THE EFFECTIVENESS OF THE TRANSFER AND TAX SYSTEM IN REDUCING POVERTY IN 1998.

• Author: Stephens, Robert
• Position: Statistical Data Included

Abstract

The paper analyses the incidence and severity of poverty, measured by income inadequacy, for the year to April 1998. Using various ways of categorising households based on Statistics New Zealand's Household Economic Survey, the paper shows which household groups are most likely to have inadequate incomes, the extent to which those households fall below three different low-income thresholds, and the effectiveness of net social security transfer payments in reducing the incidence and severity of poverty. The initial level of the income adequacy threshold was calculated through focus group discussion. The thresholds and poverty measures have been analysed on the basis of disposable income, adjusted for family size and composition, and after adjusting disposable income for relative housing costs.

INTRODUCTION

The social security system in New Zealand stems from a social and political desire to alleviate poverty and hardship. From the original inception of the Pensions Act in 1898, categories of people likely to be in need have been gradually added to the social security network. The tax-financed, flat rate benefit system was based on a male breadwinner perception of society. Full employment achieved through protectionist and government-based employment policies, combined with a minimum wage set at an adequate level for a husband with two children, meant that the social security system was only designed to deal with the residual pockets of hardship which existed after the operation of the wage/employment system (Castles 1985). The breakdown of this system led to new policy initiatives to offset emerging causes of hardship: the mass unemployment of the 1930s resulted in the unemployment benefit, and the introduction of in-work benefits in the 1980s and 1990s was a consequence of wages being set on economic rather than social considerations.

The social security system has more objectives than poverty relief. McClure (1998) indicates that the Social Security Act 1938, and the subsequent provision of universal family benefits, cheap housing, free education and subsidised health care, were based on notions of equal rights for all citizens. Labour market incentives have affected political decision-making, as have issues of inter-generational equity and fiscal costs. The relative weight given to these objectives has oscillated over the past century, based on economic circumstances and prevailing social attitudes. The real benefit level has fluctuated between a "minimalist safety net" and a "belonging and participating" notion of poverty relief. Policies have also swung between universalist and selectivist phases, and between views on the degree of independence that families should have from the state or from the labour force.

Between 1984 and 1999, fiscal savings dominated poverty relief, with a shift to selectivist policies, encouragement of work and independence from the state, user pays and declining real levels of assistance. This cold climate for social policy brought a clamour from welfare and community groups about increasing poverty and social exclusion, while professional groups indicated downstream effects on health and education attainments. Elliot et al. (1999) developed a 66-page annotated bibliography about poverty in New Zealand, and Waldegrave et al. (1997) a 46-page review of issues in the poverty debate. From the political arena came concerns over inter-generational welfare dependency, but a denial of the existence of poverty. Both the community groups and government recognised that the social policy changes were not the only influence: slow economic growth, increasing unemployment with its spillover effects into other benefit categories, and social and demographic change from increasing numbers in the most vulnerable age groups and social categories, such as sole parents and older people, had equal impacts on living standards.

The start of the new millennium and the election of a Labour/Alliance Government may indicate a thaw in the social policy climate. A return to the generous 1970s is unlikely: the number of beneficiaries, constraints on tax levels due to globalisation, the recognition of (relatively small) incentive effects from high tax rates and benefit levels, and the impact of social attitudes towards the poor will ensure that the thaw is gradual. But if the new government is committed to improving the economic and social position of the poorest in society, then it needs information that can help determine to whom resources should be directed, the level of those resources, whether the resources should be in cash or in kind, and the resultant fiscal cost. Policies need to be developed which provide both a short-term amelioration from hardship as well as longer-term solutions to wider concerns of social exclusion.

The objective of this paper is to provide policy makers with information that will enable a cost-effective alleviation of hardship. The paper starts with a description of the methodology used to establish a standard of income adequacy suitable for contemporary New Zealand economic conditions, demographic structure and policy parameters. A framework to analyse the effectiveness of transfer programmes to alleviate poverty follows, before using that framework to describe which household groups are poor, the extent of their hardship and the impact of net social security expenditure in reducing that hardship. The analysis uses poverty thresholds based on disposable income, adjusted for household size and composition, and disposable income after taking account of relative housing costs.

METHODOLOGICAL ISSUES

There are a variety of ways of conceptualising poverty and a plethora of techniques for measuring each concept, as well as a series of linked steps in the process of poverty measurement (Atkinson 1989, Stephens 1988). The choice of technique is important: Hagenaars and de Vos (1988) and Bradshaw (1993) show that there is no consistency between the techniques for determining the extent of poverty and which groups are most likely to be poor. Hagenaars and de Vos concluded from European data that the budget standard and the subjective poverty measure were best able to identify subgroups of the population with a high risk of poverty. Bradshaw argued that the United Kingdom supplementary benefit level (an "official" poverty line), and 50% and 60% of median equivalent household disposable income, before and after adjusting for housing costs, were best able to identify who was poor.

The measurement technique should be related to the objective for establishing a poverty measure. The major objective of this research was to provide policy makers and politicians with information on who is poor, the dimensions of their poverty and its causes (whether due to low employment earnings, inadequate benefit income, high housing costs, large family size, etc.), in order to see how effective existing interventions are in the alleviation of poverty. A second objective was to monitor the impact of economic and social policy reform between 1984 and 1998 on the least advantaged groups in society. The third objective was to develop a method for determining the adequacy of social security benefit levels.

These objectives led to several requirements for a poverty measure. First, the measure had to be set relative to current standards of living in New Zealand, and to policy parameters such as the extent of user pays, targeting of government services, and the impact of direct and indirect taxation. The measure also had to be absolute, in the sense that failure to achieve that standard of living resulted in either adverse social outcomes in the form of deprivation, poor health status and lower educational attainment, or required stigmatising behaviour such as application for means-tested special benefits or food parcels from charitable organisations. Second, the measure had to be operationalised for each year between 1984 and 1998: this meant recourse to official statistics, with the annual Household Economic Survey (HES) providing the only consistent data source. Third, given that the major policy variable is the level of government financial assistance to households, the appropriate concept of poverty was the "right to a minimum level of resources", leading to an income (or input) measure, rather than an outcome (or standard of living) measure based on consumption or degree of relative deprivation (Atkinson 1989).

A consistent input measure of poverty has been developed based on a consensual measurement of income adequacy using focus groups (Stephens et al. 1995 and Waldegrave et al. 1996 provide the justification for the focus group methodology and the initial results). The first set of focus groups, based in Wellington in 1993, provided a fairly uniform estimate of the level of income required to sustain expenditure that would enable the household to pay for its own food, clothing, utilities and rent, without either going into debt or taking out special benefits or food parcels. Despite a varying proportion of one- and two-parent households, income levels, ethnic groupings, housing tenure arrangements, age of oldest householder and income sources, the estimates for two adults and three children varied between $442 and $491 per week, with housing costs being the major source of variation in the level of required expenditure.

For poverty measurement, the average focus group estimate of $471 per week was related (with inflation adjustment) to the 1991 HES from Statistics New Zealand. This estimate of a minimum adequate income approximated 60% of median equivalent household disposable income(2). It is recognised that not all households below this threshold are poor: the asset-rich/income-poor and the "low-income by choice" groups cannot be addressed by an income-based poverty measure. Furthermore, an investigation into the database showed that some low-income households had substantial...