# 9.2  Modelling of welfare spending

## 9.2.1  Unemployment benefit

Spending on UB is the largest of the income-tested benefits. In any projected year, the cost is grown from the previous year's value via the formula:

where:

t = the year that the variable refers to

UBt = UB expenditure

πt = inflation, as measured by annual growth in CPI

LFt = size of the total labour force, and

URt = the unemployment rate.

The annual CPI-inflation rate represents the indexation regime of UB rates.

Multiplying the labour force by the economy-wide unemployment rate gives the number of people unemployed. The ratio of this calculation between consecutive years gives the annual growth in the number of people seeking work, which is used as a proxy for the growth in the numbers receiving UB.

In recent years in New Zealand until the recent recession, UB recipient numbers continued to fall while the unemployment rate levelled off, admittedly at a low level by historic standards. Despite this, matching the growth of UB recipient numbers to the growth of the unemployed is a logical way of projecting UB. The recession has seen the relationship between UB and the unemployment rate strengthen again.

## 9.2.2  Domestic purposes, invalid’s, and sickness benefits

The remaining three major income-tested benefits are projected together, using an average of their respective demographic drivers. Given SB and IB numbers have grown more quickly than DPB recipients in recent years, it could be argued that these benefit types should be projected individually, and that may be the course followed in future Statements.

Spending on DPB, IB and SB in any projected year is grown from the previous year's value via:

where:

Et = combined expenditure on DPB, IB and SB

πt = inflation, as measured by annual growth in the CPI

Σj = summation over j groups (j refers to each of 22 age and gender groups, comprising the two sexes and 11 age groups: under 20, the nine subsequent 5-year age groups up to 64, and 65 and above)

bpj = an average, across the three different benefit types, of the historic proportions of the total recipients of each benefit who are in the j age and gender group - these proportions are based on recent data from the Ministry of Social Development, and

pgjt = the growth of the j age and gender group in year t of demographic projections.

As described above for UB, the inflation rate represents the indexation of the benefit rates.

The weighting of age-and-gender group demographic growth rates by the proportions of benefit recipients in each group achieves two things, namely:

• it concentrates demographic growth in the areas where benefit receipt is largest, eg the majority of DPB spending goes to females aged between 20 and 45, and
• it enables changes in demographics to be reflected in the benefit expenditure projections, eg because most people 65 or over qualify for NZS, benefit receipt is not high in this age group.

As noted in the 2009 Statement, growth in SB and IB numbers have outstripped population growth over the last decade or more. Even the weighting of population growth into the age and gender groups where benefit receipt is concentrated does not fully address this difference. This suggests that stronger recipient growth could be built into projections, at least for SB and IB, and this might be an approach followed in future Statements. It was not attempted this time, mainly because:

• in the case of SB, in particular, the growth has been erratic - levelling out over some periods in history and accelerating in others - making it difficult to estimate an increment to apply to demographic growth, and
• projecting constant recipient growth above that of normal demographic change over a 40-year projection horizon runs a risk of significantly overstating benefit expenditure - especially given that policy and operational changes to reduce this growth in SB and IB are being developed.

## 9.2.3  Other welfare assistance and expenses

The rest of core Crown spending on social welfare is encapsulated in this third category. This includes WFF tax credits and significant transfers such as AS.

Spending on other welfare assistance and expensesis grown from the previous year's value via:

where:

Wt = expenditure on core Crown welfare except for NZS, UB, DPB, SB and IB

πt = inflation, as measured by annual growth in the CPI

pnt = growth of the entire population in year t, and

ypt= growth of the population aged under 20 in year t.

Inflation growth in this category not only represents the indexation of benefit rates, but is a proxy for the indexation applied to WFF tax credits and the growth of administration costs.

The averaging of the demographic growth rates between that of the entire population and the under 20 group is an attempt to recognise the significance of WFF tax credits in this group. As these are only paid to families with dependent children, the under 20 demographic driver is a proxy for the growth rate of recipient families, especially as the tax credits are paid largely on a per child basis.

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