OECD comparisons reveal an unflattering picture of inequality in NZ – could that change?

Recent research showing the richest New Zealanders pay less tax than their counterparts in nine similar OECD countries raises, yet again, serious questions about wealth, equality and fairness.

How unequal is the distribution of income in New Zealand? How do we compare with some of the countries we might benchmark against? And, if we don’t like what we see, can we change it?

The metric most widely used by economists to measure inequality in incomes is called the Gini coefficient (named after the Italian statistician Corrado Gini who developed it).

It brings together income data across all households, typically divided into groupings of 10% or 20% of the total. When there is no inequality of incomes between groups, Gini equals zero. When the top group captures all income, Gini equals 1.

Measuring inequality

The graph below shows Gini coefficients, before taxes and welfare payments (known as “transfers”), for all 37 countries in the OECD in 2019 (before the COVID pandemic disrupted household surveys). Ginis are ranked left to right, from least to most unequal.

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. They are shown in the following graph, again from least to most unequal. These give us a measure of social inequalities.

Focusing just on social inequality, it is no surprise Scandinavian countries are among the least unequal, as well as Canada and Ireland. Neither is it surprising the UK and US approach the highest levels of social inequality in the OECD.

Inequalities in Australia and New Zealand lie between these, but further from the Scandinavians and closer to the Anglo-Americans.

Social inequality in NZ

When we look at the difference between structural and social inequalities, we can see the extent to which taxes and transfers – government redistribution of income – reduce inequality.

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.

The downward columns in the following graph show the effect of government redistributive measures, ranked from most to least active. The result of these government redistributions in New Zealand is weaker even than in the laissez-faire economies of the United Kingdom and United States.

Where does NZ sit?

How do New Zealand’s inequalities compare with countries we might choose to benchmark against?

Below, the Scandinavian countries famous for their egalitarian social systems are shown in orange. In green are countries that tolerate slightly higher social inequality: Sweden, Canada and Ireland.

And the UK and US – exemplars of free-market capitalism that were the models for New Zealand’s reforms of the mid-1980s – are highlighted in grey.

Reducing inequality

How hard would it be to change? Could New Zealand, for example, reduce its level of social inequality to match Canada? Absolutely, yes.

Other OECD data show Canada significantly cut its inequalities between 2010 and 2019. The country moved from a position identical to Luxembourg (haven for Europe’s wealthy) to be roughly level with Sweden.

To match Canada’s level now, New Zealand would need to reduce structural inequalities further, or redistribute about as much as Norway and Denmark do. It can be done, in other words.

Indeed, Finland shows government redistributions can transform some of the worst levels of structural inequality to produce outcomes comparable to other Scandinavian countries.

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.

The author acknowledges the contribution of data provided by Max Rashbrooke.