Education the key

A new OECD report appears to show inequality is growing in New Zealand.

But NBR editor Nevil Gibson discusses what it really shows:

. . . The four-page summary report based on a working paper, Trends in income inequality and its impact on economic growth (See report here), and statistical tables, has been seized on by the media the opposition as a “failure of trickle down economics” and a case for higher taxes on the rich and more redistribution to the poor.

In fact, this is not the case. The main reason is the dated nature of statistical material, while the policy suggestions carry a heavy caveat that “Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies.”

The figures that show New Zealand’s growth was inhibited by increased income inequality are based on the period 1990-2010. The figures show “real disposable household income” in New Zealand from 1985 to the GFC (2008) was around the OECD average and well below countries such as Australia.

In the five years post the GFC, New Zealand disposable incomes among the top 10% fell 2.2% (OECD average 0.7%) while those in the bottom 10% fell the least, 0.5% (also the OECD average). Average New Zealand incomes fell  0.9% compared with the OECD average of 1.8%. . .

The GFC hit the richest but National’s policies to look after the most vulnerable during the GFC gave them some protection.

. . . But the main interest in the paper is the evidence it offers on the main mechanism through which inequality affects growth.

This is that the wider income gap between the lower middle class and poor households compared to the rest of society undermines education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.

In other words, it is education rather than taxation that is the key: “a lack of investment in education by the poor is the main factor behind inequality hurting growth,” the report says.

“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,” says OECD Secretary-General Angel Gurría:

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

Few would argue that successive governments in New Zealand are seriously deficient in this area and the biggest deniers would be the Labour government of 1999-2008.

The OECD handout summarising the report observes:

“People whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background.

“The impact of inequality on growth stems from the gap between the bottom 40% with the rest of society, not just the poorest 10%. Anti-poverty programmes will not be enough, says the OECD.

“Cash transfers and increasing access to public services, such as high-quality education, training and healthcare, are an essential social investment to create greater equality of opportunities in the long run.”

As mentioned, the paper also finds no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.

Well-off New Zealanders already carry a high tax burden – more than half of the population pays no tax except GST – so I don’t think any party can justify higher taxes on the basis of this report.

As the report itself warns,” not all redistributive measures are equally good for growth.”

Inequality increased under Labour’s high tax, high spending policies of the noughties.

It has improved under National which has reduced taxes and taken a much more careful approach to targeting spending where it is needed most needed.

One of those areas is education:

The key message of the OECD’s report on inequality, released today, is investment in education and is not a prescription for higher taxes, says the Taxpayers’ Union.

The Union’s Executive Director, Jordan Williams, reacting to the OECD report and interviews with Grant Robertson and Russel Norman on this morning’s Morning Report says:

“Grant Robertson and Russel Norman want to use the report as justification to tax high incomes more, even though the top 6% of income earners already pay 37% of everyone’s income tax. They are trying to use the OECD report to frame small efficient government and incentives to work as a bad thing.”

“We’re disappointed that Mr Robertson continues to refer to the made up economic theory of ‘trickle down economics’. Mr Robertson must know that no such economic theory exists. No economist has ever argued that in order to make a poor person richer you should make a rich person richer first. Economists have, however, argued that economic growth and freedom makes us all, rich or poor, better off.”

“The biggest cost of living is people’s tax bills. Instead of wanting to solve inequality by cutting government waste and taxes at the low end, politicians immediately want to tax more so they can distribute it to constituencies.”

The background to the oxymoronic ‘trickle-down economics’ argument Messrs Robertson and Norman referred to on radio this morning to is available in a piece by New Zealand Initiative Researcher Jenesa Jeram republished with permission.

“Mr Robertson is now shadow Minister of Finance. He should be focused on arguing real economic data, not taking on his own straw men arguments,” concludes Mr Williams.

The poor won’t get richer by making the rich richer first. But nor will taking more than is fair and reasonable from anyone help those most in need.

Higher taxes and poor spending don’t help the poor and harm the wider economy.

Education is the key to helping the poor, along with carefully targeted investments in health and other services needed to provide equality of opportunity for them.

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