Analysis of the NZ government’s proposed unemployment insurance scheme

This Wednesday the New Zealand government announced an unemployment insurance scheme which pays workers 80% of their income for up to six months. On the surface, I think this is a great idea which adds much needed resilience to the economy and grants citizens a great deal of peace-of-mind when it comes to their financial wellbeing. In the wake of the ongoing pandemic, I think it’s safe to say that everyone’s eyes are wide open to how fragile our world’s economy really is. Kudos to Labour (and ACT) for this idea which, on paper, adds much-needed stability to everyone’s lives.

Where things get a bit less rosy, however, is in the details. The government’s initial design of the system has it being funded through a flat levy on workers’ income of 2.78%¹. This proposal, frankly, is far too expensive: the median earner in New Zealand would see their effective tax rate increase by 18.5%, on top of needing to deal with record inflation which might still be occurring by the time the scheme is implemented properly.

By the numbers

That level of increase in taxation seems unconscionable to me, and will undoubtedly result in many people finding themselves beneath the poverty line. As we know there’s a strong correlation between your income and demographic, we can infer that the people most hurt by this policy would be from disadvantaged groups such as women, rainbow people, and Māori or Pacific islanders.

The above graph shows the effective tax rate of our median earner increasing from 15.1% up to 17.9%—which is an 18.5% increase in relative terms. While an effective tax rate of 17.9% overall is fairly low by international standards—bearing in mind this isn't accounting for GST or other levies—it's important to remember that incomes in New Zealand are generally lower than comparable countries and cost of living tends to be higher as well due to our geography and small size. A direct comparison of taxes number-for-number is not an apples-to-apples comparison, and European levels of taxation combined with the economic reality of New Zealand would be a disaster.

The above taxation income has been calculated based on the following assumptions:

• Gross income of $770/week which was the median reported by StatsNZ for Q2 2021, totalling ~$40k/year
• ACC earners’ levy of 1.39%
• Receiving a $520 income tax credit via IETC
• Not accounting for miscellaneous taxes such as fuel excise
• Assuming the employer’s portion of the unemployment insurance levy is treated the same as the ACC earners’ levy, instead of how employer KiwiSaver contributions are handled — that is, your employer doesn’t need to increase your compensation if their contribution places you under minimum wage
• Not accounting for GST, as GST doesn’t impact the overall ‘take home’ figure

From what we’ve been told about the scheme so far, the above assumptions don’t seem unreasonable. If you do want to account for GST’s dilution of purchasing power, then the increase is “only” 9.2%, which is still very high. To speak in actual numbers, our hypothetical earner is losing $1,113 from their take home pay every year—from $33,976 down to $32,863.

There’s a distinct possibility of this additional $1k/year expense preventing our earner from being able to save money, which is particularly insidious given how close that figure is to the amount you need to put into KiwiSaver in order to get the maximum government contribution. 25% of people in New Zealand have no savings, and news articles talk about $50/week as a good goal to have: losing $20/week to this levy is a substantial outgoing for 50% of the population.

The impact on other demographics

I'm specifically focused on low-income earners because I think their needs are the most important to consider, but it’s also worth mentioning how other income brackets will be effected. If you’re middle class in this country, then you should in theory have the ability to save an emergency fund which would reduce the benefit of this scheme for you.

While its existence means you might theoretically be free to take your emergency fund and invest it elsewhere, paying a 2.38% levy each and every year is obviously going to be more expensive than setting aside a chunk of cash one time. In reality, you’ll likely still want some form of emergency fund as this insurance scheme only covers you if you’re made redundant at work—so it’s no good if you need some emergency work done on your car before work the next day.

For wealthy individuals, the levy is pointless—traditional income insurance is cheaper than 2.38% of your gross income. I don’t think this is a bad thing, as if you’re in this bracket then you’ve benefitted from the government injecting ~$50B into assets via pandemic interventions.

Ways to improve the proposal

I’ll caveat all of the above by saying that it’s entirely possible (I’d even say it’s likely) this scheme might not be quite as bad as I'm calculating for those on low incomes. Some levers the government can play with are:

• Individuals being exempt from paying the levy below a certain income level similar to how student loan repayments are handled; this has already been floated as a possibility
• Failing that, treating the employer levy analogous to employer KiwiSaver contributions with respect to minimum wage legislation
• Adjusting the levy so that it’s more progressive, instead of just being applied at a flat rate
• Reducing the length of the unemployment insurance—six months is a long time for the government to budget for when you consider our longest lockdown was about five months; three months of which was spent at the looser Alert Level 3.
• Applying the levy to net income after income tax, instead of to earners' gross income
• Reducing income tax in order to compensate for the new levy (which would make this proposal closer to ACT's). Eliminating the 10.5% tax bracket and adjusting the higher brackets would have immense benefit for low-income individuals, and would also align our income tax system better with other developed nations².

It's also entirely possible (although I think this is unlikely) that the proposal could be even worse than currently described—as the government has left on the table the possibility of a maximum income for the purposes of the levy. The ACC earners' levy works like this, and isn't applied to any income beyond $130,911. This is the exact opposite of a progressive tax, where as your income increases your financial burden actually decreases. I don't think regressive systems like the ACC earner's levy are inherently bad, and there is room for some of them in our society—but the implementation of them needs to be based on strong evidence that it will benefit society as a whole.

I really don’t like how this levy is structured. Even if the percentages do get massaged, it seems bizarre that the government is introducing additional taxes³ on income at this point in time. I find it difficult to believe that a nascent capital gains tax⁴ would be somehow harder to push through than this insurance scheme, and doing so would present a great opportunity to clean up some of the oddities of the tax system—like cryptoasset gains being treated as income instead of capital gains.

Aside from capital gains, there are other instruments which the government could be taxing/levying instead: estates or financial transactions are two other possiblities which would have precisely zero negative impact on low earners.

Final remarks

The bottom line is that this is the largest tax increase low-income earners have faced in a very long time, and it's coming at a moment in history where tax take from income and GST are at all time highs. We have record low unemployment which means there's more income being made across the country, and record inflation has resulted in substantial bracket creep over the past two years in particular.

Adding additional taxes on income is absurd and cruel to the most vulnerable members of our community, and it is critical that everybody recognizes how uneven this levy will be in practice. While I'm certain that nobody wants to be losing a further 2.78% of their gross income, as a society we need to pay particular attention to those who are already struggling to make their financial situation work as it is.

I encourage everyone to provide the government with feedback on this proposal by participating in the NZIIS consultation. I think it's absolutely critical that the scheme is reworked ahead of its implementation in 2023, so that we can avoid substantial societal harm. The deadline for submissions is 5pm on 26 April 2022, and the web page for doing so is here.