Where have all the tax-free thresholds and UBIs gone? Our politicians are quite right to be concerned that living costs are rising more for those on lower incomes; But how do we improve living standards? Reducing costs is tough so let's look at incomes

By Alex Tarrant

Those blasted cigarettes.

A thorn in the side of lower-income households as they face a greater increase in the cost of living than income groups above them, due to rising smokes prices.

Those blasted landlords.

Rent rises impact lower income households more than those above them.

Those blasted petrol prices.

A cost lower-income households can’t avoid. And when prices rise, again this affects them the most.

Stats NZ last week released a set of figures detailing living costs faced by parts of society, based on income levels:

Beneficiaries experienced the highest inflation in the March 2017 quarter, Stats NZ said today. Their overall costs rose 1.4 percent, almost three times the rate of inflation experienced by the biggest spenders group (up 0.5 percent).

"Higher costs for cigarettes and tobacco had a greater effect on beneficiaries. About 5 percent of their spending went up in smoke, proportionally more than most other types of households spent," consumer prices acting manager Nicola Growden said.

Higher rents, which make up one-third of their total spending, also had a greater effect on beneficiaries.

Inflation for households with high spending rose the least (up 0.5 percent), with the biggest impact coming from higher petrol prices. The fall in international air fares and mortgage interest rates in the quarter dampened overall inflation rise of high-spending households.

Political reactions quite rightly expressed concern that the cost of living rose more for beneficiaries and lower-income households in the March quarter than it did for higher-income groups.

We’re told that only a vote one way will mean better living standards for those earning the least. There are two ways to do this: Raise their incomes, or reduce the costs they face.

Labour has been attracted by the relatively new Stats NZ series, titled the Household Living-costs Price Index (HLPI). The series of HLPIs measure typical price inflation faced by 13 income groups.

Different weightings are given to costs for goods and services faced by each group, based on spending patterns.

For example, cigarettes and rents pose greater relative costs to beneficiaries and those on lower incomes. As you go up the ladder, higher income groups are faced more with the costs of package holidays and mortgage interest rates.

One idea being considered by Labour is that government welfare payments, like unemployment and disability benefits, are indexed to certain HLPI branches each year rather than the economy-wide Consumers Price Index (CPI).

Cost pressures

It seems like a fair call to ask the MSD to consider this. But raising benefits to cover rising costs effectively defeats the idea of boosting living standards.

So, let’s look at whether there could be at least a partial focus on improving living standards at the bottom of the income scale by removing cost pressures.

Rents, grocery food, household energy, petrol and cigarettes: The five highest weighted costs faced by beneficiary households, according to the HLPI series. They make up for 59% of the HLPI beneficiary weightings.

And for the lowest-income households (ie the ones just above beneficiaries), the weightings are largely the same: Rent, grocery food, petrol, household energy, and telecommunication services. (Cigarettes are only 12th!) These top five make up only 49% of the weightings.

On rents, Labour has committed to building tens of thousands more houses over the next decade and providing more social housing for those on the bottom rungs of the income ladder.

Andrew Little has even said he wants house prices to stay steady while that happens – so housing costs – rents in the case of beneficiary and low-income households – shouldn’t rise from here on. However, reducing property investors’ abilities to achieve capital gains might mean they refocus on rental yields. A possible sting in the tail there, at least for a few years.

On food and petrol, one roadblock is that it can get quite tough arguing for lower import prices while at the same time asking for a lower exchange rate.

On household energy, research shows that government-funded insulation schemes are a help to lower-income households in terms of health. However, there is a tendency for them to keep spending the same amount on heating and have warmer homes once insulation is put in.

Though the energy bill may not reduce here, the potential longer-term health benefits should be considered. It’s something that should be supported – living standards will rise.

So where might living cost savings come from?

For beneficiary households, one of the top five remains: Beneficiary households unfortunately have a higher living cost weighting (about 5%) towards cigarettes and tobacco than the income groups above them.

Now, don’t laugh, but Labour and National have signed up to ensure a smoke-free New Zealand by 2025. This means we shouldn’t be needing the cigarette category in the HLPIs from then on. Or in the CPI for that matter.

How are we going to reach that goal though? Well, part of it will most certainly be increasing prices for cigarettes. Cost pressures are likely to continue there for the next eight years (at least – let’s not forget that Smoke Free 2025 is a political promise, an aspiration…).

For low-income households (the category above beneficiaries), the fifth category is telecommunication services. Yes, we are getting more data for our buck.

But if you include extra subgroups to take ‘Income Quintile 1’ up to the Beneficiaries’ 59% of weightings, you’re including insurance and property rates. I can’t see many savings coming from there in the next few years.

I get it – it’s hard to find cost savings

So, if it’s tough finding cost savings to help improve living standards, we must turn to the other side of the ledger: How do you improve incomes at the bottom of the income ladder, while encouraging beneficiaries into work (ie you’re not just promising to always raise benefit rates by more than the cost of living)?

One idea previously floated by the Labour Party at a previous election was tax-free thresholds – you don’t start paying tax until your income hits $X thousand. It is now an ex-policy.

Another is a universal basic income. There was some excitement last year that the Labour Party might be looking at this in terms of policy when it was floated during Grant Robertson’s Future of Work conferences.

Andrew Little did a John Key though. When the poll numbers looked like they were heading down partly due to the public discussion around UBI, it was made clear that this wasn’t a policy option. Much easier to drop it than explain it.

Labour won’t be going into the election with a tax policy. They’ve lost too many elections because of the difficulties inherent in communicating sound tax policy to the electorate. It’s much easier to say ‘build more bloody houses’ and ‘the Reserve Bank will help create jobs’ than explaining why having a proper capital gains tax levels the playing field and how a UBI works.

On a political level, I don’t blame them. But that still leaves the problem: where will change come from regarding this kind of policy reaction?

Well, there’s some good news. Labour Party policy shouldn’t be taken on its own nowadays. We’ve been told that the Green Party will be the first to receive a phone call from Andrew Little, even if they are trounced by New Zealand First.

And either way, it’s looking like all three parties will be required for a Labour-led majority government post-election if it were to come to that.

The Greens are yet to release their detailed tax and economic policies. But they should be encouraged to run again with their previous cause for a tax-free threshold.

And they should be encouraged to push this policy when it comes to coalition negotiations. Settling for a promise of yet another Tax Working Group in three years’ time will not cut it.

That’s at least more likely than Gareth Morgan’s lot having the balance of power to demand a UBI.