Three decades of neo-liberalism in New Zealand

How New Zealand's rich-poor divide killed its egalitarian paradise

A new report shows New Zealand’s economy has been most affected by inequality out of all the OECD nations. How did the land of the fair go end up in such a state?

Max Rashbrooke

The Guardian,

17 December, 2014

In the 1940s, New Zealanders hated inequality so much that one visiting academic suggested they should erect a statue of equality in Auckland harbour, as a counterpart to the United States’s celebrated sculpture. And that image lingers: many people still think of New Zealand as an egalitarian paradise, a friendly and accommodating country where “a fair go” is the national phrase.

Those observers, and indeed many New Zealanders, might have got a shock this week when the OECD published a landmark report, showing that economies the world over are being hamstrung by growing inequality – and that New Zealand was the worst affected. A stark rich-poor divide, the OECD argued, had taken over a third off the country’s economic growth rate in the last 20 years. But how could this be?

The simple answer is that in the two decades from 1985 onwards, New Zealand had the biggest increase in income gaps of any developed country. Incomes for the richest Kiwis doubled, while those of the poorest stagnated. Middle income earners didn’t do too well, either.

Because New Zealand had previously been so egalitarian, that world-beating increase still wasn’t enough to rocket the country right to the top of the inequality league table, but it is now doing just as badly on some measures as Britain. In both countries, the top fifth get about 40% of after-tax income; the bottom fifth get just 8%. New Zealand is now just as divided as the country that many of its citizens’ ancestors left in order to find a more equal society.

How has this happened? Tracing the causes of a growing income gap is like trying to map earthquake fault lines – never a precise science – but it is hard to ignore the correlation between the timing of the increase and the country’s post-1984 political revolution. Embracing reforms known elsewhere as Thatchernomics and Reaganomics with unprecedented enthusiasm, New Zealand halved its top tax rate, cut benefits by up to a quarter of their value, and dramatically reduced the bargaining power – and therefore the share of national income – of ordinary workers. Thousands of people lost their jobs as manufacturing work went overseas, and there was no significant response with increased trade training or skills programmes, a policy failure that is ongoing. At the same time, New Zealand stopped building affordable houses in any serious quantity, forcing poorer households to spend ever-increasing amounts on rent and mortgages.

None of this implies that New Zealand enjoyed a halcyon existence before the 1980s’ reforms; it didn’t. But it does imply that an alternative path towards a modern economy, one in which the benefits of growth were shared evenly, was ignored. As the OECD report points out, that would actually have led to greater growth, as well as greater equality.

Outrage over New Zealand’s widening gaps has been muted, partly because much of the extremes are hidden: poverty tends to be concentrated in areas that middle-class New Zealanders don’t enter, and the richest citizens still feel some pressure not to flaunt their wealth. Perspectives can also be short. In recent years, after that explosive 20-year rise, income gaps have been steady, leading some to dismiss the issue. But as the OECD report shows, the key learning is the long-term impact. What started in the 1980s continues to hold back New Zealanders – and their economy – today.

Alarm bells are finally beginning to sound. Recent polling shows three-quarters of New Zealanders think theirs is no longer an egalitarian country, and that this is a bad thing. Part of the unease stems from a realisation that big income gaps aren’t compatible with the idea that there should be an equal chance for all.

In very unequal countries like the United States, half an adult’s income can be predicted from what their parents earned. New Zealand isn’t there yet, but it does have a situation in which exclusive schools are raffling off internships at New York firms, while the parents of poor children are on such low wages that they can’t afford the electricity to keep a fridge running. Is that “a fair go”? It’s hard to think so.