August 7, 2016

CEO Update - August 2016

There's been a lot of attention recently given to financial modelling - an 'investment approach' - driving government funding of social services, with New Zealand leading the way. This month CSI's Professor Kristy Muir looks at the need to balance social and financial outcomes - Andrew Young

Balancing value with values

In a recent article in the Australian Financial Review* by Luke Malpass, Social Services Minister Christian Porter talked about the Turnbull Government embarking “on a radical program of welfare reform” drawn from New Zealand’s ‘investment approach’. The intent is to spend money on early intervention to stop people ending up in situations that cost government far more into the future, such as long-term reliance on income support.

Few people would disagree with successful early intervention and it makes economic sense. As Malpass points out, “compared with a lifetime of liability, spending $10,000 or $20,000 on an early intervention may be a bargain”. The article gives an example of 600 five-year-old children living in New Zealand who are experiencing a range of vulnerabilities who are projected to cost the taxpayer between $320,000 and $1 million by the time they are 35-years-old.

But does this approach work? The answer depends on how you measure success. If we’re talking about financial values, then the answer appears to be ‘yes’. In New Zealand’s case, there were 13,000 less people on benefits in June 2013 compared to June 2012 and the government’s liability was estimated to have decreased by $7.4 billion (NZD).

But what if we measure success by social outcomes? One of the criticisms of New Zealand’s approach is that the longer-term social outcomes have not been tracked.

We don’t know whether people are any better off as a result of the investment approach: whether they have obtained and maintained work; if their standards of living are any better; whether their quality of life has improved; or if they have housing or have become homeless.

There is some suggestion that outcomes are worse and there have been warnings of the unintended consequences of such an approach.

At a time of diminishing resources, sound decisions need to be made about whether, where and how resources should be invested and for whose benefit. A cost-benefit analysis (rather than an actuarial valuation) can determine the financial value returned for every dollar invested. It can help to understand and inform resource allocation decisions about the financial benefit if we did nothing or if we took an alternative decision.

But what does this economic lens mean for our societal values? If we go back to the original example in the AFR, we’re talking about vulnerable children. What value do we place on their lives and their quality of life?

For example, what if we find that it costs more money to take a young man with complex problems off the streets than to keep him there? Does that mean we don’t intervene? Take this young man off the streets (who was previously only receiving support via soup kitchens and specialist homelessness services) and provide him with what he needs (social housing, tenancy support, mental health services, physical health services, drug and alcohol rehabilitation, social security, support to develop social skills, literacy and numeracy) and there may be an increase in cost. There might be a return on investment in the very long-term, but if it costs more to get him off the streets than to keep him there, would we make that decision?

What about our elderly? What happens when it costs more to keep someone alive or to improve their quality of life? What happens in a market driven approach to service delivery (think about disability, aged or child-care) if it costs more to provide niche support to those who need it, or those who live outside of metropolitan areas, than a traditional business model can maintain? I hope that in all these cases our societal values outweigh an economic argument.

Our societal values matter. Our human rights matter. Many other outcomes that cannot - or should not - have a financial value placed on them matter. At a time when we have diminishing resources, an ageing population, a shift to a market driven approaches to social services, and new funding models (such as social impact investment) that rely on a financial return, it’s worthwhile stopping and thinking carefully about how we understand and balance financial value with our societal values.

Different sectors and organisations within those sectors – philanthropists, not-for-profits, social enterprises, corporates and governments – will take different ideological positions on the societal value they aim to contribute, their expected financial returns (or losses) and how they redistribute equity. Importantly, each sector can and does contribute to societal values through social outcomes. The differences are in how much societal value organisations (including government agencies) intend and actually add and whether they are willing to do so without expecting a financial return or to fore-go some financial return in exchange for improving social outcomes.

If Australia goes down a similar path to New Zealand’s ‘investment approach’, we must proceed with caution and a commitment to put people at the centre. At a minimum we must consider carefully the intended and unintended financial and social consequences, have mechanisms in place to measure people’s social outcomes, and to have safety nets in place if (or when) markets or investment approaches fail. We need to balance the economic need to be fiscally responsible with our societal values, particularly the social and moral need to support our most vulnerable and to create a strong, cohesive society.

Professor Kristy Muir

*Link to article is here (paywalled). Or you can access it by searching Google.

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