Andrew Gawith: Policy on welfare in need of inspiration

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Welfare systems are well designed when everyone involved - beneficiaries and taxpayers - voluntarily behave in ways that contribute to the redistribution agenda.

It makes sense to invest in early practical intervention to ensure the children of long-term beneficiaries have the skills and confidence to help expand their options as adults. File photo / NZ Herald
It makes sense to invest in early practical intervention to ensure the children of long-term beneficiaries have the skills and confidence to help expand their options as adults. File photo / NZ Herald

The Welfare Working Group, a panel put together by the Government to investigate aspects of the welfare system, tabled its final report on February 22.

Despite the group's claims to the contrary, this was not "an expansive and fundamental review of New Zealand's welfare system". It was more a tunnel-visioned look backwards.

To be sure, the welfare system is a mess and it is overdue for radical reform. But the mess is of a fundamentally different nature to that implied by the group.

The Welfare Working Group's primary task was to identify how to reduce long-term welfare dependency. The final report made frequent reference to benefit abuse and a reluctance by some beneficiaries to take up job opportunities. The clear implication is that beneficiaries themselves are the problem.

But to focus on benefit "dependency" is to miss the point. Less than a third of those who receive a benefit have been long-term beneficiaries.

Within that group there are a sizeable number of permanently disabled people (physically and/or intellectually) who will require financial support whatever system is in place. Other long-term dependants are doing the very important, but unpaid and largely unrecognised, work of raising young children.

Yes, the current system permits a few who could work, to live a life of (financially constrained) leisure - but why overhaul the system to deal with the behaviour of a minority? By all means reform, but target the right issues.

If the group had truly undertaken an "expansive and fundamental" review of our welfare system they would have spent much more time looking at both tax and welfare policies. They would have realised that modern welfare systems are about redistributing resources within communities with the aim of providing social cohesion. Welfare systems are well designed when everyone involved - beneficiaries and taxpayers - voluntarily behave in ways that contribute to the redistribution agenda.

That means being self-reliant whenever possible and paying tax. The group failed to point out that many taxpayers (legally and sometimes illegally) sometimes just don't play ball. There is also a concern that by highlighting, and possibly exaggerating, benefit abuse the group may well have reinforced the justification many taxpayers feel they have to aggressively minimise the tax they pay.

The fact is the combination of tax and abatement rates for benefits and supplementary allowances can make work financially unrewarding for those with low skills and/or the ability to only work part time, discouraging self-reliance.

But let's look at the other side of the coin - certain wealth and income is only lightly taxed and some not at all (most capital gains). A more coherent policy approach would be to address both these issues.

Other problems that exist with targeted income support include high administrative expenses and the unfair reality that what you get depends on what, and who you know. This is a further challenge that makes it hard for beneficiaries to identify the full benefits of working. These problems will persist under the Welfare Working Group proposals.

Of course it makes sense to invest in early practical intervention to ensure the children of long-term beneficiaries have the skills and confidence to help expand their options as adults. Cross-agency co-ordination in social services is a no-brainer. These policies stand alone as sensible options that should be pursued anyway. Imposing penalties on parents who don't meet job search requirements won't make these sensible policies work any better.

An ideal for any welfare system is to provide income support without reducing the financial rewards from working, and having tax policies which effectively apply to all types of income (including increases in the value of assets such as property).

Last November the findings of a wide-ranging review of the UK tax system - the Mirrlees Review - provided an up-to-date report card on the nightmare that is the UK tax and welfare system (providing a salutary lesson on what not to do).

The report's authors outlined that an ideal welfare system is one which fully integrates tax and welfare benefits.

They pointed out that a flat income tax combined with a universal minimum income paid to every citizen would achieve the elusive solution.

Under a universal basic income scheme every adult (and child potentially) receives a fixed unconditional annual payment from the government removing the complexities, incentives, disincentives and unfairness that litters the current benefit system.

Every dollar people earn would be taxed at the same rate.

It is easy to see how this approach improves the incentives to work compared with the current system and is would be more constructive than the "hit with a stick" approach the Welfare Working Group supported for moving long-term beneficiaries into work.

Moreover, a flat tax would encourage the tax "planning" industry to focus on more productive endeavours.

Despite the group's claim to the contrary, it may well be possible to fund a universal basic income scheme without excessive tax rates.

It's time this option was investigated more thoroughly - the country desperately needs some inspirational policy.

Andrew Gawith is director of Gareth Morgan Investments, an investment manager, KiwiSaver and superannuation provider.

- NZ Herald

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