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An Analysis of Benefit Flows in New Zealand Using a Social Accounting Framework WP 13/01

2.2 Examining the Potential Effects of Policy Changes

Policy changes may be designed to affect a wide range of components of the social accounting framework. For example, changes to eligibility conditions for certain types of benefit may affect the number of people moving onto those benefits (both in terms of 'inflows' and transitions from other benefit categories). In addition, changes to the administration of benefits (including, for example, the monitoring of behaviour relating to moral hazard, the provision of information for potential benefit recipients regarding regulations, and so on) can affect flows of individuals in and out of a range of states. In addition, changes to benefit levels and abatement rates, through their effects on individuals' budget constraints and thus financial incentives, can also influence transitions.

It is therefore possible to use the framework presented here to examine the implications for benefit flows of various policy reforms, given a priori information about the likely effects on particular elements of the accounting matrix. The effects on future total costs of any particular reform are far from obvious, since they depend on the pattern of movements of individuals through the various states. For example, an initiative designed to increase the flow of individuals off a particular benefit type, and which moves those individuals into other states where they are more likely to move into full time employment and off the benefit system entirely, has different implications from a policy which moves individuals away from what may be an expensive benefit but into other states where they are more likely to remain for longer periods.

Changes in flows, in particular the inflows and outflows, also arise from changes that are independent of the benefit system. Structural or cyclical changes to probabilities of becoming unemployed or gaining employment are likely to have significant impacts on flows and costs. Other exogenous changes include, for example, changes in the age composition of the population and fertility rates.

The effects on equilibrium stocks of individuals in the various benefit categories of changes in the inflow vector are easily obtained from equation (6). Letting Equation. denote the 'matrix multiplier', the changes in the stocks are a multiple of the change in the flows for any category. A change in one of the elements of the inflow vector has effects on many of the stocks, not simply the category whose inflow has changed. Thus, if the jth element of b changes, the equilibrium stock changes in all categories, i, for which the ith row element, Equation. , from the jth column of M is non zero. In equilibrium the outflows from each category must precisely match the inflows, so that an increase in the latter can only be matched by outflows after the stocks have built up sufficiently. The extra inflows in any category also lead to higher movements among benefit categories. In a large system, the consequences can easily be obtained from the matrix multiplier, M, but of course the elements of M are not transparent from the flow coefficients, given the matrix inversion involved. The speed of adjustment to the new equilibrium also depends on the speed of convergence of the powers of C towards zero, as is evident from equation (5). The effects of changes in the elements of C itself are also discussed in Appendix E.

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