Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: It shouldn't be just the rich getting richer

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A number of recent publications on wealth and income, including the National Business Review's Rich List and the Ministry of Social Development's Household Incomes Report, have highlighted several issues as far as New Zealand is concerned.

The first point to note is that there are a large number of wealthy New Zealanders but our wealth is more concentrated than it is in Australia.

As the accompanying table shows the 10 wealthiest New Zealanders have total assets of $21.7 billion, the equivalent of 37.5 per cent of the total value of all NZX-listed companies at the end of June.

By comparison the 10 wealthiest Australians have total assets of A$55.5 billion, or just 4.1 per cent of the value of all ASX listed companies.

Our wealth is also far more concentrated when compared with GDP. The top 10 in our Rich List have total assets equal to 11.0 per cent of GDP whereas Australia's 10 wealthiest individuals have total assets equal to just 4.1 per cent of GDP.

A similar trend is evident when we look at the 50 wealthiest individuals in both countries. In New Zealand this group has total assets equivalent to 61.3 per cent of the NZX's total value compared with their Australian peers which have total assets equal to just 8.0 per cent of the ASX's total capitalisation.

Based on these figures wealth in New Zealand seems to be incredibly concentrated but there are a number of additional factors that have to be considered, including:

* New Zealand's Rich List figures may be substantially overstated because only a small number of these individuals have their money tied up in listed companies where value is much easier to measure. Sir Stephen Tindall, who is in 25th place, is the highest-ranked New Zealander with most of his assets in a listed company whereas a larger per cent of the wealthiest Australians have substantial ASX investments.

* A number of the wealthiest New Zealanders live offshore whereas the Australian Rich List only includes individuals who live across the Tasman. For example Rupert Murdoch is not included in the Australian list because he lives in New York.

* It is easier to create additional wealth in New Zealand, and to pass it on to the next generation, because of the absence of a capital gains tax or death duties.

* Any comparison with the NZX flatters our Rich List because the domestic sharemarket has hardly grown over the past 24 years. In mid-1987 the top 10 New Zealand Rich Listers were worth $2.9 billion or 6.9 per cent of the NZX's value of $42 billion, whereas they are now worth $21.7 billion or 37.5 per cent of the NZX's current value of $58 billion. One of the notable features of the New Zealand Rich List is that there are few rising stars on the NZX, with the notable exception of Rod Drury, the founder of Xero. Sharemarkets are major vehicles of wealth creation in most Western countries but the NZX is not performing this role at present.

New Zealanders generally try to create wealth through property investment or the sale of private businesses to trade buyers or to private equity.

Our heavy reliance on property is strange because this asset class usually has limited upside potential but has substantial downside risks because of high gearing. The New Zealand Rich List has seen a large number of property investors come and go since its inception 24 years ago. Michael Friedlander and Sir Robert Jones are the only property investors to consistently remain in the top section of the Rich List over the past two decades.

The Ministry of Social Development's "Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2010", which was published this week, confirms this wealth inequality.

The report discloses that the top decile (top 10 per cent of wealthy in terms of numbers) have 52 per cent of the country's wealth, compared with only 25 per cent of the country's income.

According to the report: "This degree of wealth inequality appears to be not greatly different to what prevails in many other OECD countries." The report reveals that the top decile holds 45 per cent of the United Kingdom's wealth and 71 per cent of total United States wealth.

The concentration of wealth, which is increasing rather than decreasing, will remain a feature of New Zealand until we save more and have a much stronger sharemarket. A more buoyant sharemarket would enable young entrepreneurs, with strong business models, to raise capital and create wealth for themselves, their employees and external investors.

The Ministry of Social Development's report on income shows that income inequality in New Zealand was low by OECD standards in the mid-1980s.

However income inequality increased rapidly from 1988 to 1992 as higher income earners did much better than those on lower incomes.

The income gap narrowed between 2004 and 2007, mainly because of the Working for Families scheme. This programme has boosted incomes for low- to middle- income households with children. Inequality has declined further since 2007 because the top two deciles have experienced lower investment returns and the lower deciles have made gains in real terms.

One of the most disturbing features of the ministry's report is the income position of older New Zealanders, those over 65 years of age.

The great majority of the older age group are heavily dependent on New Zealand Superannuation, Veterans Pension and other government transfers for their income. According to the ministry's report:

* 40 per cent of the 65+ age group have virtually no other income source.

* The next 20 per cent have on average around 80 per cent of their income from New Zealand Superannuation and other government transfers.

* The government provides 50 per cent of the income for the next 20 per cent.

* In 2010 around 50 per cent of older New Zealanders had income of less than $100 per week from sources other than government transfers.

* The degree of government dependence has not changed greatly in the past two decades but the number of individuals in the older age group is increasing rapidly.

Although the ministry's report warns about the value and wisdom of international league tables it goes on to say that based on the latest data "New Zealand had one of the higher poverty rates in the OECD in 2008-09 for those aged 65+".

The good news is that New Zealanders in the 65+ age group rank much higher on OECD non-monetary indicators than they do in income-only indicators.

A large number of government policies, including capital gains taxes, death duties, income tax, superannuation policies and government income transfers, play big roles as far as wealth and income inequality are concerned.

If the National Business Review's Rich List figures are accurate then there has been a dramatic concentration of wealth at the top end since the 1980s.

The increase in income inequality has been checked in recent years only through the introduction of Working for Families and lower investment returns for the wealthy.

There seem to be inconsistencies regarding the latter point as the National Business Review reports that its Rich List group is doing very well, yet the ministry argues that income inequality is contracting because the wealthy are experiencing low investment returns.

The most appropriate way to solve the wealth and income inequality problem is to find ways to raise the wealth and income of all New Zealanders.

This should be one of the main issues for debate in the upcoming general election campaign.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

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