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Dr Muriel Newman

Recession Increases Need for Welfare Reform

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While socialists have blamed capitalism and the free market for the global financial crisis, economist Richard M. Salsman holds “altruism” responsible. In his article “Altruism: The Moral Root of the Financial Crisis”, he explains that altruism, which is based on the notion that being moral consists of sacrificing oneself for the needs of others, has long been a driving force of government policy.[1] In the US, not only has this resulted in a burgeoning welfare state, but altruistic home ownership initiatives targeted at minority groups, created a house of cards of catastrophic proportions.

Salsman describes the welfare state as the political ideal of altruism, since it facilitates “the sacrifice of the successful to the needy”. He reminds us that Karl Marx was the pre-eminent altruist of the 19th century advocating that in a truly socialist world, wealth would be perpetually transferred “from each according to his ability, to each according to his need”. The popularity of progressive tax systems around the world – long-favoured by socialist politicians – bears testimony to the power of political altruism.

New Zealand has always had a strong welfare state tradition. In its original form – as introduced by Michael Joseph Savage in 1938 – state welfare was more pragmatic than altruistic. It was designed to be a hand-up to work, supplementing widespread community-based charitable efforts to assist the needy. For thirty years, right up until the late sixties, there were less than 15,000 people receiving state welfare, with fewer than a thousand unemployed.

In the late sixties, however, amid growing concerns that the benefit system was losing relativity with rising living standards, the Holyoake Government established a Royal Commission on social security. Many of the recommendations contained in their 1972 report, were adopted by the 1973 Kirk Labour Government. But it was three of those recommendations in particular that were responsible for the establishment of New Zealand’s permanent dependency culture.

The first of the three recommendations changed benefit eligibility from being needs-based and available only to those ‘of good moral character and sober habits’, into a universal entitlement. That change destroyed a well-established social contract between taxpayers and the government that had ensured that only those who were good citizens and met community standards were eligible for state benefits. For the first time ever, the welfare system thus began to reward indolent and destructive behaviours such as alcoholism, drug addiction, and criminality.

The second of the three misguided recommendations was the raising of benefit levels closer to a working wage. Instead of temporary welfare benefits being sufficient to tide people over while they found a new job, the Commission wanted to ensure someone on a benefit could “enjoy a standard of living close enough to the general community standard for him to feel a sense of participating in the community and belonging to it”. As a result of this change, the urgency for a beneficiary to find a job – to ensure they would be appreciably better off – all but disappeared, setting the scene for the establishment of long-term, intergenerational benefit dependency.

The third recommendation – one that changed the face of welfare and the family in New Zealand forever – was the introduction of the Domestic Purposes Benefit. The DPB, a statutory benefit for sole mothers with dependent children, was established to enable an estimated 20,000 women to escape violent relationships. It was a landmark change to the benefit system, being the first benefit available for reasons of personal choice – such as no longer wanting to remain married – rather than for reasons outside of a person’s control such as the death of a spouse, the loss of a job, injury or accident.

More than thirty years on, the results of those three major changes speak for themselves. One in three of all New Zealand families with children are single parent families. A quarter of all children now live with one parent instead of two.[2] According to the budget estimates, in the next financial year 336,000 working age people will be in receipt of a welfare benefit, 400,000 or so working families will be receiving Working for Families payouts, and some 538,000 retirees will be in receipt of a pension. Altogether the total cost of income support will be $21,509 million or one third of all government spending.[3] In comparison, total income support in 1972 (arguably before altruism took hold!) was around 23 percent of all government spending.

The Ministry of Social Development provides a breakdown of benefit data as at March 2009.[4] Their figures show that the number of sole parents receiving the Domestic Purposes Benefit has risen by over 6,000 from a year ago to 102,003. Of those, 76,000 have been on a benefit for longer than a year, with 15,500 receiving a benefit for more than ten years. Maori are massively over-represented – while they comprise 15 percent of the population, they make up 41.5 percent of all DPB recipients.

The numbers of beneficiaries migrating onto the Sickness and Invalid Benefits continue their relentless rise (largely as a result of the benefits not being work tested and in some cases being more generous) with increases over the last twelve months totalling 5,365 and 2,831 respectively to take the totals to 51,041 and 83,961.

And while the budget shows unemployment benefit numbers rising to 85,000 in the next financial year, the breakdown of the 37,146 receiving the dole in March shows more than a third are Maori, and 31 percent are young people aged from 18 to 24.

This week’s NZCPR Guest Commentator, Luke Malpass a policy analyst with the Centre for Independent Studies, reminds us that the National Party campaigned on reforming welfare. In his article Incentivising Welfare he explains that with the country now in recession, getting the incentives in the welfare system right is more important than ever:

“Welfare policy is important at all stages of the economic cycle. When the economy is growing steadily the aim of welfare policy should be to get every person who is able into the labour force. And, when the economy is in recession it is even more vital that welfare policy is designed to encourage able people into the workforce. To this end welfare policy is a hugely important area in which to legislate. The rules around conditionality are important and the incentives they create crucial.

Luke explains that, “Internationally, New Zealand is behind best practice. In Scandinavian countries, the United States and Germany, welfare has been reformed with remarkable results. Numbers on welfare rolls have been reduced dramatically with the tightening of conditionality and reciprocal obligations. Workfare schemes, time-limiting of benefits, and compelling single parents back into part time work once their youngest goes to school have all been shown to be effective and have positive benefits for peoples’ job prospects. Yet in New Zealand this is still characterised as cruel and uncaring.

He concludes, “As New Zealand heads deeper into recession it is more important than ever that the government’s welfare policy gets it right. Reform is important, because allowing people to become lost on welfare rolls and out of touch with the world of work is a failure of government, and by extension, a failure of society.”

There is no doubt that as the welfare lines grow longer and the cost of income support soars, a major re-think of welfare policy is urgently needed. For instance, New Zealand is one of only a handful of countries that has a stand-alone benefit for sole parents. Most provide temporary support based on the expectation that the mother will re-enter the workforce after a year or two to properly provide for herself and her child.

Many countries have unemployment insurance schemes, or time-limits for the unemployment benefit, as well as a full-time programmes of work, training or job search designed to prevent job seekers becoming isolated and losing their confidence. And with regard to disability benefits, the most successful way to discourage ‘freeloading’ is through tightening the rules of eligibility and more intensive monitoring.

As well as needing to reform our main benefits, we surely need to rethink the whole Working for Families scheme as well. With a stroke of the pen in 2004, the Labour Government effectively turned hundreds of thousands of independent working families – including some who earn up to $120,500 a year – into state beneficiaries.[5] With fear of losing their benefits affecting their decision-making and their lives – dictating to some extent whether they take the new job or accept the promotion package – it could be argued that the massive $2.7 billion in Working for Families payments would be of greater benefit redirected into tax cuts. Tax cuts, as we all know, are vital to incentivising work and wealth creation, and would certainly help the country move out of recession far more quickly.

These are important issues. At the present time more than a quarter of working-age adults are relying on benefits to some extent, and, with a growing population of retirees, younger workers are being condemned to a future of struggling under an increasing tax burden – as the government soaks up more and more of the nation’s wealth to pay for our growing state dependency.

The destructive effects of welfare are much too serious for governments to ignore. Now more than ever the culture of welfarism that has burdened us for more than 30 years needs to be broken. Regrettably it is something our new government has not yet acknowledged, let alone addressed.

1.Richard M. Salesman, Altruism: The Moral Root of the Financial Crisis
2.Statistics NZ, Projected Families by Family Type
3.Treasury, 2009 Budget Economic and Fiscal Update
4.Minstry of Social Development, National Benefit Factsheets 2009
5.IRD, Working for Families Tax Credit Chart