The $21m-plus cost of the Government’s shelved Income Insurance Scheme

The Accident Compensation Corporation (ACC) has confirmed it is on the hook for up to $390,000 in redundancy payments for departing staff and some $1.73 million in contractor termination costs following the Government’s decision to
shelve its Income Insurance Scheme.

Those costs are just a small fraction of the $21.6m the agency has sunk in preparing to implement the scheme, and then halt its implementation.

Most of the cost was incurred by the Crown entity in the roughly 18-month period to March this year, as the agency prepared to introduce and manage the Government’s controversial plan for a payroll tax to fund laid-off workers, and those unemployed through ill-health or disability.

However, Prime Minister Chris Hipkins delayed the scheme indefinitely, and ordered its implementation unit shut down, shortly after he succeeded Jacinda Ardern in January.

Hipkins tacitly admitted at the time that the Government had bitten off more new policy and reform work than it could chew, especially in an election year. He also said the soaring cost of living made this the wrong time to push ahead with such a considerable expense to both workers and employers.

Previously, it was planned that legislation for the scheme would be enacted by the end of July this year, and operation would begin on April 1, 2025.

In February, Cabinet agreed the scheme would be delayed “as it is currently proposed” and that it will not come into force “until economic conditions are better”, and not before 2025/26 at the earliest.

National Party deputy leader and finance spokesperson Nicola Willis called the “wasted millions” spent on income insurance another sign of Labour’s failure to govern prudently.

She pointed out that New Zealanders still don’t know the full cost of the “redundant work”, since, in addition to ACC’s involvement, the Ministry of Business, Innovation and Employment (MBIE) has largely footed the bill for the scheme’s policy development, and it is still working to explore alternatives.

The ACC figures do not include the additional cost of considerable policy work for the scheme borne by MBIE.

Finance Minister Grant Robertson said there remains value in the spending: “the work that has been done and is being done is still of value on what is an important policy issue, which we can return to at an appropriate time in the future.”

He accepted that: “as with a number of programmes that have been reprioritised, stopped or paused there will be some costs associated with doing that.”

The insurance scheme is just one of many Government plans recently revised, mothballed or scrapped.

Robertson said there remained “a gap” in the country’s social security system, and that without some form of income insurance, New Zealand remains an outlier within the OECD.

ACC confirmed that as of early this year, it had a permanent and fixed-term staff of some 30 employees in its NZISS implementation unit; all of those roles are now disestablished. Three of the employees have received redundancy payouts, and another five are eligible for them.

The vendor shutdown costs are likely to be incurred this fiscal year and relate to technology contracts, said Andy Milne, deputy chief of strategy, engagement and planning at ACC.

The figures and details relating to the unit were released to the Herald under the provisions of the Official Information Act.

The information release shows that of the $19.4m the agency spent on preparatory and implementation work for the scheme, some 66 per cent ($11.7m) was spent on contractors and consultants.

The lion’s share of the outside work went to PwC. The consultancy was paid $5.4m for work on preparing for the scheme, including the work of some 39 consultants, the highest-paid of whom was charged out at $4000-$5000 daily, while the bulk (17) were charged at $2000-$3000 per day.

Some 51 contractors also worked on the scheme, both full- and part-time, over the 12 months from March 2022 to March 2023, at a cost of $5.2m.

Government contractor and consultant spending has marched higher by hundreds of millions of dollars under Labour, despite Hipkins’ previous promises, particularly in Labour’s first term, to rein in the spending and rebuild the public service’s internal capacity.

National has called Labour’s heavy spending on outside help a “gravy train” and promised to cut it by $400m a year if given the opportunity. Robertson, however, said most of the increase had been driven by Covid-19, as well as one-off IT improvements, and that public service chief executives are aware that the Government wants to limit contractor and consultant work to “where it is necessary”.

Both ACC and MBIE confirmed that, despite the implementation shutdown, some policy work is continuing.

ACC indicated it has a remaining income insurance budget in the current fiscal year of roughly $800,000, from which it is funding two policy roles. Milne said those officials would work with MBIE on an ongoing basis.

Libby Gerard, manager for the MBIE Income Insurance policy team, confirmed that a policy group within the ministry was also continuing work on possible plans to replace income insurance. The group has the equivalent of 7.5 full-time staff currently, and two further posts are currently advertised.

“The Prime Minister announced on 8 February 2023 that work on NZIIS would be reprioritised and ministers would seek further advice on how to support New Zealanders who lose their jobs through no fault of their own. This means looking at alternative options, including whether existing services could be expanded.” Gerard said the MBIE team was now pursuing this work.

Willis said Labour was “throwing good money after bad and should immediately stop the ongoing work … this is where Labour gets it wrong. Government is all about priorities and Labour just can’t seem to focus theirs.”

Key parameters of the shelved NZIIS scheme that went to public consultation last year include that it would pay laid-off workers, or those incapacitated by ill-health or disability, 80 per cent of their usual salary (to a cap of $130,911) for up to seven months. The first month would be paid for by employers; the balance would be funded by a payroll tax, footed equally by employers and employees and amounting to 2.77 per cent of wages.

MBIE estimated that the scheme would raise $3.54 billion a year (based on 2018 data), a figure officials said reflected a total annual cost to the scheme of $1.81b for displacement – redundancy through no fault of the worker – and $1.73b to cover the cost of health condition and disability claims.

Late in 2022 the Cabinet agreed “in-principle” to a modified version of those details.

While the scheme had wide union support, polling showed it was deeply unpopular with a wide swathe of the New Zealand public. It was also opposed by a broad range of groups from business (too expensive and a disincentive to return quickly to work) to anti-poverty campaigners (not equitable and of little incremental benefit over the existing welfare system for low income-earners).