Wrap Up and My Preferred Solution

This post is by PaulL, a regular commentor and occasional contributor. It is the sixteenth post in a series on the financial incentives to work and the impacts of our tax and transfer system on household formation, and the ninth post on the “what could we do” subsection. The index to all posts in the series can be found here.

I’ve spent quite a bit of time (some would say an interminable time) articulating what I see as the current disincentives in our tax and transfer system, and some options for what we’d do about them.

To my mind the current system has too many people on a benefit at a time when work is plentiful, and we’re getting worse not better. This is saving up trouble for the future – we need everyone to have a productive life, and contributing to society is part of that. We also cannot be serious about people having equal opportunity if some people fundamentally cannot even get on the first rung of their working life.

If National in particular are serious about a social investment approach, then surely this area is one of the best social investments we can make? If we can get people off a benefit and into work then we change their lives.

This post covers to what I’d do to make progress on this problem if I was leader of a major political party. 

The first thing is to acknowledge that there’s a problem, and state that you see it as a problem that you’ll prioritise in all future tax and welfare policies. With this comes:

1. Some form of analysis or tool that is easily usable by media and other interested parties to understand what the effective marginal tax rates (EMTRs) are today, and what they’d be under any future proposed policy. Treasury have the start of this, but it’s not easily usable and consumable enough. Even perhaps fund a unit within Treasury that will cost for free particular policies as requested by media or political parties (within reason)
2. A standard report that is provided on every policy change. It would explain in a consistent way what the impact is. Create an expectation that even under a change of government this same information will be provided, and over time train journalists to understand and comment on it. My theory is that part of the reason we have this problem is that people don’t understand it – so spend the time to make it understandable. Recognise that many journalists are innumerate, so dumb it down
3. Set a target that no significant group of people in NZ face an effective marginal tax rate greater than 50%. Require one of the government agencies to produce a substantive report on how that could be done (either the Productivity Commission or Treasury I’d guess)
4. Perhaps create a working group akin to the tax policy working group that specifically addresses this question. Again the aim is to get the general population understanding how big this problem is

I’d expect that analysis and working group to come up with a policy that costs in the order of $5-10 billion per annum. Less than we spend on National Superannuation, and around one sixth to one third the amount we currently spend on welfare in total. I’d be hopeful that we could come in at the lower end of that cost with the right attention.

I’d also like that programme to both deal with incentives to move into work, but also directly address barriers that people have to moving into work. It should also have some element of consequence as well – either time limiting of benefits for some people, or a requirement to work/attend for your benefit.

I’d like to see a return of some form of sheltered workshop for those who can/would like to contribute, but can’t contribute enough to earn a minimum wage. This will give those people some dignity and contribution to society.

The programme this group would come up with is likely to cover a number of elements such as:

1. Changing the benefit abatement rates.  The abatement rate on the main benefit needs to be around 40% rather than the current 70%
2. Addressing the particular problem faced by those with children. We need to determine an age of youngest child at which we’d like people to work (previously I think it was 3 years old), and how many hours (I think it was 20 hours of work until youngest child is 5). In that environment I think our current settings of 20 hours of ECE free from 3-5, and schooling plus after school care from 5 onwards, make sense. We could probably work on the mechanisms by which this is delivered to improve outcomes
3. Consider making more ECE free for more hours and from a younger age, where people want it
4. We need some clear disincentives to having additional children whilst on a benefit, and some clear subsidies and support for contraception whilst on a benefit (or, if that’s too scary, just flat out making contraception free for everyone or everyone with a community services card if that’s what it takes). There needs to be no excuse for having children when you’re unable to support them, and it needs to be as easy as possible to avoid that. Note that I’m not interested in older people who’ve forgotten what being young is like and suggest that the easiest way to avoid having kids is to just not have sex. Young people have sex, it’s what they do.
5. Adjust the WFF abatement rates.  This means people on much higher incomes will get WFF.  They pay lots of tax anyway, so it’s not like it wouldn’t be OK for them to get a little return. Worst case, just make it universal (no abatement rate). Universal programmes aren’t my favourite, but it’s a good way to fix abatement rates, and probably the lesser evil
6. Adjust the 30% tax threshold up, and therefore the 33% threshold up as well. We’ll probably be doing this anyway
7. Create stronger requirements for some groups to be moving into work. I’m thinking here particularly of those under 25 who don’t have dependent children (and even those who do once youngest is 3 years old). They simply should be required to be in training or work or community service at least 20 hours a week. And we need to put enough time into monitoring that to make it effective, not just pay lip service to it. At that age, no benefit if you don’t turn up and don’t have a medical certificate. We could also consider drug testing and drug rehab programmes, similar to what many employers require of their staff.
8. I like the MSD Mana in Mahi programme, and I’d extend it. This helps young people into a job or apprenticeship that suits them. Time with a coach who understands you and helps you to find a job that you might be good at, and that you might enjoy, is time well spent. This could put a young person on a path to a fulfilling career. Again this would fit well with National’s social investment approach.

I’d also be running, again under the social investment umbrella, a really strong process to identify barriers that groups of people face to work, and then try things to address those barriers. Do they need mental health support, drug and addiction support, a mentor or coach, an apprenticeship or other training? MSD already do a lot of this, but I’m not sure that it’s as individual centric as it could be, nor as innovative as it could be.

Where possible, partner with the young person’s community. Whānau Ora programmes can work quite well. Sure, some of them fail, but all government programmes have a failure rate. Any social intervention is generally considered successful if you move the dial by 10-20%. You have to try a lot of things to find things that work, by definition many of them won’t work and therefore that money is “wasted.”

I’d also be quite keen that many of these programmes are run by people who come off a benefit themselves. Constantly giving jobs in MSD to middle class pakeha may not be the best idea – ultimately that’s money spent that could have been creating employment.

There are 8,000 people at MSD, what if we had a rule that half of them were employed on two year contracts, and had to come off a benefit.  Every two years that’s 4,000 people who come off a benefit. After two years of working at MSD they should have built a work history that allows them to go into another job. What other government agencies could we run this rule on? DoC perhaps? And if the argument is that government agencies can’t employ people off a benefit….why would we think private organisations can/should?

The 4,000 people who would lose their jobs at MSD to achieve this would presumably all find another job in the current employment market. I’m not trying to be unkind in saying that, I’ll do a more full post on this topic in a few days.

I don’t have all the answers, and nor would I expect to. It is a complex problem, and there is no silver bullet. I do believe that the aggregation of a number of small changes can make a difference. The key policy prescription is to actually care about it, rather than any specific action.