How the middle class always wins

Article requested by NZ Herald but not published

When in the early 1990s Margaret Wilson, now Minister of Labour, ran into problems with Wellington politicians opposed to Waikato University setting up the law school she was to run, she mobilised the district’s burghers and farmers. She got her law school.

Fast forward to 1999, when, politicians believe, some middle-class votes moved leftward in search of the promised higher subsidies (lower fees) for their children’s tertiary education.

The middle classes are politically powerful and they want their cut of the welfare state.

Reel back to the mid-1980s when a rising young Labour MP argued that universal or broadly spread state services gave the middle classes, who were paying higher taxes, a return on their money and thereby a stake in the welfare state. The MP was Helen Clark.

Into this tangled debate has stepped Australian James Cox with a book, Middle Class Welfare, published by the Business Roundtable. He says too much government spending goes to the comfortably off and that is both inefficient and inequitable.

Three elements cut through the welfare debate.

One is efficiency: fiscal efficiency in getting the most return for tax dollars spent and economic efficiency in ensuring benefits of spending tax dollars outweighs the costs of levying the taxes.

A second is social integration which might also be seen as a sort of efficiency: ensuring the less-well-off have access to education and health care and thereby can contribute more to society in return; but, conversely, ensuring that welfare doesn’t perversely lock its recipients into “dependency” and out of full participation in society.

A third is ideology: a belief that equity — fairness — is more likely if the state delivers social services; versus a belief that programmes will be more cost-efficient and more effective in meeting differing individual needs if delivered by result-oriented, self-starting individuals and non-state organisations.

Cox is keen on economic efficiency and getting more programmes delivered by the private sector. His book follows hard on the heels of another Business Roundtable book by Winton Bates arguing that small government — lower taxes — means faster economic growth.

Cox’s concern is with “churning” — middle-class people paying taxes which are then returned to them in health, education and superannuation — “unnecessary” spending, which “substitutes for private effort, displaces higher-priority government expenditure and makes people less willing to pay taxes”.

“Society is unambiguously worse off as a result of churning,” Cox says.

This is the opposite of the Clark thesis and is likely to fall on profoundly deaf ears in the present cabinet. Moreover, the National party, whipped in 1999 for cutting student subsidies and lowering superannuation’s relativity to wages, has jettisoned those policies.

And Cox himself points out that our welfare state takes a smaller share (25 per cent) of the economy than Britain (28 per cent) and Germany, France and Sweden (all above 30 per cent). These economies are richer than ours.

Cox focuses instead on the United States and Australia (20 per cent) and east Asia (5-17 per cent). All except Japan have grown faster than our economy over the past decade.

In those countries private sector involvement in social services is greater than here. Though markets sometimes fail, Cox says, “greater private sector involvement in providing welfare state services would assist in better meeting people’s needs”.

It would be more efficient, he says. But he also carries his argument directly on to the ground of the welfare state’s advocates by stating it would be more equitable.

Cox shows that the top two-fifths of taxpayers in this country received just over a quarter of all welfare state spending in 1997-98. These comfortably off people scooped up nearly half — 48 per cent — of government spending on education, 35 per cent of that on health and 14 per cent of government superannuation.

Australia directs more of its state help to the needier lowest two-fifths, Cox says, through means testing age benefits and a less extensive system of benefits for low-income working people.

And, he says, Australia “seems to treat couples with children more generously on balance than the relatively larger New Zealand welfare state”. This is the time of life when financial pressures are greatest.

Here couples with children and households that include young adults pay 56 per cent of all taxes but get back only 40 per cent of all government social spending (though 75 per cent of education spending). Sole parents and retired people get half of all social spending but pay only a sixth of the taxes.

Cox’s prescription is “lower taxation, less and more flexible regulation and more reliance on the market”, which he says will “improve the standard of living of most people” and also “improve education, health and retirement incomes”.

How? By reducing welfare going to the middle classes, which would “lead to greater work effort and higher market incomes for those affected. The reduced impediments to market transactions arising from lower taxation will assist families to adjust to reduced availability of government services.”

Cox acknowledges the political difficulties in this sort of change so new policies “should work with, rather than against, the public’s views about fairness” and be incremental.

He would first establish privately provided education and health care through subsidies, higher fees and some means testing and encourage privately provided retirement incomes through lower wage-relativity for government superannuation and incomes and asset testing of it. He would provide tax credits for families with children.