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Monday 9 March 2015

A Wel-fairer system

The recent McClure report has highlighted the plight of our welfare system.

Our welfare budget is currently $150 B / yr.

This is spent in a rather complex array of payments to qualifying individuals, be they unemployed, sick, disabled, children, so on. The system is complex, expensive to operate and arguably mis-directed, creating disincentives to recipients to seek work and allocating payments to those not 'in need'.

$150 B is a lot of money! Could it be allocated in a more efficient and more effective way? McClure has suggested a much simplified system that is currently being scrutinized by the government and will no doubt lead to a response over the next few months.

I have only had a brief introduction to the McClure report so cannot comment on it, other than note that it still seems complex. 

It starts by classifying welfare recipients according to various criteria and then establishes how each is to be treated by the system. Although much simpler than the current bureaucratic nightmare, I wonder if this is the right approach?

Welfare, at its core, is intended for those who, for whatever reason, are 'in need'. Simply stated, they cannot afford to pay for their day to day living and medical expenses themselves. It can be due to unemployment, hopefully temporary, illness, disability, etc. No matter the cause, the problem is they have insufficient earnings for their needs.

So why not use earnings as the sole criterion for determining who receives welfare?

Under this alternative approach welfare recipients would all have to pass an earnings test. The test itself would take into account only a few factors, such as number and age of dependents, special needs for the physically disabled, and the value of assets for high nett worth individuals.

Welfare payments would go to those whose earnings were below the benchmark minimum earnings (BME) for their group. The size of the payment would be equal to the difference between their current earning and the BME for their group, but would be subject to an adjustment to ensure there was always an incentive to work. The details for this adjustment have to be thought through and I accept there is some 'devil in this detail'. For the current overview suffice it to note that the adjustment would be sufficient to ensure there is a financial benefit for a welfare recipient to secure employment if there is any opportunity to do so.

I can see two key advantages of this approach. Firstly, it would be simple to administer and easy to understand These criteria are too often ignored when framing government policies. And Secondly it would bring a visible 'fairness' into the system by ensuring that only those in need received welfare payments and that the value they received was related directly to the extent of their need.

I have not done the sums on this (yet), but feel that by eliminating mis-directed expenditure, this alternative approach would deliver a higher welfare benefit to those in genuine need without increasing the overall welfare budget .

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