Annual John Howard Lecture to Menzies Research CentreFinance
Thank you for inviting me tonight.
It’s a pleasure to be here in Australia.
What happens over here, and what people are thinking, affects New Zealand profoundly.
That’s why I try to visit here regularly and talk to as many people as I can.
I want to acknowledge the warm relationship shared between our respective Governments – and the constructive engagements we have with Prime Minister Abbott and Joe Hockey in particular.
Australia has enjoyed 25 years of solid economic growth. Following the end of the mining boom, I believe you are well placed to make the necessary adjustments and continue that run of solid growth.
Australia is New Zealand’s most important trading partner and biggest source of overseas investment.
It’s also where many New Zealanders have come to live.
That is, until the last couple of months when – for the first time since 1991 – there was a net migration flow from Australia to New Zealand.
On a seasonally adjusted basis, a net 130 people moved from Australia to New Zealand last month, and I’d like to welcome each and every one of them to our country.
It’s also a pleasure to be following in the footsteps of Prime Minister John Key, who gave this lecture in 2012.
He is the outstanding New Zealand political leader of recent decades.
He brings to bear a remarkable combination of analytical and political skills with the confidence and aspiration New Zealand has needed in tough times.
I know John Key has a huge amount of respect for John Howard.
So do I.
I followed his career for many years through the pages of The Bulletin, which I read in my farming home in the far south of New Zealand.
My first substantial conversation with John Howard was in extraordinary circumstances.
I came over to Australia to meet him in May 2003, as the leader of the opposition National Party.
Unfortunately my visit coincided perfectly with the resignation of the Governor-General.
John Howard obviously had a great deal on his hands dealing with this critical constitutional issue.
However, after watching the Prime Minister answer questions in a very sombre Parliament, I was summoned to his office, greeted warmly and treated to a 45-minute, relaxed, wide-ranging discussion on politics.
That afternoon, I could not have been less relevant to his considerations. But I could not have been treated more warmly and respectfully.
It was a real boost for a young, struggling opposition leader, and I have always remembered his generosity.
Unfortunately, his wisdom and guidance was not sufficient to prevent me from losing my job a few months later.
But John Howard’s example showed me that in politics, persistence is rewarded.
Here I am part of a successful government, now into its third term and hopefully with more to come.
I want to offer some thoughts tonight about the business of government, from a centre-right perspective.
Others can determine whether those thoughts are applicable elsewhere. Each country has its own set of circumstances and its own unique challenges to deal with.
A guiding principle of the John Key-led government has been to take the public along with us as we make changes, explain the reasons for them well in advance, lay out the logic, adjust expectations and implement those changes competently.
Over time, that builds up a popular support for our changes so they will stick.
This approach was developed partly from the experiences of the 1990-1999 National government.
The early 1990s were a time of extensive and sometimes unexpected changes in New Zealand. We implemented sound policies, but we failed to build broader constituencies for those changes.
As a result we lost support, the electoral system was changed to MMP, and many of our policies were undone by the subsequent Labour government.
Since our election in 2008, we have taken a different approach.
Over the past six-and-a-half years the National-led government has been able to implement sound centre-right policy which is now sufficiently embedded with public support that I am confident it will remain in place.
Our approach has been dubbed ‘incremental radicalism’. This differentiates it from another approach to centre-right reform which I call ‘crash or crash through’.
The elements of the ‘crash or crash through’ method include creating a burning platform, initiating rapid change, and spending large amounts of political capital which you hope you will recoup when the expected benefits flow through sufficiently strongly for the government to be re-elected.
In some circumstances this has worked. In the 1980s it was probably necessary.
We didn’t have that choice this time around – nor did we want it.
Our MMP system ensures that electoral success always comes down to a few seats in Parliament.
In last year’s election we beat our main opponents by 47 per cent to 25 per cent of the vote, but our four-party coalition has only a slim majority in the House.
This means we have had to build and maintain continuous public support for our policies.
We have kept a tight rein on new spending – including delivering two budgets in a row with no net new discretionary spending – but it hasn’t felt to people like fiscal austerity.
For instance we increased welfare benefit rates for families with children in our most recent budget – the first time this has happened in more than 40 years. But it was within an overall spending increase that was very slim by historical standards.
In 2010, we implemented a revenue-neutral tax switch which cut all income tax rates and the company rate, funded by an increase in GST and property taxes.
We spent a long time working publicly through the issues so the changes were largely uncontroversial by the time we finalised them, and people could see that the package of measures was balanced and fair.
We also sold 49 per cent of three government-owned electricity companies.
We laid that plan out to the public at the beginning of election year 2011 and campaigned on it, because the legacy of previous asset sales in New Zealand is one of distrust when the public feels assets are sold without a mandate.
While opinion polls showed people didn’t like the policy, there was no evidence of a backlash against us in the 2011 election, and no question that we had a mandate.
In the right circumstances, I believe people can grasp long-term policy trade-offs, so we’ve tried very hard to be predictable, consistent and upfront with voters.
Our fiscal policies and microeconomic reforms are familiar centre-right approaches adapted to New Zealand’s particular circumstances.
But it’s the third part of our policy programme I really want to talk about tonight, and that’s our public sector reforms.
Excluding transfers, government makes up around a quarter of all economic activity in New Zealand.
Government is a huge, diversified business and we can make a big contribution to the country’s prosperity by running that business more effectively.
Centre-right parties tend to want to limit the role of government, which they believe holds back growth in the economy and undermines individual and community liberties.
I share that view – the more so the longer I am in politics.
However because of their scepticism about government, centre-right parties can underestimate their ability to improve the economy by understanding and improving government.
I believe in smaller government.
I also believe the best way to achieve smaller government is to deliver better government.
The centre-right toolkit has traditionally focused on reducing levels of spending, rather than addressing the long-term drivers of that spending.
But too often, spending cuts are only temporary, as they are reversed in the face of public opinion or reinstated by an incoming government.
What is less intuitive for a centre-right party is to better understand the lives and needs of the government’s regular, long-term and most expensive customers.
When government does its job well and intervenes effectively it enables vulnerable people to increase their resilience and social mobility, and it helps them make positive changes to their lives.
It also reduces demand for public services over the medium to long term, and therefore saves taxpayers money.
What works for the community works for the government’s books.
If you compare it to the private sector, a business needs to understand its customers because they drive its revenue. We need to understand our customers because they drive our costs.
It makes sense to get to know our most expensive customers.
Their lives are complex and often challenging. Their interactions with government agencies can be chaotic and crisis-driven.
The result is a loss of human potential and long-term harm to families and communities. And there are big costs for taxpayers.
We are starting to dig into those costs, and the information is proving to be a powerful driver for institutional and policy change.
We can now pretty accurately know the likely life path of different groups of children. For example, there is a relatively small set of children with multiple problems for whom we can expect that:
- three quarters will not get a high-school qualification,
- four in ten will have been on a benefit for more than 2 years before they are 21, and
- a quarter will have been in prison by the time they are 35.
Each of these children will cost taxpayers an average of $320,000 by the time they are 35, and some will cost more than a million dollars.
Front line workers in the community will know most of their names. We can deal with them one by one.
The ideal outcome for us is fewer customers, not more. Fewer dysfunctional families. Fewer parents who spend decades on welfare. Fewer people who commit crimes.
Part of our response is to recognise that people can do more for themselves, and often want to.
We expect more from people, because ultimately they are responsible for their own lives and responsible for their own families.
We expect parents to actively support their children at school. We expect prisoners to get off drugs and gain work skills. And we expect young sole parents who are on benefits to get qualifications.
We’ll help them do that.
We don’t believe that people whose lives are difficult are automatically helpless and will stay that way forever.
But reducing misery, rather than servicing it, requires us to organise responses around these individuals, with them at the centre of public spending.
Inconvenient as it might seem, people don’t live in government departments, they live in families and communities.
Last year we got officials from the health, education, welfare and justice sectors to bring along a summary of analysis about at-risk children and youth.
What we saw were four well-crafted ways of analysing exactly the same people. But they were all quite different because of each agency’s own institutional and professional history and culture.
One agency, for example, used a deprivation index that goes from 1 to 10, while another used one that goes from 10 to 1. Same kids.
That sort of issue is at the easier end of the scale to fix, or at least it should be.
It’s more difficult to set up structures that recognise people’s problems are connected.
Take the case of five-year-olds in state care.
In New Zealand, there are 1,500 of them each year and by the time they are 35 they will incur prison and welfare costs totalling $550 million.
Traditionally we’ve looked after those kids on a shoestring budget, through the valiant efforts of foster parents and front line social workers.
The question is, what can we do differently now, and spend up front, to save those children from such a life and save a good portion of those $550 million in future costs?
When we ask that question, departments usually don’t know the answer because they haven’t tried to solve that problem.
Instead, governments have simply serviced the system for caring for children, and serviced the prison system, and treated those as two separate issues. They are not.
We are starting to link these issues of foster care, education, welfare dependency, youth justice and prison sentences through analysis that shows the costs and potential for more effective intervention at multiple points in a child’s path to adulthood.
We are prepared to spend money now to secure better long-term results for the most vulnerable New Zealanders, and lower costs to the government in the future.
We call this social investment.
It challenges a lot of the structures that have been set up to manage government spending on an annual basis.
If there’s enough good-quality data, the investment approach can look out 20 or 30 years and model the costs of dysfunction, and the benefits of intervention, for particular communities and populations.
That’s how we are now approaching the welfare system.
We previously had a cash-driven, point-in-time view of the welfare system. This led to a focus on short-term results, like bringing down the number of people on the unemployment benefit.
A couple of years ago we commissioned Australian actuaries Taylor Fry to calculate the lifetime welfare costs of people on benefits.
That liability turned out to be $78 billion – or just under 40 per cent of annual GDP.
And we discovered that those on the unemployment benefit made up only 4 per cent of the future liability.
Groups you never thought of made up a bigger percentage. Like those we call ‘recent exits’ - people who have recently returned to work after being on a benefit.
It turns out that many come back on welfare, and their long-term cost was higher in total than the people currently on an unemployment benefit.
Sole parents had an even larger lifetime liability. So did a large group of people with psychiatric and psychological conditions.
You can drill down further into this information.
Among sole parents, for example, you can then ask “Who is going to cost us the most money?” and it turns out it’s the ones who go onto a sole parent benefit before they turn 20.
A teen sole parent on a benefit in New Zealand is on a benefit for around 20 years, on average, with a net present cost of $213,000 per person. So that helps us know where to focus our efforts.
The next obvious question is “what can we do about it?”
With that group of teen sole parents, for example, we no longer just give them a fortnightly benefit and wish them good luck.
They are now enrolled in a scheme that, among other things, ensures they are in school or training, gives them each a supervising adult, and manages their money for them. That programme is showing promising results.
We are also much more focused on getting sole parents of all ages off a benefit and into work, through extra support and greater work obligations.
The latest welfare valuation, which is updated every six months, shows the future liability of beneficiaries has reduced by $7.5 billion in the last year, with $2.2 billion of this due to steps we have taken as a government.
There are now 43,000 fewer children living in a benefit dependent household than there were three years ago, and the number of sole parents on a benefit is the lowest since 1988.
In other areas too, there is a role for better data, and better use of data.
We need to manage privacy and other issues very carefully, but data gives us an opportunity to drive a programme of work firmly focused on getting better results.
That focus is a challenge to public accounting.
The traditional public finance structure is designed to track where every dollar goes, but was never designed to find out whether it made any difference.
Making a difference is the whole point though.
Too often, success has been defined simply in terms of spending money on something. Politicians say “look, we spent more” as though that on its own is what matters.
Public services, which are full of good and capable people, still spend a lot of time not sure of the effects of what they’re doing.
The public think we know, or at least they think we’ve got good intentions.
Borrowing and committing billions of dollars on good intentions has been the post-war model.
Where possible we want to start purchasing results.
We want to buy reductions in recidivism, for example, more educational achievement, and lower welfare dependence.
We also want to broaden the range of organisations and providers we buy these results from.
The more people who worry about New Zealand’s longstanding social challenges, and work on innovative approaches, the better.
The Government doesn’t have a monopoly on good ideas, resources and expertise.
So I expect more involvement from not-for-profit and private sector providers alongside government agencies.
We are aiming to make data more open, so people and organisations outside the usual public policy process can analyse it to develop new ways of reducing dysfunction in vulnerable groups.
Individuals will also benefit from more information about what works, because it supports the ability for them to make choices.
Why shouldn’t someone with a disability, for example, have access to comparisons of different employment support services?
Technology is allowing us to develop new tools to take these sorts of ideas and make them a reality.
Our social investment approach is based on common sense, not a profound new theory.
People have talked about having a results focus for years, and taking a cost-benefit approach to social spending is probably taught in all good public policy courses.
But the difficult part is being able to put these ideas into practice in the real, messy and contentious world of government.
The social investment approach won’t be suitable for all public spending, or even a majority of it, but we’re rolling it out as far as we can.
That’s the opportunity for the centre-right.
Parties to the left of us appear to have given up on innovation in public services. Certainly that is the case in New Zealand, where the Labour Party consistently argues for the status quo.
Centre-right governments have the opportunity to achieve smaller government by delivering better government.
Public services should make a genuine difference to those people in our communities who live with the least resources, and the least hope.
In fact, they should make enough of a difference to reduce the number of people who suffer these disadvantages.
If we focus on making that difference, the centre-right can change government for the better.
More importantly, we can build on the resilience and aspiration of those who are excluded from the economy and community by a passive, unaccountable welfare state.