How wage inflation supports the Government

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

High inflation is not only reaching further into our pockets for almost everything we need to buy, the wage inflation it has engendered also has an insidious and perverse impact that is further worsening many family budgets in this cost-of-living crisis.

The problem is that successive governments have not put in place regular adjustments to income tax brackets along with income thresholds for Working for Families tax credits, by indexing them to wage inflation.

This boosts government coffers, especially during high inflation, but it does so at the expense of taxpayers — and is felt worst by lower and middle-income New Zealanders.

It has been an “automatic stabiliser” for the Government, when this term applies to mechanisms in government budgets to ease financial stress on households and stimulate demand during a recession, by increasing spending or decreasing taxes.

This was a slow-burning problem until inflation, then wage inflation, started climbing steeply two years ago.

The National Party has made us all very aware of how this has hiked the tax take and reduced effective incomes, as more and more is taxed at 17.5 percent (for each dollar earned from $14,000-$48,000) and 30 percent (on $48,000-$70,000).

In response some on the Left accuse it of pushing tax cuts for the rich . . .

while this week the Council of Trade Unions highlighted how much wage inflation since 2021 has increased the cost of this policy to a National Government if it wins the election — but also the effective penalty on lower and middle-income earners.

Acknowledging the issue, Prime Minister Chris Hipkins told Newstalk ZB listeners this week that Labour would “eventually” look at adjusting tax brackets, but that doing so now would be so inflationary it would eat up the gains in people’s income.

The Government is also well aware of flaws in the $3 billion Working for Families tax credit system, which now supports just under 350,000 families with children, having received recommendations at the end of last year from a review that found “serious design issues” and warned that “in-work poverty” was becoming an increasing issue for families.

Many commentators expected the cost-of-living component of this year’s Budget would include greater support via Working for Families.

After all, in 2017 the incoming Labour Government increased the tax credit abatement threshold from $36,350 to $42,700. It has stayed there, despite wage inflation (more than matched by price inflation) meaning it should now be just under $52,000 . . . at what would be extra cost to the Government — but against dwindling support now for struggling families.