Bernard Hickey says the Government should use its strong balance sheet and low borrowing costs to make millions of dollars in social investments that save everyone billions in the long run

Bernard Hickey says the Government should use its strong balance sheet and low borrowing costs to make millions of dollars in social investments that save everyone billions in the long run

By Bernard Hickey

Just imagine if you could invest NZ$14.1 million up front and get a return over the next 50 years of NZ$3.3 billion. Would you do it?

Most would say a return that was over 200 times greater than than investment was probably worth it.

But most people don't have those sorts of opportunities, or the ability to magic up NZ$14.1 million at the drop of a hat at a low cost.

Except everyone in New Zealand does, in the form of being taxpayers in common to a Government that does have these opportunities and has the access to those funds at a much lower cost than most would realise.

This is what the Government's social investment approach is all about and the apparatus of Government is starting to get its head around how to measure those costs and benefits, and what types of investments it could make.

There is potentially a huge opportunity, if the early results are any indication.

Back in 2013 the Government announced it would spend NZ$7.9 million to employ individual case workers to essentially nag and cajole individual teen single mums back into work and education, and to help them make sure the bills are paid and their kids looked after. It was like employing a 'super nana' for every teen mum and baby. It also spent NZ$6.2 million on setting up seven supported shared homes for these young single mothers, including around-the-clock support and care for their babies.

The theory was that single mums who stay on the benefit without any ability to get a job and start an independent life are often the ones most at risk of being stuck on the benefit for decades, and more importantly, their own children get stuck there too. The risks that those kids will be sicker and get into trouble with the justice system is also much higher, amplifying the cost, not to mention the human misery.

The Government's actuaries have worked out that a single parent on the benefit under the age of 20 is likely to be on the benefit at one time or another for 20 years by the time they retire and the net present cost of that person is NZ$220,000.

So investing heavily in that teen mum's training, health, housing and life skills at a very early stage can have a very big payoff. Do it for enough teen mums, or kids in bad housing, or illiterate teenagers and you could end up with a very big 'investment' return.

The early verdict was a very big number. The actuaries worked out that the lifetime liabilities to taxpayers of those single mums reduced by NZ$3.3 billion between June 2013 and June 2014. That's at least partly because the early interventions reduced the numbers of single mums on benefits and reduced their expected time on benefits over the long run. There are now 43,000 fewer single mums on benefits than there were three years ago.

Finance Minister Bill English talked in the Budget about another group where early investment could create huge benefits for those people and taxpayers at large. He says 1,500 5-year-olds are in state care every year and they're expected to cost the taxpayer NZ$550 million in welfare and prison costs by the time they are 35.

So if the Government could devise a way to invest in those 1,500 youngsters up front to give them the skills and resources to avoid the benefit and prison systems then the payoff could be immense.

This week ANZ Economist Cameron Bagrie sensibly questioned whether it was time for the Government to use its balance sheet, which means its ability to borrow cheaply, to invest and spend in the economy and help keep it growing strongly. Prime Minister John Key said it was too early to push the panic button yet, but the Government would invest heavily again to support the economy if it needed to. He referred to the Government's billions of dollars of investments in motorways and infrastructure during and after the 2008/09 Global Financial Crisis and the 2010/11 earthquakes.

Here's the opportunity. The Government's net debt is just over 25% of GDP at the moment and forecast to drop back towards 20% over the next couple of years. The IMF and OECD says the New Zealand Government could easily handle net debt of 60-90% and was over 200% of GDP away from its absolute limit. The OECD also recommended this week that countries invest in skills to help restart productivity growth.

No one is suggesting investing tens of billions of dollars in training and nagging and doctoring and housing thousands of kids and teenagers. A few hundred million dollars could make an enormous difference if the early results of the social investments so far are any indication. The spending certainly appeals more than a couple of kilometres of concrete.

One thing the Government could do to smooth the path for more of this investment is to reduce the discount rate recommended by Treasury to Government departments considering these sorts of social investment projects and programmes. It currently says they should use 8% as the rate and has asked for feedback on a draft manual for cost benefit analysis for social spending. That's important because a high discount rate often means future benefits count for little in any cost benefit analysis.

The Government can currently borrow for a 10 year term at around 3.5%, which is less than half the cost when the Treasury was setting discount rate baselines. It should lower them.

Wouldn't you borrow NZ$14.1 million at 3.5% for an effective return of NZ$3.3 billion?

The Government could do an awful lot more using its own social investment techniques and its very strong balance sheet.

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A version of this article has also appeared in the Herald on Sunday. It is here with permission.

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Breathtaking level of confusion by Bernard here. Social Investment is great policy. Getting rid of the aimless gaggle of do-gooder organisations and moving its existing large expenditure to effective activity is what it is about. Much of the expensive work now done makes provider organisations feel good but produces no change.They just faff about.using taxpayers contracts for not much outcome.
Thing is Bernard it is a quality change. It is like they taught you about Japanese manufacturing. You can reduce costs and increase quality at the same time. There is no conflict between the two.
No extra money is required Bernard. The 'investment' is in working smart.
How you link this to Government ability to borrow is beyond me. Unless it is 'small boy in the lolly shop syndrome'. All that money out there and you just have to borrow it.

How typical for a right winger to think of humans with issues as a "production item", they are not. Each NZer with problems is unique each cant be thrown away and a new cheap one from china purchased......

How typical a Steven comment. Explain to me your point - which seems to be that we should continue to spend money on things that don't work. And not divert activity and spending to things that do.
As for me, I'm into helping people.

Evaluating the cost-benefit of any expenditure goes a bit further than sitting in an arm chair rallying against the world and ranting that things don't work. Whether your expenditure is for commercial or social objectives, it's always good to focus on outcomes and Bernard is right to point out that this approach can be more robust for govt expenditure.

Why would the government lend internally at a punitive rate? Is there a history of default?

It can only be an accounting trick - future payments look a lot smaller today when the discount rate is expediently and erroneously raised above the benchmark government debt market funding rate.

Stephen H - Was it you who gave us the link to "Princes of the Yen: Central Bank Truth Documentary" on Youtube.
I was most facinated by the part (just over one hour in) when he says "Japan was shifting its economic system to a US style market economy".
Then, the part i found most interesting he said "And that also meant that the centre of the economy was being moved from banks to the stockmarkets"
I am now wondering if what happenned to Japan is about to happen on a global scale.
Look at the many signs, bloated debt, the open bank resolution, super funds going into stock and much more.
I think all the signs are there for a planed global crash destroying many of the worlds banks.
The new systen, as i see it will be each contries central bank taking control of each countries economy (like controlling budgets and so forth) There will only be about four banks world wide (all American).
Well ill have to stop and let you work out your own theory.
https://www.youtube.com/watch?v=p5Ac7ap_MAY

maybe they think their customers are a bit clueless and don't understand the value of their money...

11
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Here's the opportunity. The Government's net debt is just over 25% of GDP at the moment and forecast to drop back towards 20% over the next couple of years. The IMF and OECD says the New Zealand Government could easily handle net debt of 60-90% and was over 200% of GDP away from its absolute limit. The OECD also recommended this week that countries invest in skills to help restart productivity growth.

Here's the catch. External debt in New Zealand increased to 247,182 NZD Million in the first quarter of 2015. Foreigner's goodwill is stretched at the moment with global public debt standing at USD ~56 trillion+. 2.355 million employed Kiwis can never pay what they already owe foreigners per capita in their own lifetimes. Piling debt upon debt can no longer be counted as sustainable economic policy.

Public debt per person in the States and the UK is a bit scary, they are a wreck looking for a reef. Canada is bloody awful, Japan beats all.

"invest" in skills. There's the privilege talking. That's what I was explaining about tort and social privilege to Polteriat last night - the upper levels have no concept of monetary limitations and are divorced from it's reality. To them it's about power and social standing, A fine is just a forfeit, a slap on the wrist for being naughty. Unless they are business orientated (and the most wealthy are) they don't have a clue about how money works or it's limits.

Just what are we supposed to be "investing"???? money? from where? borrow it? helloooo!

Pouring in extra skills? we already have educated white collars looking for any work. count the number of degrees/certificates on the unemployment lines, or in minimum wage work ! Do we need a bachelors to do gardening? Will it add value to the result or process? NO!!

without monied consumers all the skills in the world won't increase productivity. the problem is that labour income (from human person capital) is dwarfed by corporate and accumulated capital, thus all the income goes into the top tiers and directly back into corporate accounts. (ie no velocity of money).

They're playing monopoly, and the corporations have got all the property and the money.
You're almost at "victory" condition. if we can't get tradeables to the broke players. and they got nothing to 'mortgage' or auction left.

To extend that "Monopoly"(tm) metaphor a bit futher.

We've reached the point where my uncle has all the cash and properties and is saying, "if we put on 2 more streets, with 6 more browns and 9 more light blues, and I chuck in an extra $20 when we pass go, can we keep playing? "

" the upper levels" neither do the "bottom levels" some of the vitriolic outbursts is actually quite concerning in terms of social stability.

IMF misses the bugbear, expensive energy ie we cannot kickstart/feed an economy with higher skills when the energy to do so is too expensive. Unless those with skills get them via huge crippling debt which then takes them decades to pay off, in effect slaves for life.

Gee, tourist arrivals seem to be plummeting as well according to that first link to RBNZ data.

Bernard, would you really run your business like that? Would you really hire a business manager who came you with a proposal like that? (If so I've really got the get a managers job in Auckland if the bar is that low).

"So investing heavily in that teen mum's training, health, housing and life skills at a very early stage can have a very big payoff. Do it for enough teen mums, or kids in bad housing, or illiterate teenagers and you could end up with a very big 'investment' return"

So where do the actuaries think the _jobs_ are going to appear for those skilled up Mums?, or the increased business revenues to pay them enough for their now-educated selves to be worth their work.

In short, where is the _market_ end of this analysis?

Languishing In the same dustbin as the agricultural exports plan.

Cutting young people adrift to sink or swim at the end of their education (whether they failed NCEA or got a PhD) is the cause of so many social problems.

For many young people the canyon that lays between them and the rest of their life is too wide. Those that fall, often end up swept away by drink, drugs, violence and state dependency. They fail to form meaningful relationships, leading to crime, single parent families and general social dysfunction.

Without mentoring and direction it is so easy to fall.

Those who stepped over that canyon and made it to the top with ease, fail to recognise the issue.

Education institutions need to focus on how mentor young people into life not just get them to recite the syllabus.

Without a market to push the product into, it's not "Easy" to fail, it's Guaranteed.

That's my concern, why Bernard would back such a play with his reputation. Put up over $10mil for miracle promises of billions, with no market plan?

Reminds me of the Virgin's Richard Branson's reality TV show when he offered an event to drop off Victoria Fall's in a tin box. He managed to sell one contestant into in the end. and as he said, Just because someone tells you it's a great idea and it'll all work out, you got to look where you're going and assess the risk.
And the government clearly have no idea where they are going. Just "off the edge and down" the rest will sort itself out later..... (after all what risk to the consultants or government employees tocking off the decision.)

What also bugs me, as a parent whose wife decided that money and life were easier on the DPB than go farming. Is why _those_ people get another hand out... what about the people who are already working hard in the system to get those things, do they get a hand out too? Or is it just the DPB and others doing poorly that get the treats.... BIG moral hazard. Big. HUGE. moral hazard.

from Charlie Munger, I learnt 2 fundamental effects/principles of economic/Govt policies.
1/ Look out for higher order effect s..( unintended consequences ).
2/ Expect people to..."game " the system..

10 yrs ago i met a woman who was a solo mum on the DPB..
She was being forced to "upskill" and "retrain" while being on the DPB.
She was doing a " film makeup course".. ( blood and guts makeup stuff)
She showed me her makeup kit and told me it cost $6000 , which inclued the first yrs course fees...
She was ok with this as she was given a Student Loan to cover this. ( her "money" skills/knowledge were low )
She never got work in that industry...and was never going to... All she ended up with was $$$ debt.
the reason she choose the course was that she was given a free cell Phone.. The course provider had set up shop to take advantage of the new policy that compelled women on DPB to retrain..

The worst thing we ever did was to do away with the apprentice system.... My guess is that part of the reason may have been that tertiary institutions wanted complete control of the Industry education... which becomes a kinda monopoly licence which allows for large increases of fees....a fattening of the bureaucratic layers of an institution..
This is another way of..."gaming" the system.
The whole idea of getting "youth" ready to live and work in an adult world becomes corrupt.

from Charlie Munger, I learnt 2 fundamental effects/principles of economic/Govt policies.
1/ Look out for higher order effect s..( unintended consequences ).
2/ Expect people to..."game " the system..

Yes indeed.
NEW YORK (MarketWatch) -- Billionaire investor Warren Buffett said Wednesday he believes some form of Treasury Secretary Henry Paulson's rescue plan for the U.S. financial system will pass, adding that he wouldn't have invested in Goldman Sachs this week otherwise.

Paulson has asked for authority to spend $700 billion of taxpayer money to buy soured assets in the U.S. financial system to allow it to recapitalize and begin lending again.

"If I didn't think the government was going to act, I wouldn't have done anything," Buffett said Wednesday during an interview with the CNBC news network. Read more

Ah, Happy Days! When Hank wanted $700 billion to spend, (but didn't want to tell anyone where he was going to spend it, and wanted immunity from prosecution if it all went wrong!), to rescue us all. And further down that piece from '08 we get:
"the financial markets remain in "a very, very difficult situation. The market could not have taken another week like the one that was developing last week." that sounds eerily like China right now. So all Hank's Tea In China hasn't and won't save us, after all.....

The present value of $3.3 billion over the next 50 years is only $70.4 million, assuming equal returns each year and an 8% annual opportunity cost of capital, which is very reasonable. That's a return of 5 times the initial outlay, not "over 200 times" as Bernard implies.

Wow, there are some good ideas and feedback in here. I would like to come from another view as the existing comments and perspectives are onto it.

Whenever there is a problem like this, I like to have a look at history and see where we have come from. In generations gone by, there were not as many solo teen mums, because of an inferior social safety net, and a social norm that encouraged marriage. The father would teach his kids, and provide a stable male role model, which I believe in part is the historic 'training' we are talking about borrowing for. Look, ilthere a bit more to it than that, I am just askin for a historical concideration to the effect of esteming fatherhood in society.

Now, we have a nice cosy socialist safety net which is brilliant as we don't have 17th century style homeless dying in the streets around us. This however has a cost, which increases with the scope of the net (more lifestyle choices).

There is also a cost of having Hollywood beamed into our houses nonstop. As we move away from the social norms of the past, we indeed encounter unintended consiquences. The producers of shows that glamorise consiquence free sleeping around don't pay the ? how many billion again did Bernard says this costs? And how much of the unintended consiquences do Hollywood pay?

No, the past wasn't perfect, but I dare say it has at times been more financially productive than now (re velocity of money).

I'll summerise. Social welfare is easier when coupled with strong moral fortitude. Unlimited lifestyle choice is not the responsibility of the tax payer.

Moral perseverance as a society, or expensive welfare: choose one.

Save me the moralistic high ground of the past, thanks. Maybe read up on the Victorian era where the rich prayed on the poor young women often as young as 12, or life in the poor houses. As for "financially productive" a) read up on events like the Long Depression and Great Depression (and all the other ones), hardly productive, plus the era of cheap and abundant fossil fuel is ending. The Industrial revolution happened because of cheap coal and then cheap oil, passing eras.