Understanding the data – benefits are being cut in value in real terms – but why?

The real value of benefits is being cut by switching the calculation of annual changes from the movement of the average wage to the Consumer Price Index. The CPI has traditionally been a lower number.

Benefits had been switched back to the average wage movement only as recently as 2020 after being tied to the CPI in 1990.

That decision was made by the National Party Finance Minister Ruth Richardson in her “Mother of All Budgets” of that year. That decision wasn’t reversed during the nine years that Labour held office under Prime Minister Helen Clark from 1999-2008.

National Superannuitants get the average wage movement so their benefits have retained their relative value to wages over the last few decades and one of the reasons New Zealand has low poverty rates for the elderl – in fact, the lowest in the OECD.

In 2024 we have gone back to CPI adjustments but its impact has been muted by the fact that inflation has remained higher than usual. A 4.66% adjustment was needed to benefits from April 1, 2024, compared to the net average wage increase this year of 5.28%.

This government does seem to be echoing the anti-beneficiary rhetoric that accompanied the 1990 cuts with the demand for “sanctions” to be applied.. However, shifting the calculation of adjustments from being tied to average wage movements is mild compared to the direct 25% cut in the value of unemployment benefits that was made then in addition to the way it way changes were calculated each year.

The 1990 direct cut and then the way it was calculated for the next 20 years saw it lose half in value compared to the average wage – dropping from 37.8% of the average wage for an adult single benefit to just 19% of the average wage before Labour reversed course on this way of calculating benefits in 2020.

A direct consequence of the austerity budget that was imposed in 1990 was also a sharp contraction in the New Zealand economy. Unemployment jumped to between 10% and 11.6% for ten consecutive quarters from the beginning of 1991. Unemployment reached 25% in working-class communities and among Māori and Pacifika. 

Despite the anti-beneficiary rhetoric and the reduced value of the benefit the number of people forced onto benefits exploded. From around 140,000 on all forms of means-tested benefits (unemployed, sole parent, invalid & sickness) to 340,000 by the mid-90s (about 13% of the working age population from 16-64).

Capitalists hate having people on benefits because working people have a cushion against being forced into the worst-paid and most dangerous jobs. Increasingly punitive systems were put in place by the government agencies managing benefits to force people off benefits and in theory “into work”. What happened was people were forced off benefits and into absolute poverty. This can be documented.

The Household Labour Force Survey measures the number of people officially unemployed, as well as a broader number of people who are “jobless” – the “underutilisation rate”.

Between 1990 and 2003 the number of people on benefits never dropped below 64% of the “jobless” number. Over the next decade, it dropped to only 18% of the “jobless” number. During the same period, it went from 120% of the official unemployed number to only 45% in 2013.

No explanation has ever been provided as to how this was achieved. However, it does help explain the explosion in the need for special benefits and food banks when official unemployment numbers were falling. It stayed at around those numbers until the 2017-2023 Labour government was elected and we also had Covid to manage.

It seems that the government agency managing benefits, WINZ, was asked to be slightly less punitive. The percentage of beneficiaries who are “work ready” (which compares more closely to the old unemployment benefit) was 109,698 at the end of December or about 32% of the jobless number – still half the percentage that applied from 1990 to 2003 but up from 19% minimum reached in 2013.

Using the April 1 new benefit rates (compared to December 2023 average weekly wages of $1394.11) the new weekly adult unemployment of $353.46 benefit has also crept up under Labour to be about 25.3% of the average with some small but real value increases under the last three years of the Labour Party-led government. However, it was still way below the value of 38% that existed in 1990 before Ruth Richardson’s cuts in value.

It seems that there is no direct relationship between the level of benefits (or minimum wages for that manner) and the number of people unemployed. New Zealand benefit levels (and minimum wages) were much higher when unemployment was low from the period after World War Two until the 1980s. This was also a period when real wages were able to be pushed up.

The austerity unleashed in the 1990s was designed to break union power and lower real wages, to boost the profits of big business. Cutting benefit values and access to benefits, they believe helps that process. The economic and social results last time were horrendous. But it seems that the bosses and their political representatives are planning on going down the same road again. 

Last time we couldn’t stop them because the working class movement had been to an extent disarmed by the 1984-90 Labour government initiating the austerity agenda and unemployment had already gone from 4 to 7.5% before National took power. The union leaders told us then that there was no alternative and we could not fight. Today we know that there must be an alternative and we must fight.