As I mentioned yesterday, New Zealand’s Gini coefficient has been fairly status since the late 1990s. Why no movement? There has certainly been lots going on the New Zealand economy.
The answer to that backwards-looking question helps us understand what is coming in future years.
Fifth Labour government
Why did inequality stay the same during Labour’s period in office? Increased taxes on high-income earners should have brought inequality down, and much more money started going to low-income families via Working for Families, too. Why didn’t inequality fall? The answer is because the economy was buoyant through Labour’s time in office, and high-income earners’ investment returns soared to offset the tax increases.
Current National government
In National’s time, we might have thought inequality should fall as well. The GFC brought the rich’s investment returns down to earth with a thud, and the Christchurch earthquakes would have dented some of those returns still further1 Why didn’t inequality drop ithe face of those circumstances?
The answer there likely lies in the tax system. National’s tax “switch” in 2010 provided higher returns to the rich, no matter how you look at it, and those disproportate returns halped make up for the rich’s investment losses.
Beyond 2014
Projecting forward, we now have this uncomfortable combination of one of the most pro-rich tax systems in the developed world, along with rebounding investment returns.
That is a recipe for increasing inequality over the next few years, which is what Treasury’s forecasts are obliquely predicting through their forecasts that per person GDP growth will be much higher than wage growth. Unless, that is, New Zealanders vote to change it.
1. Some jobs, of course, disappeared at the low end as well, but the dollar impact (though not the welfare impact) for a rich person would have been much bigger.
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