I warmed to Jim Bolger considerably after his Mea Culpa moment. His government indeed was responsible for the unfortunate gutting of the unions and the massive redistribution to the wealthy under National’s failed trickle down theory.
In contrast Jenny Shipley has no such insights or humility as to her role in the social chaos produced by her government in the 1990s. One of my vivid memories was listening to the dulcet tones of Ruth Richardson and Jenny Shipley announcing benefit cuts in Parliament and the audible sucking in of breath. The ill-effects of the ill-fated 1991 budget reverberate 26 years on.
Shipley says defensively in her Guyon Espiner interview, “I was trying to take the welfare state off the middle class”. How much more noble that sounds than what she should have said: “I crushed the poor to serve an outdated and failed ideology.”
Let’s revisit the background. In the mid-1980s, economists thought high tax rates on high income earners reduced their incentives to earn and save. Rogernomics was supposed to fix that. Government spending was to be cut sharply in the shift to userpays and tight targeting for social provisions and the tax scale flattened to give a low flat tax rate. While Lange had a cup of tea and moderated this a little, the problem of high tax rates was simply shifted from top income to low and middle income earners.
The snag is, the greater the amount of social assistance to be reduced as income rises, the longer is the range of income before all assistance has been bled out, unless a higher rate of abatement is imposed. A long income range defeats the purpose of welfare only for the poor, while a high rate of abatement imposes severe disincentive effects.
In advice to the incoming government in 1990, Treasury had warned:
As a general rule, the more people facing higher effective marginal tax rates [EMTR]over longer ranges of potential income, the greater the costs to society and the greater the probable loss of output.
So they were worried about the effect of overlapping abatements that mean very little is left in the hand when low income people earn a bit more- the high effective marginal tax rate (EMTR) problem .
Treasury identified high levels of benefits as a major factor preventing a more gradual abatement system and benefits were cut significantly in 1991. The Change Team on Targeting Social Assistance in 1991 was then tasked with designing a new ‘integrated’ system of targeted social assistance to solve the overlap problem of multiple targeted provisions.
The 1991 budget document ‘Welfare that works’ contained the lie that the technocrats could make tight targeting of social provision work. They devised a complex system of Family accounts. They drew clever diagrams like this one to show how they would make welfare only for the poor by aggregating social assistance of all kinds onto a family based ‘smart card’. When a family increased its income by a dollar, entitlement would reduce by a uniform rate of abatement. Voilà, a miracle.
Unfortunately, while aggregating assistance onto a family-based ‘smart card’, abating at one rate worked in theory, the technocrats could not make it work in practice. One of the problems was that the typical modern family did not resemble the assumed nuclear family model. Another was that the scale of assistance to be targeted, even with the 1991 welfare benefit cuts, meant assistance would be paid well up the income scale even with a very high single rate of abatement. The integrated solution that had been used to justify the low flat-tax user-pays approach had quietly disintegrated leaving the unresolved welfare mess of a plethora of high and overlapping abatements.
While one might have expected a re-examination of the basis of the 1990s reforms, instead the welfare morass has been intensified in the name of target efficiency. It is one of the major reasons that hardship rates are high in low income working families even when gross income looks to be above the poverty line.
Let’s take the example of a parent on the minimum wage of $15.75 per hour, earning $36,350 per annum. There are some Working for Families and rent subsidies but increasingly this family relies on foodbanks and loan sharks. Let’s say there is an opportunity to earn another $10,000. Once tax and ACC are paid (18.71%), Working for Families is abated (22.5%), student loan repayments are made (12%), Accommodation Supplement is reduced (25%) and KiwiSaver extracted (3%), the $10,000 has been effectively taxed at 81.21%. Furthermore, there may be a sudden drop in child care subsidies, and child support payments of between 18-30% may apply taking the rate to over 100%. Every family is in a different set of circumstances, and few will understand what is actually happening. They will know that at the end of the year despite their extra work effort they are no better off, may actually be worse off and will undoubtedly feel despair.
Jenny Shipley wants to take the credit for her ‘brave’ leadership in smashing welfare in paving the way for Labour to do so well in the early 2000s. She deflects attention from the very poor performance of the NZ economy in the 1990s due in very large part to her government’s policies. The fact the 1990s weren’t worse, is due to the early failure of many parts of the Welfare that Works package.
Remember what she tried to do to National Superannuation? After Bolger, pre-election, promised to remove the mild income test of the surcharge, she and Ruth rammed into legislation on budget night 1991 changes that made the pension a welfare benefit. There was a tiny exemption of $80 a week for a couple before their pension was clawed back virtually dollar for dollar to ‘take welfare off the middle class’. Before that legislation took effect they faced an angry backlash and were made to back-down and rescind the changes. Furthermore, her government’s user pays in health could not be made to work.
Her legacy is the failure of the ‘born to rule’ class to understand a single thing about the reality of other people’s lives.