Of all the organisations that might have become champions of the welfare state, it's Treasury that has shown why we need it -- and why it is at risk

Last week Treasury released work on income and poverty that it commissioned from the University of Otago. For the first time in New Zealand we have a picture of how incomes change, how some people see their lives improving and how persistent low income is pushing others into poverty. And it’s this richer picture that tells us why the first Labour government’s welfare state is working and why National’s reforms of it have been so popular.

Ironically, the good news comes from a graphic about long term low income increasing poverty. The graph on the bottom of page 3 shows the proportion suffering deprivation by the number of years they had a low income. In the jargon of the research, individuals have a low income when they earn less than 60% of pre-tax median income (after adjusting for family size), and deprivation is not being able to get the necessities of life.

As you would expect, the longer people have a low income, the more likely it is they will struggle to get the necessities. But here’s the interesting thing: two thirds of people who go through seven years of low income do not suffer deprivation.

In the imperfect, messy world where imperfect, messy policies attempt to help real people, this is an stunning success. If you don’t believe it, think for a moment what the situation would have been prior to Savage’s welfare state. Could anyone have gone seven years with a low income and still not be in poverty?

Being Treasury, the emphasis is on how “modest” the link is between low income and deprivation, downplaying how this has been achieved. For those who think the necessities of life should be possible whatever a person’s income -- which is most New Zealanders -- this is something to build on. The welfare state has done its job for the majority, but what about the rest?

This is where another Treasury graphic tells us about the risk to the system. The picture at the top of page 2 shows how relative incomes changed across the whole of society over those seven years. The left hand box colour codes people by their relative income at the start. The right hand box is what would have happened if there had been complete relative income mobility. The middle shows how incomes actually changed.

What strikes you at first is how much change there was. Only a quarter of the people at the very bottom of the income scale were still there at the end, and more than half of those with the lowest income at the end were not in the lowest 30% at the beginning. There is not so much movement at the top, but for most people in New Zealand the experience of low income is transitory. If you read deeper in the paper, you find most people on a low income saw increases in their income even after inflation is taken into account, and of all New Zealanders, they saw the greatest improvements in income.

The picture is not all rosy. Look again at the middle box and it is clear those with the lowest incomes at the beginning (red, orange and yellow) are still most likely to have the lowest incomes at the end. Likewise, the top 30% are still most likely to be at the top after seven years. Income mobility, yes; equality of opportunity, no.

Nevertheless, this tells us why the political economy of the welfare system favours the right. Most people, most of the time, do not feel trapped by their current situation. For most people on the lowest incomes, the most likely experience is an improvement in circumstances. For those experiencing these improvements, the scale of expenditure of benefits is a mystery – If I can do it, why can’t they...?

This is not about selfishness. It is not kicking the dust from the heels of people like yourself. In fact, a sense of social solidarity is going to work against the welfare state when you and most of the people like yourself are doing better.

What emerges from this report is how fragile the successes of the welfare state are. The system provides protection for most of the people who need it, but most people will experience opportunity and improvement. The last election suggests those seeing improvements are no longer sure the protections are for them.

 

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