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Source: University of Canterbury

04 June 2021

Stephen Hickson is the Director of the Business Taught Masters programme and teaches Economics at the University of Canterbury.

A lot has been said about benefit increases in the 2021 Budget reversing the benefit cuts made in the 1991 Budget. Finance Minister Grant Robertson directly set his 2021 budget against a budget from 30 years ago – 1991’s infamous ‘Mother of All Budgets’.   In his speech he said, “Today, we address the most inequitable of the changes made 30 years ago”. It is, according to Robertson, “the righting of a wrong”. But is it correct to claim that the 2021 Budget undoes the 1991 benefit cuts?

It is not easy to establish this. We need to compare benefit rates from 30 years ago to today. However this is not straightforward.  There is the effect of inflation, which can be easily corrected for, but more difficult is the complexity of the welfare system. There are several types of benefits plus layers of add-ons that depend on income, number of dependents, location or expenses faced by the beneficiary, such as housing costs. Not only do the amounts of these vary over time, so do the conditions under which beneficiaries qualify. Useful information can also be lost in the mists of time and historical rates are only available online back to 1998.

We can compare main benefit standard rates over time and it is these rates that are most often referred to in the media. They are the benchmark. In 1990, the standard adult + 1 child (nett) rate for the Sickness, Domestic Purposes (DPB), and Widows benefits was $213.14. In 1991 this was cut to $185.93 (a 12.7 percent reduction). At the time the unemployment benefit was lower than other benefit rates, and these rates did not include add-ons such as accommodation supplements. 

At April 2021 the standard rate for Jobseeker Support (previously unemployment) and for Sole Parent Support (previously DPB) was $386.78 (1 adult and 1 child). The Sickness Benefit no longer appears as it has been subsumed into Jobseeker Support.

If the rate from 1 April 1990 (before the 1991 cut) had simply kept pace with inflation then by 1 April 2021 the rate would be $396.60 or about $10 more than what the rate actually is. In other words, by April 2021 welfare benefits were not greatly different from what they were prior to the 1991 cuts in terms of purchasing power.

How can this be the case? Benefit rate changes are not even over time.  Sometimes rates rise by more than inflation and sometimes less but these can even out over time.  By 2015 benefit rates had increased by 62% compared to 1991 but prices had also risen by 62% over the same period. In other words, beneficiaries in 2015 could consume a similar basket of goods and services to 1991 beneficiaries. Of course that’s a smaller basket than beneficiaries in 1990 could have consumed before the 1991 cuts. By 2015 the gap that had been opened up in 1991 had remained unchanged.

Then in 2016 the rate increased by $25 (8.3 percent) from $300.98 to $325.98 and again in 2020 by a further $35.48 from $339.69 to $375.17 (10.4 percent). These two increases almost closed the gap on what benefit rates were and what they would have been with no 1991 cuts.

By April 2022, following the 2021 Budget changes, the benefit rate will be $434. Had there been no cuts in 1991 and had rates risen in line with inflation then the April 2022 rate would be about $400. If you have managed to follow the numbers you will realise that 2022 benefit rates, following the 2021 budget, will not just be the same as the 1990 rates, they will in fact be higher. 

There is a legitimate conversation to be had about what level benefit rates should be and reasonable people will disagree. Further, a government may decide that income redistribution should be stronger or that benefit rates are too low and so, under their watch, benefits will be increased. That’s a policy choice that voters get a say on every three years.

So does the 2021 budget directly undo the 1991 benefit cuts?  Not exactly. By 2020 benefits had already been returned to similar levels in terms of purchasing power to what they were before the cuts in 1991. The 2021 budget closed what small gap remained and then added some more. Perhaps such a statement about reversing the ‘Mother of All Budgets’ says more about the politics of budgets than about the economics.

MIL OSI