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Where have all the tax-free thresholds and UBIs gone? Our politicians are quite right to be concerned that living costs are rising more for those on lower incomes; But how do we improve living standards? Reducing costs is tough so let's look at incomes

Where have all the tax-free thresholds and UBIs gone? Our politicians are quite right to be concerned that living costs are rising more for those on lower incomes; But how do we improve living standards? Reducing costs is tough so let's look at incomes

By Alex Tarrant

Those blasted cigarettes.

A thorn in the side of lower-income households as they face a greater increase in the cost of living than income groups above them, due to rising smokes prices.

Those blasted landlords.

Rent rises impact lower income households more than those above them.

Those blasted petrol prices.

A cost lower-income households can’t avoid. And when prices rise, again this affects them the most.

Stats NZ last week released a set of figures detailing living costs faced by parts of society, based on income levels:

Beneficiaries experienced the highest inflation in the March 2017 quarter, Stats NZ said today. Their overall costs rose 1.4 percent, almost three times the rate of inflation experienced by the biggest spenders group (up 0.5 percent).

"Higher costs for cigarettes and tobacco had a greater effect on beneficiaries. About 5 percent of their spending went up in smoke, proportionally more than most other types of households spent," consumer prices acting manager Nicola Growden said.

Higher rents, which make up one-third of their total spending, also had a greater effect on beneficiaries.

Inflation for households with high spending rose the least (up 0.5 percent), with the biggest impact coming from higher petrol prices. The fall in international air fares and mortgage interest rates in the quarter dampened overall inflation rise of high-spending households.

Political reactions quite rightly expressed concern that the cost of living rose more for beneficiaries and lower-income households in the March quarter than it did for higher-income groups.

We’re told that only a vote one way will mean better living standards for those earning the least. There are two ways to do this: Raise their incomes, or reduce the costs they face.

Labour has been attracted by the relatively new Stats NZ series, titled the Household Living-costs Price Index (HLPI). The series of HLPIs measure typical price inflation faced by 13 income groups.

Different weightings are given to costs for goods and services faced by each group, based on spending patterns.

For example, cigarettes and rents pose greater relative costs to beneficiaries and those on lower incomes. As you go up the ladder, higher income groups are faced more with the costs of package holidays and mortgage interest rates.

One idea being considered by Labour is that government welfare payments, like unemployment and disability benefits, are indexed to certain HLPI branches each year rather than the economy-wide Consumers Price Index (CPI).

Cost pressures

It seems like a fair call to ask the MSD to consider this. But raising benefits to cover rising costs effectively defeats the idea of boosting living standards.

So, let’s look at whether there could be at least a partial focus on improving living standards at the bottom of the income scale by removing cost pressures.

Rents, grocery food, household energy, petrol and cigarettes: The five highest weighted costs faced by beneficiary households, according to the HLPI series. They make up for 59% of the HLPI beneficiary weightings.

And for the lowest-income households (ie the ones just above beneficiaries), the weightings are largely the same: Rent, grocery food, petrol, household energy, and telecommunication services. (Cigarettes are only 12th!) These top five make up only 49% of the weightings.

On rents, Labour has committed to building tens of thousands more houses over the next decade and providing more social housing for those on the bottom rungs of the income ladder.

Andrew Little has even said he wants house prices to stay steady while that happens – so housing costs – rents in the case of beneficiary and low-income households – shouldn’t rise from here on. However, reducing property investors’ abilities to achieve capital gains might mean they refocus on rental yields. A possible sting in the tail there, at least for a few years.

On food and petrol, one roadblock is that it can get quite tough arguing for lower import prices while at the same time asking for a lower exchange rate.

On household energy, research shows that government-funded insulation schemes are a help to lower-income households in terms of health. However, there is a tendency for them to keep spending the same amount on heating and have warmer homes once insulation is put in.

Though the energy bill may not reduce here, the potential longer-term health benefits should be considered. It’s something that should be supported – living standards will rise.

So where might living cost savings come from?

For beneficiary households, one of the top five remains: Beneficiary households unfortunately have a higher living cost weighting (about 5%) towards cigarettes and tobacco than the income groups above them.

Now, don’t laugh, but Labour and National have signed up to ensure a smoke-free New Zealand by 2025. This means we shouldn’t be needing the cigarette category in the HLPIs from then on. Or in the CPI for that matter.

How are we going to reach that goal though? Well, part of it will most certainly be increasing prices for cigarettes. Cost pressures are likely to continue there for the next eight years (at least – let’s not forget that Smoke Free 2025 is a political promise, an aspiration…).

For low-income households (the category above beneficiaries), the fifth category is telecommunication services. Yes, we are getting more data for our buck.

But if you include extra subgroups to take ‘Income Quintile 1’ up to the Beneficiaries’ 59% of weightings, you’re including insurance and property rates. I can’t see many savings coming from there in the next few years.

I get it – it’s hard to find cost savings

So, if it’s tough finding cost savings to help improve living standards, we must turn to the other side of the ledger: How do you improve incomes at the bottom of the income ladder, while encouraging beneficiaries into work (ie you’re not just promising to always raise benefit rates by more than the cost of living)?

One idea previously floated by the Labour Party at a previous election was tax-free thresholds – you don’t start paying tax until your income hits $X thousand. It is now an ex-policy.

Another is a universal basic income. There was some excitement last year that the Labour Party might be looking at this in terms of policy when it was floated during Grant Robertson’s Future of Work conferences.

Andrew Little did a John Key though. When the poll numbers looked like they were heading down partly due to the public discussion around UBI, it was made clear that this wasn’t a policy option. Much easier to drop it than explain it.

Labour won’t be going into the election with a tax policy. They’ve lost too many elections because of the difficulties inherent in communicating sound tax policy to the electorate. It’s much easier to say ‘build more bloody houses’ and ‘the Reserve Bank will help create jobs’ than explaining why having a proper capital gains tax levels the playing field and how a UBI works.

On a political level, I don’t blame them. But that still leaves the problem: where will change come from regarding this kind of policy reaction?

Well, there’s some good news. Labour Party policy shouldn’t be taken on its own nowadays. We’ve been told that the Green Party will be the first to receive a phone call from Andrew Little, even if they are trounced by New Zealand First.

And either way, it’s looking like all three parties will be required for a Labour-led majority government post-election if it were to come to that.

The Greens are yet to release their detailed tax and economic policies. But they should be encouraged to run again with their previous cause for a tax-free threshold.

And they should be encouraged to push this policy when it comes to coalition negotiations. Settling for a promise of yet another Tax Working Group in three years’ time will not cut it.

That’s at least more likely than Gareth Morgan’s lot having the balance of power to demand a UBI.

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I think tobacco should be in a special category that is excluded form inflation calculations, For those that need a nicotine kick nicotine gum is a good alternative. If you buy a large pack of 4mg ones you can cut them in half and they cost about 15 cents each. There could actually be health benefits to pure nicotine that is negated by smoke.
I think a UBI would be a disaster in a multi-cultural society. People need to compete, people need to work. The same with any legalisation of stupefying drugs. Governments are keeping these options in reserve for when things get ugly out there on the street.

... I've heard that hypnotism is very effective in stopping smokers from lighting up .... it's a one off expense ... costly initially , but a big saving in health and money over the long haul ...

We could subsidize it to assist low income earners into treatment ...

... and offer Hypnotism101 certificate and diploma classes at the polytechs around the country ...

There's 120 or so experts in Wellington who've had the voting public completely mezmorized for the past 25 years or so ...

Fill out the Vector Arena with smokers and get the best hypnotist and have a massive impact on getting towards the smoke free by 2025

Why are you assuming that a UBI discourages competition or stops people working? It's actually designed to encourage people off benefits and into work by taking away the ridiculous disincentives that exist now.

On a UBI any work you do adds to your income without reducing your UBI, contrasted with benefits that get reduced the more you earn. A UBI is also circa $10-$15k per adult, maybe less for youths and a few grand for each child. A couple with 2 kids might get $30k. A good backup to stop people falling into destitution but hardly enough to live the high life or stop people working, especially seeing as they keep 100% of the UBI regardless of how much they earn.

We would see a culture develop where people work out to how to survive on a subsistence budget in tents and huts in remote areas and parks. You could supplement food by foraging. Books and blogs would be created to show people how.

Sounds awesome, better for the environment, better for everyone else (less infrastructure to be built), better communities.

And those people would be doing their bit to minimise their footprint on this world. If we don't need everybody working, and some people want to minimise. Then it's win-win. I'm not in that camp though. Unfortunately I, like you, am addicted to money. We will keep working and consuming regardless of UBI.


This is the tragedy. While we were all getting rich off the housing boom (sarcasm, we weren't), what we were really doing was bidding up the cost of living for everybody. We effectly implemented a tax on ourselves. The best part is the impact of the insanity hasn't even been fully felt yet, that will keep ratcheting up as more people transact houses at the new prices and more existing home owners cash out their equity for boats and holidays.

Just to illustrate my point, imagine two scenarios in a world with one person and one house. If a person's hard limit on buying a house is 25% of their income then they will have 75% to spend on other stuff. If their mate tells them "just borrow and do whatever you have to to get on the property ladder because otherwise they'll be more expensive next year" and they borrow to 35% of their income (talking repayments here) then now they only have 65%. The difference between 25% and 35% is solely based on willingness to pay (soft constraints like personal heuristics) and ability to pay (hard constraints like bank lending limits). In a world where people were prevented from borrowing more, house prices would remain lower and collectively we would all be better off.

Now you might say, what happens if it's a two person world and I don't bid more and I miss out on the house. Well here is the thing, it's an arms race. You leverage more, your opponent leverages more, your parents guarantee, their parents guarantee. The point is someone always gets the house, bidding up the price just sets the toll society has to pay. And it would perhaps be fine if at the other end the beneficiaries - those with increased equity or sale price - invested their money wisely to balance the debt the buyers were taking on but I doubt that happens.

So my argument, long as it is is that every $1 house prices increase is a tax increase on New Zealanders. The best decision we could take is to introduce debt to income limits which would lead to better economic decisions. Lower house prices = a lower cost of living and a wealthier New Zealand.

The poor will see their rents go up like a rocket, because NZ would build even less homes than we build today.

Auckland is current world leader in preventing homes being built, our most useless of councils has placed regulatory and cost barriers in the way of building homes that are damned near economically insurmountable. Even with currently out of control hyper demand, hardly a home gets built.

When DTI ratios were introduced in Ireland they cut back the rate housing construction dramatically, applying the same approach to Auckland would be socially irresponsible and dramatically increase homelessness.

It would be interesting to see it modeled in combination with government build activity. As I understand it, when NZ last had a massive influx of immigration (post WW2) the government focused a lot of building houses to ensure availability of homes, rather than ending up in a stupid situation like we have now. And these policies contributed to the high rate of home ownership we used to have until twenty or so years ago.

So, if it’s tough finding cost savings to help improve living standards, we must turn to the other side of the ledger:

Not necessarily - control those entitled to have their hands in our pockets.

Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might, said Nobel-winning economist Angus Deaton on Monday.

If an entrepreneur invents something on the order of another Facebook, Deaton said he has no problem with that person becoming wealthy.

“What is not OK is for rent-seekers to get rich,” Deaton said in a luncheon speech to the National Association for Business Economics.

Rent seekers lobby and persuade governments to give them special favors.

Bankers during the financial crisis, and much of the health-care system, are two prime examples, Deaton said.

Rent-seeking is not only does not generate new product, it actually slows down economic growth, Deaton said.

“All that talent is devoted to stealing things, instead of making things,” he said. Read more

Disgusting rent seekers or how to fong the disadvantaged.

Can u define rent seeker...??? ( seem to be so many different meanings ..??.. I use the term in the Georgist definition )

Do u define rent seeking as... " Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. "

Under that definition , maybe the Auck. city council is rent seeking , in how they use the RMA and building consent process to generate income..???

One could say that about many/most Govt agencies.. ( they have created their own fiefdoms and use regulatory power to extract income... ( this is an unintended consequence of the user pays directive of Roger Douglas and Labour... which is kinda ironic ) )

I see this as a subtle form of corruption..

I dont think many of these agencies consider themselves as ..."public servants"...????

Can u define rent seeker...???

I can supply what I think is an example that needs to be stamped out .

But Wellington Electricity had no such reluctance when it made the announcement in February that its charges would be going up this month. The increase, it told us, affected 40% of our total electricity bill, which is the portion of the bill related to lines services.

How much discussion could there have been before the Hong Kong directors agreed that they needed us to pay them more for our electricity?

Financial statements filed with the Companies Office show that revenue earned by Wellington Electricity Distribution Network from its customers last year was more than $177million. We are paying it well for its service.

Operating expenses (including a management fee of $10million paid to a related party) are shown as $97million.

But this didn’t result in a profit. The accounts show a loss, with a major cause being the fact that almost $50m was spent paying interest on overseas borrowings – including a loan “from a related party.” Borrowings, no doubt, which paid for the purchase of the Wellington network back in 2008. Read more and more

This is LF Economics’ first review of a book, entitled “Game of Mates: How Favours Bleed the Nation” by economists Cameron K. Murray and Paul Frijters. The name is a play upon the wonderful TV series Game of Thrones and rightfully so, given both are about how a small number of wealthy and highly-connected individuals, often operating within a cluster of powerful networks, rig rules, policy, laws and ideology for their personal and class benefit.
Game of Mates is a gold mine of information on the racket of rent extraction for a number of reasons. First, it provides background on how the game slowly evolves (Chapter 1) by contrasting the hard-working Aussie Bruce with the connected insider and rent extractor known as James. By using the power of networking and soft corruption, the wealthy James (the 1%) is able to rip-off Bruce (the public) legally without violating the rule of law.
Second, the book goes on to detail the largest state-backed legal thefts carried out by the corporate sector for the benefit of rentiers. This term means those who obtain rents (unearned wealth and income over and above what is justified by perfectly-competitive markets). Unfortunately, Australia is a haven for robber barons, siphoning massive and illegitimate mountains of rents from the property market (Chapter 2), transportation (Chapter 3), superannuation (Chapter 5), mining (Chapter 7) and banking (Chapter 9) for the benefit of owners and managers.
The gargantuan level of graft which is currently taking place in our economy is not to be underestimated. Australia has the world’s largest tax expenditures to GDP ratio, feeding the property and superannuation industries. Our household debt to GDP ratio is the second-highest, explaining the sky-high land prices and super-profits our state-protected oligopolistic banking industry siphon annually. While there has been much commentary around the banks’ profiteering, it pales into comparison with those generated by the heavily-subsidised, rent-extracting mining industry over the last decade.
Transportation is heavily interconnected with the property market, and has devolved into private monopolistic tax farms, delivering substandard services while charging usurious fees…….

Transportation is heavily interconnected with the property market, and has devolved into private monopolistic tax farms, delivering substandard services while charging usurious fees……


Wellington International Airport, which is 66 per cent owned by investment group Infratil, posted a 29 per cent gain in full-year profit as growth in international passenger volumes drove revenue.

The airport paid a dividend of about $13 million to the city council and a subvention payment of $39.5 million on Infratil. Read more

Another blemish to detract from Wellington Airport's claim, ratepayers/taxpayers should fund a loss leading runway extension since it's they who will be the prime beneficiaries. I think not.

So why does Infratil appear to get a disproportionate share of the profits each year?

It comes down to tax - Wellington International Airport doesn't pay any. Chalkie has gone through several years of cashflow statements and found not a cent paid out since at least 2007.

The reason it doesn't pay tax relates to the subvention payment to Infratil. A subvention payment is a legitimate method of balancing the tax liabilities in a group of commonly owned companies - the threshold for common ownership is 66 per cent.

If company A owns companies B and C, where B makes a profit of $100 and C makes a loss of $100, A has made a balance of zero. To avoid the unfairness of B having to pay tax even though the group has made no money, B can make a subvention payment of $100 to C, so both make zero and no tax is payable.

Infratil does this with Wellington Airport, using a subvention payment to reduce the airport's profitability to negligible levels and offset losses elsewhere in its New Zealand portfolio. Since 2007 the payments have averaged $23.7m.

According to IRD tax rules, a subvention payment cannot exceed the amount of the loss-company's loss, so the $30.1m payment last year means another New Zealand company within Infratil had a loss of at least $30.1m.

Leaving aside the oddity of an Infratil subsidiary apparently losing tens of millions year after year, Chalkie reckons there's something odd about how the subvention payment is calculated.

According to Brown "the airport calculates what the net profit after tax would have been, and then the city council gets 34 per cent of that, and then the remaining share of net profit after tax, and the amount of tax would have been paid, is taken by Infratil as a subvention payment". But if the loss-making Infratil subsidiary pays no tax, and the airport pays no tax, why does Infratil get paid extra to cover tax?

Not only that, but the Commerce Commission calculates the airport's allowable returns as net of tax, even though no tax is being paid.

Admittedly, Chalkie is no sophisticate in tax matters, but he reckons Infratil is. If the airport's prices take a hit, perhaps tax benefits will be a consolation. Read more

Stephen... here is another similar example.... thou more to do with related party loans and transfer pricing.

I have a friend in private equity.... He says that foreign entities can pay too much for NZ companies simply because of our taxation laws... ( he told me this over 10 yrs ago )..

I struggle to understand why our Govts. and IRD have simply done nothing ???

Austrailia has woken up..somewhat...

Maybe its part of the graft that the "Game of Mates " book describes.... which Brendon mentions..??

I say that, because it beggars belief that something so blatant and obvious can be allowed to go on..and on...and on..
Long term , all the best NZ businesses will be owned by foreign entities , simply because they can outbid NZers based on the Tax advantage...

Stephen Holme says,"Income inequality is not killing capitalism in the United States"
Except it's crony capitalism in the USA .
I don t need to provide examples as the present POTUS exhibits nepotism in the WhiteHouse perfectly
Then there was the WallSt bailout yet foreclosure on 3 million ordinary folks homes
The Cheney family profiting from war supply contracts
The list is ..........endless cronyism

We have rent-seekers lobbying other rent-seekers who give dosh to more rent-seekers to pass it up and down the line and the people down the line who had it taken from them are then forced to spend it all on the basics (exclude the cigarettes and booze) which keeps the SME's generating taxes for the second group of rent-seekers to pass it on and each time round the cycle the amount gets smaller because it is not tied to production........but rather a cut off the productive........

GST on Financial Services and Interest will fix everything.

  • Pay for much needed improvements in health services.
  • Pay for UBI
  • Pay for a tax-free threshold like in Aus
  • Reduce overinflated property prices

GST on Financial Services and Interest will fix everything.

Yes, why should we give the financial industry such an advantage?

Gypsymanz - you don't think it will impact the consumer price of financial services ? It will just become another tax you will have to pay if you use them.

Yes it would, but given how big the financial services industry is, the GST rate could be dropped to reduce the impact and remain fiscally neutral.

It will just become another tax you will have to pay if you use them.
What other tax?

Also throw in an undeveloped land tax, a capital gains tax on a sliding scale and a vacant property tax.

You haven't thought that through at all.

Interest rates on mortgages will go up 15%. That's not going to be a vote winner.
People with large bank deposits will have to register for GST, and return that to IRD
Banks will be able to recover all the GST on their overheads. That'll increase their profit (do you work for a bank?)

Interest rates wont go up by 15%, GST is only on the value added so only applies to the interest component, given current interest rates the rate would increase approx 1.5%(at 15% GST), given the GST rate could be reduced as a larger portion of the economy would be included that increase would likely be even less.

You would need approx 1.5 million on deposit to get above the 60,000 GST threshold, that's got to be a fairly small number of Kiwis

Banks can already recover all the GST on their overheads, under my idea they would actually have to pay GST for a change.

Nope don't work for a bank, but if any are looking for a well paid economist.........


A government that focused on making us a higher income nation would help. Instead of the current bunch who see higher wages as a problem, not as a solution.


... or , we could accept being just a middle income country , rather than being high income ... if we also had a great standard of affordable living through modest housing costs , and 100 % pure waterways and a clean green great out-doors ...

A truly caring and sharing society .... that'd be nice ....

Is it possible to do in an open, multi-cultural country, committed to globalization and capitalism, with a government elected by the sheeple?

Yes, it is technically possible to do. Increasing income taxes and de-multiculturalalising the entire country would be a good start. You would also have to reorganise the entire social structure of the country and force a massive transfer of wealth from the 10%ers to the rest of the populace. See Denmark, Norway and Sweden as examples of the outcome of this. Of course, the entire change would be a combination of immoral, illegal and legally and morally grey and it would be impossible to do.

Interesting .... word ...

How would you de-multiculturalise New Zealand? What would you do?

Primary school kids are masters at de-multiculturalising people I have noticed.

Yes dead right. And exactly why we don't need private schools, religious schools or charter schools. Throw all our kids in together, let them learn that we are all kiwis and need to get along. Create a world where the school system improves across the board for all, not just the little elites.

We could all be "freed" from the terrible curse of choice. Hm. Interesting but I am pretty sure I would rather live in NZ than China.

How would you de-multiculturalise the Pakuranga Night Market? Only allow them to sell pies, muffins and scones?

I don't think our culture or economy depends on the Pakuranga Night Market. When I went there I could hardly breathe. I bought a belt that only last a few weeks before the buckle broke up. Contrast that with another belt I own that I bought from Smith & Caugheys which is still going strong after twenty years of use. The food is quite pricey when you add it all up for the whole family. I would be very reluctant to return.
What we should develop is a more forward thinking, modern, culture, that focuses on quality not import third world style markets selling junk.

Aiming too low there Gummy. Whats wrong with high income - and - modest cost housing, pure, and green.

It is important to consider the disincentives people face in our social welfare system. Perhaps the best feature of a 'basic income' is the ability to work while receiving it. Beneficiaries get the messages very quickly when they realize if they work part-time, they are losing almost a dollar form their benefit for every dollar they earn. Effectively these beneficiaries are working for what they could get for free. Also this does not take into account the costs involved in working, as we all know, clothes, petrol, lunches, etc.

With the above costs included, on paper low income earners are often better off receiving state assistance than working a part-time job. Because a 'basic income' is guaranteed, people are free to move around the labor market. Unlike our current system where if a low income earner or beneficiary starts a new full-time job and it doesn't work out, too bad! A freshly unemployed person who needs assistance from Work and Income NZ could realistically be waiting weeks, even months depending on stand-down periods and appointment availability.

Heaven help you if you have savings, they must be used first. If you have no savings ... enjoy keeping a working phone, power, roof over your head, etc while you wait for assistance. People can become dispossessed very quickly, there but for the grace of God go us. If we want to move forward a 'basic income' needs to be implemented. Perhaps offering long term beneficiaries an option of keeping their benefit or receiving $200 per week and being able to work freely without deductions to that $200.

Does the above sound good, maybe unfair because you would not qualify for the $200? How about we abolish all benefits and Work and Income NZ, with the savings, pay everybody between 18 - 65 a basic income of $200 ... a Universal Basic Income.

Good comment Zack. Here's a bit about my personal experience. Whilst unemployed, I was getting $348 per week on the benefit. Last year I found a job, unfortunately earning minimum wage (It's appalling that so many NZ employers seem to pay minimum wage as a matter of course). Now that I am working, my take home pay is $358 per week after deductions. So if I take into account transport costs, and other costs of being in the workforce, I am actually worse off by working. Where is the incentive to work!! The only solution I can see is: either raise the minimum wage (substantially) or cut the benefit to say $250 per week. But God knows, it is hard enough surviving in Auckland on $348 per week.

Stop moaning about being on minimum wage. Possibly you farted around in your school and early work days so you are worth little to an employer? Min wage is $600, so how come you go home with $358? Bad degree perhaps?

Thanks Alex - enjoyed your article. Lets not be too dismissive of TOP however. It is their policy re a UBI that got the subject back on the agenda. We need them to continue promoting new financial ideas for a sustainable economic future