3  Methods

3.1  Introduction

The final incomes of households in New Zealand in 1997/98 were estimated by:

• obtaining market incomes, measured over a 12-month period, from the 1997/98 HES;
• using Treasury’s TAXMOD model, and information on benefit receipt, to calculate households’ entitlements to government cash benefits and to estimate payments of income and consumption taxes;
• apportioning government health and education spending to households on the basis of administrative data about the use of health and education services (where the benefit to a household is assumed to be the dollar cost of provision); and
• adjusting all figures proportionately to ensure consistency with the national accounts.

The Department of Statistics (1990) conducted a study of final household incomes in 1987/88, also based on the HES. The data from this earlier study were reanalysed and modified to make them comparable with the 1997/98 study. Wherever possible, the two HES datasets were treated in the same way and the same methods were used to attribute government expenditure and revenue to households. Income and expenditure figures from both studies were converted into 1997 dollars so that they could be meaningfully compared.

The following sections describe these methods in more detail.

3.2  Market incomes

Data on market incomes were obtained from the Household Economic Survey (HES), which collects detailed income, expenditure and demographic information from New Zealand households.[5] In the HES, a household is defined as a person living alone, or a group of persons sharing a private dwelling for most of the reference period, who share consumption of food or contribute some portion of income towards the provision of essentials of living for the group as a whole. This definition excludes people living in non-private dwellings such as student hostels, army bases, prisons, religious institutions, boarding houses, motor camps and residential homes for the elderly. Overseas visitors are ineligible for the survey. In the 1997/98 HES, 92% of dwellings in New Zealand were estimated to contain a household eligible to participate. Around 2,900 randomly selected households participated in the survey in 1997/98 and around 4,400 households participated in 1987/88.

In the HES, all household members aged 15 and over were asked about their income and major items of expenditure over the previous 12 months. For regular commitments such as rent, electricity and rates they were asked for their latest payment, and were asked to keep a diary of expenditure over a 14-day period. Income in the HES does not include irregular or non-recurring income such as bequests or lottery wins, capital gains, imputed rent from owning ones own home, or fringe benefits (Statistics New Zealand 1999). HES data from 1987/88 and 1997/98 were entered into TAXMOD, which is a Treasury model designed to forecast data and model policy changes in the areas of income, tax and transfers.

3.3  Receipt of government benefits

This study considers households’ receipt of non-cash benefits (publicly-funded health services, education, and rental and mortgage subsidies) as well as cash benefits (social welfare transfers and Superannuation). The value of non-cash benefits to a household is assumed to be the cost to the government of providing these benefits; the cost, for example, of providing a year’s primary school education. Practically, this assumption is required but it may overstate the value of health, education and housing services: some households might well have chosen to spend the monetary value of these non-cash benefits in other areas, or on different health and education services, had they been given it in cash.

3.3.1  Social welfare transfers, Superannuation and housing assistance

The HES records income from social welfare benefits and Superannuation but this information was not used directly in the calculation of gross income, because of concerns about the accuracy of respondents’ recall. Instead, for respondents who reported receiving a particular benefit, TAXMOD calculated their entitlement based on household size, composition and other relevant information. This method was applied to both the 1987/88 and 1997/98 data.

Housing assistance in 1997/98 was provided through a social welfare benefit—the Accommodation Supplement—which was available to low income families to subsidise the costs of rent, board and home purchase. Housing assistance in 1987/88, however, also included assistance from the Housing Corporation of New Zealand (HCNZ) in the form of implicit rental and mortgage subsidies, as well as the Accommodation Benefit (the forerunner of the Accommodation Supplement) which was available to people who did not live in state-owned houses. The value of HCNZ subsidies was calculated by the Department of Statistics in their 1990 study, using information on market rentals and mortgage interest rates. In this paper, all housing expenditure is included with social welfare benefits, although it is separately identified in the detailed tables in Appendix 2.

3.3.2  Education

Government expenditure on education in 1997/98 was allocated to households in the following way: first, the national average expenditure per student for different education programmes was estimated; and second, these national average expenditures were allocated to HES households that included students attending the various programmes. For each of the major education programmes—early childhood, primary, secondary and tertiary education—average expenditure per student was calculated by dividing national expenditure by the number of students attending. These data were obtained from Ministry of Education publications. The HES itself records whether any household members were at school, or had attended an educational programme, in the previous 12 months. Expenditure on youth training and industry training programmes were allocated by demographic groups. Full details of the methodology are provided by Sutton (1999a).

For 1987/88 education expenditure, the Department of Statistics (1990) results were used, although these were reconciled to revised totals from the System of National Accounts (see Section 3.7.1). This earlier work used the same methodology as in 1997/98, differing only by allocating early childhood expenditure on the basis of age rather than actual participation.

3.3.3  Health

Government expenditure on health services in 1997/98 was allocated to households in the following way: first, the national average expenditure per person, in different categories and for different health services, was estimated; and second, these national average expenditures were allocated to HES households that included people in the various categories. Categories were defined by age, sex, and, depending on the service, either ethnicity or eligibility for a Community Services Card (CSC). So, for example, a 65-69 year old female Maori with a CSC would be allocated the national average health expenditure on people in this demographic category. Government health expenditure in 1997/98 was obtained from Ministry of Health publications. The calculation of national average expenditures was performed differently for each different type of health service, depending on what data were available. Full details of the methodology are provided by Sutton (1998, 1999b).

This method of allocating health expenditures by demographic groups, rather than by the individuals’ use of health services, is equivalent to allocating the cost of a group risk-related insurance premium. Since the actual use of publicly-funded health services is likely to be negatively correlated with income (Howden-Chapman and Tobias 2000), analyses by income decile may overstate the health benefits received by households in higher deciles and understate those received by households in lower deciles.

For 1987/88 health expenditure, the Department of Statistics (1990) results were used, although these were reconciled to revised totals from the System of National Accounts (see Section 3.7.1). This earlier work used a similar methodology to that used in 1997/98, but defined categories only by age and sex.