Matt Nolan examines 10 elements of the changing tax and benefit system in New Zealand’s history

Matt Nolan examines 10 elements of the changing tax and benefit system in New Zealand’s history

This week's Top 10 is a guest post from Matt Nolan, an economist at Infometrics, and a contributor at the blog site TVHE.

As always, we welcome your additions in the comments below. If you're interested in contributing a Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

In recent years I have spent a bit of time looking into how personal income tax and benefit policies have changed in New Zealand, and trying to figure out how to describe some of the ways this influences the final incomes of people in New Zealand.  A breakdown of some of the more recent history I’ve looked into can be given here.

One of the interesting parts of this investigation has been the broader perspective it has given me about the tax and benefit systems.  An example of the received truth I’d taken about the tax and benefit system comes from the Wikipedia page on the Social Security Act.

The policies and emphases of the Social Security Act would set the social pattern of New Zealand for several generations. New Zealand was to remain a government regulated welfare state until the early 1990s when new neo-liberal policies (labeled Ruthanasia) superseded much of the surviving policies of the First Labour Government.

However, reality is more complicated – with this narrative overplaying the significance of the Social Security Act and Mother of all Budgets, while downplaying other significant changes over the past 120 years.  Here are 10 elements of the changing tax and benefit system in New Zealand’s history that have given me pause.

Generally there will not be many additional links below, with much of the discussion based on two excellent books:  A Civilised Community: A History of Social Security in New Zealand 1898–1998 and Two Models of Welfare.  Furthermore, in the paper I link to in the first paragraph there are links to some additional sources I enjoyed.

1. Important parts of the welfare state were established under a right wing government

State support didn’t appear from the ether in 1938, with the Social Security Act an extension and consolidation of support schemes that had existed before the First Labour government was elected (this document from 1939 is a nice summary).

Arguably the welfare state kicked off in the way we think about it today with the Old Age Pension’s Act, a means tested payment for people who were 65 and “of good character”.  A widow’s pension was subsequently added on the view that a widow would not have a husband supporting her and so would struggle to meet necessities (Note:  These types of policies need to be seen within the social conditions of the day – this does not mean women are incapable, but instead they were in a society where such difficulties for them as a group occurred).

However, its expansion continued under the Reform party from 1912 – New Zealand’s right wing party at the time. A payment to blind people, a family allowance for low income earners, war veterans, and sick miners were all introduced by New Zealand’s centre right.

The New Zealand of 1938 was completely different than the New Zealand of 1898, with the population more than doubling while a recession and multiple world wars helped to make the case to people in society that government support to those in need was a necessity.

So often we throw around the labels “left” and “right” as if they indicate where patterns of social support will head – but in truth it is the experiences of broader society, and the way that comes out in the types of policies they support, which drive the ebbs and flows of government support.

2. Sickness, Invalid, Retirees - initial levels and justification

When the Social Security Act was passed into law in 1938 (SSA 1938) there was already a system of pensions/benefits that were paid on the basis that people are unable to work as described above.

  • Old age pension
  • War pension
  • Mining pension
  • Blind pension
  • Widow’s pension

In each case, a clearly observable situation that makes it difficult for the person to earn enough to live.

Following the introduction of the SSA 1938 the broader sickness and invalids benefits were introduced – where sickness payments were for people temporarily out of the workforce due to illness and invalids payments were for those permanently out of the workforce due to illness.  Furthermore, the old age pension stopped being means testing for those over 65.

As a result, when we look at the initial act we can see that payments differed based on the lack of opportunity someone faces.  Someone on the invalid’s benefit received a higher payment than someone on the sickness benefit or the unemployment benefit.  In fact, the core payment for the sickness benefit was the same as the unemployment benefit (£1 a week for singles).

3. Sickness, Invalid, Retirees - pre-1984 and the debates

By 1984 the sickness, invalids, and unemployment benefits were fundamentally different than they were in 1938.  Payments had been equalised between those on invalid, sickness, superannuation and unemployed with child benefits - with the generic unemployment benefit around 10-20% lower.  This had made the benefit level more like a universal payment, rather than a payment on need which was traditionally introduced.

Going through this history it seemed that, arguably, the reforms in the Mother of All Budgets made the scheme more similar in form to the initial 1938 scheme.  This then raises the question of whether payments were sufficient for what we believe is a fair minimum standard.

Another way of looking at it is to start from the view that the pre-1992 payments were seen as sufficient for helping with need.  The 1992 reforms did not reduce payments to those on the invalid’s benefit and was initially supposed to increase targeted payments to those in need (although arguably this did not happen), but it did sharply cut payments to other benefit types.

To be clear, this does not persuade me that income support is necessarily sufficient – and anyone who believes benefit payments should be higher can still justifiably make that argument.  But it does indicate that the change in payments was based on a clear justification that others in society may agree with, and one that was consistent with the “social pattern” of the initial SSA 1938.  I personally found this surprising.

4. Compensation, minimum standard, and all government policies

When looking at support for those unable to work due to injury we’ve focused on direct payments.  But there is an obvious problem with this – there are other forms of support.

Direct payments are intended to provide a minimum standard, and direct spending on matters like healthcare count in the same vein.

However, when the social welfare system was designed in different countries there was an argument between those who wanted such a minimum standard as social insurance – and those who believed social insurance should be contributory.

In that New Zealand has ACC, a contributory scheme that pays a proportion of lost earnings following an injury that keeps you out of work.  As this scheme has changed, the requirements of the benefit system have changed as well.

In this way it is important to remember we cannot look at benefit policies in isolation (as I’m largely doing here) if we really want to compare the situation people face through time.

5. Family benefits - new or old?

Working for Families was introduced as an important step in helping to support families – to the point where someone my age gets the impression that there was no to limited family assistance before it was introduced.

But if I’d just read my brother’s writing on the issue earlier, I would have known that there is more the family benefit history in New Zealand than just the current scheme.  As mentioned above a government provided family allowance had been introduced as early as in 1926.  Furthermore, in 1979 the real value of payments to those on family assistance who were out of work was near current levels (although it was less generous for larger numbers of children).  As wages have grown much faster than prices, this implies that the payments to families who are out of work provided a closer relative living standard to other people in society.

Working for families changed two things:

  • It increased payments after they had been allowed to decline in both real and relative terms since 1979.
  • It added additional payments for those who worked (In work tax credits).  Adding to the parental tax credit and child tax credits that had been introduced over the 1990s.

But it did not reintroduce the universality of payments (the family benefit was not means tested) and it also removed some specific child based payments to beneficiaries – although this was more than compensated by with the increase in family support, focusing on family support alone exaggerates the increase in income for those out of work.

So working for families involved changes – but again it was an evolution and rebranding of a series of existing schemes rather than a brave new world.

6. Single parents and the welfare state

Child benefits and child support have been complex in New Zealand as it has been wrapped up with a long term debate about the “type of family” society is willing to support.

The introduction of the DPB (Domestic Purposes Benefit) in 1973 replaced the emergency benefit payments that were provided to sole parents – who at this time were predominantly women.  This removed the discretionary nature of such assistance, and as a result allowed people who were in abusive relationships with a child assistance which in turn made it easier to get out of that situation.

What I didn’t realise is how significantly this legislation was reversed under Muldoon’s third National government.  Six month stand down periods were introduced and compulsory counselling with a (potentially abusive) partner was put in place.  Government was mirroring the view of a large part of society that people should just “make relationships work” even in the face of abuse – a view that exists but is less prevalent today.  The book A Civilised Community gives an excellent run down of what happened during this period.

Furthermore, the increase in welfare payments associated with sole parents at a time when the Oil Crises and British entry into the EEC were eating into growth in New Zealand created the conditions where the public increasingly saw welfare payments as unjustifiably generous.  Again we don’t have to agree that such payments were excessive (I don’t), but the justifiable inclusion of the DPB helped lead to a situation where the public was calling the fairness of all payments into account.

7. Racism and sexism

The pre-1984 benefit system was clearly based on a specific view of the nuclear family with a male head of household – a view that is fundamentally sexist.  Now even if you believe that the nuclear family with a male head is what is “natural”, what you would prefer, and what you believe the vast majority of people would prefer it does not punitive treatment of people who fit a different family type – or differential treatment on the basis of sex.  In a couple women were ineligible for payments if their “husband could support them”, without a reciprocal obligation for a wife to support a husband.  Furthermore, severe conditions were placed on female recipients of the domestic purposes benefit (and earlier emergency benefit) with women expected to stay with their partner even in situations that we would currently classify as abusive.

However, the earlier racism inherent in the old benefit system is also shocking – and is something I think we should all try to be aware of.  Quoting from A Civilised Community comes the following description of the implementation of the Old-age Pension at the turn of the 20th century.

The inclusion of aboriginal natives, on equal terms, is however regarded as undesirable or at least, unnecessary. … it is by all argued that the claims and needs of a Maori living in Maori fashion, are much less than those of a European, and that a marked distinction should be made.

Given this view, pensions often went unpaid to Maori individuals who lived communally and even when pensions were paid they were lowered to 2/3rds of the European rate.  Even more stringent conditions were placed on those with foreign ancestry, with early 20th Century New Zealand’s treatment of Chinese people especially abhorrent. 

One thing to take out of these isn’t that the people making these statements are “bad”.  Note that they are based on a view of need.  People who are non-European were assumed to need less, and this filtered into the policy making of the day.  Similar biases undoubtedly infect our views and policy making in the present day – and asking ourselves exactly why we think why people’s needs differ, and whether that is justifiable, is important.

8. Tax schedule/scale itself wasn’t that complex before 1984

All this tax of benefit ignores the other part of the redistributive equation – taxation.  In a similar manner it is received wisdom that

The top tax rate of 66% that is often trumpeted was due to a 10% surcharge that had to be reapproved each year.  Even including this there were four personal income tax thresholds – compared to the three we have currently.  Stories about 11 or 14 rate thresholds come from earlier on in the design of the tax system, the personal income scale itself was not complex.

Now, the tax system in its entirety was a complex set of rates and exemptions – but the fact that there were four thresholds in 1984 is not the reason for it.

9. Fringe benefits, exemptions, and GST

This factor is a bit better known among people of my generation, but deserves repeating – the pre-1984 tax system was wildly favoured to people who could write off expenses or shift income. 

When an economist talks about “eroding the tax base” or New Zealand having a “narrow tax base” before 1984 it was due to individuals avoiding tax through the use of exemptions or receiving significant untaxed fringe benefits (a company vehicle) instead of income which could be taxed.  The personal income tax scale and rates themselves were not the issue – the fact that a lot of people weren’t paying them due to this avoidance was.

Once the new government put forward its Budget following the 1984 election, fringe benefit taxes and the removal of exemptions were put in place.  Replacing the inconsistently applied VAT with a flat GST over all goods and services acted in a similar manner – ensuring that peoples tax liability depending on the amount they spent, not on what they purchased.

These reforms were focused on treating people the same way – someone with the same access to income would face the same tax burden (horizontal equity).  Many complaints about the tax system in modern times come from a belief that this principle is not being satisfied, and as a result almost no-one would criticise this area of tax reforms.

10. Tax reforms and equity targets are complicated

Part of broadening the base is the idea that lower tax rates will be required to raise the same amount of revenue – if fewer people are avoiding tax, then you have a greater number of tax payers with which to raise revenue off.  During 1984-1987 tax rates were not really cut if we view the introduction of GST as ultimately a tax on that income.  Furthermore, significant price and wage inflation had pushed an increasing number of people into higher tax brackets.

If the broader base was leading to greater revenue then there is a justification for lower taxes. Then the question of how the lower tax burden would be spread across the population became the key one.

We now know that government borrowing in the previous decades had left the country in a precarious financial situation, and as a result the justification for tax cuts was weaker than it first appeared.  Even so, through until 1990 tax rates would be reduced significantly.

Say that we believed top income earners were paying too little in 1990 given the income tax schedule, such that we believe the 1984 schedule was a “fairer” one.  That does not mean that the tax system we had in 1984 was fairer – as the loopholes and exemptions that were in place allowed high income earners to avoid tax.  The lack of a fringe benefit tax was the most egregious example as it allowed high income earners to purchase final consumer goods without paying tax on the income used to do this at any point – it was not just shifting income through time but a refusal to ever pay tax.

It was for this reason that Roger Douglas stated that the tax system as of 1990 was more progressive than the system in 1984 – even though measures of tax progressivity using the tax scale had fallen sharply.  This is one reason why I’ve had to limit my own research to the post-1988 period when measuring equity and post-tax and benefit income inequality.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Great article!

Lost of interesting information and background on NZ society in here. Really worth a careful read.

Thanks, Matt.

Taxation is a sore point. I well remember Michael Cullen stating categorically that NZ was one of the lowest taxed countries in the OECD several ways and times. And finally a Massey lecturer popped into the discussion that the average rate of tax in NZ taking into account ALL forms of taxation was actually around 57%. Interesting that Cullen is now chairing the Taxation working group.

Not sure where they got that figure from. Even if you paid mostly the top tax rate (33%) and spent everything you earn't (incurring 15% GST) then that's less than 48%. Excise taxes would add a bit more but not much. Anything I'm missing?

Not really - if you are at the top you pay maximum ~30% as 33% is the marginal tax....so you have 70% pay and then you paying 15% on the top of that - so 10.5% - altogether ~40% of original pay plus other taxes etc.

Did they include tax on petrol, cigs, booze etc... I think they've all got additional taxes baked into the retail price before GST hits?

Interesting how superior we feel about the sexism and racism of the past. We look down on those who opposed same sex marriage but maybe 15 years ago it was not in the public's awareness let alone debated. Interesting because I wonder how our generation will be judged by the next generation.
My guess is they will look back and wonder why we argued about mental health expenditure without ever addressing the issue that mental health problem were growing dramatically and yet nothing was done to find out why. They will also puzzle how having a serious child poverty problem we just kept throwing money at families with generations of welfare beneficiaries while economising on the social workers and their support staff.

Thinking of NZ Superannuation it surprises me how quickly people have become entitled to something that did not exist until very recently.

My grandparents (born 1910-1920 and left school at age 14) would not have expected a universal pension when they were starting their working lives (the 1898 Old-Age Pensions Act was means tested).

And nobody my age expects there to be a universal pension from age 65 when we get there in 35 years time.

I think you are wise to doubt an equivalent pension in 35 years time. However my super is mainly from the UK and topped up by NZ and that was a contributory pension - that is I am entitled to it and NZ taxes it. It is also probable that you will live longer and healthier. Certainly I would be happy to trade places with you (40 years younger).

I dunno, this younger generation who aspire to own a home are now expected to save many multiples of their annual wages just on a deposit when previously this ratio would have been adequate for the house itself.

Makes you wonder why mortgages were even necessary back when house prices were 2 - 3 the average household income. Must have frittered money away on unnecessary things.

Back in the 60s Family income was One income earner, ditto average household income was lower, lots of land for green fields development. Manageable population and infrastructure growth
Wading to static house price growth. Having 2 working parents in the 60s meant you were poor. On that basis there are more poor people now.

The issue of the future will not be whether or not there will be a superannuation for retirees, it will be one of a universal basic income as work becomes more precarious and robotics and AI take over, and I have no doubt whatsoever that they will. It is not 1920 any more.

Back in the sixties a family could have a comfortable living on one income of 20 pounds (forty dollars) per week.