Time to help the kids, hit the landlords
Two changes to the tax rules could improve life for children of beneficiaries, and put an end to a property rort
It is high time the Government switched from subsidising landlords, to providing more fiscal support to beneficiary parents of Kiwi kids. Two recent sets of data prompt that observation.
One is the latest report from Auckland University’s longitudinal study “Growing Up in New Zealand”, which is tracking a cohort of more than 6000 children, now 8 years old.
Its findings make sobering reading, on both material hardship and substandard housing, liable to stunt the development of a substantial minority of those children.
The other point is the stark evidence of inequality seen in the latest crop of data on the cost of living for various subsets of households.
The mothers of children in the longitudinal survey were asked about 17 standard non-relative indicators of poverty — things like having a spare pair of shoes, putting off visits to the doctor, not paying electricity bills on time, or going without fresh fruit and vegetables.
Ten per cent ticked six or more of those boxes, which meets the official threshold for material hardship, and 4 per cent ticked nine or more, which counts as severe material hardship.
This is consistent with Statistics NZ’s 2018/19 household economic survey, which found 152,000 children living in material hardship, 66,000 of whom were in severe material hardship.
The Auckland University study also found that 7 per cent of the children it is tracking live in households where the mother reports a major problem with heating, and 6 per cent in homes that have major problems with dampness or mould.
The proportions are notably higher among the 24 per cent living in private rentals than among the 66 per cent who live in owner-occupied housing.
But major problems with poor housing are especially — and shamefully — prevalent among the 5 per cent of kids in public rental housing, just under a third of whose mothers reported a major problem with heating and a quarter with dampness or mould. The Government, it seems, is a slumlord.
Meanwhile, the cost of living data show inflation is much more of a problem for beneficiary and other low-income households than for the population as a whole.
Statistics NZ’s household livingcosts price indices (HLPIs) reweight the 700 or so items in the Consumers Price Index to more accurately reflect spending patterns among 13 different subsets of households. Unlike the CPI, they also include interest costs.
In the year ended September 2020, the cost of living for beneficiary households rose 2 per cent, compared with 0.8 per cent for all households and just 0.2 per cent for the richest fifth of households ranked by spending.
This is not an aberration. Since June 2014, the baseline for this indicator, the cost of living for beneficiary households has risen a cumulative 11.1 per cent compared with 7.9 per cent for all households and 5.9 per cent for the highestspending quintile.
Beneficiary households on average spend just under 30 per cent of their pre-tax income on rent, compared with 13.4 per cent for all households and just under 5 per cent for the highest-spending fifth of them.
By contrast, interest costs account for just 2.7 per cent of beneficiary households’ spending compared with 9.1 per cent for the richest fifth.
To state the obvious, an environment of rising rents and falling interest rates will only widen inequality.
So what might a cautious, centrist, fiscally conservative, incrementalist Government realistically be expected to do about all this?
For one thing, it could reform a brutal feature of Working for Families which penalises the children of beneficiaries, whose ranks, after all, are swelling because of the recession.
It is perverse that a fifth of the total value of tax credits under Working for Families, namely the In-Work Tax Credit (IWTC), is not available if either parent is on any welfare benefit, regardless of whether they have parttime work or not.
As Auckland University economist Susan St John, long an advocate of reform in this area on behalf of the Child Poverty Action Group, puts it, Working for Families works very badly for the worst-off children, because it is based on the neoliberal thinking that the only way out of poverty is a job and parents need an incentive to work.
“This is cruel in the extreme considering the nature of this recession, with so many desperate for work,” she has said. St John points out that a sole parent who fails to meet both tests for the IWTC — having some paid work and not being on a benefit — loses $72.50 a week or 40 per cent of Working for Families for a onechild family.
“The IRD could flip the switch overnight and pay the full WfF to all low-income families,” St John said.
“It won’t cure child poverty on its own but it is an obvious start.” She estimates the fiscal cost at around $500 million a year and argues that it would be an effective stimulus as it would all be spent immediately.
Another area crying out for reform is the tax privilege which is enjoyed by landlords.
People buy investment properties not primarily for the rental yield — which is modest and in some cases non-existent, otherwise we would not need rules ring-fencing tax losses from negative gearing — but rather for the expected capital gain.
Right now those gains are increasing rapidly, propelled by double-digit house price inflation, amplified by leverage.
Even when LVR limits are restored, people going into the landlord business will be able to gear up far more than the typical business that employs people.
Yet the tax rules allow them to claim a deduction for all of the interest they pay. It violates the fundamental principle that a deduction should only be allowed for costs incurred earning income that is taxable. That is why owner-occupiers cannot deduct their interest costs.
But provided the property investor waits out the five years of the brightline test before flipping the property, the capital gain is untaxed.
Allowing unlimited interest deductibility in these circumstances is a rort. It is a rip-off.
And what adds insult to fiscal injury is that the taxable portion of many landlords’ return — rents — is subsidised though the Accommodation Supplement.
The Pre-election Economic and Fiscal Update forecasts that the cost of the Accommodation Supplement will climb from $1.6 billion in the 2019 fiscal year to $2.6b in fiscal 2022, reflecting an expected rise of 125,000 or 42 per cent in the number of people requiring this assistance.
You would expect a Labour Finance Minister and a Labour Revenue Minster contemplating all this to react not with resigned complacency, but with indignation and resolve.
The IRD could flip the switch overnight and pay the full [Working for Families] to all low-income families.
Susan St John (left)