The average wage is higher. That is inevitable. In an unequal distribution of incomes, most people are below average.
Statistics NZ's March 2022 quarterly employment survey found average weekly earnings were $1406, or $73,000 a year, per full-time equivalent employee.
National's proposed increases in the income tax rate thresholds, to compensate for bracket creep since 2017, would be worth $800 a year to someone on the median wage and a bit more, $890, to someone on the average wage.
It would be about the equivalent of a 2 per cent pay rise in both cases.
But it is not safe to assume that that 2 per cent would be additional to what the employee would have got anyway. It could mean that the employer gets away with a pay rise lower than might otherwise have been necessary.
It is like the accommodation supplement: whether it is the tenant or the landlord who benefits from the subsidy depends on which has the market power.
In any case an extra 2 per cent, while welcome, would only compensate for less than four months' inflation at the current rate.
After that the squeeze on real incomes resumes.
The Government would have $1.7 billion less to spend, all else being equal.
And the enduring effect, in a country with a real problem with income inequality, is that the income tax is less progressive.
