BLOG: Nikki Hurst - Subsidies Don't Really Help

Subsidies don’t really help - Or at least, not who you think.

Governments over time like to offer targeted support to meet specific needs. Generally, these are described as a subsidy, allowance or supplement. And while not always specifically within the tax system, they are effectively Government’s way of targeting lower income earners.

Currently, the most well-known are support payments for accommodation, childcare and winter energy payments.

But do they help? That is less clear, at least for who they claim to help.

The reality is that money received goes where the subsidy says it will – to the for-profit businesses providing the service, not the family who needs to pay for it. The cost of accommodation in Aotearoa is famously high, and residential rental market poorly regulated and undertaxed.

Early childhood education in New Zealand is mostly delivered by five massive organisations, regardless of what the sign on the safety gate says. And our power is supplied by huge companies that are listed on our stock exchange, making millions daily with shareholders as diverse as the government of New Zealand.

While not the intention, the transfers may as well go from the governments bank account directly to the businesses where they will end up. The lower income earners, families and older people are simply conduits for tax-payers money to flow through to property investors, owners of childcare business, and power companies.

These transfers occur alongside the already favourable tax arrangements each of these groups have.

The fact that these payments are well known - and that increases are big news - creates unintended problems for those that receive them. Repeatedly we see that once an increase is announced the businesses receiving them then increase what they charge.

A quick google will show that there are plenty of reports arguing that there isn’t a connection.

But that same google search shows consistent calls for increases needed to subsidies to meet the market – so is it a chicken and egg scenario, and the overall result is the same?

If the point of the free market is to make as much profit as possible, and a key player seems to constantly pay what the market demands, then costs will always increase.

These transfers are why investing into residential rentals and childcare are so secure – your investment is guaranteed by the government of the day.

And the other major beneficiary, banks, take this into account when giving access to financial capital.

We need to seriously address whether or not residential property investment and early childhood education are businesses or essential elements of our infrastructure. Current tax breaks for rental properties and plans to address calls from the ECE sector to lift rebates so their business model doesn’t fail suggest that as a nation we value the services provided.

But do we also value a small group of people having ownership of these businesses, their longer term profits and their very long term asset base? Or should we be aggressively funding and growing state owned childcare and developments?

We use the excuse of “the power of the market” to ensure that government owned / partially owned entities operate in that same market. But what if our government owned and controlled entities like Kiwibank, like Genesis, Mercury and Meridian became loss leaders?

What if Kiwibank and the power companies we control acted to create profits on far, far smaller margins while attracting greater numbers of clients?

What if crazy things like price controls were at least debated – as well as for rentals? Has New Zealand’s famously free market become so free that we accept that it is the government’s role to subsidise the substantial profits of the few, to gain access to services for the many?

After all, the first law of capitalism is to be the one with the means to control the flow of capital – or as we used to say it back in the 90’s, he who dies with the most toys wins.

Nikki Hurst is Kaiwhakahaere Matua, Executive Officer of New Zealand Council of Christian Social Services.