National Party finance spokeswoman Nicola Willis and leader Christopher Luxon have said they will move to a cheaper form of indexing benefits. Photo / Jason Oxenham
ANALYSIS:
A National Party promise to decouple benefit increases from wages will see hundreds of thousands of people miss out on payments worth more than $50 a week by the end of the decade, and would likely see National struggling to meet some child poverty targets.
The changes will save the Government about $2 billion over the next four years, but will cost beneficiaries dearly.
By the end of the decade, someone on Jobseeker will be $50 a week worse-off under National’s changes, while someone on a disability benefit will be $60 a week worse off. Those figures equate to a cut of $2600 to $3120 a year.
The change affects an enormous number of people: As of June 351,000 people, or 11.2 per cent of the working age population receive a main benefit.
Of them, 170,000 are on Jobseeker, the main unemployment benefit. A further 74,166 people receive sole parent support, and 100,000 receiving the supported living payment, the main disability benefit for people who cannot work and their carers.
These benefits are increased every year so that they don’t lose value. As a result of a change made in by Labour 2019, these increases are indexed to wages, meaning they rise with the incomes of a median household.
National has said it would revert to the old system. Prior to the change, benefits, apart from superannuation, increased at the rate of CPI inflation (minus the inflation in tobacco and alcohol). Advice to the government in 2019 said the change would mean fewer families falling into poverty - although it warned that the problem was so entrenched that the change on its own would not lift significant numbers of people out of poverty - this would require real-terms increases in benefits and tax credits.
The change brought main benefits in line with superannuation, New Zealand’s largest benefit, which is increased in line with wages, although by a different formula.
(This year’s adjustment was actually for the 7.22 per cent rate of CPI inflation in the year to December 2022 because, inflation soared ahead of wages - a rare occurrence)
What benefit increases are meant to do
When considering how much to increase a benefit, there are two obvious problems a government must address.
The first and most obvious is what level that benefit needs to be for it to be sufficient for someone to survive on. All parties agree that benefit levels should keep up with providing a certain standard of living, although what that standard should be is a matter of hot debate.
The second challenge is ensuring people on a benefit do not slip into poverty, and that children living in benefit households do not slip into poverty either.
This is particularly challenging, because what constitutes poverty and how it relates to someone’s income is contentious.
Stats NZ publishes nine child poverty indicators, three primary measures and six supplementary ones, against which it sets targets.
The three primary measures ask the Government to report on: first, whether the number of children living what would be considered poverty in 2018; second, the number of children in households much poorer than a typical household currently; and third, the number of children living in households that go without the basics.
You can see these statistics all work together, one tells us whether things are improving over time (relative to 2018), another gives an indication of the number of how poor households are doing in relation to other households.
While some metrics might be easier to address, like ensuring fewer families fall into material deprivation, ensuring that families at the bottom keep up with families in the middle is far more difficult.
The problem: indexing to the cost of living... doesn’t keep up with the cost of living
The problem with the CPI metric is that it fails on both counts mentioned above: it fails to keep pace with the rising cost of living in benefit households, and it can see some households slide into poverty because it sees benefit households fall out of alignment with other households.
The first, and most obvious problem, is that inflation in benefit households is often different to that in the economy as a whole, which is what CPI measures.
The CPI measure of inflation looks at an average “basket” of goods across the whole economy. It includes things that nearly all households will consume, like food and transport, but it also includes things like international air travel, surgeons’ fees, exercise equipment, and cars, which low income households either don’t consume or consume less than other households.
Stats NZ collects and publishes the CPI data, but it also collects and publishes data on inflation as its experienced by individual households in something called the Household Living Costs survey, which looks at the cost of living across a range of household types, like beneficiary households, superannuitant households, and the wealthiest and least wealthy 20 per cent of households.
The most recent data found that beneficiary households experienced inflation of 6.8 per cent in the year to June 2023. That is more than the 6 per cent inflation measured across the economy as a whole by CPI for that year. It means that for beneficiary households, CPI adjustment for the prior 12 months, would not have kept pace with the rising cost of living, which was significantly higher.
In an individual year, this is unlikely to mean much to a beneficiary household, but remember these things are cumulative. Year upon year of increases at below the rate of inflation experienced by that household would leave it worse off.
Because wages tend to increase more than CPI inflation, this issue is less of a problem.
Auckland University Professor Susan St John said that the indexation to wages did not solve the problem of poverty, but “stopped it getting worse”.
She said National’s plan to revert to the old model would be “a retrograde step”.
“What we know is if things are indexed to prices is they fall in real terms compared to others’ standard of living.”
Labour leader Chris Hipkins and finance spokesman Grant Robertson say the changes are tantamount to a “cut”.
“Contrary to what the National Party think, it’s not easy to live on a benefit,” Hipkins said.
“People on a benefit generally live a hand-to-mouth existence. Cutting their benefits in order to pay for tax cuts would make life very difficult for those families.”
How wage indexation is meant to fix it
Critics argue the current indexation regime is not driving a reduction in child poverty, it is only ensuring the problem is not getting worse, which was the case when benefits were linked to CPI.
A 2019 DPMC paper to Prime Minister Jacinda Ardern, in her role as the Child Poverty Reduction Minister, said “if the Government decided to index payment rates of benefits to wages, this would help ensure the distance between the incomes of low-income households and middle income households would not grow”.
The paper laid out the problem quite clearly: “In times of general economic growth, poverty measures... can generally be expected to decline, even on the after-housing-cost measures, through improved wages for low-income households”.
This is because economic prosperity would lift people out of poverty - but, crucially, it would not lift everyone out of poverty. Some people would be left behind: beneficiary households, because their incomes were fixed to the wrong peg, CPI instead of wages.
“However, there is a limit to how low these [poverty] rates can fall, as there is a large beneficiary population on incomes that do not (often) rise in real terms,” the paper said, warning that not only did benefits need to rise, but so did things like the accommodation supplement, which helps with the cost of housing.
Prior to the Fourth National Government’s decision to cut benefit levels in the early 1990s, the net payment rate of Jobseeker or equivalent benefit for a couple with children was between 60-70 per cent of the net average wage. It is now just over 40 per cent. Other benefits have similarly declined relative to wages.
The paper noted that this is because “wages have generally grown faster than inflation over the past two decades”.
“Even if income support had completely maintained its relationship with prices in recent decades, the gap between the living standards of beneficiaries and other New Zealanders would have grown,” the paper warned.
“Benefit levels have declined as a proportion of average wages; overall, the incomes of beneficiaries have fallen further behind working households.”
How the changes are meant to address child poverty
Some of the nine child poverty indicators are “moving line” measures, as mentioned above.
This means that for poorer households to keep up, let alone catch up, they need to move in line with other households.
The 2019 paper said that for one measure, child poverty rates could even increase in times of relative prosperity, because the incomes of the middle households would become further detached from those at the bottom, whose incomes increased by only as much as the CPI peg would allow.
“Because the median tends to increase in real terms each year, the general trend is for child poverty rates on the moving line income measures to gradually rise,” the paper warned.
“In order to achieve a reduction and meet its target for this measure, the Government must ensure that the incomes of New Zealand’s poorest families not only keep pace with those in the middle, but actually increase in relative terms”, it said, in bold.
In fact, modelling presented to ministers in 2019 warned that if nothing were done, they would expect 10,000 more children to fall into poverty by the BHC50 measure over the forecast period, despite strong economic growth forecasts.
Indexing benefits to wages, however, would mean ,000 children being lifted out of poverty over that period, a difference of 15,000 from the forecast.
This came to pass. The most recent child poverty report showed 22,000 fewer children living in poverty on the BHC50 measure.
National’s answer
When asked about these concerns, National leader Christopher Luxon talks about growing the economy more and getting people off benefits and into paid work.
“When you look at all those metrics, we are committed to delivering on that,” Luxon said, about the child poverty reporting.
“We need to grow the economy and get people on welfare into work.
“That’s why child poverty can’t be linked solely to people in benefits.”
Luxon has a point. The best way to get people’s incomes to rise in line with wages is to get people to earn wages rather than a benefit.
But, as any politician will tell you, this is easier said than done.
One of the policy issues confounding Wellington brains at the moment is why New Zealand has relatively high numbers of people on a jobseeker benefit during a time of near record unemployment.
In June 2018, there were 122,000 people receiving jobseeker support, 4.1 per cent of the working-age population. This has risen to 173,000 people or 5.5 per cent of the working age population.
The number of people on a benefit spiked during the pandemic, which is understandable, but it has remained elevated.
National is keen to get some of these people into paid work, where they would earn more.
But no government has ever been able to reduce the number of people who could work but are not working to zero, and National wouldn’t want to do this anyway because it would send inflation through the roof. If unemployment gets “too low”, inflation begins to rise as sought-after workers bid for higher wages.
Luxon, despite being asked multiple times, has also been unable to answer what the solution is to those on sole parent support or disability benefits. These beneficiaries cannot easily enter the workforce and so have no way of avoiding National’s cut to benefit increases.
And that is where the real challenge exists, as the DPMC paper to Ardern warned four years ago. Just growing the economy is not enough if benefits are indexed to CPI.
It’s worth repeating that the paper’s warning that there was “a limit to how low these [poverty] rates can fall thanks to economic growth”, ”as there is a large beneficiary population on incomes that do not (often) rise in real terms”.
There’s a lot of politics on the line for National too. The party has promised to deliver a $2.9b surplus in 2027, $800m more than what Labour is promising.
However, more than three-quarters of that $800m increase or $616m, comes from savings on benefits thanks to indexation changes.
Another problem:
On the other side of the debate is the massive cost to the state’s balance sheet. This is something National is less keen to talk about, although it is undoubtedly top of mind.
Switching to a CPI index costs beneficiaries dearly, but that cost, multiplied by the hundreds of thousands of recipients, is a massive gain for the state.
The 2019 paper warned that the initial cost of the change would be small, but would rise dramatically in the out years as the benefits adjusted by wages diverged from what they would have been had they been adjusted by CPI.
It warned the “additional fiscal cost” of wage indexation would become “more and more substantial in outyears”.
“For example, indicative costings show wage indexing main benefits would cost $50m in 2020/21, rising to $130m in 2022/23 and $700m in 2028/29,” the paper warned.
The change was clever politics from Labour at the time, as the costs were relatively small in the forecast period with the big costs booked in the outyears. Now that we are entering the outyears, we can see how costly the scheme can be.
But the affordability of the scheme depends largely on maintaining low unemployment in the good times, and allowing benefits to operate counter-cyclically in the bad.
Currently, New Zealand spends about 6.91 per cent of GDP on superannuation, jobseeker, supported living payments and sole parent support.
By 2037, this is set to increase to 8 per cent
It is still affordable in the context of a Government budget worth more than 31 per cent of GDP, but it will mean tough decisions around whether to invest more in things like health and education as potential budget increases in these areas get squeezed out by the rising cost of benefits.
But none of that increase in cost is coming from the benefits that National wants to fix to CPI. All of the increase in cost comes from the one benefit that remains stuck to wages: superannuation.
Main benefit spend, even with the current wage index, declines from about 1.95 per cent of GDP now to 1.74 per cent of GDP in 2037. It becomes more, rather than less, affordable.
The reason for this is that the labour market is expected to continue to keep a lid on the number of people needing support. While projecting out that far is an inherently fraught exercise, what the data does show is the affordability of the scheme is not less contingent on its generosity than it is on how much work the economy can do to keep people from needing it in the first place.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Oranga Tamariki agreed to make changes in response to the feedback.