Household Incomes in New Zealand: The impact of the Market, Taxes and Government Spending, 1987/88-1997/98 (WP 04/20)

Abstract#

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How well have New Zealand households fared over a decade of extensive economic and social changes? This study compares household incomes in 1997/98 with household incomes in 1987/88, using the concept of “final income”. Final income is a measure of the income accruing to households after adjusting for payments to, and benefits from, central government, whether these benefits are in cash or in kind. In particular, receipt of government health and education services is counted as adding to a household’s income, and payment of consumption taxes is counted as taking away from a household’s income. In all income deciles, the real final incomes of households were, on average, at least maintained between 1987/88 and 1997/98 and in most cases increased. Government intervention, through taxes, cash benefits and social services, has acted to protect less well-off households over a period of upheaval in New Zealand.

Acknowledgements#

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We are grateful to a number of people who read and commented on versions of this paper and in particular to Bob Stephens, Roger Hurnard, John Creedy and Dean Hyslop. We are also indebted to Matthew Bell, Katy Henderson and Ivan Tuckwell from the Treasury, who performed the TAXMOD modelling for this study.

Statistics New Zealand kindly made available the documentation and statistical programmes for their 1990 study. Many of the staff at Statistics New Zealand, John Scott in particular, made helpful contributions.

Ron Crawford began this study and undertook it over a number of years while employed at the Treasury.

Disclaimer#

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The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the authors. They do not necessarily reflect the views of the New Zealand Treasury or the Ministry of Economic Development. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

1  Introduction#

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This study compares household incomes in 1997/98 with household incomes in 1987/88: two years separated by a decade of extensive economic and social changes. What distinguishes it from other New Zealand studies is the estimation of “final incomes”. A household’s final income is its income from wages, salaries and investments, plus the government benefits it receives either in cash or in kind, and minus the income and consumption taxes it pays. The main source of data for the study is Statistics New Zealand’s Household Economic Survey (HES).

Three main results are reported. Principally, the paper reports the amount of final income that different types of households received in 1997/98 compared to the amount these types of households received a decade earlier. In the body of the paper, household incomes are reported by decile of population, that is, for the least well-off 10% of the population (decile 1), the next most well-off 10% (decile 2), and so on up to decile 10. In addition, Appendix 2 reports household incomes in 1987/88 and 1997/98 by categories of households defined by composition and stage of the life-cycle.

Secondly, the paper reports the redistribution of income across different types of households. Redistribution occurs because some types of households pay more tax in a year than they receive in government benefits, while other households receive more in benefits than they pay in tax. Again, this effect is reported by deciles of income in the body of the paper and by household categories in Appendix 2. Finally, the paper looks at how the relative incomes of different deciles have changed between 1987/88 and 1997/98. Other studies have shown that household incomes in New Zealand became more unequally distributed over the 1980s and 1990s. This study considers whether, and to what extent, this has occurred when household income is defined using final income.

The paper is set out as follows. Section 2 contains a discussion of the measure of income used in the study; a summary of the economic, demographic and social policy changes over the 1980s and 1990s; and a discussion of other New Zealand studies of household incomes. The method by which the study was conducted follows in Section 3. The results of the study are presented in Section 4 and there is a discussion in Section 5.

2  Background#

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2.1  Measuring incomes#

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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#

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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

 

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

 

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.

2.3  Previous New Zealand studies#

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Studies of final household incomes, similar to this one, are regularly undertaken in some other countries including the United Kingdom (Lakin 2004), Australia (Australian Bureau of Statistics 2001) and the United States (DeNavas-Walt, Cleveland and Webster 2003). In contrast, there have been relatively few studies of final household incomes in New Zealand. The last were those undertaken by the Department of Statistics (1990), by the Income Distribution Group (1988) and by Brashares (1990), each studying the 1987/88 year. These three studies used a wide definition of final income, apportioning all government revenue and expenditure to households (see Section 3.5). Earlier in the 1980s, Snively (1986, 1988) pioneered the study of final household incomes in New Zealand.

No studies of final household incomes in New Zealand have been undertaken over the late 1980s and throughout the 1990s. Household income studies over this period have used one or more of the other definitions of income (see Section 2.1). The most extensive household-based studies have been conducted by Statistics New Zealand (1999), covering the period 1981/82 to 1995/96, and by Mowbray (2001), covering the period 1981/82 to 1997/98. Both studies use data from the HES and report changes in households’ market income, gross income, disposable income and equivalent disposable income. They find that the average household income, however defined, fell from the early 1980s to reach a low point in the early 1990s, and then recovered throughout the rest of the 1990s (Figure 3). Whichever definition is used, Mowbray finds that the average household income rose between 1987/88 and 1997/98—the period which the current study covers.

Figure 3 – Average household income, by different definitions of income, 1981/82 to 1997/98

 

Source: Mowbray (2001), Tables A5 and A10

The trends shown in Figure 3, however, disguise considerable changes in the distribution of income. Statistics New Zealand (1999) and Mowbray (2001) find that incomes, however defined, fell in most deciles between 1982 and the late 1990s. The notable exception was in decile 10, where incomes increased markedly (Figure 4). Mowbray finds that the average income in deciles 1, 8, 9 and 10 was higher in 1997/98 than it was in 1987/88.

Figure 4 – Average equivalent disposable income, by income decile, 1981/82 to 1997/98

 

Source: Mowbray (2001), Table A10.

Statistics New Zealand (1999) measures changes in the relative income levels of different deciles using Gini coefficients.[4] The Gini coefficient for equivalent disposable income and for market income increased markedly between 1985/86 and 1990/91, but not during other time periods. The late 1980s and early 1990s therefore appears to have been a time of increasing income inequality in New Zealand.

Two recent New Zealand studies have attempted to explain changes in the distribution of household income over the 1980s and 1990s, using data from the HES. Podder and Chatterjee (2002) look at equivalised gross household income between 1983/84 and 1995/96 by decomposing changes in the Gini coefficient. They show that a change in the distribution of earned income was the main contributor to increased income inequality over this period. Podder and Chatterjee consider that high unemployment, nominal interest rate rises, the introduction of GST and cuts in welfare benefits may have contributed to rising income inequality. Hyslop and Maré (2001) look at changes in gross household income between 1982/83 and 1997/98. They find that changes in the proportions of different household types account for between 10% and one-third of the increase in income inequality over this period, depending on the specific measure of inequality used. Changing socio-demographic attributes of households, such as changes in the age-mix and educational qualifications of household members, account for a similar fraction of the observed changes. Hyslop and Maré find that job losses had only modest effects on overall income inequality.

3  Methods#

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3.1  Introduction#

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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#

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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#

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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.

3.4  Taxation#

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On the basis of each person’s gross income in the survey year, TAXMOD calculated income tax liabilities and assigned these to households, also taking into account household composition and other available information. The amount of tax calculated by TAXMOD may, however, differ from the amount of tax that a household actually paid. One reason is that, for business and investment income, tax payments may have depended on income earned in past years as well as in the survey year.

The total consumption tax take, consisting principally of Goods and Services Tax (GST) and excise duties, was obtained from the System of National Accounts and allocated to households in proportion to their expenditure over the survey period. Excise duties were not allocated according to expenditure on specific products (alcohol, cigarettes, petrol, etc).[6]

These methods were applied to both the 1987/88 and 1997/98 data.

3.5  Government spending and taxes not included#

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This study allocates those government benefits and taxes that can reasonably be attributed to households. It does not attempt to allocate “non-social” government expenditure such as roading, defence and debt repayment to households; nor does it attempt to allocate company tax to households. Around three-quarters of tax revenue and two-thirds of government spending are included in the analysis, however, which means that, on average, households will be seen as paying more in attributable tax than they receive in attributable benefits. This is an approach which is common to many other studies of final household incomes.

There is a tradition of studies, however, which do attempt to allocate all government expenditure and all government revenue to households (eg, Gillespie 1965, Musgrave, Case and Leonard 1974, Ruggles and O'Higgins 1981). A number of these types of studies were conducted in New Zealand in the 1980s (eg, Snively 1986, Income Distribution Group 1988, Department of Statistics 1990).[7] Other studies are also differentiated by including local government taxes and expenditure in their analysis of final income (O'Higgins and Ruggles 1981) or by including other forms of non-cash income such as imputed rent to owner-occupiers (Smeeding, Saunders, Coder, Jenkins, Fritzell, Hagenaars, Hauser and Wolfson 1993, DeNavas-Walt et al 2003).

This study does not include these wider benefits and taxes, chiefly because there is no clear conceptual basis for allocating many types of benefits and taxes to individual households. In other cases, while there might be a conceptual basis for allocation there is no data available from the HES or other sources to enable this to happen. Some taxes and benefits also fall on people who do not live in private households, such as publicly-funded long-term residential care for the elderly.

3.6  Population estimates#

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The steps outlined above provide information on final incomes for households in the HES, but this information needs to be translated into estimates for the whole population of New Zealand. This translation requires weighting the different types of households in the survey to reflect their prevalence in the population. In preference to earlier weightings used in the HES and in TAXMOD, a new set of “integrated weights”, developed by Statistics New Zealand, was applied to both the 1987/88 and 1997/98 results. Integrated weighting is described in detail in Statistics New Zealand (2001b).[8]

Population estimates are subject to sampling errors but these have not been calculated for all of the results reported in this paper. Using replicated sampling techniques, TAXMOD was used to construct a selection of confidence intervals for estimates from the 1997/98 HES. As expected, this analysis suggests that more reliance can be placed on changes in broad summary measures than on changes in particular deciles or household types. Results indicating relatively small differences between deciles or household types need to be interpreted with caution.

3.7  Other adjustments#

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3.7.1  Consistency with the Crown accounts

All government expenditure and revenue data used in the study for both 1987/88 and 1997/98 were reconciled to the Crown Accounts Analysis produced by Statistics New Zealand as part of the New Zealand System of National Accounts. Across the different types of expenditure or taxes, relative allocations per household were pro-rated upwards or downwards to make the population totals equal the official national figures.

The HES is a survey of private households and excludes individuals in non-private dwellings. Expenditure and taxation, however, covers the whole population. Census data from 1986 and 2001 were used to allocate expenditure and taxes to individuals living in non-private dwellings, according to their age, income and assumed eligibility for government services. This expenditure and tax was subtracted from the national totals before the study results for private households were pro-rated.[9]

3.7.2  Price adjustments

In order to get an accurate comparison across time, all money figures were adjusted to the December quarter of 1997, using the All Groups Consumer Price Index. Income and expenditure in 1987/88 was inflated by a factor of 1.364.

3.8  Income deciles and equivalence scales#

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This study reports a number of results by income decile. A single ranking-and-dividing system is required so that “decile 3”, for example, refers to the same group of people and households, regardless of whether the analysis is of market income, government benefits, tax payments, gross income, disposable income or final income. For this purpose, the study used equivalent disposable income as the measure by which deciles were constructed. Disposable income is a household’s income from all sources after income tax has been deducted—it is a household’s “cash in hand”. Equivalising this income takes account of differences in the demands on households’ resources. This study uses the LIS(0.5) equivalence scale, which scales down household disposable income according to the square root of the number of individuals in the household, regardless of whether they are adults or children (Atkinson, Rainwater and Smeeding 1995).[10] Equivalent disposable income roughly corresponds to common ideas in the community about who is better off and worse off and is therefore a proxy for people’s level of welfare.

In constructing deciles of equivalent disposable income, households were weighted by their number of occupants, so that a household of six people “counts” six times as much as a single-person household. Individuals were ranked by their household’s income (where all members of a household have the same rank) and divided into ten even groups. Decile 1 therefore contains the least well-off 10% of the population and decile 10 contains the most well-off 10% of the population. Deciles of equivalised disposable income are used in all the tables and figures in the paper (apart from when calculating Gini coefficients in Table 3). Weighting households by size means that the economic welfare of each individual in society counts equally when measuring income distribution (Danziger and Taussig 1979). The alternative, which is to give each household equal weight, reveals something about the economic differences between households but begs the question of the number of people affected by those differences.[11] Weighting households by size also makes for consistent comparisons over time, since the size of households in different deciles has changed between 1987/88 and 1997/98 (see Appendix Tables 6 and 7).

Equivalised income is used only to rank people for the purposes of creating deciles. All of the monetary values shown in this paper are actual dollars and are not equivalised. This is because the LIS(0.5), and other equivalence scales, have been designed to adjust for the demands on households’ disposable incomes—the housing, clothing, food, and other needs of different types of households. Households’ disposable incomes do not have to pay for publicly-funded education and health services, and therefore the education and medical needs of different types of households are not (at least in theory) reflected in ordinary equivalence scales. Therefore it may not be appropriate to use ordinary equivalence scales to adjust household incomes that include notional income from the receipt of government education and health benefits (Radner 1997). In other words, just as the relative incomes of different groups of households change when health and education benefits are included in the definition of income, the relative needs of different groups of households also change and equivalence scales should change. It is beyond the capacity of this study to develop an equivalence scale for final income, and therefore the dollar figures for income are left unadjusted for household needs.[12] However, while household incomes are not equivalised, Appendix 2 presents the results of the study by various different categories of households at different stages of the life-cycle, and thus provides a partial equivalisation analysis.

Other final income studies use a variety of ways of weighting, measuring and rank-ordering household incomes. The various possibilities are discussed in O'Higgins, Schmaus and Stephenson (1989). Ranking according to equivalised disposable income, but reporting actual final income, as this study does, follows the same methodology as the annual studies conducted in the United Kingdom by the Office for National Statistics (Lakin 2004).

3.9  Household types#

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Appendix 2 contains a series of tables showing the components of final household income by categories of households. These “life-cycle” household types are those previously included in the Department of Statistics (1990) study with minor changes to reflect an increase in the age of eligibility for Superannuation: the 1987/88 analyses refer to people aged 60 or more but this has been changed to age 63 or more in the 1997/98 analyses. In this classification, “other family group” refers to households which include a family together with one or more other people, and “non-family household” refers to households in which none of the occupants of the household are related to each other.[13] “Children” means dependent children who are under 18 years of age, are not receiving a benefit, and are not in full-time work. The number of households in each category in 1987/88 and 1997/98 is shown in Appendix Tables 2 and 3.

 

 

 

 

4  Results#

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4.1  Introduction#

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This study estimates the average final incomes of households in different deciles, measured in 1987/88 and in 1997/98.[14] A household’s final income is composed of its market income, plus the government benefits it receives either in cash or in kind, and minus the tax it pays. The following sections therefore look in turn at:

• changes in the market incomes of households in different deciles (Section 4.2);
• changes in the government social benefits received by households in different deciles (Section 4.3), where these are broken down into changes in cash benefits, education benefits and health benefits;
• changes in the tax paid by households in different deciles (Section 4.4), where this is broken down into changes in income tax and consumption tax payments; and
• changes in the final incomes of households in different deciles (Section 4.5).

Some comment is made on possible reasons for these changes, but a full decomposition or explanation of trends in household income is beyond the scope of this paper.

Section 4.6 looks specifically at the redistribution of income from households in higher deciles to households in lower deciles, and how this has changed between 1987/88 and 1997/98. Finally, Section 4.7 looks at whether the distribution of final income has become more or less unequal from 1987/88 to 1997/98. Appendix 2 contains the data for the figures presented in the following sections and also contains analyses of income, benefit and tax changes by household type.

4.2  Market incomes#

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Households report a wide range of market income in the HES, from negative incomes (reflecting losses by sole traders and partnerships) through the very low market incomes of beneficiaries to household incomes of well over $200,000 per year. The lowest deciles of household income are characterised by a relatively high number of beneficiaries and superannuitants, and relatively few wage and salary earners. Most of the households in the bottom two deciles are either retired people, especially those living alone, or sole parents and their children. In addition, a significant proportion of people in decile 1 are self-employed, a few of whom have large negative incomes. Younger couples with children tend to be in the middle deciles. Older couples with children, as well as working-age couples without children, tend to be in the higher income deciles. These patterns are shown in Appendix Tables 6 and 7.

Between 1987/88 and 1997/98, average market incomes rose in the higher deciles and fell in the lower deciles, with the exception of decile 1, where the average market income was negative in 1987/88 (Figure 5, I). Notably, average market incomes in decile 10 rose by 29% between 1987/88 and 1997/98, while average market incomes in decile 2 fell by 38%.

Households in decile 10 took a larger share of total market income in 1997/98 than they did a decade earlier: in 1997/98 a third of the total market income in New Zealand was earned by the top 10% of earners (Figure 5, II). No other deciles increased their share of total market income, with the exception of decile 1. Results for decile 1 should be interpreted with care, since the people in this decile are a heterogeneous group including self-employed people reporting business losses (but who may not be suffering hardship) and people receiving benefits and Superannuation who have no, or very little, other income.

Figure 5 – Market income by income decile, 1987/88 and 1997/98

I. Average market income ($)

 

II.  Share of total market income (%)

 

Explaining changes in market income is not easy since a wide range of social, demographic and economic trends can affect the composition of the deciles. These include, for example, changes in population characteristics such as the age structure of the population, proportions of different household types in the population (eg, the proportion headed by a single parent), and the proportion of people with educational qualifications. Incomes will also be affected by changes in the labour market returns to these population characteristics, such as the wage rate associated with having a university degree or having School Certificate. O'Dea (2000) discusses these and other drivers of change in income and income dispersion in New Zealand.

4.3  Receipt of government benefits#

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4.3.1  Social welfare transfers, Superannuation and housing assistance

Cash benefits were more concentrated amongst lower-income households in 1997/98 than in 1987/88, as Figure 6 shows. Households in the lowest five deciles received more on average in 1997/98 than their counterparts did in 1987/88, and households in the highest deciles received less. Changes in the receipt of cash benefits will have been affected by, amongst other things, the number of people eligible for assistance, the rate of benefits, the targeting of these benefits, and changes in population characteristics. For example, there was an increase over this period in the proportion of the population receiving the Unemployment Benefit, the Domestic Purposes Benefit and other taxable benefits, and the people receiving these benefits were concentrated in the lower deciles. Targeting of payments to families was also intensified in this period, with the abolition of the universal Family Benefit and the expansion of the income-tested Family Support Tax Credit.

Figure 6 – Average receipt of cash benefits, by income decile, 1987/88 and 1997/98

 

 

Note: Cash benefits comprise social welfare transfers, Superannuation and housing assistance.

4.3.2  Education

There is less of a clear pattern to the receipt of education benefits across deciles, as Figure 7 shows. This is largely because all households with children benefit from education spending and households with children are distributed across the income deciles (see Appendix Tables 4 and 5). Average receipt of education benefits increased between 1987/88 and 1997/98 in all of the lower deciles, but not in some of the higher deciles.

Figure 7 – Average receipt of education benefits, by income decile, 1987/88 and 1997/98

 

 

Some of this change in receipt of benefits will be due to changes in the composition of deciles and in particular the proportion of each decile constituted by households with children or households containing tertiary students. This is accounted for in Figure 8, which shows the receipt of education benefits per person aged 3-22 years. Average benefit per person was more even in 1997/98 than it was a decade earlier, with significant increases in the lower deciles, and in decile 8. These changes may in part be due to strong increases in tertiary education participation, particularly amongst people from lower-income families, together with the targeting of student support on the basis of family income. Changes are difficult to interpret by decile, however, because students from reasonably well-off families may nevertheless be flatting in low-income, “non-family” households. For this household type, there was a 43% increase in real average education expenditures (Appendix Tables 23 and 29).

Figure 8 – Receipt of education benefits per occupant aged between 3 and 22 years, by income decile, 1987/88 and 1997/98

 

 

Government spending on secondary education per household fell in most deciles between 1987/88 and 1997/98, reflecting a decline in the overall number of secondary students. On the other hand, early childhood education expenditure grew markedly, particularly for households in the lower half of the distribution, but this spending accounts for only a small proportion of overall education spending (Appendix Tables 9 and 16).

4.3.3  Health

Health benefits, like cash benefits, were more concentrated amongst lower-income households in 1997/98 than in 1987/88 (Figure 9). In particular, younger households with children (who tend to be located in the lower income deciles) appear to have markedly increased their receipt of health benefits over this decade, while households without children have in some cases reduced their average receipt of health benefits (Appendix Tables 24 and 30). In part, this trend is a result of differences in methodology between the current study, which allocates maternity expenditure to infants, and the Department of Statistics (1990) study, which allocated maternity expenditure to women of child-bearing age. This is unlikely to explain all of the differences between 1987/88 and 1997/98, however, since maternity expenditure is only a small part of total health expenditure.

Increased targeting of some health expenditures may have contributed to the trend shown in Figure 9. Government funding for general practitioner visits, pharmaceuticals, and some other health services became more targeted over the late 1980s and early 1990s through the use of the Community Services Card, held by low-income families and individuals. Population ageing may also have contributed, since elderly people attract much higher rates of health expenditure than younger people and are also concentrated in the lower half of the income distribution.

Figure 9 – Average receipt of health benefits, by income decile, 1987/88 and 1997/98

 

 

4.3.4  Total government benefits

Adding together cash benefits (Figure 6), education benefits (Figure 7) and health benefits (Figure 9) gives total government benefits by decile, which are shown in Figure 10. Average receipt of government benefits increased in the bottom five deciles and decreased in the top five deciles (Figure 10, I). The greatest percentage increase was in decile 3 (a 24% increase) and the greatest percentage decrease was in decile 10 (a 29% decrease). The bottom five deciles also increased their share of total social policy expenditure between 1987/88 and 1997/98 (Figure 10, II).

Figure 10 – Receipt of government benefits, by income decile, 1987/88 and 1997/98

I.  Average receipt of government benefits ($)

 

II.  Share of total government benefits (%)

 

4.4  Taxation#

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4.4.1  Income tax

Changes in tax payments result from changes in income and changes in tax rates. Figure 11 shows that in all deciles, with the exception of decile 10, average income tax payments were lower in 1997/98 than they were a decade earlier. This reflects a series of reductions in income tax rates, and changes in thresholds, over the period covered by the study. Table 1 shows the income tax rates and thresholds in 1986/87 and in 1997/98. Despite reductions in the top income tax rate, households in decile 10 paid more income tax in 1997/98 because they received considerably more gross (taxable) income in this year than comparable households did in 1987/88 (see Appendix Figure 1).

Figure 11 – Average income tax payments, by income decile, 1987/88 and 1997/98

 

 

Sources: Department of Statistics (1987) and Statistics New Zealand (1998b). Income thresholds have been adjusted for inflation. Tax rates are for the full year.

4.4.2  Consumption tax

In all deciles, with the exception of decile 2, average consumption tax payments were higher in 1997/98 than they were a decade earlier (Figure 12). This reflects an increase in GST from 10% to 12.5% in 1989 and, to a lesser degree, increases in tobacco, alcohol and petrol excises. The increase in consumption tax payments was highest in decile 10 because disposable income in this decile was much greater in 1997/98 than it was in 1987/88, and households therefore had more money to spend on goods and services (see Appendix Figure 2). Conversely, disposable income in decile 2 was lower in 1997/98 than it was in 1987/8, and the average consumption tax payment was about the same in both years.

Figure 12 – Average consumption tax payments, by income decile, 1987/88 and 1997/98

 

 

4.4.3  Tax payments in total

Adding together income tax payments (Figure 11) and consumption tax payments (Figure 12) gives total tax payments by decile, which are shown in Figure 13. In deciles 1 to 9, households paid less tax in 1997/98 than comparable households did a decade earlier. In decile 10, tax payments increased (Figure 13, I). Changes in the share of tax follows a similar pattern, with households in the top decile paying 30% of total taxes in 1997/98 compared to 24% in 1987/88 (Figure 13, II).

Figure 13 – Tax payments, by income decile, 1987/88 and 1997/98

I. Average tax payments ($)

 

II. Share of total tax payments (%)

 

4.5  Final incomes#

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Adding together market income (Figure 5) and total government benefits (Figure 10), then taking away total tax payments (Figure 13), gives final income by decile, which is shown in Figure 14. In deciles 2, 4, 5, and 7, average final income was about the same in 1997/98 as it was in 1987/88.[15] In all other deciles, average final income was higher in 1997/98. In deciles 1 and 10, households experienced the largest growth in final incomes, increasing by 46% and 34% respectively between 1987/88 and 1997/98. These deciles were also the only ones to increase their share of total final income (Figure 14, II). For the reasons given in Section 4.2, however, results for decile 1 should be treated with some caution.

Figure 14 – Final income, by income decile, 1987/88 and 1997/98

I.  Average final income ($)

 

II.  Share of total final income (%)

 

4.6  Redistribution of income#

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Redistribution occurs because better-off households pay more tax than poorer households, receive less of their income as cash benefits, and tend to use government services, particularly health services, to a lesser extent. Taking total tax payments (Figure 13) away from total government benefits (Figure 10) reveals the extent of this redistribution, which is shown in Figure 15. In other words, Figure 15 shows the net effect of households’ payments to, and benefits from, central government, whether these benefits are in cash or in kind.

Figure 15 – Average receipt of government benefits minus tax payments, by income decile, 1987/88 and 1997/98

 

 

In 1997/98, households in deciles 1 to 5 received more in government benefits, on average, than they paid in tax. This net “gain” from redistribution also increased from 1987/88 to 1997/98. On the other hand, households in deciles 6 to 10 received less in government benefits, on average, than they paid in tax. For deciles 6 to 9, this net “loss” from redistribution was about the same in 1997/98 as it was in 1987/88. For households in decile 10, however, the net “loss” was markedly greater in 1997/98. Overall, the average household, across all deciles, paid slightly more in tax than it received in cash or in-kind benefits. This average “overpayment”, which is an artefact of the study methodology (see Section 3.5), was $4,751 in 1987/88 and $3,770 in 1997/98.

Figure 16 depicts this redistribution in a slightly different way by showing, for both 1987/88 and 1997/98, how market income is modified by income tax payments and receipt of cash benefits to produce disposable income, and then by consumption tax payments and receipt of other government benefits to produce final income. This shows the scale of redistribution relative to market incomes, which for many deciles is considerable. The final income of a household in decile 10, for example, is on average a third lower than its market income. The final income of a household in decile 1, on the other hand, is on average nine times higher than its market income. For deciles 5 and 6, in the middle of the distribution, market income and final income are very similar, showing that these households pay as much in tax, on average, as they receive in government benefits. Individual households within each of these deciles, however, will differ in the extent to which they pay taxes and receive government benefits, particularly those benefits which are not directly linked to a household’s income, such as education and health services.

Figure 16 – Redistribution of income, by income decile, 1987/88 and 1997/98

I.  Redistribution in 1987/88

 

II.  Redistribution in 1997/98

 

Table 2 shows final income as a proportion of market income, for each income decile and in both years. In all deciles this proportion was at least as high or higher in 1997/98 as in 1987/88, and strongly so in the first five deciles. 

4.7  Income inequality#

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Each decile’s share of total market, disposable and final income, in both 1987/88 and 1997/98, is shown in Table 3. This Table also shows the Gini coefficients associated with each measure of income. Previous New Zealand studies have established that household market income, or disposable income, became more unequally distributed over the 1980s and 1990s. Table 3 adds two findings. Firstly, it shows that final income is more equally distributed than disposable income (the Gini for final income was lower than the Gini for disposable income in both 1987/88 and in 1997/98). Secondly, it shows that final household income became more unequally distributed over this period (the Gini for final income was higher in 1997/98 than it was in 1987/88). It is notable, however, that the growth in inequality of final incomes is relatively small—a 0.023 difference in Gini coefficients between 1987/88 and 1997/98—and is considerably less than the growth in inequality of either market incomes or of final incomes.[16]

^a These are deciles of equivalent disposable income, as used in the other tables and figures in this paper.

^b In calculating Gini coefficients, individuals have been re-ranked for each different definition of income, that is, they have been ranked by market income for the market income Gini, and so on. They have not been ranked by equivalent disposable income.

5  Discussion#

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The starting point in this paper, looking at final household incomes in New Zealand, is to consider market incomes, and then to see how the tax and benefit system redistributes this income. Market incomes do not, however, represent a “natural state” of income which would exist if there were no taxes or government benefits. The existence of taxes and benefits clearly affects people’s participation in the workforce and the amount of money they are prepared to earn. Market incomes differ significantly across households, for a variety of reasons. Income differences are to a large extent due to the changing patterns of earnings over the life-cycle. Individuals tend to earn more as they get older and gain more work experience. Couples who both work can bring in a large annual income, although this is significantly reduced if one leaves work to look after young children. On retirement, market income drops considerably although many older people still have income from investments. Some people inherit wealth, from which they can gain income, and inherit characteristics, such as intelligence, dedication and perseverance, which make them more productive and better-paid workers. Others choose to develop their skills, work long hours, take risks, or do unpleasant work for greater pay. Some people suffer ill-fortune and others in contrast are just plain lucky.

This study found, as other New Zealand studies have also found, that market income increased, on average, for households in the top deciles, especially in decile 10, between 1987/88 and 1997/98. Market income decreased for households in most of the lower deciles. As discussed in Section 4.2, these trends are not easy to explain, and the role of government policy in influencing them is unclear. Since household market income varies with age, marital status and family formation, for example, demographic and social trends will influence the distribution of income in New Zealand. Some of these trends, such as the ageing of the population, are clearly independent of any policy reforms of the time. Others, such as the number of sole parent families, or trends in unemployment, might be directly or indirectly influenced by changes in government policy. The government might also have an influence on the returns to some population characteristics, for example by stipulating a minimum wage, but no influence on many others. Changes in tax policy, particularly the difference between the top income tax rate and the company tax rate, might have an effect on how much market income was reported by households, especially households at the upper end of the income distribution.

The key finding which this study reaches, however, is that government intervention—through taxes and social expenditure—has acted to protect less well-off households by increasing their net government benefits to counteract declining market incomes. Between 1987/88 and 1997/98, redistribution became more favourable toward households in the low income deciles. A part of this increase in redistribution is automatic—households earning more income pay more tax, for example, but are unlikely to receive more in government benefits—but a part of the increase is also likely to be a result of specific government policy changes. As a result of this change in redistribution, real incomes were maintained for all income deciles between 1987/88 and 1997/98. While there will undoubtedly have been individual households which suffered financial hardship and declining circumstances, all deciles were, on average, doing at least as well in 1997/98 as they were ten years previously, and in most cases were doing better.

As measured by Gini coefficients, final household income was more unequally distributed in 1997/98 than it was in 1987/88. This growth in inequality of final incomes was relatively small, however, and considerably less than the growth in inequality of market incomes or disposable incomes. This paper makes no judgement about whether, or to what extent, increases in income inequality are desirable, tolerable or otherwise.

Other New Zealand studies have examined changes in household income during the 1980s and 1990s, although none has used final income as a measure. What does the estimation of final income add to what is already known? Estimating final income, rather than just disposable income, reveals further redistribution from more well-off households to less well-off households. This redistribution is especially evident in 1997/98. In all deciles, the average final income was at least maintained between 1987/88 and 1997/98, but in some deciles the average disposable income fell (see Appendix Table 2). Final incomes are more equally distributed than disposable incomes. Using final income as the measure of household income therefore provides a richer picture of incomes and income distribution in New Zealand. It is arguably a less intuitive measure than disposable income, however, not least because households which are heavy users of publicly-funded education and health services are not obviously better off than households which are not (household members are likely to be sicker, for a start).[17]

More generally, this study is in the broad tradition of studies which measure incomes, by decile, over a period of time and attempt to make sense of the observed changes. It is worth considering what these types of studies do and do not tell us. Firstly, households in each income decile are not homogeneous with regard to their circumstances, and are likely to vary widely in terms of household expenses and household wealth. In the lower deciles of income, for example, retired people who have paid off their home and accumulated savings are likely to live much more comfortably than sole parent families with young children. Incomes are only one element of people’s material standard of living, which in turn is only one element of their overall standard of living or quality of life.

Secondly, studies compare two or more cross-sectional “snapshots” of incomes and therefore cannot show how the incomes of particular individuals or households change over time. The distribution of people’s lifetime income is more equal than the distribution of personal income at a given point in time (Creedy 1997), and this is likely to be the case for household income as well. Since the current study only compares a snapshot of incomes in 1987/88 with another snapshot in 1997/98 it is not possible to say whether individual households were better or worse off in 1997/98 than they were in 1987/88. Over this ten-year period, individual households may have moved between income deciles several times, as their circumstances change. At one point in time a household may be a net “winner” from fiscal policy and at another, a net “loser”. How these benefits and losses accumulate over the life cycle is only loosely covered in this study through the analysis of households by life-cycle stages which are presented in Appendix 2.[18]

Thirdly, studies of income changes between two points in time will show different results depending on exactly which two points are chosen. The New Zealand economy was deep in recession in 1992 (Figure 1) and if the second reference point had been 1992/93, rather than 1997/98, the results may well have shown a reduction in final incomes for all deciles. On the other hand, if the 2000/01 HES had been used as the second year of the study,[19] the results may well have shown a strong increase in final incomes for all deciles, given the strong economic growth which has occurred in New Zealand since late 1999.

Finally, it is easy to speculate (as this paper does) on the reasons for observed trends in household income and to link these trends to particular government policies. It is quite another matter, though, to demonstrate that these really are major contributing factors. Little rigorous analysis on the reasons for income changes has been undertaken in New Zealand and what has been done does not always accord with commonly-held beliefs. Hyslop and Maré (2001) show, for example, that job losses in the late 1980s and early 1990s, although substantial, had only a small net effect on overall income inequality. Income studies by decile also do not reveal what would happen if tax or expenditure policies changed in the future, although they may allow some “first-round” predictions to be made. That is, such studies do not predict longer-term behavioural responses to government fiscal policy. For example, if the government reduced the level of New Zealand Superannuation paid to elderly people we would not simply find that the incomes of older people declined, but rather that, after a period of adjustment, older people might stay in the workforce longer, earning more income, or save more during their working lives to give themselves more investment income in their retirement.[20]

These considerations should be borne in mind when interpreting the results of this study, and others like it. For example, it may or may not be true, as some commentators assert, that “the rich are getting richer”, but this study cannot prove or disprove this assertion because it does not track individual households over time. Many of the households who were in the top decile in 1987/88 will be in lower deciles a decade on (as people retire, for example) and, similarly, some households which were in low income deciles will be in deciles 9 or 10 in 1997/98. What the study does show is that the top 10% of households in 1997/98 had higher final incomes, on average, than the top 10% of households in 1987/88, but this is a slightly different finding. Similarly, the study shows that, on average, final household incomes in the lowest income deciles were maintained over the decade, but this does not reveal whether the proportion of the population facing genuine hardship has grown or diminished. The contribution of this study is to show that redistribution through taxes, cash benefits and social services has protected the position of less well-off households in New Zealand over a decade of extensive policy reforms and significant economic fluctuations.

References#

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Mowbray, Mary (2001) "Distribution and disparity: New Zealand household incomes." Wellington, Ministry of Social Policy.

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Appendix 1  Gross income and disposable income#

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Two other commonly-reported measures of household income can be calculated in this study. Gross income is the cash income that households receive from all sources, namely their market income plus any cash benefits they receive from the government in the form of Superannuation and social welfare benefits. Appendix Figure 1 shows that gross income declined, on average, for households in deciles 2 to 7, but increased, in particular, for households in decile 1 and decile 10.

Appendix Figure 1 – Average gross income by income decile, 1987/88 and 1997/98

 

 

Disposable income is what households receive in their hands to spend on goods and services, namely their gross income minus the tax they pay on their various sources of income. This is shown in Appendix Figure 2. Households in most, but not all, deciles experienced an increase in disposable income, on average, between 1987/88 and 1997/98.

Appendix Figure 2 – Average disposable income, by income decile, 1987/88 and 1997/98

 

 

Mowbray (2001) also calculates household disposable incomes by decile for 1987/88 and 1997/98, based on the HES, and it is a useful check on the results of this study to compare them with the corresponding figures from Mowbray. The main differences between the studies are that Mowbray equivalises income and uses different weightings. Her results are shown in Appendix Figure 3. These show a very similar pattern to the results in Appendix Figure 2.

Appendix Figure 3 – Average equivalent disposable income, by income decile, 1987/88 and 1997/98, from Mowbray

 

Source: Mowbray (2001), Table A10.

Appendix 2  Detailed tables#

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The deciles referred to in the following tables are deciles of equivalent disposable income, and are constructed to contain equal numbers of individuals, not equal numbers of households (see Section 3.8). Households are those in private dwellings and do not include institutions such as student hostels, army bases and residential homes for the elderly (see Section 3.2). Household types are discussed in Section 3.9.

Characteristics of households and deciles#

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Income tables by decile, 1987/88#

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All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

Income tables by decile, 1997/98#

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All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

Income tables by household type, 1987/88#

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All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

Income tables by household type, 1997/98#

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All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.

All figures reported in this table are $1997 dollars per household per year.