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2  Background

2.1  Measuring incomes

This section defines what is meant by “final household incomes”. Firstly, this is a study of household incomes. A household is either a person living alone or a group of people who share a dwelling and have some sort of communal living arrangement. They need not be related to each other. Other New Zealand studies have looked at changes in individual incomes (Dixon 1998) and family incomes (Martin 2000).

This is also a study of final incomes. “Income” admits of a number of definitions. “Market income” is the income that households receive from wages and salaries, from investments and from people running their own businesses as sole traders or partnerships. “Gross income” is the income that households receive from all sources, namely their market income plus any cash benefits they receive from the government in the form of social welfare benefits or New Zealand Superannuation. “Disposable income” is what households actually receive in their hands to spend on goods and services, namely their gross income minus income tax.

Households also receive government-funded health and education services, which means that they do not have to pay for these out of their own pockets. Receipt of these services can therefore be considered a form of income—indirect government benefits, to be counted alongside the direct cash benefits they receive. Similarly, as well as paying income tax, households also pay consumption taxes when they spend money on goods and services. We can therefore define a household’s “final income” as its market income plus benefits from government social expenditure (whether these benefits are in cash or in kind) and minus income and consumption taxes.

Final income and its components—market income, taxes and government benefits—are reported in this study in actual dollar amounts, rather than being “equivalised” to take account of differences in the demands on households’ resources. This issue of equivalence is discussed in Section 3.8.

2.2  Economic, demographic and government policy changes

This section summarises the key economic, demographic and government policy changes in the period covered by the study (defined most widely as the period from April 1986 to March 1998)[1]. It provides a context for looking at the results of the study, but does not in itself explain why certain changes have occurred.

The period of the study includes a significant portion of the decade of reform which began in New Zealand in 1984.[2] From the outset, government involvement in supporting and protecting local industries was reduced markedly. Together with other reforms, this opened the New Zealand economy to international competition. In the ensuing period of adjustment, many workers lost their jobs, particularly in the manufacturing sector. Jobs were also lost in a programme of corporatisation and privatisation of state assets. Unemployment reached a peak of 11% in 1991 and in 1998 was still higher than it was 12 years earlier. Participation in the labour force (being either employed or unemployed) was about the same in 1986 and 1998, although the overall participation rate disguises a rise in women’s participation and a corresponding fall in men’s participation. In 1998, a greater proportion of the population were employed in “white-collar” professional, technical, administrative and managerial occupations than a decade earlier and a lesser proportion were “blue-collar” workers in the primary and manufacturing industries.

The New Zealand economy stagnated in the late 1980s and early 1990s. As Figure 1 shows, real GDP per capita showed little or no growth, and in fact declined for a period, before picking up strongly again in 1993.

Figure 1 – Real GDP per capita, seasonally adjusted by quarter, 1986 to 1998
Figure 1 – Real GDP per capita, seasonally adjusted by quarter, 1986 to 1998.
Source: Treasury series, using data from Statistics New Zealand.
Fiscal policy from 1984 until the early 1990s was directed at reducing large budget deficits. In 1993/94 a budget surplus was achieved, and has been maintained ever since. Tax reforms included the introduction of a comprehensive and uniform Goods and Services Tax (GST) in October 1986, and a reduction in the top personal income tax rate. Further income tax cuts occurred in 1997 and 1998. On the expenditure side, the National Government introduced spending cuts in 1991 which included reductions in social welfare benefits. The age at which people became eligible for Superannuation was raised from 60 to 65, and this change was gradually phased in between 1992 and 2001. Over the whole period, however, government social spending, and in particular health and education spending, increased as a proportion of total government spending and increased as a proportion of GDP. At the same time, explicit policy decisions were made to target some areas of social spending at lower-income families, with relatively well-off individuals or families contributing more out of their own pockets.

Over the 1980s and 1990s the population became slightly older, with the proportion of New Zealanders aged 65 and over increasing from 10.4% in 1986 to 11.6% in 1998 (Statistics New Zealand 2001a). The birth rate and fertility rate grew as part of the “baby blip” at the turn of the decade, but by 1998 had fallen to significantly below what it was in 1986. There was also an increase in the proportion of families headed by only one parent,[3] and an increase in the proportion of households constituted by single people living alone or by couples without children. As a result, the average household size fell from 2.8 people as measured in the 1987/88 HES to 2.7 people as measured in the 1997/98 HES.

Figure 2 shows the changes in real government expenditure per household between 1987/88 and 1997/98. Government social spending per household, particularly in the health and education sectors, increased over this period, while debt servicing and other spending per household fell.

Figure 2 – Government expenditure per household by purpose, 1987/88 and 1997/98
Figure 2 – Government expenditure per household by purpose, 1987/88 and 1997/98.
Source: Statistics New Zealand NZSNA, Crown Accounts Analysis, Tables 1 and 6. Expenditures are allocated to private households in proportion to the percentage of the population in private households.

Notes

  • [1]Interviews for the 1987/88 and 1997/98 HES surveys  were conducted between 1 April and 31 March. Respondents were asked about their income over the previous 12 months so each study in fact collected information on incomes over a two-year period. For example, the first respondent in the 1987/88 study provided information from 1 April 1986 to 1 April 1987 and the last respondent provided information from 31 March 1987 to 31 March 1988 (or thereabouts).
  • [2]Evans, Grimes, Wilkinson and Teece (1996), Silverstone, Bollard and Lattimore (1996), and Dalziel and Lattimore (2001) describe these reforms, and the performance of the New Zealand economy over this period.
  • [3]This trend is apparent in the analysis of households shown in Appendix Tables 2 and 3, but is less obvious there because about one in every three one-parent families lives in a household with other people and will therefore be included in the category of “other family types” (Statistics New Zealand 1998a).
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