30 September 2013

Paula Bennett's voodoo economics

You can be forgiven if you are scratching your head over a report from the Ministry of Social Development that claims a liability that is estimated to have risen by $9 billion actually means that the government has saved $3 billion. Is this some new kind of accountancy double-speak?
The figures arise from an actuarial valuation of the projected lifetime liability of benefits for those who were on welfare in the 12 months prior to the date of valuation. Last year an estimate of $78 billion was issued, but this year it is estimated at $87 billion. So that's about $9 billion increase.
But the Minister is arguing that a change in the estimate of future interest rates – and hence a shift in the valuation's discount rate – has added $13.4 billion to the valuers' calculations, and that increase is counterbalanced by the government's policies to reduce the numbers on benefits producing a $3 billion 'reduction' in the estimated forward liability.
Well, this just goes to show you the hazards of actuarial estimates of long-tail risk. If changing predictions of future interest rates mean that your valuation can flap around in the wind to the extent of (on paper) $13 billion, then how can you be sure that the lesser sum of $3 billion is not equally subject to grand fluctuations? The answer is: you can't – it's all just based on projections, estimates and sophisticated mathematics. Another recession or a drought and your estimates are up the proverbial creek.
But that's not the end of the story. The Minister's actuarial valuation of the welfare budget does not necessarily represent long-term value for the taxpayer or for the Treasury. This is because it's a single-budget estimate, and not a whole-of-government cost-benefit analysis. In short, the Minister's theoretical reduction in future liability of $3 billion takes no account of the potential for extra costs to be borne by, say, the justice or public health budgets that may arise from abandoning the poor and dumping them off welfare with no jobs to go to.
What (in theory) may have saved her budget some money in the long term may lead to rising costs elsewhere in the long term.
MSD and its Minister should do less voodoo economics and creative accounting and do more to care for the sick and vulnerable. Above all, we need more training and job schemes, especially for the young.

(For closer supporting analysis, see the article by Simon Chapple.)


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