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Susan St John says this latest 'ad hoc policy change' from the Government will be used to make Working for Families less generous for ‘working’ families through a poorly understood sleight of hand

Public Policy / opinion
Susan St John says this latest 'ad hoc policy change' from the Government will be used to make Working for Families less generous for ‘working’ families through a poorly understood sleight of hand
working-for-families

Susan St John*

If the government cares about child poverty it would immediately fix the fatal flaw in Working for Families (WFF).

The flaw was exposed for all to see in the latest announcements that from 1 April 2022 there will be an increase in the real Family Tax Credit (FTC) of a pitiful $5 per child.

While the most efficient way the worst-off children can be helped is via the FTC, sadly, there can be no major improvement in the FTC because it is too expensive - any increase flows right up the income scale.

So even the paltry $5 increase had to have consequences:  middle and high-income families have to PAY IT back with a higher abatement once incomes exceed $42,700.

We are told that the average family will be $20 a week better off in 2022 or $1040 per year. The raising of the abatement rate from 25% to 27% is designed to claw this back, even the bit that is the inflation adjustment.

Thus, this latest ad hoc policy change will be used to make Working for Families less generous for ‘working’ families by a poorly understood sleight of hand. The 2% extra claw-back on incomes will slowly erode the $1040 until it all disappears at $94,700 of family income.

This has all sorts of flow on effects for effective marginal tax rates over long income ranges and thus, ironically, given the obsession over work incentives, just adds to the already high disincentives to increase paid work.  

Once low-income families reach $48,000, their effective marginal tax rate will be 57%, or 69% if repaying student loans. 

For incomes over $70,000 this becomes 60% and 72% respectively, and still more with ACC and KiwiSaver contributions, let alone child support payments.

The government is well aware of this problem.

This fatal flaw keeps low-income desperate whānau and families in poverty as the government tinkers.

But surely the answer is obvious. It is to increase the FTC significantly and abolish the outdated Work Tax Credit (IWTC) at the same time. This removes the unjustified discrimination against children in benefit and lowest income families and gives them the full WFF package.

The Welfare Expert Advisory Group said in 2018 that the first child FTC (now $113) needed to rise to $170 and additional children (now $ 93) to $120. In inflation-adjusted terms this is $185 for the first child and $130 for each additional child.

This should be implemented immediately.

To focus spending where it is most needed the IWTC should be abandoned (saving $600m).

Middle-income families are no worse off because their loss of the IWTC is balanced by the gain in the FTC. At about $500m per annum this is the most cost-effective spending that the government could do to reduce the worst of child poverty. It contrasts starkly with the paltry $68m per annum Labour announced on Saturday.

Over the years since the introduction of the IWTC, the government has saved $7.5 billion by denying the full WFF to the very worst-off families. No wonder so many children (at least 160,000) are located below the very lowest poverty line (40% after housing costs median income). For families in growing debt, with parents having to beg for food at foodbanks and for recoverable grants from Work and Income, an extra $5 at some time in the future is a meaningless and demeaning gesture.

Once the fatal flaw is fixed then WFF should be further improved. The FTC would become the only tax credit paid to the caregiver making it much simpler, but it should also be annually adjusted for wage growth just as NZ Super is. Over time, the threshold for maximum payment should be lifted significantly from the fixed $42,700 level and the rate of abatement should be lowered to 20% where it used to be.  

The longer it is believed by Labour that a child poverty alleviation payment should also be a work incentive, the more bogged under the long awaited review of WFF will be.

 In the meantime, Child Poverty Action Group research released this week shows that even in Australia, families on benefits receive far more in tax credits than families on benefits in New Zealand- they do not discriminate against the worst-off families.

Canada made its child tax credit available in full to all low-income families in 2016. To alleviate suffering in the lockdown , the US child tax credit was paid in full to all low income families, even when they didn’t have enough taxable income. And as a result  the child poverty rate fell significantly.

The Biden administration is determined to make this permanent.

It is beyond time in New Zealand to make some bold, mana-enhancing  transformative changes for the sake of our children.


*Susan St John is an Associate Professor at the University of Auckland Business School.

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50 Comments

Susan, can you shed light on the number of families who meet the definition of poverty but subsequently go on to have another child? 

I work in the healthcare sector and am continually amazed at how our lowest decile can still smoke (Maori women 30%) and drink alcohol. Personal responsibility seems to be swept under the carpet.

Personally i have had a gutsful of intergenerational welfare dependency and seeing the impact on children and their trajectory for the future. What would you do if you had free reign to implement policy AKA our current PM who swore to reduce poverty in a Government with a clear majority.

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As they say...subsidise what you want more of.  Whatever we do to make it more 'liveable' for the present recipients, the more we encourage others to follow suit.

What has been suggested in this article is tinkering.... a much bolder overhaul of the welfare system is long overdue.

I'll start the ball rolling.  Cancel all accommodation supplements of very type.  Let the landlords meet the market.

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Cancel all WFF as well, it's always been a wage/salary subsidy for employers paid by all NZdrs, let employers meet the market.

 

Truly “The poor you will always have with you” (Matthew 26:11) - because they are now statistically defined as living on a % of the average wage. 

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Its a program to promote having a job and children, i.e. it's promoting natural population growth over immigration.

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A large proportion of our population aren't capable of attaining the skills required to contribute to our society.

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NZ has three major redistributive programmes; social welfare benefits for working age adults, Working for Families for children, and New Zealand Superannuation for those over 65.  Many commentators on this article clearly dislike beneficiaries, have little sympathy for the plight of low income children, and yet are happy to ignore the comparatively, wildly generous treatment of those over 65 even if in full-time well-paid work or with multiple million-dollar properties. May be it is fear that, as the pandemic has shown, too many of us are only a few pay cheques away from the need of state support ourselves and we know how miserable the system is? Few seem to understand that all developed counties have a programme like WFF to assist in the costs of rearing children, usually more generous and better designed. 

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So even the paltry $5 increase had to have consequences:  middle and high-income families have to PAY IT back with a higher abatement once incomes exceed $42,700.

You're right. The current policy incentivises people not to cross a low threshold income; thus, discouraging people from achieving their full potential.

Working for families should not be a long term solution to low income, it should be a transitioning platform to encourage people to rise to their abilities, not barring it.

Having said that, what the government is doing to effectively uplift the lower socioeconomic group is still left to be seen despite decades of talk and policy tweaks.

 

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what the lower socioeconomic group is doing to effectively uplift themselves is still left to be seen despite decades of government/taxpayer support, talk and policy tweaks.

 

Hint: starting by not having kids you cant afford to support yourself.

 

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Surely, our biggest problem is over-population.  Stone-age-size large families abound. I go along with Richard Attenborough on this point. 

The outer suburbs have become a cesspit of crime......what does Susan say about all the shootings of late?  Too late, the horse has bolted?  The dark underbelly of USA crime, purveyed to our young underclass by American trash tv and movies?

I'm thinking that before long NZ sociologists are going to have to make comparisons with Haiti rather than the Western countries.

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You're not very streetwise are you? Are you asserting that big families are to blame for crime? You don't think that some macroeconomic conditions contribute to that? What if big families were born into neighbourhoods where banks lent most of their money to productive businesses and children were furnished with an education system that fostered innovation and an entrepreneurial spirit? Both these levers are in the hands of government. And the government presides over debt slavery and un-education. 

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Rosenstein

I was brought up in Manurewa and then spent the next 25 years in Clover Park, Manukau Central while I developed a business in the city.  Over that 25 years I've noticed a tectonic change for the worse:  I had 3 major day-time burglaries; had my house egged because I phoned the police when I heard the terrible screams of a woman being bashed up across the road.  I was fortunate to be able to move to the inner city after selling my business. I'd been a South Aucklander for at least 60 years.  So don't presume to tell me my observations aren't factual.

Manurewa was once a nice township where a lot of returned servicemen settled when they returned to NZ.  The township now looks like a foresaken slum.

Manurewa had but one policeman during the 1950s, 1960s and 1970s.   A couple of years ago I read where the Halver Road Police station had over 50 police.  Over the last decade there have been numerous firearms incidents.

 

   

 

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Anything to keep house prices insane I guess.

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Welfare is a cancer on the lives of so many. It is truly awful to watch. And watch again. And watch again, as each generation continues its slide into a deeper form of hell. For a culture supposedly so educated we have really stuffed this up big time. It's time for the brave to stand up politically. The weak have had their turn.

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Her heart is probably in the right place.

But her understanding of what is about to hit the kids of today, seems to be nil.

Two offspring and sterilisation for free (with bonus takeaway as incentive).

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Don't even need sterilization. You can get long lasting contraception these days installed at your GP. Lasts 3 years.

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Let's be clear, the Govt's economic approach is literally designed to keep a few hundred thousand people out of work (or short of work). This 'bufferstock' of unemployed and under-employed people is apparently required to prevent wage inflation. The below-poverty welfare payments are designed to keep people desperate for work - even though there is zero evidence that this actually works.

People will no doubt share their reckons on there being loads of work opportunities - but there is barely 1 job vacancy for every 10 people wanting work currently in NZ - and a lot of the work available is temporary, zero hours, demeaning and inaccessible for most of the unemployed due to childcare commitments, geographical location, costs of accommodation etc. 

We can and should adjust the tax settings, but fundamentally Govt should be committing to a policy of zero involuntary unemployment - with a strong welfare system in support. This is not a new idea - the US adopted this approach after the second world war and their economy boomed and living standards went through the roof. Involuntary unemployment in many developed countries in the 60s and 70s was around 1%. Then the neoliberals took over and worked out that capitalists would make more money if workers were stripped of their power - and that the public could be easily persauded to blame the unemployed for their plight rather than the people in charge.

 

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There is a subset of people who are unemployable, whether drugged, dishonest, violent etc etc. I feel like that subset has increased significantly in recent decades.

I wouldn't employ them if they worked for free.

Good luck getting to zero.

Anyone who can't land a job in the current environment needs to have a good look in the mirror.

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You started off making sense there - there are a small group that are unable to work because of the state they are in. But then you blew it by insisting that there is no good reason that ten people looking for work can't fit in to one job vacancy!!

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If the government focused their efforts on significantly lowering the cost of housing then families would be substantially and meaningfully better of and there would be a lot less need for these benefits and the poverty traps that they create.  These benefits are little more than a subsidy to the property investment sector.  The poor souls that receive the benefits are just the hapless middle men and women. 

If the government did it's job properly, everybody except the greedy land lords would be far better off.  i.e. Normal families, employers, tax payers and the productive economy.  But no, we have governments and an economy which is devoted to sacrificing everyone in favor of property speculators. 

\The young FHB has no hope at all in this poverty trap and their only way to really get ahead is to leave the country for another where wages and salaries have meaningful value when it comes to purchasing a home.

 

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Exactly. Government grants whether they be the accomadation supplement or working for families have been soaked up by landlords in higher rents.

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Yes, it’s such an obvious solution Chris. Lower the cost of living and there will be less pressure on welfare. The problem comes when 60+% of voters are home owners, jacked up on credit and leveraged to the eye balls. It appears that the fat cats have a bigger voice than the little guy. ‘The economy will crash’ if the market drops 0.1% apparently….complete self serving BS. Some investors simply don’t know when to stop, gorging on cheap money likes it’s a free for all at the cake shop. It’s a cultural shift that is needed, the country has lost its way. Where is our community focus? I doubt we could collaborate on anything these days as it’s so divided. Who ever puts their hand up to reform this mess will get my vote. 

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The problem in NZ is everyone blames someone else for their problems. In this case you are blaming the "greedy" landlords for poverty? 

The FHB is not helpless, they are currently setting records for purchasing. 

The one thing I hate about living in NZ is everyone brings each other down. We need to be more like Australia where everyone tries to win and grow together. We cannot create a better society if we just bad mouth and tax everyone that does slightly better then ourselves. 

 

 

 

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Its actually worst for parents who need early childcare to work , they get hit twice , over about the same threshold they start paying for the full cost of  childcare. 

at one stage , with 2 kids in childcare , when my partner went back to work , we actually lost money . 

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This feels like where I'm heading. I mean it is more likely my career ends than my partner's (I suppose you can chalk one up for feminism) but it also means our mortgage will be paid slower, we won't be able to afford holidays and our kids will probably have to do without a bunch of extra-curricular stuff. Meanwhile, the tax one of us paid will be directly given to people who, in some cases, pay no net tax at all. 

It's extremely demotivating, given what we pay for a mortgage on a three-bedder in the outer suburbs of Auckland would by me a five bedroom palace on the Gold Coast.

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It's extremely demotivating, given what we pay for a mortgage on a three-bedder in the outer suburbs of Auckland would by me a five bedroom palace on the Gold Coast.

I hear all the cool kids are moving to the Gold Coast.

Be quick.

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When our first child was on the way my wife ran some numbers and determined that, all things considered, the partner returning to work would have to clear about $60Kpa for it to be financially worthwhile. Then of course there's the question of the child's welfare. In the end, even though my wife was making well over that mark, we decided she would stop work and we would get by on my income.

Things got very tight for a long time, and even though we've never been entitled to any form of government benefit we've managed to make it work, with two well-adjusted, ambitious and talented children, and a wife who carries a lot less stress through the day (she was previously in finance). I am fortunate to have a good income from a stable job so it won't be this way for everyone.

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WFF is terrible policy and delivered in the worst way they could find .

instead just make the first 15K tax free  save lot of money  on administration and cut a few government jobs 

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A concrete example of how this policy disincentivises improving one's lot:

Not so long ago I was on $86k with 3 children. I am the sole breadwinner. I got a temporary promotion, and with it came a $25,000 payrise. After the WFF deductions it amounted to $100 per week pay rise after tax and Kiwisaver. (When I informed my boss she was disappointed - she thought she was being generous)

For those who say why claim it at all - I'm still better off with WFF. The alternative is not to claim WFF, keep everything you earn (after tax) and be less well off overall. Looking at the WFF payment chart, someone in my position needs a salary of $119k before they can get rid of the WFF monkey on their back. It's a huge, regressive hump in the earnings road that encourages mediocrity.

*Edit*

 

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During the Muldoon years, I recall being quite proud/pleased when I reached the 66% tax rate threshold prior to turning 30. We had two toddlers and I was the sole income earner but we never begrudged paying tax - as we lived very comfortably;

https://teara.govt.nz/en/taxes/page-6

Paying that highest rate of tax was seen by me a kind of individual contribution to betterment of society/community - and it came with bettering my own personal/family situation as well - a win-win, if you will..  

Our current problems all come down to the cost-of-living.  I lament all the middle class welfare tools that have been introduced since those times (pre-neoliberalism).  The cost-of-living escalation began with the very wide sector reforms of the 80s, and by the late 90s these general cost-of-living subsidies for the middle classes had become necessary.

We no longer have the large institutions that delivered a 'public good' and hence, kept costs down.  Seems odd, doesn't it, that the 'free market' actually delivered the opposite to what was intended - i.e., higher cost-of-living and an expanded welfare state.

 

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And of course Kate, because you didn't begrudge paying 66%, you could have continued making voluntary payments to the IRD after rates were reduced. But you didn't, did you? So your individual contribution to the betterment of society didn't extend to continuing to pay 66%. So your statement is hypocritical nonsense.

When you make comments about the "free market", how free do you think it is in NZ? After all, we have all sorts of Government mandated distortions. For instance, income tax itself is a distortion. 

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Actually, income tax rates were reduced but GST was introduced.  I was never in favour of GST (and the rate as it has become these days is ludicrous) as it is a flat tax - particularly punishing to those on lower incomes.  Yet another example of the way the 'free market' reforms drove societal attitudes in the wrong direction - i.e., from having a sense of collectivism and redistribution, to that of consumerism and individualism.

And as to your last question - exactly my point - the 'free market' never delivered the freedom it was purported to.  We had no term for 'wage slaves' prior to the reforms.  And, if interested in economics - all the evidence also points to our productivity and (income gaps with the rest-of-the-world) worsening significantly;

https://croakingcassandra.com/2021/11/09/the-beehive-will-have-been-hap…

Aside from a good legislative model having been developed for state-owned enterprises, I can't think of one other good thing to have come from diving headlong into the Washington Consensus.

Anyone else got some?

 

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The last line of the Te Ara article says it well:

By the 1980s some could use the loopholes, exemptions and incentives extensively to minimise their tax payments while others could not. Not only was the tax system unfair, it was distorting the economy.

The same could be said of WFF.

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Whatwillhappen, and a socialists "loopholes" are generally a business persons deductions allowable by tax legislation. And of course, socialists ALWAYS bleat that people with money "minimise" their taxation, when minimisation is actually not paying any more than the legislation says they should. Sort of like a salaried person not being taxed any more than the legislated rate for their income. 

St John and her ilk should be ignored and left to be miserable among themselves.

 

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Absolutely, because the government encouraged it - all a part of the notion of a new type of freedom under a neoliberal regime.  That's why it was coined 'trickle down' as opposed to 'cascade down'.

 

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Great article

+1

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Socialist dribble.

The idea of working for familys tax credits was to help the working parents that didnt earn enough to bring up their children. You had to pass a work test to qualify. This was good and fair. This has been changed.

There are jobs and people with lower skill levels that can not pay enough to support families. These tax credits keep those people gainfully employed while providing enough for their family.

The less enlightened will suggest that the employer should pay more. The employers only choice if they must pay more wages is often to out source the job to overseas. As the customer demands a product or service at a competitive price. 

So yes WFF does subsidise jobs for lower paid workers with families. It would be great if all these workers could suddenly become highly skilled, but get real, we are not all made equal.

In a perfect world we help everyone up and share. Unfortunately many people now feel that its their right to constantly recieve a handout. The problem is that someone has to pay that cost as there is only so much 'pie' to share.

So go back to the original WFF design and deal with unemployed families separately with wrap around services.

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Starting to think we'd be better off reforming WFF so that it's basically there for sick or injured parents and the huge, massive balance of funds left over is used to do things like bloster ECE care, and for up to 40 hours a week so that parents can actually work

Without available family, the cost of going to work often exceeds the wages on offer once these sorts of costs are factored in. 

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If the solution is for the Govt to pay for childcare to enable people to work, then the system is not just broken it is completely F#@!&^

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No it's not. School has been exactly that for quite some time.  Nothing wrong with paying for professional child care where kids get to socialise and learn heaps of social skills in a chaotic environment. Don't know a single kid who prefers staying at home with their parents as opposed to having a purpose built play area where they learn and play while making friends!

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WFF is a byproduct of our housing, food and energy markets being so inefficient.

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My god, what a read. But she's totally wrong, the system is wrong in all aspects because it sends all the wrong signals and can be gamed endlessly by landlords and those getting WFF directly.  And it's so complex even those on the front line don't know what they are doing or how to administer it properly.  And with all these problems, it does two things: destroys productivity and employs and a s#%t tonne of civil servants all working to figure out why Bob needs to get $23.45 and Jane needs to get $23.52.  A total waste of time and effort.  Add in a completely unfair tax system that needed reform 20 years ago and you have a complete distortionary mess that everybody is too scared to clean up. 

So let's get real and reform both the tax and welfare system in one go with a UBI. TOP's policy is a fully costed UBI policy that encourages people to actually work, is simple to administer and will lead to increased productivity.

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The best thing any government could have done for the economic and social wellbeing of lower-middle and middle income families in NZ was to sort the housing debacle out.

Whoops...

The fundamental error from the Clark era onwards has been a system set up to fail in terms of housing:

- sky high immigration

- the wrong tax settings

- sell off of state housing and insufficient building of new state housing

- restrictive planning rules

All of these things have started to be redressed in the past few years, but far too late. Huge damage done.

And damage exacerbated by the government changing the RBNZ's remit...

 

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I really wish this re-distribution mechanism is removed.

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while we are at it remove the accommodation supplement as well, all it does is increase rental prices 

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I have been bleating on about this for years ! 

1. Why do we need an accommodation supplement, when all these "astute" property investors only increase their rents with it, to pay ever increasing mortgages on their property portfolios  - so straight back to the bank on that one ! .....no wonder their profits are so high. While it's out of the taxpayer's pocket into the banks !   

2. If a business can't afford to pay a decent wage/salary,  in a so called "first world" country  - they should not be in business ! ...so why should the taxpayer foot the bill of a business owner, who hasn't got a handle to make a decent profit to pay their wage bill. 

If all this money above, especially over the last 10 years, had gone into capital expenditure, new businesses, R & D etc etc the economy of this country would be much better off, with higher salaries/wages and greater productivity etc ..........so in the end a much better standard of living for all. 

 

 

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Labour ginned up a formula for calculating "poverty" so they could constantly castigate National. Of course, it's a rod for their back now, given that using their own calculation, the number of children living in so called "poverty" has increased significantly.

My view is that there is zero poverty in New Zealand. How can there be? After all, we have a well funded, functioning social welfare system that provides food, clothing and shelter. Ergo, NO POVERTY. Again, there will be those that say that if you can't afford a pack of smokes every 2 days, a jug of beer every day and an annual overseas holiday with the family, you are living in poverty. Seem familiar Ardern? Church groups?

Why is it that Labour and the do-gooder groups think that firing other peoples money at the issues is going to solve them? If it did, the issues would have been solved 50 years ago, and hundreds of billions of dollars would have been saved. You can't buy a change in peoples natural tendencies.

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Not all people have the 'natural tendencies' you refer to. Greed is not to my mind 'natural' - it is learned.

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Susan St John only sees solutions in endless fiddling about shifting money from here to there.   WFF was always going to be a crock.

You can't fix it.  It will always be a tar baby sort of problem and draw you into more and more convoluted remedies.

Get rid of it entirely.

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Go back to universal child allowance to the main caregiver, allow it to be capitalised for house deposit, government provide low interest loans for first home buyers, build lots of state houses, govt financial support for urban infrastructure.

It worked before, why not again.

No need for landlord subsidy aka accommodation allowance then.

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It did work - really, really well.  NZ had one of the highest standards of living in the world in the 1950s, as I understand it.

It (SOL) isn't even a used socio-economic measurement these days - as a metric it's been replaced by a plethora of different measures;

https://en.wikipedia.org/wiki/Standard_of_living

 

 

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