Beware corporate welfare in disguise
ANALYSIS: Ah Speenhamland - such a wonderful and improbable word!
In these trying times, when Brexit ructions test every bit of goodwill towards the old country, it’s nice to remember Britain’s lost talent for inventing new words, especially as the new contenders: Brexit, Bremain, Bremoan and the horrid Flextention - lack Speenhamland’s ageless flair.
But I want to draw attention to Speenhamland (uh, just say it out loud, it’s wonderful!) because it has more than a little relevance to contemporary New Zealand.
Speenhamland is known to economists and historians as the name of an ostensibly benevolent system to alleviate rural poverty by topping up the wages of the poor with money from landowners in the local parish.
The name comes from the town of Speenhamland, a town in Berkshire, where the system was first created at the end of the 18th century.
The system was remarkably similar to poverty alleviation tools we have today. Payments were calculated based on a reasonable cost of living, and fluctuated depending on how many children families had.
But what’s significant is not the relatively enlightened approach the system took to alleviating poverty, but that the system was a hopeless failure. While the system was introduced in response to the spiralling costs of grain, it eventually became a way of allowing landowners and industrialists to pay below-subsistence wages to their staff, safe in the knowledge that the parish would top up their income.
This was fantastic for employers, who could boost profits by lowering the cost of wages, but terrible for the economy as it detached the true value of labour from its cost.
Welfare is crucial. It is unconscionable that anyone should go hungry, cold, or homeless in rich countries (or anywhere in this rich world, frankly). But we should cast a critical eye over parts of our welfare system and ask ourselves whether payments made to individuals are actually corporate welfare in disguise.
Working For Families tax credits, which turn 15 at this Budget, are a prime example. The credits funnel billions of dollars' worth of income to New Zealand’s poorest. They were introduced in the 2004 Budget by then-Prime Minister Helen Clark and her Finance Minister Michael Cullen. Clark labelled them one of that government’s “most important achievements” at the time.
The tax credits are effectively an income supplement, helping people on low incomes make ends meet. They fluctuate based on how much money people earn and how many children they have.
There should be no doubt that raising people’s income to the cost of living is a good thing. It’s a barely-contested fact that it should be one of the government’s top priorities. On this score, the credits were something of a success. They helped boost household incomes and helped briefly arrest a growing trend towards greater income inequality.
But shifting this cost onto the government’s balance sheet lets businesses off the hook too easily. It makes it easy to employ someone on below-subsistence wages, and know that they’ll come to work fed, clothed and housed without having to bother about it all that much. (And let us not forget that even with tax credits, feeding, clothing, and housing is out of reach for too many families).
This is damaging for two reasons. It lets companies off the hook for not paying their workers what they should, and it stops companies from making investments that would make workers more productive.
This is why just upping the minimum wage isn’t a solution to boosting people’s incomes. At a certain point, employers either fire people they can’t afford to keep, or up their prices, raising the cost of living for the very people high minimum wages are meant to protect.
The worst kept secret in Wellington (worst kept because everyone worries about it, yet no one seems to have the answer for it), is how New Zealand businesses can improve their productivity to the point where they can afford to pay their workers better wages.
Encouraging some to raise capital and invest in new machinery is one answer. Forcing others to make the tough decision to sell or merge into a larger, more efficient company could be another.
Tax settings help here, too. The Government is currently looking at forms of capital gains taxes that it may or may not adopt - we’ll know by the end of the year. The tax favoured by the majority of the tax working group would tax capital gains from both property (but not the family home) and the sale of companies, while the minority report from the committee favours a tax on capital gains from rental properties.
The Government should think hard about taxing businesses. There are serious arguments in favour of this on the grounds of equity - shouldn’t all income be taxed equally? - but there are also strong arguments against taxing businesses when we look at the root cause of the conditions such taxes are intended to solve.
For example, the high cost of housing. The last thing New Zealand needs is more expensive housing, which is why any tax on real estate no matter how weak or strong should be looked at. Land taxes, capital gains taxes, or the relatively light tax on capital gains from rentals - take your pick.
But New Zealand has a serious problem when it comes to the capital pool our businesses can call on when they wish to invest in technology that would improve their productivity.
The Productivity Commission last year identified a lack of capital as a key constraint on businesses investing in technology that would help them pay workers more.
“A greater pool of domestic savings could deepen domestic capital markets and enhance the ability of local firms to secure capital to grow,” it said.
On this basis, we should look to Scandanavia, where some countries tax capital at rates below income. This has the effect of driving investment into the country, which helps boost productivity and workers’ incomes. Lower rates of taxation on businesses might also encourage investors to overcome New Zealanders' hitherto unshakable addiction to throwing money at assets they can see, like property.
Progressively boosting the minimum wage and bolstering workers rights in New Zealand would be one way to ensure that productivity gains accrued across the spectrum, and not just to the wealthy.
On the 15th anniversary of the Working for Families tax credits they should be remembered for what they are, a necessary evil rather than a benevolent good; a quick fix for a problem that governments are too scared to solve.