- Over $11 billion (6.5% of GDP) was spent on benefits and transfer payments in 2009. This figure excludes NZS but includes Working for Families (WFF) tax credits.
- In June 2009, around 298,000 people were receiving one of the four main income-tested benefits. This represents 6.8% of the total population or 11.0% of the population aged 18 to 64.
- Over the past decade, the total number of people receiving these benefits has dropped. The number of unemployed has declined significantly, but there has been steady growth in Sickness and Invalid's Benefit numbers. More recently, the number of people unemployed is increasing because of the recession, but should fall again as the economy recovers.
- Over 384,000 families were recipients of the more than $2.5 billion spent on WFF tax credits for the entitlement year ended March 2008.
- Between 1994 and 2009 the average annual growth in the expenditure on non-NZS benefits and transfers was 4.7%. As a share of GDP, the figure has slightly declined over this period, from 7.0 to 6.5%. A major factor behind this reduction is that benefits are indexed to inflation by convention.
The benefit system comprises the following main income-tested benefits:
- the Unemployment Benefit (UB), for people who are able to work but do not have a job
- the Domestic Purposes Benefit (DPB), mainly paid to sole parents caring for children
- the Sickness Benefit (SB), either for those with short-term conditions that prevent them from working now or for those with longer-term health problems that limit the number of hours they can work, and
- the Invalid's Benefit (IB), paid to people who are unable to work because of permanent and severe health restrictions.
1999 to 2004
2004 to 2009
Source: Ministry of Social Development
As well as these benefits, a number of transfers are provided to assist those in financial need. The most significant of these, outside of those delivered mainly via the tax system, is the Accommodation Supplement.
Targeted financial assistance via tax credits is provided to people with dependent children through WFF tax credits. The total cost of WFF was around $2.7 billion in the year to 30 June 2009.
Transfers via tax credits to families with dependent children have become larger in value and more widespread in recent years. In 1998, an earlier form of payments, also mainly delivered via the tax system and which targeted the same groups as WFF does, went to 280,000 families, with an average annual receipt of $3,500. In 2008, WFF was received by more than 384,000 families at an average annual amount of $6,500. Over the intervening decade, the number of recipient families grew by 37% and their average receipt by 84%. Currently, a working family with three children, all aged under 13 years, would still receive some amount of WFF tax credits provided their annual income is below $106,000.
There have been quite different trends around the main income-tested benefit types. UB numbers have dropped sharply in recent years. From a peak above 160,000 at the beginning of the decade, numbers fell steadily over the ensuing years to around 18,000 by the middle of 2008. They have since climbed to around 59,000 at the end of August 2009, reflecting the impact of the economic recession.
DPB numbers have also declined in recent years, from a high around 115,000 in early 1998, to around 97,000 in the middle of 2008. However, they have recently increased to around 107,000 in August 2009, reflecting a combination of a temporary rise in the number of young women having children and the impact of the recession. Like the UB, it is probable that DPB numbers will fall again as the economy recovers and more jobs become available.
SB numbers were around 10,000 (0.3% of the population) in the mid-1980s, but have risen markedly since then. While SB numbers appeared to stabilise during the latter half of the 1990s, this proved to be a temporary lull in growth and numbers have grown steadily to around 55,000 (1.3% of the population) by the middle of 2009.
Growth in IB recipients has been ongoing for more than 30 years. From around 10,000 (0.3% of the population) in the mid-1970s, numbers receiving this benefit have increased, as a percentage of the population, by nearly eight times to more than 87,000 by mid-2009.
There are many factors that have contributed to the growth of both SB and IB, such as the impact of an ageing population, increasing recognition and treatment of a wider range of conditions and removal of older age group work test exemptions from UB. Due to these factors and others, addressing the growth of SB and IB will not be easy. However, given they are two of the major factors driving up non-NZS welfare expenditure, it is an issue that could be considered among the mix of options to reduce overall spending.
Options for managing spending growth
This section considers two possible options for reducing benefit expenditure: changes to the rates and coverage of WFF tax credits, and reducing SB and IB recipient numbers and their subsequent growth. This would potentially allow more to be spent in areas like health and education.
The rationale for including changes to WFF as one of the potential options examined is that stopping the inflation indexing of the abatement threshold would mainly impact families around the centre of the income distribution, rather than those on the lowest incomes.
The SB and IB option has been chosen because these two benefit types have displayed continual growth in numbers well in excess of overall population growth. If the numbers on these benefits could be reduced, or even if the growth in numbers could be reduced, more than just cost savings would be achieved. Getting people off benefit and into work will help those individuals, possibly in more ways than just financially. It will also boost the labour force at a time when an ageing population may see labour force participation and the average number of hours worked declining.
Projections of benefit expenditure are driven by recipient numbers, population growth and the indexation regime for benefit payments. Assuming these income-tested benefits are adjusted annually for inflation, as they have been, at least since 1991, their cost is shown in Figure 7.8. This is our assumption in both the historic trends and sustainable debt scenarios. This figure also depicts a scenario, applying the same drivers, where the costs of both WFF tax credits and SB and IB are reduced from 2013 onwards. For WFF, this is achieved by ceasing inflation indexation of both Family Tax Credit rates, the biggest of the WFF tax credits, and the WFF abatement threshold.
Reducing SB and IB numbers is more challenging. The scenario assumes that combined numbers are reduced, from around 140,000 now, to around 100,000 by 2013 (about where they were in June 2002). After that, they grow in line with the population. Achieving this would involve a complex mixture of changes to policy, services and employment support and training.
- Figure 7.8 - Benefit spending
- Source: The Treasury
Alternative indexation options
Inflation indexation of benefit rates, using annual growth in the CPI, maintains the real purchasing power of beneficiaries. This enables them to buy the same bundle of goods and services as prices rise. However, it does not allow them to increase their overall consumption over time, as is the case for workers, whose wage growth will generally be higher than inflation, or for superannuitants, whose public pension is indexed to the average wage.
While simply maintaining the real purchasing power of beneficiaries is not out of line with what has happened in New Zealand over the past decade, it is worth considering the fiscal impacts of alternative, higher-indexation regimes. Figure 7.9 shows projections of benefits under two alternative indexation options, along with the current inflation-indexation regime.
- Figure 7.9 - Benefit spending
- Source: The Treasury
Nominal wage growth indexation could be applied to benefits, in the same manner as for NZS. This results in the real spending power of beneficiaries being around 66% higher than its 2013 level by 2050. This compares to no growth in spending power under the existing CPI indexation assumption. Another option, lying between the indexation options of inflation and wage growth, is to apply a rate 1% higher than inflation growth to benefit rates each year. As a consequence, while spending on benefits still falls relative to GDP, beneficiaries do not fall as far behind workers and superannuitants as under the current regime, with the real spending power of beneficiaries being around 45% above its 2013 level by 2050.
There is a fiscal cost if the rate of indexation is increased. This cost could be in terms of letting debt rise, or increasing taxes to pay for the extra spending. An alternative is to reduce spending in other areas. Indexing benefit payments to CPI inflation + 1% or indexing to nominal wage growth would result in the basket of publicly-funded services being respectively around 10% and 14% lower than in the sustainable debt scenario.