The Effectiveness of the Transfer and Tax System in Reducing Poverty in 1998

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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. …