Choices of the Affluent – Why Wealth Matters
The gap between “the rich and rest” has become a defining debate in social and economic policy in New Zealand and around the world. Max Rashbrooke has been at the forefront of that debate in New Zealand and it makes sense that after tackling income inequality in his previous books, he has turned his sights on the other dimension of economic inequality – wealth. His book brings both new data and information into the debate as well as sharp analysis.
Choices of the Affluent
The “choices of the affluent” are defining what happens in society, he argues and we can’t afford to ignore the way their choices drive poverty and inequality in this country.
Education is often touted as one of the “solutions” to reduce inequality but the educational divide is being widened by the choices of the affluent to move their children out of their neighbourhoods and into the schools of privilege.
Similarly, we have seen a shift in power to managers and owners of businesses, reflected in and reinforced by the enormous and disproportionate increases in CEO and senior management pay packages over the recent decades.
At the same time New Zealand has the third-lowest benefit rates among the 34 wealthy countries in the OECD, with the standard unemployment rate just one third of the average wage.
Wealth is “exceptionally under-taxed” in New Zealand compared to other wealthy, developed countries. Unlike most other developed countries, New Zealand does not tax wealth, capital gains, inheritances or gifts. Thus someone making $50,000 in their job pays tax but someone making $50,000 selling a house does not.
Inequality is a “whole of society problem” and not just about the poor. Waikato University’s Professor Linda Tuhiwai Smith has pointed out we cannot understand what happens just by looking at the groups that are identified and targeted as the problem of poverty. As Susan St John has pointed out, the forces that make some people poor are the same ones that make other people rich. Decisions about employment law that reduce protection for low paid workers and lowers their wages, setting of benefits levels for those out of work and decisions about how to subsidise housing such as the Accommodation Supplement have all had the effect of transferring income and wealth upwards.
Wealth Gains Captured by a Few
Fascinating new figures about wealth in New Zealand are published for the first time in this book. Data from the Survey of Family, Income and Employment (SoFIE) study, while only covering the period from 2004 – 2010, are is still the most recent and comprehensive data available on wealth distribution in this country. It tells something of what is happening to wealth in New Zealand in the first decades of the 21st Century.
The picture is not pretty – the richest 10% are wealthier, the poorest quite literally poorer (even more in debt to be precise).
A small group of people has benefited a great deal at the expense of most of the rest, particularly of those at the very bottom. In the six years from 2004 to 2010 total “net worth” (this is one way of measuring actual wealth: total assets less debts = net worth) grew from $472 billion in 2004 to an estimated $816 billion in 2010 and most of that growth was captured by a small proportion of people. Out of an adult population of 3.4 million people, the top 10%, around 340,000 people, control half of total “net worth” in this country. A similar number (around 270,000) are in debt to the tune of $7.4 billion.
The size of the wealth gaps are mind-boggling. While one group of around 340,000 people gained an average of about $600,000 in net worth, almost half of the population (1,4 million adults) gained a mere $8,000 on average, while the poorest of, around 271,000 people (8% of the adult population) who have no net wealth and are in fact in debt, saw their debts increase from $5.7 billion to $7.4 billion.
In a small country like New Zealand it is sobering to realise just how small the elite group of the very wealthy – the “1 percent” – actually is. There are around 34,000 people with wealth of $4.5 million or more. While the share of net worth of the 1% dropped slightly from 20.1% to 18.1% this does not mean they became less wealthy. Far from it, their wealth increased by more than half from $94 billion to $147 billion, an average gain of about $1.5 million per person!
Inequalities within the Inequality
Between ethnic groups the wealth divides are even more extreme. Average Pakeha wealth is $125,000 compared to $18,750 for Māori and $8,500 for Pacific peoples. Within each ethnic group the disparities compound even further, with the differences within Pacific communities three times those of Pakeha communities and for Māori twice as high.
The gender wealth imbalance is also clear. Women have on average $50,000 lower net worth than men, as a result of lower rates of pay and fewer years in the workforce that lead to lower lifetime earnings and ability to accumulate wealth (women’s average Kiwisaver balances are 28% lower than men’s).
Wealth Gap Expected to Grow
While no new data is yet available (a new wealth survey based on the Household Incomes Survey is due in mid- 2016), the growth in the property market and the recovery of the financial markets in that time suggest a widening of the gap is to be expected.
The Auckland property market price increases are benefiting a reducing number of property owners and Rashbrooke quotes housing policy analyst Alan Johnson, who suggests that “nearly half the benefits of house prices appreciation have gone to a small proportion of New Zealanders who were most likely already part of the wealthiest quarter of the population.”
Similarly, since 2010 the NBR Rich List has shown a strong rebound following the global financial crisis, growing by nearly 40%. The value of shares which are much more often held by the wealthy since 2010 as the stock exchanges recover from the large falls during the global financial crisis.
What Can Be Done to Reduce the Wealth Gap?
What can be done help to turn back this powerful tide of wealth accumulation for a small and privileged group in our land? We have choices as a country about the kind of society we want to see develop. We can choose to allow the current situation to continue to play out, where wealth continues to concentrate in the hands of a small group that passes on advantages to each generation through property and inheritances, privileged education and political influence. Success is largely determined by who your parents are, not how hard you work.
Or we can work towards a future where the passing on of advantage and disadvantage is less important, neighbourhoods are more mixed ensuring everyone understands the challenges others face better, and access to education and politicians is more equal. Such a society gives more people opportunity and differences between groups do not become entrenched.
Five areas are highlighted that could help close the wealth gaps. In line with the work of Closer Together Reducing Inequalities programme over the past five years, reducing income imbalances will help reduce the resulting wealth gaps that accumulate. Secondly, encouraging entrepreneurship by “rebalancing the risks and rewards of entrepreneurship to acknowledge that it is a whole of society issue” through mechanisms such as employee profit sharing. Thirdly, introducing more forms of taxing wealth and inheritance need to be considered. There are several ideas around such as Gareth Morgan’s annual wealth tax idea. Fourthly, more needs to be done to take the heat out of the housing market through better renting laws, increased housing supply, reducing tax subsidies for housing investors, lending restrictions and offering other investment alternatives that ordinary New Zealanders can trust. Finally, Rashbrooke suggests improving democracy by active blocks on influence by the wealthy such as strict limits on donations to political parties.
Max Rashbrooke ‘Wealth and New Zealand’ is available from BWB Texts as an e-book or in hard copy.