Labour's election campaign six months ago was defined by two issues that will confront each other next week when it announces its first Budget.

First, the Prime Minister's commitment that child poverty was her motivation for being in politics, which harnessed public impatience with inequality.

Poverty and poor housing were the most commonly recited issues in public opinion surveys. Expectations are very high and the Government's credibility depends on game-changing initiatives as the centrepiece of the Budget.

But then the Government staked its reputation on another election commitment — no new taxes. Not the pledge I would have made. After nine years in opposition, the work should have been done to campaign on a defensible tax and spend package that reduced income tax and introduced a tax on unearned wealth, treating all income the same. But it's a promise locked in political iron now.


Set aside mostly partisan bickering over whether or not road user changers or GST on Amazon purchases count as "new taxes" because these issues are relatively fiddling. The tax debate that matters is about redistribution and the proportion of our economy that is transferred through the tax system to reduce inequality or at least reduce poverty.

Given the double-whammy pledges not to introduce new taxes and also to run surpluses, the Government's only options to reduce inequality are to reprioritise spending, use its capital rather than its "grocery" budget, and to be bold in reforming social spending.

We have already heard that about $700 million of spending has been re-allocated, which sounds like a lot but against an annual spend on social welfare and superannuation of more than $30 billion its too puny to go far.

That's why a very large investment in new housing and infrastructure is the logical priority for social investment. To simplify a little, when you spend $100 to build a house you also create an asset worth $100, and so your surplus remains the same. The Government can invest heavily in house building or infrastructure without blowing its fiscal limits, and doing so achieves substantial social gains for the people housed.

The Government potentially also racks up wins in reduced rent-subsidies for landlords, and in job creation because house building is one of the most employment-positive things we can do.

But while a huge Government-led housing project can make a life-changing difference for a lot of people, the Government on its own can't come close to building enough. That's because the crisis in housing affordability ultimately works as a rough indicator of inequality. When huge numbers of us can't afford to own a house, and many families can't even afford to rent, then too small a portion of our economy must be going to incomes.

Let me put that the other way around: our economy produces enough wealth to build enough houses, so if many families can't afford housing they are not getting an adequate share of the economy. We don't have a housing problem. We have a wage problem.

The Council of Trade Unions has pointed out that working people's share of the economy has fallen from around half thirty years ago to barely 40 per cent today, a difference in wage packets of $20 billion a year, which is worth $6000 to $10,000 a year to an average family. That is wealth our economy produces each year, but is no longer going to working people.


The Government can't fix wages in its budget. Only significant changes in the way wages are agreed between working people and employers will increase returns to work compared to returns to capital.

Awkwardly, expectations of wage increases in the public sector are high, which further reduces the Government's room to supplement wages through initiatives like KiwiSaver and Working For Families. Not much cash is going to be left for the hard up and those kids in poverty.

The obvious and moral choice is to make social spending more effective. The Labour-led Government should be prepared to learn from some of National's ideas around devolving the delivery of care and social spending to local communities.

As we have seen in Māori development (with some spectacular results), and mental health care (with mixed results), devolving responsibility to communities empowers them to solve their own problems.

The last National Government took ownership of the very "Labour" concept of subsidiarity, where decision-making and resources are handed over to communities who understand their problems better than anyone in Wellington. Labour needs to reclaim devolution.

After 30 years of attempts to more efficiently target social spending, poverty traps, unfairness and generational inequality call for change.

What most people receiving social assistance need is more money in the right place. The Government simply won't have enough pinger to re-cut the pie to ensure all the hungry kids get enough of a slice. Devolution of services and targeting funds would mean more effective use of existing spending.

If facebook can work out which kitten videos you want to see, then the Government's data should be able to work out who needs the most support.

• Josie Pagani is a former Labour Party candidate.