The social investment approach to public spending in New Zealand: looking to the long term

New Zealand is reforming its approach to public spending. Its ‘social investment’ strategy is designed to save money in the long term by investing in vulnerable groups of people, informed by analysis of future costs and the effectiveness of different policy interventions. At a recent Institute for Government event, New Zealand Finance Minister Bill English outlined how this approach is working. George Miller highlights the main lessons, as the UK and as of this week – Australia consider adopting the approach for their own domestic contexts. 

This post originally appeared on the Institute for Government blog.

Social investment is an attempt to address the economic costs of New Zealand’s “20 to 30 year exposure to social dysfunction,” as part of the New Zealand Government’s long-term approach to fiscal control. Rather than simply cutting departmental budgets to reach short-term fiscal targets, the intention is to take spending decisions informed by a proper understanding of long-term financial pressures on government, ranging from pension liabilities to the costs of family breakdown and welfare dependence.

Based on systematic information gathering and a significant widening of access to data, the New Zealand Government has sought to identify the lifetime financial liability of specific groups of vulnerable people. For example, English pointed to the so-called ‘million dollar kids’ – 1,000 or so seven-year-old boys in care, with an estimated 70% probability of being incarcerated by age 35. By investing early in vulnerable groups like these, particularly through the education, justice and welfare systems, the goal is to save the taxpayer significant sums in the long term.

To tackle these liabilities, departments have to take a customer-focused approach, being clear about whothey are helping and how. English argued that it is no longer good enough for public services to be populated with “people with good intentions spending hard earned taxpayer money with no thought about the expected return on their social investment.”

Now, to get proposals for new funds into the Government’s budget, departments have to answer three questions: Which people will the proposal help, and where? Who has a connection and trusted relationship with the targeted people? And how will the department demonstrate the impact their proposal has had? If a proposal can answer these questions, the Treasury “will pay whatever the programme costs” – however, since introducing these strict criteria the Treasury has seen the lowest number of new budget bids in years.

Transparency and accountability

Information is a key element of New Zealand’s social investment toolkit. The Government is widening access to data, and encouraging public providers and non-governmental organisations (NGOs) to better understand the needs of the people they are helping. English explained that opening up data motivates public service providers, allowing them to clearly see the long-term implications of failing to act, and enabling others to challenge agencies that make unfounded claims about the performance of their programmes or fail to act effectively.

Sharp accountability is important too. The Government has committed to 10 overarching Better Public Services targets. In particular departments, ‘liability managers’ have been appointed, whose role is to manage down the long-term financial liability of a particular population group.

The challenge has been to make innovation and risk-taking the norm: the focus is squarely on getting results. “Nothing we’re doing is new, but we’re trying to make this the system.” But to enable frontline innovation, English argued, central government has a key role to play: “The top-down approach isn’t designed to innovate itself, but to change the system, and break up obstructive middle management structures.”

Questions and challenges

New Zealand’s social investment system offers an ambitious vision of a more joined-up and long-term approach to public expenditure, but there are questions about how it will work in practice. For instance, the model relies upon collaboration between government departments, but as a recent Institute for Government study highlighted, the ‘agency first’ mentality remains strong in many parts of New Zealand’s governmental system.

Other issues arose at our event. For instance, would the focus on long-term liabilities create a bias towards young people and against the old? English’s response was pragmatic: social investment could not answer every question at once, and in any case “we’ve spent 30 years arguing about pensions, but other liabilities haven’t been discussed at all.”

Another contributor highlighted the issue of ‘time-shifting’ funds: “How will the Treasury ensure that it cashes in on the savings made from the up-front investment?” English recognised that tough decisions lay ahead – for instance to close down or reduce funding to underperforming public services. The key is to shift the mindset from “let’s make it look like the project has worked” to “try anything to achieve actual results.”

English also acknowledged that the long-term focus did not sit comfortably with the existing budget processes: “We are constitutionally stuck with our appropriation system, where we are trying to tackle 40-year problems on annual budgetary cycles.” The Government is therefore seeking to build the social investment toolkit alongside the regular compliance-based budgetary system, which demonstrates to Parliament that public funds are being appropriately used.

The Government is trying to entrench social investment in the public sector – but what if departments and agencies learn how to game the new structures to protect their budgets? English accepted that departments will learn how to extract money from the Treasury and “play the game”, but argued that gaming is part of any budget system. The point is to “align the game better with changing lives.”

Applying these lessons to the UK

Could a social investment approach work in the UK? One contributor observed that the UK has started to pursue elements of the social investment approach – albeit in isolation, while New Zealand has brought these elements together in a more coherent and purposeful way. New Zealand is also in a healthier fiscal position than the UK, so has more ability to commit the higher up-front spending this model relies upon.

Size plays an important role too. As Bill English noted, in New Zealand national government can identify and “wrap our arms around” a particular vulnerable population group (such as the 4,300 sole parents under 20 across New Zealand in 2008, each of whom has been allocated a dedicated individual support worker). This sort of approach would be much harder in the UK, and might only be feasible at a devolved level, or in partnership between central and regional or local governments.

Whether or not the UK is in a position to follow suit, New Zealand offers a fascinating case study of a government actively pursuing the social investment approach. The Institute will keep a watchful eye on the progress of this agenda; if it works in New Zealand, it could hold lessons for governments across the world.

Posted by Luke Craven.

Power to Persuade