NZ should look to Latin America for welfare policy

Gareth MorganTax and Welfare

It’s time New Zealand learned what the developing world knows. Having a lot of people living in severe poverty is a disaster, socially and economically.  The good news is the developing world has found a solution to it – and it looks a lot like our proposal for an Unconditional Basic Income (UBI). The bad news is New Zealand is oblivious to the progress happening just across the Pacific.

NZ-style targeted welfare is on the way out

The way countries provide income support to families has been rapidly evolving internationally, particularly in the developing world. The move has been towards programmes which provide government cash transfers to any poor family, irrespective of the number of hours they work (the adults might be unemployed or work full time). There can be conditions attached to getting the cash but these relate to ensuring the family is accessing social support – for example, making sure children attend school or are brought to medical centres for immunisations – not the hours spent in paid work. Countries that have rolled out these schemes include (but are not limited to) Brazil, Mexico, South Africa and India.

And it is working

The developing world’s approach to income support is all about eliminating poverty and helping people reach their full potential. And the programmes are working. In Latin America the proportion of the population living in extreme poverty (defined as living on US$1.25 a day) fell from 12.2 per cent in 1990 to 6.5 per cent in 2008 and falling, and in moderate poverty (US$2.5 a day) fell from 22.4 per cent to 12.4 per cent during the same period. The conditions related to social support are also working – child attendance at school has increased, as have immunisation levels.

Contrast all this to New Zealand. Here poor families also receive income support from the government but the amount they get depends on a whole raft of conditions. Benefit payments reduce when people start working, and Working for Families (WfF) payments don’t kick in until the adults spend a combined 30 hours a week or more in paid work. This condition is very important – there is more than $3,000 a year difference in family income net of tax depending on whether or not this paid work condition is met.

So why are we stuck in the past?

The New Zealand approach is a legacy from that long ago era when it was believed economies could always provide full employment. If that were true it wouldn’t matter that unemployed parents received less than low-paid working ones – there wouldn’t be any unemployed parents to worry about.

But the reality is unemployment does permanently exist in New Zealand (and indeed, every developed country) and people can remain unemployed for most of their adult life. As a result, our policies are locking thousands of families – those people unfortunate enough to be find themselves in the unemployed basket – into severe and persistent poverty. And, in contrast to the developing world, nothing in our policy mindset aims to eliminate that. Rather, we are obsessed with tying eligibility for support to paid work. Fat lot of use that is in a world where full employment is a long distant memory, and for which there’s no evidence it is the unemployed person’s fault. Instead, there is plenty of evidence that the supply of suitable paid jobs is inadequate and what’s more, where there is work the market wage for many isn’t enough to live on (the rationale for Working for Families).

It’s as if New Zealand policymakers are trapped in a 1970’s time warp, clinging to policies that long ago proved obsolete.

Poverty hurts us all, and the current approach isn’t working

Poverty is socially and economically corrosive – as a society we all pay – and there are programmes that are effective at eliminating it. It’s time we looked beyond the usual Anglo Saxon tri-partite of the UK, the USA and Australia to see what to do.

Of course, were New Zealand to adopt the developing world approach to income support there would be the usual moral outrage: ‘If you guaranteed the same low income to the unemployed as the working poor, surely all of the working poor would – well – stop working!’. That has not happened in Brazil in the ten years that their programme – the Bolsa Familia – has been running. There, someone receiving a Bolsa Familia payment is just as likely to be in paid work as anyone in the population as a whole. Who knows where this belief came from in New Zealand that workers won’t work if they are supported out of poverty. But it’s a pretty sick piece of bigotry that we should ditch quickly.

If anything, our current system makes the problem worse, because it penalises those people that are trying to get ahead – as they earn money they lose their benefit. In some cases they are no better off as a result.

We should go further – an Unconditional Basic Income

It is possible of course to take the developing world approach to income support even further and roll out a common cash transfer to every person. This avoids the need (which is still present in the developing world approach) to identify poor families. In developed countries like New Zealand, with sophisticated legal vehicles for holding assets and earning income, it is increasingly tricky to work out what any family’s true economic situation really is. Look no further than the apocryphal dairy farmer’s daughter getting student allowance at university. So simply paying a common cash transfer to every adult makes more sense here.

Rolling out a basic unconditional cash transfer to every adult is typically called a ‘guaranteed basic income’ or ‘unconditional basic income’ policy or something similar, and it’s an idea that has been gaining traction. It’s a concept we promoted in the book ‘The Big Kahuna’ released in 2011, and in 2013 the New York Times and the Economist each published articles about basic income policies.

The evidence is clear: releasing income support from conditions related to paid work is the way forward for New Zealand.  Do we have to wait until we are over-taken in the social and economic stakes by Latin America and Asia to wake up to that fact?



NZ should look to Latin America for welfare policy was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.