The NZ investment approach: boon or bane?

By David Donaldson

Tuesday August 2, 2016

The Australian government has announced it will adopt New Zealand’s “investment” approach to welfare, spending money on people at high risk of becoming major welfare recipients over their lifetime to head off the problems before they occur.

It’s about investing funds now to prevent future costs. Predicted long-term costs are calculated based on indicators of disadvantage and money is apportioned to avoid entrenched, costly disadvantage.

It’s the sort of policy idea that fits with a lot of the current thinking on social spending — it’s preventive, has potential to help build human capital and is data-driven.

But it’s been met with a fair amount of criticism. One NZ academic says “If Australia want to abuse and brutalise their people, then sure, copy our system.” ACOSS is concerned the government is more interested in kicking people off welfare than helping them.

Welfare expert and ANU Crawford School of Public Policy professor Peter Whiteford thinks “on balance it’s a good idea”, but that we’ll have to wait and see what the details are to know whether it’s worthwhile.

“The idea of early intervention — how can you argue against that? But the question is, can you actually do it.”

He’s concerned that the government is rigorous with the data, committing to evaluate the results properly. There’s also the eternal Australian problem of cost-shifting between state and Commonwealth.

“There are a lot of specific complexities in terms of evaluating it and the jurisdictional issue that need to be sorted out,” Whiteford thinks.

He suspects some of the criticism of the NZ model has conflated the investment approach with other, concurrent welfare reforms. At the same time as it was introduced, the government made greater efforts to push single parents into work, for example — changes already entrenched in Australia’s welfare system.

The investment approach

The basic idea, known in full as the forward liability investment approach, is inspired by the insurance industry. If someone meets certain criteria deemed to put them at high risk of presenting a large burden on the welfare budget in future — teenage parents or high school dropouts, for example — the government will be able to spend extra money to help get them into work.

So while it may be a significant outlay in the short term, the spending will save the government money over that person’s lifetime by avoiding expenditure on things like welfare, prison, health and family services. In theory this also means better social outcomes.

If early intervention is successful, the savings are potentially huge. One analysis found that the lifetime costs of children and young people with mental health disorders and cognitive impairment, particularly from Aboriginal and disadvantaged backgrounds, can be as high as $1 million per annum. One young woman had cost government $5.5 million by age 20, including 356 police incidents, 604 days in custody and 270 days in hospital.

Systematically factoring in future savings should make it easier to make the case for interventions that will realise significant social and fiscal benefits in future.

Last year’s McClure review of the welfare system recommended Australia adopt the idea.

Social Services Minister Christian Porter told the ABC’s AM radio program the changes would make strong use of evidence and data:

“So for instance, the example that I’ve used is that we could be able to go down and look at a group of two or three-thousand people that represent young people in Geelong between 18 and 22. And then we can use that compare the data against similar groups that might exist — young people in Newcastle or Kununurra or wherever it might be.”

It’ll be based on a $34 million longitudinal report the government commissioned from PwC. There’s also $96 million for a “try, test, learn” fund, which will give grants to NGOs with a plan to reduce welfare dependency among specific groups.

Incentives and unintended consequences

ACOSS chief Cassandra Goldie suspects the government is more interested in the budget than welfare recipients. In New Zealand it has led to lower social spending, she says, but hasn’t been as successful at finding jobs for people.

“For example, after 12 months, about 40% of those people were back on income support, so even if you were moved into some kind of employment it was not durable, it was not long term,” Goldie argues.

A key problem is that although reducing future fiscal costs is a decent proxy for improving lives, it’s not the same thing. Agencies are rewarded for helping reduce the future welfare bill. In many cases a client moving off welfare will benefit — by finding a job, for example — but this is not necessarily the case.

As University of Otago economist Simon Chapple points out, the focus on reducing costs encourages agencies to root out welfare cheats, but also genuine recipients. It “creates incentives to increase stigma and muddy entitlement information” for agencies, he argues.

The emphasis on future costs also rewards spending more on young people, potentially leading to less investment in older people.

And there’s the issue of “cream skimming” — skewing interventions towards those who are easier to help, leaving behind the “lost causes”, as has been observed in outcomes-based employment contracting.

Of course, this wouldn’t be the first perverse incentive in a policy idea, but it’s a challenge the government will have to consider carefully while setting it up.

Lining up the savings

Australia will face an additional problem not endured by our neighbours across the Tasman: our multi-tier governmental structure makes it more difficult to line up spending and saving.

Many of the savings resulting from Commonwealth spending will accrue to state governments.

“People are usually disadvantaged because of things that have nothing to do with welfare system, such as where they live, their contact with the justice system or child protection, or mental health. The NZ government can do a lot more about those things than the Commonwealth does, unless the states go along,” Whiteford argues.

Chapple is sceptical the actuarial approach is really any better than the standard cost-benefit analysis, arguing its “fails to value employment and social impacts of interventions in a rational fashion”. He believes this approach is too narrow, and that other models of measuring future benefit against short-term spending have not been fully considered.

The actuarial approach measures improvements to the budget, potentially ignoring the wider benefits captured by a cost-benefit analysis. Don Arthur of the Parliamentary Library notes:

“There is some risk that an investment model could have perverse effects if implemented in Australia. For example, some highly successful interventions could be ruled out by the investment approach because the benefits they provide flow to program participants and the broader community rather than to the Treasury.”

The differences between Australia and NZ might mean there are fewer gains to be made here from an actuarial approach.

One evaluation suggested extending activity test requirements to those who did not already have them — something Australia has already done — had been among the most effective in reducing expenditure in NZ (though without much benefit to individuals).

Whiteford points out the skew towards younger people may mean it’s a less effective tool here — New Zealand’s youth unemployment rate is almost double that of Australia’s.

The big questions about Australia’s implementation of this future liability model are yet to be nailed down. It will be interesting to see what lessons it draws on from New Zealand’s experience.

About the author
Inline Feedbacks
View all comments
The Mandarin Premium

Canberra’s changed

Stay on top for only $5 a week


Get Premium Today