When Chris Hipkins carried out a policy bonfire following his succession of Jacinda Ardern, the income insurance scheme was one of the highest-profile casualties. It's now clear just how close the scheme came to moving ahead.
The Government’s polarising plans for an income insurance scheme were killed off just weeks before legislation was to be introduced to Parliament, newly-released briefings have revealed.
The documents also show the Privacy Commissioner’s concerns about how information would be shared between agencies, as well as the extent of opposition to the proposal from those consulted.
In early February, Prime Minister Chris Hipkins announced work had been paused on a plan to expand financial support for those made redundant or too sick to work, citing cost-of-living pressures.
Hipkins’ decision came as part of a broader policy reprioritisation after he succeeded Jacinda Ardern as the country’s leader on January 25.
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However, a draft Cabinet committee paper from the day before shows just how close the insurance scheme came to moving ahead.
In the paper, officials sought approval from ministers to introduce the necessary legislation to Parliament on February 20, “with a view to completion of the legislative process and enactment in July 2023”.
The tight timeframe meant only minor changes would be possible, with more substantive ministerial concerns pushing out the legislative timeline.
A regulatory impact statement produced by the Ministry of Business, Innovation and Employment (MBIE) said the insurance scheme would pay for itself, with a cost-to-benefit ratio of $1.13 for every dollar spent.
Other benefits, such as improvements in productivity, macroeconomic stability, and the value of protecting workers’ wellbeing, were less easily measurable but also important in considering whether or not to move ahead with the scheme.
The impact statement shows that the Government had reduced the size of the proposed levy to fund the scheme – to be split evenly between employees and employers – from 2.77 percent to just 2 percent.
The indicative levy would fund roughly 114,000 redundancy claims and 130,000 health and disability claims per year across an economic cycle, although there was significant uncertainty about how many claims would actually be made.
Modelling had indicated the scheme could cost between $2.97 billion and $5.17b a year on average, equivalent to a levy rate of between 1.7 percent and 3 percent.
While levy rates set too high compared with demand could be managed with temporary cuts, the opposite scenario would be more difficult to resolve. A 2 percent levy set against demand equivalent to 3 percent would build up a $5.9b deficit over three years.
“The proposed scheme may also surface unmet health needs, which could create additional pressure for services in a system already subject to significant constraints.” - Regulatory impact statement
Among the potential costs of the scheme was the extra demand that could be placed on health professionals needing to assess workers who wanted to access the scheme.
“The proposed scheme may also surface unmet health needs, which could create additional pressure for services in a system already subject to significant constraints.”
People in some parts of the country could struggle to access the scheme if they lacked access to the services necessary for a health or disability assessment, the impact statement said.
The scheme could also lead to an increase in unemployment, by making it more likely that employers would lay off their workers and extending the duration of a related job search.
However, it was unclear how significant that effect could be, and it was likely to be small.
The proposal would generate “substantial” benefits by helping a large number of people avoid major income drops, financial stress and the associated impacts on their health and wellbeing, while also reducing the pressure for people with health and disability conditions to stay in work when unwell or leave entirely.
It would also help the economy to better weather downturns, “one of the most significant effects of the scheme”.
However, an analysis of public submissions on the scheme showed that more than three quarters (76 percent) were opposed, while 60 percent of those who took a separate online survey likewise believed it should not proceed.
“Common across the engagement, irrespective of level of support, was concern about the timeframe for implementing the proposal.”
Privacy concerns
The impact statement said the Office of the Privacy Commissioner had asked for a comment to be included in the Cabinet paper expressing concerns about the scheme’s privacy impacts.
The proposal would override the Privacy Act by allowing information sharing between government agencies outside the law’s protections, and lacked a privacy by design approach, the Privacy Commissioner said.
MBIE had since worked with the commissioner’s office to address a number of their concerns, and believed it would revise its views accordingly.
Without information sharing between agencies, the income insurance scheme “would not be able to operate efficiently or effectively”, becoming completely reliant on individuals providing information for the payment of levies, claims eligibility and other processes.
“To fully rely on consent or authorisation would shift the burden to individuals to critically analyse and decide whether they should disclose their correct personal information in return for the benefits of [the scheme].
“This would be inefficient and unrealistic, could open opportunities for fraud, and would go against the policy intent of the scheme.”
One of the main benefits of a publicly-provided income insurance scheme was the pool of funding it created, spreading the risk of income loss across the working population.
Failing to legislate for information sharing would make the scheme “essentially voluntary”, leading to "adverse selection" where only those expecting to need insurance would opt in.
The decision to put the plans on ice at late notice has had financial impacts, as well as opportunity costs for the public servants who spent years working on the proposal.
Last week, the NZ Herald reported that ACC would have to fund up to $390,000 in redundancy payments for departing staff, as well as $1.73 million in termination costs for contractors who had been working on the policy.
