Battling to pay for the basics

Inflation is officially running at 3.3 per cent but if the cost of getting by seems to be rising faster than that, you may be right.

The Consumers Price Index (CPI) was revised down a point (from 3.4) last week, just one point up from the figure for the preceding 12 months.

How can this be, when price rises seem to dominate the news?

One reason is time lag. The CPI captures inflation only over the period it looks at the quarter or the year to March. Price rises that hit the pocket after that and there have been a few won't be reflected until the next quarterly report.

Then there's what is left out of the CPI equation. It doesn't take account of your expenditure on a Van Gogh or Monet, or any other art work for that matter. Nor is provision made for shares, bonds or precious metals.

At the other end of the scale, it doesn't take into account what your gambling cost or how much you had to pay in fines.

That's because, says Statistics New Zealand spokesman Daniel Griffiths, the primary purpose of the CPI is to give a reading on inflation rather than the changing costs faced by households, even if it is regarded as a handy litmus test of that, too. Employers and employees, after all, use it as a benchmark in wage negotiations.

Mortgage costs are not included, the rationale being that the impact of mortgage increases is negated by the fact only a minority of people have a mortgage and most that do have a fixed interest rate. The trend of homeowners to fix their interest rate is the reason Reserve Bank Governor Alan Bollard found raising interest rates to dampen the residential real estate market was not the sharp tool it once was.

So what are we spending on?

Petrol, thanks to regular price increases (it is at its most expensive since the oil shock of the late 1970s and early 1980s), is the big driver on our spending, pushing up the prices of other goods and services.

It is one of the big four expenses for households identified by the Statistics Department's three-yearly Household Economic Survey, second to the cost of housing and taking marginally more than we spend on food and "other services".

The latest survey, conducted in 2004, underlined what the economists have been telling us we are spending more than we earn. Although the average annual household income had increased by 12.3 per cent in the three years since the previous survey, we were spending on average 16.1 per cent more.

Which brings us back to the "other services" category. This includes health and education, but its biggest cost was financial, insurance and legal services. While some of the extra spending went on clothes and dining out, more was also going on the cost of borrowing on such things as credit cards and hire purchase.

It's an enduring paradox that the worst-hit when it comes to the cost of credit are those who can least afford it. These are the people seen by those who work for budgetary advice services and community law centres.

The number seeking the help of Federation of Family Budgeting Services hasn't much changed but, spokeswoman Raewyn Neilsen suspects that's because unemployment remains low. That said, the numbers are significant. The foundation gives advice to a core of 20,000 families and is contacted by about 30,000 new families each year.

What Neilsen and Denise Smith, a co-ordinator at Papakura Budget Advice Service, have noticed is that the debts of those they are seeing are bigger.

"Their general problem, obviously, is debt," says Neilsen. "We'd like to have people who want to talk to us about budgeting issues but in real terms they come to us as a last resort, when the debts have got to the stage where they don't have any clues as to how to solve the problem anymore."

Problem areas include high interest borrowing for retail products and overdue bills for essentials such as rent or mortgage, power, phone as well as money owed in fines and taxes.

Budget advisers try to help them live within their means but many just don't have enough income to cover the basics.

Some haven't been able to trim expenditure following a sudden change such as family separation, redundancy, sickness, or going from an income to a benefit.

Most coped until a crisis tipped the balance, says Neilsen. "It may mean that the house they are living in they can no longer afford, which is living outside your means but if you have just gone through being made redundant or a separation you haven't necessarily got the wherewithal to move - with the disruption to family that comes with it."

Says Smith: "I think the [minimum] wages are too low. They're not keeping pace with the cost of living." Families surviving on such rates often qualify for welfare top-ups but those living alone may not.

The minimum hourly wage was increased in March to $10.25 for adults and $9.50 for those aged 16 and 17. The Council of Trade Unions is pushing for an adult minimum of $12 by 2008.

"There are people who are single, grown men, earning that sort of money. That's the most shocking thing to me," says Smith. "I had a man in last week, cutting patterns in the rag trade, who was about 40, earning [the basic minimum wage]."

While this man battled to pay for necessities, Smith suspects many people have succumbed to the enticements of advertisers and moneylenders offering attractive terms. Those who fall down are generally people on low incomes with poor education, poor language skills or all of those things.

Petrol, food, such as fresh fruit and vegetables, and finance company charges are most commonly cited by those unable to make ends meet.

Finance sharks offering instant cash have mushroomed in poorer areas, and banks send credit cards to young people. "I have a 23-year-old girl who has over $50,000 worth of debts, I had a 19-year-old boy who owed about $40,000, [neither had student loans] and we are seeing that regularly."

The 19-year-old's debt was mostly loans. "Car, mag wheels, you name it he had it."

There is a disconnection between desire and cost but, says Smith, it's pushed on people them, too. They are "totally encouraged, told this is what they need now".

Some of these unfortunate cases are referred to Graham Lee, senior solicitor with the Manukau-based Nga Ture Kaitiaki Community Law Centre. He calls his patch as "the mean streets of New Zealand".

The description covers not just poor areas of Manukau, but similar ones anywhere.

"You will see a whole bunch of loan shark shops lining the streets. Where they set up shop is where their prey is the easiest to fall upon. It's here in the southern suburbs and it is in Waitakere. It's no surprise we have a proliferation of community law centres [in these areas]."

Loan sharks he believes are "pursuing it for all it's worth", charging as much as 42 per cent interest to those whose poor credit records mean banks are closed to them. When Lee and his colleagues tell them the debtor can't pay they are willing to reschedule, happy in the knowledge that money is still coming in and that although someone at the bottom is faltering, they can find someone who will pay the top rate.

"When I look at the presentation in my office, it's the vulnerable people, those who lack knowledge, have poor education, poor social skills, poor communication skills, they are the ones being made to pay."

Unless those factors are addressed, policies such as Labour's working for families, which kicked in this month, "eventually becomes working for publicans, working for loan sharks, working for pokies".

"You are putting more money in the hands of people who are not adept at keeping it in their hands and buying more vegetables, more education, more health. Chances are their pattern of spending will not be changed simply because they have more money."

It may simply make them ripe for further debt, the rationale being that because more money is coming in they can borrow more.

"We've lost our Calvinistic, Protestant ethic of not incurring more debt than we need to. Debt has been marketed as a lovely, easy McDebt. You just drive through and pick up the upsized debt. They don't stop to think of sacrifice."

Education and self-control may be part of the answers but, Lee suspects, legislation will also be needed to help the hard cases he sees: extended cooling off periods in which borrowers can change their mind; requiring independent checks of high-interest loan deals; restricting debt advertising and banning low-equity lending; turning the clock back to a time when, by law, a chunky deposit was required to buy that fridge, that television, that car.

Perhaps then a saving habit might rise to match the impulse to consume.