Hard News by Russell Brown

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Budget 2017: How do we get out of here?

I was otherwise occupied on Budget day and thus missed most of the scoring and shouting of odds. But I did catch Checkpoint opening its coverage with a look at Budget's 2017's headline story: the combination of tax threshold adjustments, increases in the scope and size of the accommodation supplement and a boost in Working for Families tax credits that is widely reckoned to have benefited lower-income families.

The report noted Finance minister Steven Joyce's expressed desire to "give middle-income families a hand" and quoted a mother of two school-aged children, who agreed that the extra $25-30 a week it meant to her family – described as being "at the upper end of the middle income bracket" – would make a difference.

"Some weeks we struggle to buy petrol, or we struggle to buy fruit or even a loaf of bread. So that would at least give us a chance to either get to work or  to feed the kids for lunches."

She said her family and many of her friends' families still relied on their parents when things like car repair bills came in.

"It's very hard to be able to sort of run a family easily without any added help from our parents."

I sat there listening in the car and thought: in what sort of high-performing economy are upper-middle-income families relying on benefits and help from their parents just to get by? How did we get here?

It seems that an economy whose claim to fame has been getting rid of subsidies is now more reliant than ever on a subsidy to landlords which became the centrepiece of National's housing reforms of the 1990s (and was embraced again when the party regained office) and a subsidy to employers that was a flagship policy of the Clark Labour governments (I'm told it was politically verboten in Treasury at the time to characterise WFF as a benefit, which it really is).

Both of these subsidies are expensive. Last Thursday's announcements run to an additional $2 billion a year. That's a hell of a lot of money not going to more conventional goverment spending on services.

It clearly isn't just me thinking these things. David Slack, who is on quite roll in his Sunday Star Times column lately, contemplated the nation and wished for "a Budget that goes further than simply patching things". And Fran O'Sullivan also delivered a sceptical review of the Joyce's first Budget:

The lack of substantial growth in real wage rates is another failure. It is really quite disturbing that the Government is having to fund a massive increase in Working for Families tax credits and the level of the accommodation supplement simply because for many families their take-home pay packets are not sufficient to live on.

Andrew Dickens, a more capable prose writer than most of his radio colleagues and a centrist at heart, chimed in on a similar note, asking whether the ballyhooed boost for families was a sign of success or failure.

Analyses from all points of the compass, it seems, arrive at the same, uncomfortable conclusion. We can bask all we like in our pretty-good-in-global-terms recent economic growth, but we have made a country many of us can't actually afford to live in; one in which it is also proving difficult to maintain the services expected of a modern social democracy. Were it not for the stimulus of a high net migration rate, the numbers would look worse.

There's a conversation I've been having in the past few years, which is, essentially, with all this good economic news, exactly who is doing well? The answer, in general terms, is people who don't rely on wages. Labour as a share of income in the economy has fallen in the long term, but it did recover between 2002 and 2008. Since then, well, there's a reason people might feel that another $25 a week – be it a tax cut or one of those subsidies – would help them manage. And that feeling in turn guides an affinity for economic policies that might not be to the eventual good of the majority of wage earners.

In a 2015 paper noting these trends, the Productivity Commission asked:

... would New Zealanders prefer to participate in an economy where real wages are increasing strongly but the LIS [labour income share] is falling because productivity growth is even faster, or an economy with weak growth in real wages and productivity so that the LIS is more constant?

The paper's authors merrily kick for touch on which would be preferable, but it's really quite a silly question. I'm sure the large majority of New Zealanders would opt for the former – but how do we achieve that productivity growth in a way where we enjoy its rewards? It's the question we've been asking ourselves for a long time in New Zealand.

So perhaps the question isn't how did we get here? but how do we get out of here? Whatever the anwer is, I suspect it won't flatter any one particular ideology. And I know it didn't come in this Budget.

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