If you weren't able to attend the Tax Talk on Monday, 18 February 2019 you can watch it here:
To view the companion blog piece with history and background click here.
Sources for this piece are the Tax Working Group Report on The Taxation of Capital Income and Wealth and Andrew Coleman’s piece on the Great Income Tax Experiment plus the work behind The Opportunities Party tax policy
To watch the Tax event held on 18 Feb 2019 and which is the result of this research, click here.
Most people are worried about the amount of tax that they pay, but that isn’t what we are talking about here. The Opportunities Party doesn’t want to collect more tax overall, we just want to make sure it is collected in a fair and efficient way. Our goal is to use any revenue collected to reduce income taxes
For the economy the amount that one thing gets taxed relative to another is just as important as the overall amount of tax that is collected. If one type of behaviour is taxed less than another, then people will do more of the thing that isn’t taxed. If we want them to do that thing, that might be fine. But if we don’t want them to do that thing, we have a problem.
And that is the case with housing in New Zealand. The current Government is focussed on cracking down on investors and speculators. This may be popular, but doesn’t make much sense economically because the biggest tax break actually lies with the “family home” - otherwise known as owner-occupied housing.
The Government’s own Tax Working Group confirmed this in their report on Taxing Capital Income and Wealth:
See the low bar? The thing that is taxed way lower than everything else? That is the money that people invest in the family home. Many Kiwis struggle to believe this graph when they first see it. So maybe it would help to look at the history behind it.
A Brief History of Our Tax System
In the 1980s the Labour Government of the time revolutionised our tax system. The idea was to get rid of any tax incentives and loopholes so that tax rates could be lowered as much as possible. This is the mantra of the “broad-base, low-rate” tax system that is parroted by Treasury and IRD officials to this day.
This meant that almost all investments got taxed twice - once when the money for investment was initially earned as income, and again when that investment created a return. That applied to bank deposits, businesses (including shares) and retirement savings. Even the inflation component of returns is taxed, which is why the effective tax rate on most investments in New Zealand is up around 50%.
The one exception was housing and land. The income used to buy these gets taxed, but the returns from being an owner occupier of housing and land aren’t. Effectively when you live in the house you own, you are landlord and tenant and are paying rent to yourself. In most rental situations the landlord pays tax. But in this case, which is called “imputed rental”, no money changes hands so our tax system ignores it.
Housing and land based businesses such as rental property and farming pay tax on the cash returns they get, but not on the capital gain. In all, property based businesses end up paying about half as much tax as other investments. However we need to remember that capital gain happens because of higher expected returns in the future, all of which ideally should be taxed. So in the long run taxing capital gain is really unnecessary double taxation. The problem with property is that not all those future returns are taxed (the imputed rental problem), which can make a Capital Gains Tax attractive for that asset class.
There was talk of introducing a Capital Gains Tax as part of Labour’s reforms in the 1980s. However Labour imploded, National was voted in, and it was all but forgotten. That would have been the time to bring in a Capital Gains Tax (as long as it included the family home), before all the capital gain happened. But now the horse has well and truly bolted. Imputed rental would still not have been taxed, but at least housing affordability would not be as bad as it is now.
What Do Other Countries Do?
The result of this history is that the difference between tax treatment of property and other assets is the greatest in the world. How do other countries deal with this?
A few do something similar to The Opportunities Party proposal - taxing the value of living in the family home the same as you would a bank deposit. Iceland, Luxembourg, the Netherlands, Slovenia and Switzerland all do this. This eliminates the tax differential between the family home and other investments, so people have an incentive to invest in businesses.
The majority of European countries adopt another approach. They drop the ‘broad-base, low-rate’ idea completely. They hike up income taxes and use that money to reduce the taxes on other types of investments. The left of politics makes a big deal of the higher marginal tax rates in Scandinavian countries for example, which seem to have little negative impact on their economic growth. But they ignore the fact that the tax rates on capital - businesses, retirement savings for example - are much much lower than they are in New Zealand.
This approach again helps to reduce the differential between investment in housing and other types of assets, so people still have a strong incentive to invest in businesses. Of course property addicts like to point out that average people don’t have that many opportunities to invest in businesses. In these countries that role is played by retirement savings, which manage people’s portfolios on their behalf. Investments in retirement savings in particular are often untaxed when the income is initially earned.
The Impacts of this Experiment
As a result of this tax history, Kiwis have piled into housing. More of our assets are tied up in housing than any other developed country in the world, and house prices are a testament to that.
House prices have risen faster than any developed country, leaving us with the least affordable housing of any developed country. Rents have followed suit, rising faster than prices or incomes as landlords struggle to maintain some level of return on their investment. As a result, ordinary people have to work more hours to pay for their rent than they did in the 1990s.
Housing is the key driver of growing inequality. Since the mid 1990s inequality has not really grown at all. Workers in general have been getting their fair share of rather mediocre productivity gains. However, when you take housing into account it is a different story. After housing costs inequality is rising.
Rents rising faster than incomes are the key driver of poverty at the bottom end. And higher house prices are the main driver of rising wealth at the top end. Once housing costs are taken into account, the bottom 10% of families are still no better off in real terms than they were in the 1980s.
It isn’t like this is helping our economy. Most of our investment is going into unproductive areas - bidding up the price of already existing housing. Countries don’t get rich together that way, some (namely asset owners) get rich at the expense of others. In New Zealand we have effectively seen a massive transfer of wealth from younger generations to older ones. Our businesses suffer due to lack of investment, which is why our incomes are so low. Meanwhile we all bear the risk of record high foreign debt.
Could Other Factors Be Driving House Prices?
Much has been made of the role of cheap credit and housing supply in the rise of our house prices. It is impossible to completely disentangle tax from these other factors. However over the long run these other factors cannot explain everything.
Firstly cheap credit. This has been available around the world for many years, yet New Zealand has topped house price rises since the Global Financial Crisis. And when incomes are taken into account, we really do stand out.
We topped the latest Demographia survey in terms of unaffordable housing in the developed world. Interesting to note that the two markets just behind us - Australia and the United Kingdom, both have a Capital Gains Tax excluding the family home yet are still well above what experts call “affordable”.
Housing supply is certainly an issue, particularly in Auckland. However many other markets in New Zealand have been unaffordable for some time, without a discernible supply issue. Auckland too was already unaffordable long before the shortage appeared. And again internationally we are not particularly unusual for our planning rules, yet we are a stand out on house prices.
The cost of construction is often raised also. However this is not the key driver of higher house prices - the price of land is. Land banking is the key problem, and this is driven by the differential tax treatment of property. Why develop land when you can make more money sitting on an empty section?
So What Do We Do About It?
If we care about inequality, house prices and the economy, we need to tax property the same as other assets. That extra income could be used to reduce income tax by up to one third. This would be a true broad base low rate system. Returning to the original graph, that would equalise all lines on the chart by lifting the lines on owner occupied housing and rental properties and dropping the others.
Of course, even if you understand that our tax system favours housing, especially the family home, you might think that is a good thing. Bear in mind however that half of Kiwis don’t live in a house they own. Around 40% of Kiwis own nothing at all to speak of. Aren’t they the people that deserve access to New Zealand’s biggest tax break? Instead, through their income taxes they end up paying a greater burden than many of us. This property loophole is particularly exploited by the rich. One third of the wealthiest people in New Zealand don’t even pay the top rate of income tax. That isn’t the idea of a progressive tax system, and it doesn’t fix the huge distortion that exists.
Nonetheless, if we don’t care about inequality and we want to keep our tax breaks on housing, then we need to at least abandon the broad-base low-rate mantra. We need to drop the tax on other investments to match that on owner occupied housing. This will solve our investment problem and obsession with housing. The downside is that it gives a huge tax break to people with assets - the rich. The question there is where the money comes from to pay for the tax break. Scandinavia achieves that by getting more income tax from higher incomes.
A Capital Gains Tax which excludes the family home achieves neither of these things. It hikes up taxes on rental property, but leaves owner occupied housing untouched. To make matters worse it hikes up taxes on businesses too - taking them over 50% of returns. As mentioned, higher capital values for a business are a sign of higher expected future revenues. Since revenues already get taxed eventually, a Capital Gains Tax effectively brings forward future taxation burden on business. Given the already high rates of business taxes, why would anyone bother to invest in a business then?
I spent 3 years working in regional development in the United Kingdom. I started working there in 2005, 7 years after the Blair Labour Government first set up the Regional Development Agencies. This and other experiments in regional development have yielded some lessons that this coalition Government seem to have roundly ignored in setting up the Provincial Growth Fund (PGF).
Recent decisions have highlighted many of these problems. It has become clear that the Provincial Growth Fund was hastily set up, and now the focus is on shovelling money out the door. It was intended to be the jewel in NZ First’s crown but could prove to be an albatross around their neck.
Lesson #1: Do we even need the PGF?
Good regional development isn’t just about the money. It is about taking a holistic view of a region’s economy, seeing what the roadblocks are and how that might be overcome. Sometimes not much money is needed at all to solve a problem, it can be done by coordinating what different parts of government are already doing.
By contrast, the Provincial Growth Fund seems to be all about the money. Little thought has gone into what will actually make a difference to the target regions.
A good example of this is yesterday’s announcement that the Provincial Growth Fund will put $20m into Predator Free New Zealand. This allowed NZ First to make a song and dance about finding alternatives to 1080, but this announcement was really an acknowledgement of the failure of the PGF. Predator Free NZ is a great idea, and is already happening. Research into alternatives to 1080 is a great idea, and is already happening. Giving them more money is a great idea, but we didn’t need the PGF to do it.
This announcement was an admission that PGF has run out of ideas already. You have to wonder why it exists.
Lesson #2: Spending Money Well Takes Time
Regional Development in the UK started in a similar fashion to the PGF with money spent in a random, shotgun way. This is typical of new government initiatives where the pressure is to get money out the door. The easiest way to spend government money is by doing lots of little projects. This is usually not the way to get best value for money.
I started working for the Regional Development Agency 7 years after it was set up. My job was to look at all the things they had done on business support, and work out which had worked and which hadn’t. By the time I left, 10 years after they set up, that job was done and we were only funding the stuff that had worked. The short story is that we had a few, large, very effective projects.
By contrast the PGF has to get $1b out the door every year for 3 years. This doesn’t leave much time for careful thinking, and the lack of thought becomes clear when you look at what the the PGF has turned up so far. There are no clear outcomes for what different projects should achieve and how that should be measured. The cost per job of different projects is vastly different. It is hard to know what they are trying to achieve other than getting the money spent.
Lesson #3: How To Avoid Doing What Would Have Been Done Anyway
The last, and most important lesson is how to avoid funding stuff that would have happened anyway. The flip side to this is how to avoid funding stuff that shouldn’t get funded regardless - but this stuff eventually tends to come out in the media anyway.
Businesses make investments all the time without government help. The ones that don’t probably don’t deserve to be invested in. Which are the investments that should happen but would only happen with some government help? This is a tricky area and requires careful thought.
The short answer is that to justify government intervention the investments need to generate measurable environmental and social benefits alongside their financial benefits. The financial benefits alone might not be enough to justify the investment, but the social and environmental benefits might be. These sorts of investments are known in the business as “Impact Investments”.
A good example of how the PGF could have been used for Impact Investment would be to underwrite a Permanent Forest Bond. This would harness private sector funding to encourage landowners with erosion prone land to plant their land in permanent forestry by funding the up front costs of planting and fencing. Carbon credits and manuka honey can then give the landowner a return on their land while also paying back the initial investment. The community benefits through reduced erosion and cleaner rivers. If the government manages the carbon price and manuka honey industry well, they could make their money back or even make a profit on such a bond.
This is where the PGF could have made a real difference. Instead we see them putting money into questionable stuff that probably would have happened anyway, like thermal baths in Methven or a loan to Westland Dairy.
Good regional development takes time and careful thought. At this early stage the PGF seems to have neither, and little wonder when they have $3b to get out the door in 3 years. In short, it looks like a mad dash for cash than a well thought through approach to regional development.
We need to make vocational education as attractive for young people as University is now.
The Government has announced a reform of the vocational education sector, merging all 16 polytechnics and parts of the Industry Training Organisations into one national institution. Whether this will work remains to be seen – the devil will be in the detail on these reforms. The Opportunities Party will be looking at these details closely as they emerge, and will form our own position on this vital issue.
What is clear is that more successful economies and fairer societies than ours make vocational education a real priority. Is that where our Government is ultimately headed, or is this simply a cost cutting measure? If it does want to make this a real priority that will be difficult to fund, given how much money is going into Universities via the fees free policy.
Finland and Germany
In 2018 I spent a few weeks looking at the Finnish and German education systems. One of the starkest lessons from this was that they give a far greater priority to vocational education than we do.
The most obvious example is money. Vocational education starts at school, even in primary school. Schools have the money to purchase kit for students to use to learn practical skills – including sewing, cooking, woodwork and IT.
After school, these countries invest just as much in vocational education as they do in University education. Some courses are even more expensive because of the machinery that they use.
The crucial thing about vocational education in these countries is that it is done in partnership with business. In other words the study is usually done alongside work experience. Not all of the money goes into training – some goes towards paying the student’s wages in the early years when they aren’t very useful in the workplace.
One of the Government’s arguments for Fair Pay Agreements is that it will give the incentive for businesses to invest in improving skills through vocational education. In other words they are hoping to shunt businesses towards the Finnish and German model. If this were the real focus of the Fair Pay Agreements, surely it would have been better to sit down with business and talk about vocational education alongside these reforms?
But it isn’t just about money, it is also about status. Both Finland and Germany worked hard for many years to remove the stigma around vocational education. In these countries the vocational pathway is not seen as a “less skilled” option for “dumb people”. The sort of stigma we see in New Zealand simply doesn’t makes sense, because many people with practical skills end up earning more than those with University degrees.
This status issue shows up in other ways. It is a lot simpler for a young person to navigate the vocational education system in Finland and Germany than it is here. In New Zealand successive Governments have focussed on funding Universities instead of polytechs, which is why so many polytechs scrambled to become Universities.
Making vocational education a priority may be a one reason why Finland and Germany’s economies are more productive than ours. Certainly there is nothing oustanding about their University education system compared with ours.
However these countries don’t just invest for economic reasons, but for social reasons as well. Students of vocational education are more likely to come from poorer backgrounds compared to University students. High quality vocational education is not only a way to lift our economy, but also a way to break the cycle of poverty by offering those students a hand up.
Putting vocational education on a level pegging with University would involve extra funding. Finding that money will be difficult when the Government has already promised to give everyone 3 years of fees free tertiary tuition. Vocational education benefits from fees free also, but to a much lesser degree than Universities because Universities already received a higher payment per course.
Fees-free University is poor quality spending that wouldn’t get through any “Wellbeing Budget”. Given that University is generally populated by the children of the middle and upper classes, it would have been much better for the economy and society to put that money in bringing vocational education up to scratch.
Sadly it seems more likely that the Government will do this vocational reform on a shoestring budget and the truly needy will once again miss out because they are less likely to vote.
Paula Bennett has a new slot on the Breakfast Show on TV 1. Sadly, she can't seem to find a Labour MP to debate her.
Geoff Simmons responds in this video.
The economy needs to shift rapidly this century in order to meet our environmental challenges. This is a huge opportunity to do things better, to be clean and clever with our growth and to improve our standard of living at the same time.
We urgently need to nudge businesses in a sustainable direction. But we also need to remember that government doesn’t always (or even often) have the answers. Instead of banning or regulating things as left wing governments tend to do, we need to encourage businesses to innovate and seek out new opportunities to take our economy in a new direction.
The Tax Working Group report (due out next week) is the next opportunity for this Government to take such an approach. What should they be recommending in terms of the environment?
A Price on Water
Looking long term, water is our greatest resource. It is the true backbone of our economy and society, and will only become more so. It provides us with life, energy and agriculture.
First and foremost we must avoid the mistake of favouring commercial water users over the public and customary rights. The access of the public and tangata whenua must be sacrosanct. This hasn’t been the case in the past, such as in Canterbury where nitrates are contaminating people’s water supplies.
Where water is scarce, which is most of the country, commercial water users should pay for their privilege. It is a scandal that water bottlers have got away with paying nothing but the cost of a consent. However the biggest users of water are electricity generators and farmers.
As the demand for water rises, the best way to respond (unless you are a Marxist) is with a price. And the money raised from that price should go to settling Maori rights over freshwater, to improving the quality of that freshwater, and to the local communities that water is being taken from.
Charges on Water Pollution
Charges can also help some forms of water pollution. Nitrogen, mainly from cow pee, is a major problem in many waterways. We need to use charges to make polluting farmers pay, and use that money to reward farmers that are farming in a sustainable fashion. Simple carrot and stick stuff, and so easy to do. Just watch those farming practices change when this is in place.
And yes, the same goes for our urban waterways. Councils should be fined for breaches of water quality and the money used for clean up.
A Decent Price on Carbon
The price of carbon has risen under this Government as they have made relatively minor changes to the Emissions Trading Scheme. The price needs to rise much higher – at least double the current level. We also need to move away from giving away free credits to polluting businesses.
Another big issue is removing the tax incentives that encourage people to use fossil fuels and not plant trees. Here are a couple of examples:
- Our tax system currently favours small scale pastoral farming (which benefits from tax free capital gain) rather than forestry.
- Our fringe benefit tax favours gas guzzling double cab utes and companies that provide car parks for their employees, but these same tax breaks don’t apply to public transport.
This provides businesses with certainty and incentives to change their practices in the long term. Ultimately businesses and people on the ground will be the ones finding the best way to reduce emissions, not governments.
A higher carbon price is how we will see change in our economy – not by banning oil and gas exploration and running the risk of importing coal in a few years time.
We are currently working on a Waste Policy but the same approach applies – we should use economic instruments to make polluters pay and provide incentives for them to clean up their act.
This stuff isn’t rocket science. Working with business, rather than against it, is essential to making our economy sustainable and lifting our standard of living at the same time. Sadly this is an anathema to many of the left wing politicians that claim to care about the environment.
Geoff Simmons spoke at Rātana last week, taking his place with leaders from the other parties. He also met with Kaapua Smith and Che Wilson of the Maori Party. Some of The Opportunities Party membership/followership asked about his speech, so we decided to publish it in full. This is his speech, sort of. He improvises.
“How Can we Honour Rangatiratanga and the Treaty?
Rangatiratanga is the key to honouring the Treaty. However, it seems to me that the word, the symbol, the very concept of rangatiratanga is something that Pakeha New Zealanders fear.
I believe this fear is based on a misunderstanding about the term. If Pakeha really understood the term I think they would not only want Rangatiratanga for Māori in order to honour the Treaty, but they would also want it for themselves.
Let me explain what I mean. Through many Treaty settlements we have seen that Māori generally value mana over money. You only have to look at the Treasury calculations that show that Māori have settled at less than two cents in the dollar for the value of what they lost.
Unfortunately all Pakeha see in Treaty settlements is the money. This is a problem because with this mindset we think Rangatiratanga is about money too. Under the “money” mindset if someone else has something, I don’t. This breeds anger and division.
However the mana mindset is very different. If you have mana, there is nothing to stop me from having mana too.
That is why The Opportunities Party believes there is nothing to fear in resolving Māori water rights. Māori want clean fresh water as much as any Kiwi, probably more.
And so it is with Rangatiratanga. Giving Māori rangatiratanga doesn’t mean anyone else loses their Rangatiratanga. Maori communities can have Rangatiratanga. Pakeha communities can have rangatiratanga. Pasifika, LGBTQI, any community can have the same.
Some call Rangatiratanga devolution. I like to call it giving people a greater say over the things that impact their lives.
Of course, in giving communities a greater say there will be mistakes. But mistakes are what lead to growth.
Rangatiratanga will help people realise the limits of what money and government can achieve. That will encourage communities and families to do things differently and step into the gap.
In fact, the only group I can see that would lose from rangatiratanga are career politicians as they would not longer be able to take credit for the achievements of communities.
In summary, rangatiratanga is misunderstood. But if it were fully understood, I am confident that it would be embraced by Māori and Pakeha alike.
(photo credit: Phillip Capper)
The concept of a blue green party - one that is willing to work with either Labour or National and bargain with both on behalf of the environment - is a sound one. We welcome any party that genuinely shares that goal. Of course the risk with any new party is that they are just as tied to the National Party as the current Green Party is to Labour. So the first question is whether they truly represent the environment or are simply a Trojan horse to get National back into power. Time will tell on that front.
One could argue that with our strong business and environmental credentials The Opportunities Party is already in that blue green space. The Maori Party recently announced a renewed focus on the environment and arguably could say the same thing. Competition of ideas is good for democracy, and ultimately we all want what is best for the country.
The new blue green party will live or die on policy. We have seen many small parties with big ideas, but they have failed to make a dent in Labour and National's tinkering at the edges approach. This is because they either don't have the bargaining power (Look no further than the Green Party and ACT) or because they have had no real policy to speak of (NZ First, and at times the Maori Party).
The Opportunities Party already has a detailed environmental policy ready to implement (without more working groups) that will reward sustainable businesses and make polluters pay to clean up the mess that they make. We welcome any new party that wants to draw on our policy or thinks they can do better.
So what do we know about the new blue green party’s policy platform? Not much as yet. What has become clear is that the leader of the nascent party in waiting Vernon Tava thinks that our water quality woes are because of poor enforcement, not because of poor standards. We beg to differ.
If you want more information on our approach to improving water quality, check out our policy here.
Our Woeful Water Standards
Enforcement of water quality regulations by Regional Councils is certainly a problem, but not the only one facing our fresh water.
In recent times it has become pretty obvious that the water quality standards set by the previous National Government are far too low. The biggest problems in fresh water quality that haven’t been dealt with yet are sediment and nitrogen, and on both counts the current standards need a lot more work.
First up let’s deal with the easy one: sediment. This basically is dirt in our rivers and lakes. This is a problem because we all like clear water and the dirt is way better on our land. The limit approach simply doesn’t work for sediment. Instead we need regulation.
The previous National Government did put some regulations in place around fencing waterways, which will help sediment a little bit. Regulations for planting around waterways and having a dedicated minimum riparian margin would help even more.
But the big unresolved issue is the regulation of erosion prone land. There has already been some work limiting new plantation forestry on erosion prone land (although we are yet to see how that works out in practice, because enforcement is an issue there). However, there has not been any similar regulation of pastoral farming.
We continue to let sheep and cattle graze almost vertical slopes where the soil regularly falls into our rivers and ultimately the sea. This is simply not good enough. All erosion prone land needs to be planted with permanent trees. These could be native trees such as manuka (to yield honey) or if the farmer wishes to continue farming with cattle they could be deciduous trees like poplars. Either way, we should help landowners get them planted and bank the carbon credits.
Nitrogen is trickier because it is a byproduct of our economically successful dairy industry. But again the standards set by the previous National Government are woeful. The bottom line for nitrogen is more than six times what is healthy for the environment. Recent evidence also suggests it is also six times the level that is safe for drinking in terms of the risk of colon cancer.
This standard is simply not good enough. The high level of nitrogen was allowed by the previous National Government in order to allow the dairy industry to continue to grow unabated. This is despite the fact that many recent dairy conversions will probably prove to be uneconomic in the long run.
In most parts of the country this problem can be fixed with little or no loss to the economy. In fact many farmers will more profitable running less intensive farms with lower costs, less debt and happier cows. Farm values may fall as a result. However, given that will be due to lower output rather than lower profit there is no real economic damage done, just the pricking of a crazy speculative bubble.
It is only really in certain spots such as the porous soils of Canterbury where this may not be enough. In those place the communities may have to choose between shifting their economy to alternative crops or allowing their environment to be despoiled.
If a community consciously makes the choice to despoil their environment in pursuit of economic growth, that choice should be respected (as long as that environment is not of national significance). However, again the previous National Government stacked the decks against the community in the way they set their standards. By setting the standards low, they put the onus on communities to argue for higher standards. As we have seen in Canterbury it took a massive resource and science base to argue against vested interests from the dairy industry, so most communities failed.
Instead, we should set standards high and let the dairy industry pay for the science to convince local communities that they should accept lower standards in pursuit of profit. The evidence suggests that with this set up in most cases the community will say no and stick with the higher standards.
The Opportunities Party stands by our position on fresh water.
We eagerly await the environmental policy of the new blue green party to see if they can do better than this.
Yesterday’s report from Oxfam shows that the rich are getting richer and the poor are getting poorer. The question is what is driving this?
Most people have probably seen the graphs from the United States showing how the average income there has flattened since the 1970s, while the paycheck of corporate CEOs and owners has gone up and up and up. Could it be income that is driving inequality here also?
Employees are certainly not getting their fair share in the United States, but there is less evidence of that happening here in Aotearoa. Our Productivity Commission has done the work, and the real problems here are not miserly employers. Instead, the issue seems to be sky high housing costs and poor productivity (the fact that we are not working smarter, which is also partly driven by our obsession with housing).
Are Workers Getting Their Fair Share?
When we work smarter, each person produces more in their day’s work. The idea is that they should get rewarded by being paid more as a result.
There was a lot of upheaval in the 80s and 90s about which we can debate the merit. However since 1996 the labour income share has pretty much stabilised, with more than 90% of any increases in labour productivity (working smarter) going to workers. That isn’t bad - nothing like what we see in the United States. This is backed up by the fact that since the mid 1990s income inequality hasn’t really been rising.
It seems like since the mid 1990s, workers have been pretty much getting their fair share. So we can’t lay much of the blame for rising inequality at the feet of employers.
The real problem that lies at the heart of rising inequality in New Zealand is housing.
Sky high house prices are the reason why the rich are getting richer - with the top 20% of households now owning 70% of the wealth. And housing is also the reason why the poor are getting poorer. Half of Kiwis don’t own their own home and have to rent. Rents have been rising faster than wages and prices (which determines benefit increases) since the early 1990s, probably longer.
This without a doubt has been the thing that has hurt beneficiaries and the working poor the most. Generally it is the poor and young that don’t own their own home, and so they have not benefited from the house price rises and have had to pay the higher rents without their income rising to match. When you look at inequality, poverty and child poverty figures they haven’t risen since the economic reforms of the 80s and 90s. However, when you include housing costs, inequality and poverty have risen, particularly amongst the young.
The real problem isn’t wages. It is housing.
Housing is Also One Reason Why Incomes Aren't Higher
Here's the kicker: housing isn't just the driver of inequality, it is also one of the reasons incomes aren't higher.
The big difference between incomes in New Zealand and other countries is not due to tight-fisted employers. It is due to low productivity. We simply aren’t working smarter as a country. This is a complex issue and to fix it we need to invest more as a country in infrastructure, technology and skills.
What is preventing us from investing in working smarter as a country? The main reason is because we put all our money into housing.
New Zealand has the most tax favourable environment for investment in housing of any rich country.
This has led to us having more of our assets tied up in housing than any other rich country. And what do we get for all this? The most unaffordable housing in the developed world. Meanwhile we have low levels of investment in technology and businesses that can actually create jobs and higher incomes.
So the tax breaks encouraging investment in housing is certainly to blame for rising inequality, and is also partly responsible for our low incomes compared to other rich countries.
The NZ Herald ran an opinion piece featuring Briar Lipson’s analysis of The Tomorrow’s Schools Independent Taskforce in the New Zealand Herald. This analysis was sadly skin deep.
It is easy to caricature the proposed reform as removing school choice from parents and supplanting it with bureaucratic control. However, this overlooks the big hidden price tag that school choice has delivered.
For starters there was no analysis of whether we might end up with fewer bureaucrats overall if some back office functions could be more efficiently shared between schools. As an example, currently every school (even one with 20 students) pays for an auditor to go over their accounts every year. That is hardly value for money. Nor was there any discussion of whether public schools should be spending taxpayer money advertising to attract more students.
Yet these issues are dwarfed by the elephant in the room of school choice: the fact that it hurts the poor. This has been the result of school choice whenever it has been tried anywhere in the world.
Let’s make sure we are all on the same page. The aim of the education system is to help everyone achieve their potential. Some people have learning difficulties, and this is more likely for students from poorer households. An education system should invest more in these people to ensure they have a fair go.
Our education system doesn’t do this. Compared to other countries, our education system does very little to close the gap in attainment between rich and poor. Basically, we put the same amount of resource into students from poor households as we do for those from middle class ones. The result is that poor students turn up to school roughly 2 years behind richer students, and that gap never closes.
School choice is a major driver of this. Since introducing choice, all the middle and upper class parents have exercised that choice and moved to “good schools”. These “good schools” aren’t actually the schools that help students the most, rather the ones that the other middle and upper class families attend. The result is that students from poor households have been ghettoized into low decile schools.
But we fix this with extra money through the decile system! Yeah, nah. The extra money given by the decile system is more than outweighed by the extra resources middle and upper class parents bring to a school. That isn’t just more money through fees and fundraising but extra help in class and skills around the Board of Trustees table.
There is a way to fix this and keep school choice, but it isn’t cheap. It requires spending a lot more money on schooling disadvantaged pupils. The Tomorrow’s Schools Independent Taskforce suggested that current decile funding needs to be doubled to ensure schools have the resources to help those from disadvantaged backgrounds.
There is a another way to lift the achievement of poor students up to their well-off peers. It doesn’t cost any money. It doesn’t reduce the achievement of the students from richer backgrounds at all. It is called removing school choice.
Here’s the thing: students don’t just learn from teachers. They learn from each other. They learn from the role models they see in their class every day, including other students and their parents. If their classmates can do something, they start to believe they can do it too.
This is why streaming is so damaging for the students at the bottom of the heap. Once a student is labelled by a school or a teacher as “dumb”, they will tend to live up to that expectation. And if you lump all those students together all you have is a recipe for discipline problems.
If we want all our students to have a fair start in life, then the cheapest way we can do that is by making our classrooms look like our society. Is that too much to ask? Sadly it doesn’t happen through school choice.
So there is the real choice being put forward by the Tomorrow’s Schools Independent Taskforce - either we wind back school choice or we spend a lot more money on educating students from poor households. They have recommended doing a bit of both. I do agree with Briar that you should comment on the Tomorrow’s Schools Independent Taskforce recommendations. And when you do, please think about how we get the best out of all our young people, not just your own child.