Welfare reform and social investment

Australian policymakers and commentators are looking to New Zealand for ideas on reform. One idea that has attracted a lot attention is social investment.

‘Spend now to save later’ is the principle behind social investment. As New Zealand Minister for Finance Bill English puts it: ‘We are prepared to spend money on effective programs which change lives, because what works for the community also works for the Government’s books.’

Welfare reform is one area where policymakers are trialling the social investment approach.

A win-win approach to budget repair

Citizens expect governments to maintain a strong safety net to protect people in the face of challenges like unemployment, illness, disability and old age. But they also expect governments to strike a balance between the protection they offer through services and payments, and the cost they impose through the tax system.

Social investment is about simultaneously achieving benefits for individuals and savings for government. As a report by Deloitte explains:

In a New Zealand context, social investment can be defined as government activity undertaken on the basis of a return on investment justification. Data is used to quantify a social problem, including the long-term costs to individuals and government. Agencies seek funding for interventions on the basis of the likelihood and extent to which future costs to government are reduced by improving social outcomes. Finally, measurement and reporting is undertaken to ascertain how successful programmes are in achieving both the cost reduction and improved life outcomes.

In a budgetary environment where policymakers are under pressure to find savings, greater investment in one program often means cuts to another—one group’s gain is another’s loss. Social investment promises an escape from this kind of zero sum reform.

Welfare reform

Working age income support policy is an area where policymakers see opportunities for social investment. Much of the spending in this area is driven by a small proportion of recipients who spend long periods on payment. If it was possible to identify those most at risk and divert them from income support and into work, their incomes would rise and the cost to government would fall. This is the thinking behind the New Zealand ‘investment approach’ to welfare reform and the Australian Government’s Priority Investment Approach.

The easiest part of the approach is identifying groups most likely to spend long periods on income support. The harder part is to find cost-effective interventions that move individuals away from welfare. The New Zealand Government is currently running a number of randomised controlled trials to test interventions (see: NZ Productivity Commission (p. 6)). In Australia, the Government has recently announced a Try, Test and Learn Fund to trial innovative interventions.

While results from the trials are not yet available, New Zealand policymakers have already claimed some success at reducing future spending on income support. To a large extent they have achieved it by increasing the proportion of income support recipients who are required to look for work. According to a report by the Controller and Auditor-General, legislative changes in 2013 increased the number of people who had to show they were actively looking for work from 50,000 to 130,000. Policymakers began by providing ‘short-term high intensity’ services to those recipients most likely to achieve outcomes quickly. It may take time to develop effective interventions for recipients with complex needs.

Looking to the future

Nobody is sure what results to expect from a social investment approach to welfare reform. Some people suspect that much long-term reliance is due to a ‘culture of dependency’ that takes hold when otherwise employable people become habituated to receiving income without work. They argue that much of the problem is caused by the design of the income support system itself. They hope to achieve lifelong impacts on income support reliance by diverting young people away from welfare and towards work.

In contrast, others point to evidence that many long-term income support recipients have multiple, complex problems that will permanently prevent them from maintaining steady employment unless they are overcome. They argue that sustained results will only come from interventions that tackle problems like illiteracy, innumeracy, mental illness, homelessness, and substance abuse. Some, like economist James Heckman, argue that interventions with adults are rarely cost effective and that the best returns come from early childhood programs.

If a social investment approach is to move beyond enforcing work obligations, it is more likely to succeed if policymakers adopt a cross-portfolio approach to measuring savings. Interventions that successfully deal with complex underlying problems are likely to have a whole-of-government impact on government spending. These kinds of interventions may also reduce spending on acute mental health services, homeless services, and law enforcement. Effective programs are more likely to be funded if policymakers take a broad view of return on investment.


Flagpost is a blog on current issues of interest to members of the Australian Parliament

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