promoting employment through welfare reform lessons from the past, prospects for the future the...

Promoting employment through Promoting employment through welfare reform welfare reform lessons from the past, lessons from the past,

prospects for the futureprospects for the future

The Downing Lecture

Alan Duncan University of NottinghamInstitute for Fiscal Studies

Melbourne Institute

Introduction and motivationIntroduction and motivation

National policy decisions are increasingly informed by international experiences and policy structures

fiscal, welfare, family and labour policy, education, pensions etc..

What lessons can be drawn from these experiences? Does a consensus emerge from international experiences of

welfare reform? Can welfare policy be effectively transferred across institutions? How is the process of policy transfer characterised? What role is there for welfare policy in promoting employment?

Plan of lecturePlan of lecture

a short history of welfare reform concentrate on the detail of reform in US, UK and Australia draw out some themes common to recent welfare reforms

elsewhere among OECD countries

welfare policy ideas where do they come from? How do they evolve? international policy coordination and policy transfer policy ideas are shared, imported, adapted, or transferred

across countries the global laboratory Case study: Working Families’ Tax Credit in the UK


key ideas and themes in welfare reform active labour market policies mutual obligation and conditionality of support promoting employment through tax credits

an emerging consensus? simplification modularity transparency coherency


where now for welfare policy in Australia? lessons for Australia lessons from Australia prospects for the future

a missing pillar in Australian welfare support?? potential for an employment tax credit (ETC) in Australia how might it be implemented? what effect on employment? a route to greater coherency? a route to further simplification?

‘‘Three pillars’ of welfare reformThree pillars’ of welfare reform

In October 1997, the incoming Labour Government committed to the following policy objectives:

“to support families, to make work pay and to tackle child poverty”

These broad objectives informed many of the subsequent welfare and labour market reforms of the new government:

the Working Families’ Tax Credit Jobseekers’ Allowance the New Deals (for lone parents, young unemployed, disabled) Childcare Tax Credit

‘‘Three pillars’ of welfare reformThree pillars’ of welfare reform

Similar themes are replicated in policy statements throughout the developed world, with three over-riding objectives:

to provide support for low-income families to tackle child poverty to promote employment

eg. ANTS (2000) in Australiaeg. TRA (1986) and PRWORA (1996) in the US

The third pillar of welfare The third pillar of welfare reformreform

How to promote employment through welfare reform?

What lessons emerge from recent welfare reforms around the world?

Can one draw common themes from international experience?

Can policy effectively be transferred across national institutions?

Case studies: 1) the EITC system in the US 2) the WFTC system in the UK

Case study: tax credits and welfare Case study: tax credits and welfare policypolicy

Significant changes in UK welfare policy since 1997 employment- and demographic contingent benefits (WFTC) welfare-to-work programs (NewStart, JSA, Job Clubs, New Deals) Child Support Agency

Many policy ideas were borrowed from experiences elsewhere

From the United States: EITC, workfare, New Deal, Child Support (CSES)

From Australia: JET, Child Support scheme, Working Nation

Welfare support in the Welfare support in the USUS

Key features of the current system support for low-income households (TANF, Food Stamps) assistance with childcare costs (Childcare subsidies) earnings-conditional credits (EITC) mutual obligation (time limitation, mandatory job search) set alongside state minimum wages

Key characteristics systematic shift in caseload and cost from TANF (previously

AFDC) to EITC TANF caseload halved through tight targetting and strong

obligation on welfare recipients to secure employment criticisms that TANF infringes individual freedoms and

citizenships

The The US Earned Income Tax CreditUS Earned Income Tax Credit (1975-)(1975-)

some comparative structuresome comparative structure

EITC is a refundable tax credit delivering financial support to low-income working households

Structure designed to promote employment incentives:

Credit phased in at a proportion of earned income to some maximum

Credit phased out beyond some threshold income Current system differentiated by family type Creates three ranges – phase-in, plateau, phase-out No minimum hours requirement

How is EITC received? delivered as a refund by IRS through the annual tax return

Earned Income Tax CreditEarned Income Tax Credit ((after OBRA93after OBRA93))

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Earned Income Tax CreditEarned Income Tax Credit development over time, 2 or more childrendevelopment over time, 2 or more children

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Integration of EITC in the US tax Integration of EITC in the US tax systemsystem

Florida TANF structureFlorida TANF structure

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Gross income ($)

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Net earnings TANF Food Stamps EITC

Welfare support in the UKWelfare support in the UK

Key features of the current system support for low-income households (Income Support, Jobseekers

Allow) assistance with childcare costs (Childcare Tax Credit) earnings-conditional credits (Working Families’ Tax Credit) mutual obligation (New Deal, mandatory for some, Social

Contract,) national minimum wages

Key characteristics a change in emphasis, from unconditional income support to

policies promoting employment part of an ongoing development towards a coherent and modular

structure of welfare support WFTC development borrowed much from US experience of EITC

Welfare support in the UKWelfare support in the UKsome historysome history

Attitudes have changed

the early view

‘The [1944] Beveridge Report barely discusses the problem of poverty among working households. In this, it is very much a product of the particular time at which it was written… for Beveridge it was axiomatic that anyone in employment had resources sufficient to support a wife and one child’,

Dilnot, Kay and Morris (1984, p.23).

Welfare support in the UKWelfare support in the UKsome historysome history

Attitudes have changed

the current view

“..the Government’s attack on worklessness… tackles the barriers to work faced by workless households, including low skills, fears about the time lag between benefits and wages, the perverse incentives which discourage people from moving from benefits to work and the lack of affordable childcare”

A New Contract for Welfare - DSS(1999, p.3).

In-Work Benefits in the UKIn-Work Benefits in the UKsome detailssome details

Family Income Supplement (1971) the first explicit employment-contingent benefit in the United

Kingdom available only to working families with children

Family Credit (1988) aimed to improve work incentives relative to FIS More generous, assessed on net rather than gross income,

eliminating high METRs

Reforms to Family Credit (1992-1995) minimum eligibility criterion reduced from 24 to 16 hours (1992) £10 extra once FC recipient worked 30 hours or more (1995) £60 childcare expenditure disregard in Family Credit (1995)

FamilyFamily Income Supplement Income Supplement (1971)(1971)

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Hours of work

Family Credit & FIS

FIS Family Credit

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Family Credit & FIS

FIS Family Credit

FamilyFamily Credit Credit (1992)(1992)

The UK tax and transfer systemThe UK tax and transfer systemApril 1997 (upratedApril 1997 (uprated to 2000 to 2000))

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Hours worked @ £3.50

Child Benefit Net earnings Income Support FC / WFTC Rent rebate Local tax rebate

The Working Families’ Tax CreditThe Working Families’ Tax Credit (1999) (1999)some structuresome structure

WFTC represents a new tax-credit based system for delivering financial support to low-income working households

differs from Family Credit in a number of respects: increased credits for adults increased credits for children increase in threshold for maximum entitlement (“applicable amount”) reduction in credit withdrawal taper (70% to 55%) a new childcare credit (70% of actual childcare costs, up to max of

£150)

also: delivered through the tax code rather than via the Benefits Agency income taken into account in the assessment of housing and local tax benefits

Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

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Family Credit WFTC WFTC with childcare


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Integration of WFTC in the UK tax systemIntegration of WFTC in the UK tax systemApril 2000April 2000

The April 2000 system

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Child Benefit Net earnings Income Support WFTC Rent rebate Local tax rebate

Effective income gain from WFTC receiptEffective income gain from WFTC receiptApril 2000April 2000

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WFTC net income difference

WFTC: where did the idea come WFTC: where did the idea come from?from?

Although welfare policy is still dominated by national priorities and values, it is nonetheless true that domestic policy is informed by international experience

globalisation of policy ideas increasing use of ‘evidence-based’ policy initiatives international agencies to facilitate policy transfer

What evidence is there regarding the effects and outcomes of the transfer of welfare policy?

has it led to ‘good’ policy? are there circumstances under which policy convergence doesn’t

work? Case study: US-UK welfare reform

Policy TransferPolicy Transfer

Policy transfer reflects a situation whereby

‘“[..] knowledge about policies, administrative arrangements, institutions and ideas in one political setting is used in the development of policies, administrative arrangements, institutions and ideas in another setting”

Dolowitz and Marsh (2000, p.5 )

The Working Families’ Tax Credit

a case of policy transfer?

“… I have therefore also asked Martin Taylor to consider at an early stage the advantages of introducing a new in-work tax credit for low-paid workers. It would draw upon the successful experience of the American earned income tax credit, which helps reduce in-work poverty, and now

helps 19 million lower-paid workers in America.”

Rt Hon Gordon Brown MP (Chancellor), Budget Speech, 2nd July 1997

1971 Family Income Supplement (FIS) introduced as a means-tested in-work benefit.

Earned Income Tax Credit introduced for low-income working families with children

1975

Tax Reform Act 86: EITC generosity increased

1986/7

1988 FIS replaced by Family Credit (FC) generosity increased. Lower hours limit on eligibility (16 hours per week).

Time-line of welfare reform in UK & Time-line of welfare reform in UK & USUS

US UK


US UKOmnibus Reconciliation Act 1990: EITC generosity increased. Separate rates for 2+ children. EITC excluded from means test in other welfare programs.

1990/1

1992 Hours condition on eligibility reduced (to16 hours per week).

Omnibus Reconciliation Act 1993: EITC generosity increased for families with 2+ children. EITC extended to include workers without children.

1993

1995 Additional credit of £10 for those working 30 hours per week. Childcare expenditure disregards introduced.


US UKClinton’s PRWORA. AFDC replaced by TANF.

1996

1997 Labour Government elected in UK. Chancellor announces intention to introduce new tax credit

1998 SSSC visits US to look at EITC implementation issues. UK Chancellor pre-announces WFTC reform.

1999 WFTC replaces FC (refundable tax credit, increased generosity, reduced taper, support for childcare costs)

2000 Increase in generosity. WFTC paid through the tax code.

pilot study announced to extend FC-type system to childless households

Issues in the move to tax credits in the UK

policy transfer has been voluntary

transfer pre-conditioned on common values & ideologies in UK and US

policy transfer has been partial Lessons have been drawn from US experience WFTC retains payment structure of FC rather than imported from

EITC WFTC preserves the concept of independent taxation

policy transfer has been adaptive WFTC delivered monthly through the tax code rather than annually

as refund

Lesson-drawing and policy transfer

lesson-drawing

“In America, the EITC is known for its administrative complexity, its weakness as an incentive provider and its proneness to fraud--it is the most fraud-prone benefit in the United States. […]. It would be a tragedy if, on top of its other problems, that problem were to afflict the WFTC as well.”

Mr David Davis (MP for Haltemprice and Howden), 16th February 2000.

adaptation in the transfer of policy

policy adaptation

“…the United Kingdom proposals were developed to be aligned with the pre-existing in-work benefit system rather than the tax credit system in the United States. For example, eligibility for the EITC was originally checked retrospectively, in line with the policy on tax measures. The IRS now verifies eligibility before payment. Such a process is built into the UK proposals because they are based on existing structures for in-work benefits.”

Mr David Davis (MP for Haltemprice and Howden), 23rd March 1998.

‘reverse’ policy transfer

the “transatlantic policy transfer loop”

“…The Working Families Tax Credit combines the best features of the UK's Family Credit and the US's Earned Income Tax Credit. […] The most impressive feature of this plan is that it achieves the advantages of paying benefits through the tax system without losing the many desirable features of Family Credit, and without sacrificing the simplicity of the UK tax system. […]. Initial indications are that the Labour government has taken a good programme and made it better.”

Jeffrey Liebman (Harvard), 17rd March 1998.

Welfare policy transfer in the UK

So, has the policy transfer from the US led to ‘good policy’ in the UK?

generally, YES simulation and evaluation evidence of improved employment incentives Administration & delivery is working well Has provided key to harmonise other forms of assistance through tax credits

Future developments planned, through the separation of tax credit instruments to target specific objectives Integrated child credit employment tax credit disablement tax credit childcare tax credit

a global laboratory

policy transfer extends beyond any bilateral axis

UK policy is increasingly informed by experiences in Canada, Australia and OECD countries

Social Security Select Committee took evidence from welfare reforms in Australia, France, Belgium, Canada,.…

governments around the world have access to evaluation studies and social experiments in a global laboratory of welfare reform

An emerging consensus?

Do we see any patterns or common themes in welfare reform around the world?

in specific measures to promote employment? in the general structure of welfare reform?




Specific programs to promote employment active labour market programs mutual obligation and conditionality of welfare support targetted employment-contingent payments




General patterns in tax and welfare reform simplification of income support delivery clarity of aims and policy objectives coherency of tax and welfare systems modularity in structure of income support

Active labour market programs

Many such programs exist “New Deal”, Job Clubs in the UK New Deal and Enterprise Zones in US JET and Working Nation programs in Australia ALMP in Sweden, France, Poland...

Key concerns difficult to evaluate the success of active labour market

programs most evaluation evidence indicates that New Deal programs

are expensive (eg.) NDLP in the UK:

- 20% additional jobs gained at a cost of £20,000 (Aus$50,000) per job

Mutual obligation

Not a new concept in 16th Century England, the death penalty was introduced

for those able but unwilling to work Under the Thatcher administration, an emphasis was placed on individual

responsibilities for finding employment (“on your bike”, Sir Norman Tebbitt)

Blair emphasises “rights and responsibilities”, and the “social contract”. - JSA is conditioned on mandatory participation in New Deal

programs In the US, mutual obligation is more stringent

- mandatory job search, time limitations on welfare

Key challenges framing mutual obligation policies with due concern for vulnerable

groups providing effective programs of job creation and training.

Employment-contingent credits and payments

Employment tax credits and in-work benefits are featuring more and more in modern welfare systems around the world

- Canada (SSP), US (EITC), UK (WFTC), Belgium (IWB), France (EC), Ireland (FIS)..

some are contingent on earned income alone (US, France) some include hours as well as earnings contingencies (UK, Canada) most are seen as efficient and effective in the delivery of work

incentives most are now delivered as tax credits rather than welfare payments most run in tandem with minimum wage policies

Key issues provide a route (but not the only route) to coherency provide a route to modularity in income support payments

Common themes in welfare policy reform

Many tax systems are the product of incremental or piecemeal reform. In many cases, the resulting structure suffers from

a complexity in structure, with perverse employment incentives, inefficiencies, inconsistent EMTR patterns, incoherency of instruments with which to target policy objectives

Current patterns of welfare reform are moving towards more coherent structures of welfare support (eg). Employment tax credits in the UK, (eg.) ANTS (2000) in Australia What are the characteristics of a coherent tax and welfare system?

- separation of policy instruments and objectives- simplification of payment structure- modularity of welfare support

Employment tax credits in the UKa move towards coherency?

WFTC targets payments on working families with children

difficult separately to target the three pillars of welfare reform no separate employment tax credit for families without

children

New proposal: Separate the WFTC into an Employment Tax Credit and

an Integrated Child Credit. Implications?

- a clear separation of policy instruments and objectives- a move towards coherency

- the potential to build additional modules of support onto the existing credit structure


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The ANTS (2000) reform in Australia

a move towards coherency?

In many respects, YES: a simplification of twelve payments to families & children to three

separate policy instruments the system is transparent and coherent in its family and child

support measures the post-2000 system in Australia is in many respects an ornament

to modern welfare policy

A missing pillar? Currently, there exists no separate policy instrument designed

specifically to promote employment. Introducing an employment tax credit has formed a central part of

the ongoing welfare reform debate in Australia? - “Five Economists’ plan”, the Reference Group on Welfare Reform

Employment tax credits in Australia

prospects for the future?

what scope is there for an Employment Tax Credit in Australia?

Lambert (2000) proposed an extension to the existing FTB payment structure, similar in structure to the US EITC

Duncan (2002) found the ETC to increase employment among lone parent households by around 5%

Dawkins (2002) flagged up the possibility for additional modular credits to sit alongside the ETC

The debate continues...

promoting employment through welfare reform lessons from the past, prospects for the future the...

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