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Is ‘social investment’ just a warm and fuzzy cloak for seeking to shrink the state?

Budget 2017: Bill English has been trumpeting the “social investment approach” as a core part of his thinking, and it underpins much of this week’s budget. For economist Simon Chapple, however, it amounts to a rhetorical banner that obscures standard centre-right political goals

Dr Simon Chapple has held senior economist and public policy roles in New Zealand and abroad, including the OECD, NZIER, the Department of Labour, and Ministry of Social Development. He is contributing a chapter on long-term fiscal redistribution for an upcoming book on the social investment approach in New Zealand. Below, he speaks with Julienne Molineaux, director of the Policy Observatory at AUT

Read all out Budget 2017 coverage here.

Julienne Molineaux: “Social investment” is a term Bill English uses to describe his approach to social spending. What does it mean exactly?

Simon Chapple: It is important to distinguish between the rhetoric – social investment is a lovely soft attractive phrase across the political spectrum – and what is actually being done under this banner. I believe that the political focus is reducing the long-term size of government.

To understand this we need to go back in time. Bill English entered parliament in 1990. The newly elected National government, of which he was part, cut government spending through the “mother of all budgets” in 1991. Reducing the size of government is a standard centre-right prescription, but that particular slash-and-burn exercise burnt a lot of political capital. The hope was a very quick bounce back and a rapid political dividend. But the bounce back didn’t happen and the policies were unpopular with the public.

Bill English learned from that episode. In a sense the ‘social investment approach’ is pursuing the same goal – smaller government – but in a more subtle way. English’s claim is that social investment is a win-win by reducing the size of government while simultaneously enhancing people’s outcomes. However, when the nuts and bolts are examined, the principal win that government is measuring and incentivising is fewer fiscal dollars, not the secondary win which is better outcomes for people.

What are the key features of the “social investment approach”?

It is moving and evolving. We’ll get a better idea of this with the 2017 budget.

That said, the key unifying feature is managing and incentivising the welfare system in terms of reducing the future fiscal liability – that is, fiscal spending on people on the government books today and into the future – within tightening rules of entitlement and surveillance.

This approach began with the 2011 Welfare Working Group. They were was instructed by government to look at lessons to be learned from the private insurance system for how to operate welfare. Private insurers insure people against adverse events, and this creates a liability that extends into the future if they have to pay out on those events. But insurers also have a corresponding asset, which is income paid to them now and into the future as people’s insurance premiums. So the private insurance sector makes decisions to maximise the difference between their expected future assets and future liabilities.

The government is using this insurance analogy to make decisions on how well the public service is doing and about what to invest in. But how good is the analogy? The answer is not very good.

Obviously the government is not a private insurer. There isn’t a market where people can choose, say, their welfare cover and take their money elsewhere if they find a better deal. The government is only observing one aspect of the analogy with insurance: the future fiscal liability. But if the system is solely based around liabilities, why do we even have a welfare system? What is our asset and how do we value it? How do we build up the asset as much as reduce the liability? Lastly, what effect does it have on people needing welfare and the way they are treated by officials if they are conceptualised as a liability?

What are some examples of problems arising from having such a narrow focus?

Work and Income, if they are fulfilling their duties under the Social Security Act, should ensure that everyone entitled to a welfare benefit gets one. There is good evidence from the OECD that benefit non-take-up is a serious issue internationally, including New Zealand. For example, there are likely to be many working people who are entitled to but don’t get the Accommodation Supplement. Yet there is a strong disincentive under the investment approach to ensure take-up, because Work and Income is tasked with reducing welfare payments. So they don’t promote it.

Another example is that there is evidence that beneficiaries are increasingly being placed into tertiary study (see Statistics New Zealand, Table 2.1 here). The beneficiary goes off welfare and onto student assistance, and builds up student debt. Income support is effectively privatised, because some student assistance has to be paid back at the end of study. For Work and Income, this is an unambiguous win, because even if the education is a complete failure, the person is off welfare and out of the liability calculations for three years. But for the student/beneficiary, who may now have a large debt that they struggle to repay, it can be a loss.

Are government agencies being given a reward or incentive to reduce spending or the number of people on their books?

Yes, absolutely. If you look at the government’s relevant Better Public Services goal, the performance target is about reducing the fiscal liability of the welfare system and the number of beneficiaries. The target is not about getting people into jobs and ensuring that their social outcomes are better.

Two points. Firstly, leaving a benefit is not the same as getting a job. Secondly, not all jobs are created equal; some jobs are better for people’s lives than others: think a 9am to 5pm job compared to a 9pm to 5am job. Yet the social investment approach assumes that benefit exit means that people move into jobs and it presumes that all jobs are created equal. I think both of these are highly challengeable assumptions and should be empirically tested. Already, we know overall that many benefit exits are not because people get work.

Think of the government system as a hospital. People come into the hospital because they’ve got a problem. No doctor would discharge someone from hospital until they knew that where they are going to was a better place. We want to know when we discharge them that their outcomes are better. Yet this new approach says, “Who cares where they go when we discharge them? We just want them out of hospital.” And I consider that highly unethical. No doctor would be able to get away with it.

Well-designed social spending always had an investment element – for example, investing in maternity care so children get a good start in life. How does this approach differ from what has been done in the past?

In the past, rhetoric about investment has mostly lacked data. The maternity care example is intuitively plausible, but it may or may not be true in empirical practice. In the past we haven’t been very good at quantifying longer term outcomes in a sufficient number of our decision-making processes. To the extent that we can now quantify long-term outcomes better than yesterday, we should be able to make higher quality investment decisions, better informed by evidence.

In terms of evaluating policy, we know that most of the gains from social investments – if we do them well – are to people themselves. So while there may be both future fiscal gains and gains to children from better maternity care today, the government’s social investment model only counts and rewards gains to taxpayers.

Social investment includes a highly targeted approach to social spending, relying on data to pinpoint both recipients of spending and the interventions or programmes used, against a goal or outcome measure. This can be contrasted with a more universal approach to social services, which was the more traditional approach to social spending. What are the pros and cons of this shift to targeted interventions?

The classic problem with targeting is that you have false positives and false negatives. The more you target, the more likely you are to miss out on people who need the service – and you won’t completely solve the problem of providing the service to people who don’t need it.

If we’re looking at vulnerable children, whatever means we have currently for identifying vulnerable children, we’re going to miss a lot of them in the targeting process. In addition there will be some children we identify as vulnerable who won’t be and there may well be adverse consequences of this – for them and for their families. There are ethical issues about access to information needed to target well. Lastly there may be perverse effects on potential clients if they are required to divulge information. Trust between the client and the provider could be undermined, to the detriment of the client’s outcomes.

The other aspect of targeting, compared to a universal model, is that you lose the middle-class’s voice and commitment to the system: the sense of us all as citizens in this waka together. It becomes stigmatising and the risk is that funding is gradually drained out of the system. The lack of an articulate middle-class voice keeps service quality low.

What are the positives?

Thinking long-term is good. But the idea that what we do today matters for tomorrow – this is something we’ve known for a long time! The idea that we should use joined up data to evaluate programmes or connect across government agencies – again this is good, but not a new idea.

Unfortunately we’ve spent an enormous amount of money – probably tens of millions of dollars – on actuarial services to measure fiscal liability. That is money better spent in measuring the things that Ministers say are truly important: the outcomes of people who have been affected by social investment-driven policy change. I find it pretty disappointing that while using a people-focussed rhetoric, we continue spending money on expensive actuaries to measure fiscal outcomes.

Why should we care about things like this?

Rhetorically, we have a warm and fuzzy phrase – “social investment” – which is obscuring standard centre-right political goals. When people vote they should be informed on what the approach is really about, rather than what Ministers say what it is about. If they like that political goal, people can vote for it; if they don’t, then don’t.

We should also care because social investment which only values fiscal wins can go badly wrong – for others and for ourselves. The system creates a bunch of perverse incentives which can negatively impact on people’s lives. Over our lifetime, nearly half of us will be on a working age benefit. So how effectively social investment works, even just in the welfare system, is not about a small minority of Kiwis.

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