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Dr Muriel Newman

Welfare Reform on the Agenda

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New Zealand’s welfare system is long overdue for reform. Far too many people are gaming the system. That’s not to deny that there are many deserving people who realistically will never be able to work and need the full support of the state. But the fact of the matter is that welfare has become a “soft touch” and almost everyone knows someone on welfare who shouldn’t really be there.

That’s why it was so refreshing to hear that Prime Minister John Key is planning to make welfare reform a major focus in his 2010 work programme. To be honest, his hand has been somewhat forced by the dire state of the economy. With government spending having ballooned by 50 percent over the last five years of Labour’s rule – growing at twice the rate of economic growth – the National government either has to boost its income or restrain its spending. It simply cannot carry on plunging the country deeper into debt by borrowing $240 million each and every week.[1]

Late last year the government’s Tax Working Group came up with a range of suggestions for increasing taxes. The problem is that New Zealand is already a highly taxed nation and National has long campaigned for a reduction in our overall tax burden. That means that the real answer is to investigate more ways of reducing overall government expenditure. Clearly the big ticket items, is the sensible place to start.

Looking at last year’s budget, four top spending areas stand out head and shoulders above the rest: health at $12.4 billion, social welfare at $11.7 billion, education at $10.9 billion, and superannuation at $7.7 billion. Taken together, these four areas of social spending make up more than two thirds of all government spending – a total of $42.8 billion out of the 2009 budget of $62.3 billion.[2]

However, making cutbacks in health – even if there were gross inefficiencies – is extremely problematic politically, since most people want to know that the health system is there to help them when they need it. Any pruning of the education budget would face stiff opposition from the education unions – easily the most powerful unions in the country. And John Key has said he would resign rather than look into savings in the area of pensions. So that leaves welfare.

If we exclude the number of people on the unemployment benefit (since that is driven largely by the state of the economy rather than by the design of the system itself) ten years ago, the number of people receiving welfare benefits was 240,287. Today, the equivalent number is 279,148. This rise has largely been caused by the growth in both the Sickness Benefit, which has increased by 80 percent from 32,870 in 1999 to 59,158 in 2009, and the Invalid Benefit, which has increased by 63 percent from 52,195 to 85,038.[3]

This massive rise in the numbers of people on the non-work tested Sickness and Invalid Benefits is indicative of gross systemic failure. A radical overhaul is called for. Stringent eligibility criteria should be introduced to ensure that these two benefits are only available to those who are genuinely sick or disabled. To that end, everyone who is presently receiving those benefits should be re-assessed – by expert medical assessors where appropriate – with comprehensive rehabilitation plans developed for those who are expected to return to work.

In addition to the increasing numbers on the Sickness and Invalid Benefits, the numbers of working-age sole parents receiving the Domestic Purposes Benefit has also been on the rise, growing by more than 10,000 over the last two years from 98,154 in 2007 to 109,289 in 2009. With sole parent welfare dependency being the prime cause of child poverty – and other serious risk factors for children – in New Zealand, this increase in sole parent benefit dependency is especially troubling. It is also important to point out that New Zealand is one of only a handful of countries around the world that has implemented this sort of problematic stand-alone benefit for sole parents – most other countries prefer to support sole parents in ways that do not endanger children.

All in all, welfare reform cannot come soon enough. If the only people receiving benefits in New Zealand were those who were genuinely in need, the cost of welfare would drop dramatically. And that would not only be in monetary terms – but also in the release of potential as tens of thousands of able-bodied people, who are presently using their ingenuity and enterprise to stay on welfare, instead harnessed it to create wealth.

To its credit, the previous Labour Government, from time to time, took it upon itself to announce plans to toughen up on social welfare with initiatives like their much vaunted “Jobs Jolt”. This scheme, which designated regions around the country where there were few employment opportunities as ‘no-go’ zones for benefit payment – in order to prevent people from deliberately moving to areas where there was no work so that they could live permanently on welfare – held a great deal of promise. But while such schemes started out with a hiss and a roar, they tended to fizzle out and become little more than empty rhetoric. The lesson for John Key in this is that he must follow through on the reforms that he is proposing if they are to be effective.

The social welfare system should provide a genuine safety net that fast-tracks the able bodied back into work, while delivering security to those who are genuinely unable to support themselves. This was the intention of the welfare system when it was first introduced into New Zealand in 1938 by Michael Joseph Savage, and for some thirty years it worked well – that is until politicians started using the welfare system to advance their social agendas.

John Key has already indicated that he intends to introduce annual benefit reviews, along with stricter benefit eligibility requirements, and a greater emphasis on work-testing. But while these all sound like sensible measures, they will not be nearly enough. New Zealand’s welfare system has created such widespread dysfunction in this country, that major reform will be needed to replace the destructive dependency culture that has been created.

Welfare reform is also an important part of a much bigger challenge – that of ensuring New Zealand’s long term future as a prosperous first world nation. That means lifting education to ensure that children leave school on the path to highly skilled jobs. It means improving productivity and growing the economy through lowering and flattening taxes, reducing regulation, and boosting export growth. And it means creating more jobs by introducing greater flexibility into the labour market.

In a fragile economy there are many employers who have jobs, that aren’t the sort that can justify high wage rates. Every increase in the minimum wage destroys many of these sorts of jobs. Some of them are basic – the sort that used to be offered to young people first entering the workplace. They enabled these young workers to get their foot on the first rung of the employment ladder. While such jobs didn’t pay much, they helped the young person build the skills and gain the experience that they needed to progress to better jobs at higher pay. But the abolition of the youth wage has put paid to that.

Roger Kerr, the Executive Director of the Business Roundtable and this week’s NZCPR Guest Commentator, in his article Unemployment Returns as a National Scandal, describes how abolishing the youth wage has contributed to the scandalously high level of unemployment amongst young people aged 15–19 years of 26.5 percent, with the rate for young Maori a shocking 38.7 percent:

“Prior to 1994, no minimum wage applied to those under 20. Then it was increased to 60% of the adult rate. Next, 18-19 year olds were covered by the adult rate while younger people were on 70% or 80% of the adult rate.

“Now, thanks to former Green MP Sue Bradford, everyone 15 and over is subject to the same minimum wage. A conservative estimate suggests that the current youth unemployment rate of 26.5% would be seven percentage points lower if the youth minimum wage had not been abolished.”

New Zealand has waited a long time for a Prime Minister who is prepared to tackle welfare. The big question is whether National has the courage to undertake the major reform that is needed to do the job properly. If they did, they would certainly have a great deal of support, for just about the whole country knows that the welfare system is broken and that reform is long overdue.

1.Bill English, Lifting Our Economic Game
2.Treasury, Core Crown Expense Tables
3.MSD, 10 year trend in benefit numbers 2009