Economically speaking, there are few things as problematic has high inflation. Last week, inflation hit 7.3%. Yes, employment rates are high. Yes, wages are starting to rise to keep up with prices. But not everyone is benefitting from the bustling labour market, and there are many workers not in a position to bargain for a pay rise that matches the inflation rate.

Households whose incomes are not keeping up with price rises are experiencing a fall in their standard of living. Lower-income households feel the pinch more because necessities such as rent, mortgage payments, food, and fuel take up a large, and increasing, share of their income.

Here we look at those lower-income households: who they are, what pressures they are under, what is being done to help them, and what more could be done.

Research into in-work poverty by Auckland University of Technology found a number of factors associated with low incomes. Non-working households, or households where there is only a single earner, Māori and Pacific households, households with adults who have lower educational attainment, single person households, sole parent households, households comprised of multiple families, and households in which the main earner is female are all characteristics that increase the probability that a household is existing below the poverty line.

As at June 2021, sole parent median household incomes were just 48% of the average across all households. For one-person households it was 53%. In terms of personal incomes, females were 75% of the average, Māori were 89%, and Pacific Peoples 87%. These lower incomes are associated with lower employment rates and, for those in work, lower earnings because they work fewer hours, work in lower-paid jobs or are paid less because of gender and ethnic pay gaps.

Young people and retirees also tend to be on lower incomes. The median personal income of people aged 20-24 years was 92% of the average. For people aged 65 and older, just 54%. Disabled people and their carers often face economic hardship on top of the everyday challenges that their condition poses. The median personal income of disabled people was 53% of the average.

The initial effects of the COVID-19 pandemic and measures to contain it saw an increase in the number of people out of work, and reductions in the hours worked for many of those who kept their jobs.

Following lockdowns, the New Zealand economy roared back into life. Aided by the Wage Subsidy, low interest rates, high prices for our commodity exports, and other Government and Reserve Bank measures designed to avoid recession, people went out and spent the money they had saved during lockdown. The construction sector went gangbusters, and aside from tourism, most other sectors either avoided a contraction or grew faster than anyone expected.

With borders closed to working migrants, the rapidly overheating economy brought the unemployment rate below 4% and beneficiary numbers, which has spiked in 2020, started to decline. Despite low unemployment, beneficiary numbers remain well above pre-pandemic levels, which means more households are facing financial hardship. As of the March 2022 quarter, Jobseeker Support numbers were up 17% from the March 2020 quarter, and Sole Parent Support recipients were up 19%.

Then inflation reared its ugly head. Not just in New Zealand, but internationally. Which meant that not only were we creating our own domestic inflation, like the pandemic that preceded it we were also importing rising prices from overseas.

The 7.3% inflation rate that stole all the headlines last week is by no means the full story. Depending on their spending patterns, different households will be experiencing different cost of living pressures. Regionally speaking, the North Island, outside Wellington and Auckland, is facing the highest inflation pressures. Māori households and higher income households are also experiencing above average inflation rates whereas lower-income households are experiencing below average pressures. But this is cold comfort for those on lower incomes. Across all households, the cost of living is rising at a much faster rate than it has done in many people’s living memory.

Wages are starting to respond, but it takes time for pay reviews to roll through the economy. And when most of your income is already taken up by necessities such as rent, mortgage payments, food, power and fuel, if prices are rising faster than your income even for a short time, this can spell trouble.

Bottom quarter rents rose 7.8%pa in the year to April 2022. In 2022, mortgage payments on an average house value made up 49% of average incomes1, up from 33% in 2020, and interest rates are expected to rise further making it even more costly to service a mortgage. Food prices rose 6.5%pa in the June 2022 quarter, their fastest in a decade (see Chart 1). Petrol is up 38% (see Chart 2), and energy prices are starting to creep up as suppliers begin to phase out low usage plans. In comparison, the adult minimum wage rose 6% from $20 in April 2021 to $21.20 in April 2022.

It is not easy to discern the effect these cost of living pressures are having on low-income households. There is a paucity of data, and the effects are either only just beginning to materialise or are exacerbating trends that have been evident for a number of years. Either way, we probably have some way to go before they fully play out. But the signs are worrying.

Financial pressures can force families out of their rental homes or force them to default on their mortgage. The number of applicants on the public housing waitlist has been rising since 2016. In the December 2021 quarter the number rose 13%pa, albeit down from a 53%pa increase in the September 2020 quarter.

At the same time, there is continuing demand for Special Needs Grants to help people meet the costs of temporary emergency housing such as motels. In June 2022 alone, 9,600 Special Needs Grants for Housing were issued. We use the number of grants as a proxy for the number of people in emergency housing. However, with the Government moving to either own or contract motel accommodation, this will reduce demand for Special Needs Grants but not the demand for emergency housing.

In the same month, almost 78,000 Special Needs Grants for Food were issued. An in May 2022, almost 1,400 withdrawals were made from Kiwisaver for financial hardship reasons. It would be unsurprising to see cost of living pressures push these numbers higher in coming months.

Other effects of financial pressure may take years to materialise in the statistics: rises in property crime, domestic abuse, drug abuse, problem gambling, and gang membership. There may also be changes in the extent and way that health services are consumed such as visits to the Emergency Department for free treatment rather than paying for a visit to the GP. All these socially destructive forces may become symptoms of harder economic times.

Getting inflation under control is a priority. In an effort to take the heat out of the economy, the Reserve Bank continues to increase interest rates. At the same time, the Government is trying to strike a balance between alleviating cost of living pressures and not fuelling further inflationary pressure.

Increases to Working for Families, Superannuation, Student Allowance and other main benefits, Minimum Wage increases, Fair Pay Agreements, the COVID Income Relief Payment, the Temporary Cost of Living Payment, cuts in petrol excise duty, RUC charges and half price public transport (now extended until 31 Jan 2023), the Community Connect scheme, increases in Parental Leave payments, the Winter Energy Payment, Free school lunches, cheaper GP visits and Working For Families tax credits are all designed to put money in people’s pockets.

Poverty reduction is challenging not least because it is very difficult for governments to accurately target the less well off. The cut in petrol excise duty, for example, helps middle New Zealanders as much as it helps those on lower income – perhaps more so. Fiddling with the tax system is also fraught. Why not just reduce the lower rate of income tax, or increase the thresholds? Again, this helps middle income earners more than it does lower-income earners, and does hardly anything for those on benefits. Tax credits for low income earners tend to be better targeted. The Working for Families tax credits are an example of this. Benefits are also a more targeted policy. Benefit rates have been raised. Governments can also look at how benefits are withdrawn when people enter work to ensure that lower-wage earners are not penalised.

Cost is a further consideration for the government. New Zealand’s government debt is low compared with many other developed countries. But there’s no escaping the fact that government spending to address the COVID pandemic has heaped debt onto later generations, and every new hand-out increases that burden.

What else can be done? There are very few quick fixes. Opening the borders to more working migrants might help alleviate labour and skill shortages, which takes pressure off employers to raise prices to cover increasing wage costs. But allowing in too many migrants can be inflationary itself.

The Government could temporarily reduce GST on basic necessities. If it can reduce tax on petrol why not food? However, this would not be a well-targeted policy as it would benefit better-off households as well as those on lower incomes. It would also be costly.

A less eye-catching but potentially better targeted policy would be to increase Government funding that goes to community groups and government agencies whose role is to support the less well off such as the Salvation Army. The signs are that these organisations will see greater demand for their support in the coming years.

COVID has upended our society and our economy. We have all experienced hardship to some degree over the past couple of years. But as always when things get tough, it’s the most vulnerable that feel it the most.

1 Based on payments need to service a 20-year mortgage, 20% deposit, at 2-year fixed rates.