Forward liability and welfare reform in New Zealand

In November 2012, Gabriel Makhlouf, the secretary to the Treasury, gave a wide-ranging speech to the Trans-Tasman Business Circle which discussed, among other things, recent reforms in the welfare system. He described the new ‘investment approach’ as a significant change to the New Zealand welfare system, which he suggested would effectively get people back into work, reduce poverty and increase living standards. The overarching welfare reforms announced and being implemented by the current government are in large part constructed around this investment approach, which provides a central policy narrative to the reforms. The centrality of the investment approach is expressed via the operational use of a measure of what is variously termed ‘forward liability’, ‘future liability’ or ‘long-term liability’ of the welfare system as the key performance management tool for Work and Income. Forward liability (the term exclusively used here) is basically the total current and future fiscal costs of welfare, appropriately discounted.Makhlouf is correct in his assessment that the investment approach marks a significant departure in terms of performance management for the New Zealand welfare system. The purpose of this article is to critically examine the new model and its likely effectiveness, with a view to better understanding its strengths and its weaknesses. The perspective taken is one of mainstream public economics and labour economics