Corked Wine in a Cracked Bottle? 'Social Investment' and New

Corked Wine in a Cracked Bottle? 'Social Investment' and New

Corked Wine in a Cracked Bottle? ‘Social Investment’ and New Zealand’s welfare reform in Trans-Tasman context Dr Simon Chapple AUT Policy Observatory...

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Corked Wine in a Cracked Bottle? ‘Social Investment’ and New Zealand’s welfare reform in Trans-Tasman context

Dr Simon Chapple AUT Policy Observatory & VUW [email protected]

What’s good and what’s not about “social investment” in NZ 1. Tomorrow matters, as well as today 2. Joined-up policy making across agencies

3. Use of “Big Data” to help inform decisions 4. No focus on measuring people’s outcomes in making investments, despite rhetoric of their importance 5. Welfare transfers and real resource costs are treated the same 6. All win-wins. Trade-offs between equity and efficiency hidden 7. Flows off a welfare benefit are a good proxy for flows into jobs 8. All jobs are equally valued

9. Spending resources on expensive actuaries rather than measuring people’s outcomes

Political architect of social investment in New Zealand “When government does its job well and intervenes effectively it enables vulnerable people to increase their resilience and social mobility, and it helps them make positive changes to their lives. It also reduces demand for public services over the medium to long term, and therefore saves taxpayers money. What works for the community works for the government’s books.” Bill English, former Minister of Finance, current PM, Annual John Howard Lecture to Menzies Research Centre, 2015

“The purpose of an investment approach is to make the long-term costs transparent and to guide investments to improving employment outcomes and reducing long-term benefit

dependency…It is the accompanying social costs that we see alongside the financial costs

that are the real concern.”

Paula Bennett, former Minister of Social Development, now Deputy PM, 2011

The politics of social investment • Bill English entered Parliament in 1990 • National Party, elected in 1990 under the first past the post uni-cameral system (48% popular vote, 69% seats) • Cut welfare benefits and other government spending significantly in 1991 • Standard centre-right “smaller government” • Burnt political capital in hope of rapid return • Public rebellion, in part due to this budget, led to the introduction of proportional representation • Since, no majority government in New Zealand

Centre-right problem: How to achieve goals of reducing the state in an environment of proportional representation and coalition politics? (2014 election, National Party 47% of popular vote)

Answer The win-win of social investment, with headline rhetorical appeal across the political spectrum

Why did the model cross the Tasman? Centre-right government, similar political constraints

So what’s wrong with social investment win-wins? Look at what is being done, not the headline rhetoric from Ministers When the nuts and bolts of NZ social investment are examined, only one win is measured and incentivised It is the fiscal, re-distributional win. Fiscal redistribution is considered a good proxy for social and economic wins

Key unifying feature of the New Zealand social investment approach so far • Managing and incentivising the working age welfare system providers in terms of the future fiscal liability • At the same time tightening the rules of

eligibility and increasing the amount of surveillance of beneficiaries

What is future fiscal liability? • The predicted and discounted future costs in the welfare system of those who have been on a benefit over the reference year • 80 percent of liability is welfare benefit payments

Where does fiscal liability come from? • 2011 Welfare Working Group • Lessons from insurance industry – Insure against adverse events – Now and future premiums from clients (asset), now and future pay-outs to clients (liability), maximise the difference (net worth)

• How good is the analogy? – No asset, only liability – Reduce liability by running down the unobserved assets – Describing people on welfare as a “liability”

Fiscal focus: Look where the money is going • Amount of money spent on actuaries measuring fiscal liability, 2010 to 2017, probably $10 million NZD> • Amount of money spent on measuring

outcomes of people subject to social investment policy, virtually zero

Fiscal focus: Look at the government’s strategic objectives • Better Public Services Goal 1: “Reducing long-term welfare dependence”, via two measurable targets: – Reducing working age client numbers by 25% to 220,000 in 2018 – An accumulated actuarial release of $13 billion in 2018 – Note neither target is about long-term benefit dependence

Actuarial release=estimate of change in fiscal liability from changes in the number of beneficiaries and their likelihood of long-term benefit receipt. “isolate[s] the impact of collective Government activity on beneficiary numbers”

Fiscal focus: Failure to evaluate welfare reforms, 2012015 • No evaluation plan, no evaluation, despite being the biggest welfare reform for a generation • Argument offered: it is all in the residual fiscal liability change, attributed to reforms and management influence

• So nothing more need be examined

Fiscal focus: Look at the Social Investment Unit (SIU) “Social investment is about improving the lives of New

Zealanders by applying rigorous and evidence-based investment practices” “The SIU has the potential to provide Government with the ability to look across the social sector, and examine particular population groups from a life-course perspective. This will enable a greater focus on the longer-term drivers of fiscal costs, by identifying the connection between some of those cost pressures and particular at-risk groups.”

Fiscal focus means perverse systemic incentives • Benefit take-up • Good jobs, bad jobs, all the same • Not everyone leaves benefit to work

• Overall, inefficient decision making

Table 2: Most working age beneficiaries do not leave the benefit for work, 2004-2016 data on reasons for benefit cancellations More Less than or

than one

equal to one year

year

Obtained work

38.6%

27.2%

Transferred to another benefit

19.6%

33.3%

1.5%

4.9%

10.2%

3.5%

No further medical coverage provided

5.6%

3.4%

Left New Zealand

2.9%

3.2%

Failed obligations/to re-comply

3.1%

2.6%

Imprisonment

1.5%

1.9%

Excess Income

1.5%

1.3%

Other

15.6%

18.7%

Total

100.0%

100.0%

Benefit duration

52-week reapplication/annual review Full-time student

Fiscal liability crosses the Tasman Priority Investment Approach “Actuarial valuations…will be used to track the effectiveness of policy interventions” Christian Porter, Minister of Social Services, 2016 Budget DSS Try, Test, Learn Fund, @ $100 million AUD over four years, aims variously to: “help people live independently from welfare” “improve life-time well-being” and achieve “better outcomes” TTL “evaluation at the centre of design” but it is unclear what outcomes are sought from the interventions and how they are to be valued. No mention of social cost benefit analysis.

Social cost-benefit analysis and the fiscal redistribution model in the welfare system as competing investment models Social cost-benefit analysis Intellectual origins Outcome to optimise

The fiscal redistribution model

Neoclassical public economics

Fiscal accountancy Intertemporal income redistribution to net taxpayers Efficiency in the use of scarce societal resources at from net beneficiaries within current tax/benefit the margin rules

Treatment of positive employment Valued at gross dollar earnings outcomes

Not valued

Treatment of economic efficiency Explicitly efficiency focussed

Income redistribution from net beneficiaries to net tax payers results in significant trickle down efficiency gains

Treatment of marginal utility of income

Values income gains to poorer people above those to Income payments to beneficiaries valued at zero, richer people reflecting declining marginal utility of income losses to net taxpayers are valued dollar for income dollar

Treatment of welfare benefits

Income accruing to net tax payers is valued, that Explicit information provided on winners and losers, accruing to net beneficiaries is not. No additional or explicit distributional weights distributional issues Re-distributional. Costed at tax deadweight A dollar-for-dollar cost. No tax deadweight

Treatment of costs

At opportunity cost, including tax deadweight

At accounting cost. No tax deadweight

Treatment of flows over time

Inter-temporal discounting to PV

Inter-temporal discounting to PV

Treatment of distribution

Thank you!