How income inequality in New Zealand compares with other OECD countries

Colin Campbell-Hunt (University of Otago) wrote an interesting article on The Conversation last week on inequality in New Zealand. It was well-timed, given that I've been covering poverty and inequality with my ECONS102 class this week. Campbell-Hunt compares income inequality in New Zealand with inequality in other OECD countries.

However, what Campbell-Hunt does here is interesting. First, he looks at income inequality (measured using the Gini coefficient) before accounting for taxes and transfers. Then, he looks at income inequality after accounting for taxes and transfers. The difference in ranking gives us a sense of how redistributive the tax and transfer system is, relative to other countries. Campbell is most interested in the difference between those two measures:

The Gini before taxes and transfers is a measure of the inequality produced by the structures of a country’s economy: the way value chains operate, the markets for products and services, the scarcity of certain skills, rates of unionisation, and so on.

This gives us a measure of structural inequalities in a country. Governments, however, use taxes and transfers to shift income between households. They take taxes from some and boost incomes of the more disadvantaged.

Ginis of incomes after taxes and transfers give us a measure of how well members of a society can support similar standards of living... These give us a measure of social inequalities.

So, how does New Zealand compare? Before taxes and transfers, New Zealand is quite middling, ranked 16th-lowest for inequality (Iceland is first, Japan is 37th and last). After taxes and transfers, New Zealand's ranking looks far worse, being ranked 24th (Slovakia is first, Costa Rica is 37th). Campbell-Hunt interprets this as:

As we can see, New Zealand’s structural inequality, shaped by the economic reforms of the mid-1980s, is middling by comparison to other OECD countries.

But New Zealand’s social inequality lies near the bottom third of OECD measures. A halving of top income tax rates in the mid-1980s and the rollback of the welfare state in the 1990s (after then finance minister Ruth Richardson’s 1991 “mother of all budgets”) significantly contributed to this.

Now, I'm sure we can argue about why New Zealand's tax and transfer system does a poor job (compared with other OECD countries) of reducing income inequality. In my view, laying the blame on governments in the 1980s and 1990s (as Campbell-Hunt does) absolves thirty years of subsequent governments from their role in perpetuating the inequality. Regardless of which government/s may be to blame here, we find ourselves with a tax and transfer system that is nowhere near as redistributive as other countries that we might compare ourselves to. Zeroing in just on the effect of taxes and transfers on inequality, Campbell-Hunt's data shows that New Zealand's system is the 11th-least redistributive (Finland's is most redistributive, Mexico's is least), behind the US, the UK, and Canada, but slightly ahead of Australia.

Given that our closest peer countries have more redistributive tax and transfer systems than New Zealand does, that suggests that we can do more to reduce inequality. As Campbell-Hunt notes:

New Zealand can aspire to goals for social equality matching those in the upper half of OECD countries. Beyond revisions to taxation and transfers, inequalities in health and education would also need to come down to reduce the social and economic costs of poverty and disadvantage that should bring shame to us all.

Campbell-Hunt's data doesn't have anything to say about inequality in health and education, but certainly a more generous and less restrictive benefit system, and more progressivity in taxation, would go some way towards ensuring that New Zealand's inequality looked more like the countries that we compare ourselves to.

Read more:

• Is inequality increasing?
• Inequality in New Zealand over the long run