Let's turn the clock back three years, to 1995. Imagine that the Minister of Finance, wanting to look good before National's relatively affluent constituency in election year, announces a new targeted benefit. For want of a better name we'll simply call it the "New Benefit".

The Minister of Finance announces that the New Benefit that will be implemented in two stages, one before the 1996 election and one after. The value of the New Benefit is announced as being $45 dollars per week. All persons grossing $38,000 or more per annum will receive the New Benefit. Persons grossing less than $38,000 but more than $9,500 will receive a partial New Benefit.

For annual incomes between $38,000 and $30,875, the New Benefit will be deducted at 12 cents in the dollar, meaning that, a person on $37,000 would get a New Benefit of $42.70 and a person on $30,875 will get $28.80. For incomes between $30,875 and $9,500, the New Benefit will be deducted at 7 cents in the dollar.

People receiving less than $9,500 gross per annum will be ineligible for the New Benefit.

Would the people of New Zealand have accepted the New Benefit, targeted in favour of the better off and denied to those on the lowest incomes, as a legitimate addition to other benefits? Improbably as it may seem, the answer is yes.

We accepted the New Benefit, because it was called neither "New Benefit" nor "Middle Class Benefit". We accepted it because it was called "Tax Cut". When it comes to paying benefits, the name given to the benefit is all important.

The New Benefit was given other names. Respected journalists called it "a social dividend of sorts" (Warren Berryman) or "the long awaited social dividend" (Jane Clifton). Reserve Bank Governor Don Brash called it a "growth dividend". These names are all misleading. It was nothing less than a new, targeted benefit.

It is particularly useful to recall this event in our recent history, because Gareth Morgan (eg Herald, October 6) and others are embarking on a crusade against middle-class benefits, while at the same time advocating middle-class benefits by another name.

Their argument uses two very different sets of imagery. The image of the Hikoi of Hope and poor people with their hands out for charity is the picture Morgan paints as a mental picture of a "benefit".

On the other hand, the image of a "tax cut" is something invigorating, a stimulus to the nation's economy. A benefit called a tax cut is said to create jobs. But the same benefit called a benefit is said to be a drag on growth.

Dr Morgan asks us to believe that if we take away a middle class benefit of say $40 per week, while at the same time easing the lot of the middle classes with a tax cut of the same magnitude, that somehow the New Zealand economy will get a double stimulus. He calls it "economic rationalism". According to my arithmetic, the disposable incomes of the middle classes would not change one iota. The economic effect of Gareth Morgan's policy prescription would be precisely zero.

Economic rationalists present two contradictory arguments re tax-benefit policy. The same policy is either good or bad for economic growth, depending on the name given to the policy.

Behind the relative harmlessness of an ineffective policy, however, is a disturbing reality. Targeting favours those on upper-middle incomes by enabling new benefits to be funded as tax cuts. Targeting may or may not help the poor as well as the rich, depending on the exact mechanics of the system in place. What is undoubted, however, is that targeting seriously disadvantages the 'battlers' who occupy the lower-middle income range, while creating a poverty trap for the poor.

A universal approach to tax-benefit reform has the opposite effect to targeting. Universal benefits can protect the poor, stimulate the economy by adding to the disposable incomes of those whose annual incomes fall into the $5,000 to $35,000 range, while recovering from higher income recipients some of the new benefits that they have gained since 1986.

© 1998

Rankin File | 1998 titles