Targeting makes sense

April 13th, 2013 at 9:52 am by David Farrar

Simon Collins at NZ Herald reports:

A subsidy that has helped to insulate about one in every six low-income homes looks likely to be cut back in next month’s Budget to a more targeted scheme.

The Green Party, which won the subsidy in a post-election deal with the incoming National Government in 2008, is pushing for it to continue at the current level of about $70 million, reaching about 50,000 homes, a year. …

Energy Minister Simon Bridges said the Government was considering, as part of its Budget process, “whether or how the programme might be extended” beyond its scheduled expiry in September.

“Were it to continue – and I emphasise no decision has been made – consideration may be given to transitioning it to a more targeted programme towards households in need,” he said.

He said the scheme had been “a huge success”, with 204,000 homes insulated at a cost of $347 million.

A cost-benefit analysis led by Reserve Bank chairman Dr Arthur Grimes found the country gained almost $5, largely in reduced health costs, for every $1 spent on the subsidy – a net benefit of almost $1 billion.

But the study also found that the health benefits averaged $854 a year for households with community services cards, but only $336 a year for other households, and recommended that the scheme should be aimed at low income earners.

Targeting makes sense for me. Households that can afford to insulate should do so without taxpayer subsidies. Government assistance should generally be directed at the least well off, not those who have sufficient income to make their own choices.

16 Responses to “Targeting makes sense”

  1. Richard29 (377 comments) says:

    $347 million spent on a program that has so far delivered $1Billion in savings.

    In a fiscally constrained environment why would you cut a program that creates a net savings for the government.

    This comes across as ideological opposition because the scheme makes the Greens look good rather than an impartial assessment of the benefits of the scheme

    Even for middle class families the program is paying for itself and reducing health costs to the government – why would you cut that?

    You are missing the point here DPF – the scheme works because most of the return on investment is not the direct reduction in heating costs but the indirect reduction in health costs. The party who bears the cost of insulation is the homeowner but the beneficiary of cost savings is the government.

    If we lived in the USA where the vast majority of healthcare costs are picked up privately then it might make sense for the individual to pay the full cost themselves, but here in NZ we have a fully taxpayer funded healthcare system so it makes sense for the government to make a co-payment subsidy.

    Incidentally – these subsidies make sense for the private sector as well. When we got our house insulated by Eco-Insulation we provided our Southern Cross membership number and got an additional subsidy from Southern Cross representing the savings that they make as the party underwriting part of our healthcare costs. Not sure if that scheme is still running but it’s worth asking if you are getting insulation done:

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  2. Richard29 (377 comments) says:

    Incidentally – if the National party is still ideologically opposed to insulation subsidies for whatever reason (reducing size of government, borrowing to fund public health outcomes etc).

    Then how is this for an innovative approach.

    Issue Social Impact Bonds:

    We have a scheme which has been assessed by the Reserve bank as delivering a return of around 288% in the 4-5 years it has been running. That beats the hell out of any investment I’m going to find in the private sector including, MRP the overheated Auckland property market or the NZX which has been tracking at over 20% growth recently.

    Set up a scheme where ‘Mum and Dad’ investors can buy a Social Impact Bond which funds the insulation subsidy. An annual dividend is paid by the government based on a share of the health sector savings as determined via independent audit by Treasury, Infomentrics, PWC or whoever:

    – Government saves health care costs
    – Government doesn’t have to borrow to fund the scheme
    – Kiwi’s provided with investment opportunities just like the government keeps saying they want
    – Fewer families living in cold houses, fewer sick kids
    – Reduced electricity and heating fuel demand saving us carbon credits under ETS
    – It’s an ethical investment – so the National Party just out-Greened the Greens, and did it with private sector incentives and bankers! 😛

    Surely that makes more sense than cutting a scheme which saves the government money at the very time the government is saying that getting the books back in the black and reducing costs in the health sector are priorities…

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  3. tamati (76 comments) says:

    When my wealthy parents got their second batch insulated courtesy of the insulation scheme I started to think something ain’t right!

    @ Richard.

    Two issues with your argument.

    Firstly middle class families generally don’t live in sub-standard housing. Sure their houses maybe cold, and uncomfortable at times but generally they are dry and can afford heating in the winter. Given that it is chronic moisture is the main cause of illness, heating up already dry homes may make people more comfortable, but won’t reduce their health costs.

    Secondly, it’s is a zero sum game trying to save health costs with a very general primary care intervention. From a purely economic perspective it would be in the taxpayers best interest to subsidise tobacco and ban the use of seat belts, as this would encourage quick are early deaths and avoid the expense of long term chronic illness and caring for the elderly. Not that I am advocating for these interventions. Anyway, my point is that healthcare is an insatiable expense and across a population it is very difficult to make noticeable cost savings with one specific primary intervention. (Some very specific interventions can be effective though, e.g. most vaccinations, Guthrie Tests)

    A much better (and the standard) method for analyzing the benefit of a healthcare investment is QALS (Quality adjusted life years). And providing middle class families with insulation to heat their already dry homes simply doesn’t stack up. Far better to spend this money subsidizing flu vaccines or school nurses.

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  4. slijmbal (1,270 comments) says:

    As with all such subsidies it had some unintended consequences.

    Our house could benefit from improved loft insulation – what’s in place is pretty low quality. You are, however, forced to get both underfloor and loft insulation even when not appropriate.

    We’re not low income and can get the subsidy based on my research.

    However, there are issues with pricing.

    In effect, the ratified providers (for subsidies) charge more and the net effect of the subsidy is in the region of getting the insulation installed for zero labour costs on published installation prices i.e. the installation is generally being priced to match the subsidy and not necessarily the real installation price.

    If I haggle and install myself with the non ratified providers then I can get it done cheaper. Considering the amount of the subsidy and the ease of installation of the underfloor and loft insulation it looks very likely a number of providers are managing to pocket a decent extra profit as opposed to the subsidy going entirely to the installation.

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  5. Richard29 (377 comments) says:

    1) Indeed there are I’m sure a minority of cases where the subsidy doesn’t stack up and your folks bach seems like an example of that. However, I think there are benefits of a universal scheme – the reality is that insulation subsidies have been around for years for low income people, but for a bunch of reasons (mainly relating to access to capital and access to information) they are less likely to take up the offer. It’s easier to make sense of the policy if you see it as a relationship between underinsulated housing stock and the health sector and ignore the current owners of the home or their income level. For example our household is middle income, the reality is that in the absence of the subsidy we would not have insulated. One reason is that we live in a lower price quartile Auckland home and will probably be moving in a couple of years at which point the house will be sold (likely to a lower income family than us) or rented out. As such it doesn’t benefit us to pay the full cost of insulation (which might pay itself off over say 4-5 years). It does make sense however for the government to subsidise half the cost of the insulation if it means we insulate now as the savings will continue to accrue to the health sector for years regardless of who lives in the home.

    2) I think your argument for smoking promotion is bogus. The costs of smoking in terms of quality adjusted life years are higher than any savings in early deaths. For every person who dies quickly and cheaply of lung cancer there are many more who go through years of expensive treatment, suffer chronic respiratory illnesses which reduce their ability to work (reducing tax revenue and increasing sickness benefit costs) etc

    3) Re the comparative value of flu vaccinations and school nurses – couldn’t agree more. These could also be funded through social impact bonds. This really goes back to the whole PPP debate- it is the government’s view that the private sector is better at pricing risk. so here we have an example of a business case which clearly stacks up (even if you approach it with very conservative ROI and even with the government taking a cut of the savings). Let the market decide what works, preventative healthcare has generally got a very good ROI so lets see. I would be happy to invest in a government insulation bond with say a 10% dividend (easily achievable on the Reserve Banks figures). If the proposed primary health intervention is likely to fail then nobody will buy the bonds. I probably wouldn’t invest in a ‘Push Play’ bond that argues expensive television commercials will make fat people want to exercise – but hell maybe I’m wrong and it’s a sure bet. The point is that there are real benefits but also a degree of risk – why is it our default position that it is the role of government to take these risks or that government is the party best suited to assessing risk.

    It seems to me that the government is opposed to the insulation program because a balanced budget in 2014/15 is of principal political importance so they are not interested in paying an additional $347 million in FY 14/15 so that they can accrue $1billion in benefits over the period of 2016-2021. I don’t necessarily agree with that stance as the government has a low cost of borrowing and the program has already been piloted and independently assessed as achieving the desired returns – it seems like a no brainer to continue it.

    My point is there are more options than A) Government pays or B) It doesn’t happen. A social impact bond allows the government to incur no costs in year one and still receive a share of the benefits in years 2-6. It not only transfers the cost of capital to the private sector but also the risk. Surely that is a valid option C) which should be considered?

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  6. Bullitt (147 comments) says:

    My issue with the scheme is it is only available to professionally installed insulation. I looked into it and I could install R3.6 ceiling insulation myself for the same price as a professional with the subsidy using R2.7 (higher is better). So it cost me two days of my time but I saved the government some money and got a slightly warmer house out of it. I don’t fit into the low income category they would try to target but why shouldnt the same options be subsidised if it is deemed worthwhile to have a subsidy at all.

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  7. David Farrar (1,769 comments) says:

    One issue with this scheme is that some insulators are using it as a business boom. I’ve been rung three times in the last month asking if I knew about the scheme and can they insulate my home for me. I now cut them off and point out I am in an apartment.

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  8. Joseph Carpenter (215 comments) says:

    Where the hell did Dr Grimes get the figure of $1,000,000,000 (suspicious round number, almost looks like it was pulled out of someone arse) in health savings from? Health spending and health data for respiratory illness over recent years certainly don’t show this – in fact the opposite. Well at least the insulation companies have made a huge profit ripping off the taxpayer for substandard materials and generally workmanship.

    Just as well the Government spent $387 million without doing any product testing, onsite inspections, subsidised firms audit checking, BRANZ thermal profiling of adjacent identical unaltered and retrofitted houses, long term health surveys between retrofit and control group households, etc. And luckily we’ve had only six fires and one death directly attributable to the program unlike Australia (though their insulation is different and for different reasons).

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  9. Judith (8,534 comments) says:

    David Farrar (1,710) Says:
    April 13th, 2013 at 1:30 pm

    We have experienced the same thing, many times, every one at about 5.30 pm.
    We have heat pumps, complete insulation and DVS – there is nothing more they can do for us – however the same companies phone over and over again.

    We didn’t use the scheme but my daughter has – there was never any follow up to actually check whether they got the product and it was working properly from Govt – I wonder about the ability to manipulate the scheme?

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  10. tamati (76 comments) says:

    I am unable to read the economist article as I don’t subscribe, so only had a look at the wikipedia page.

    My main concern is that the how would we measure success on the these impact bonds? Insulate a house then somehow measure that I the child growing up in that house doesn’t get the flu and a coupon or principal is paid? Would seem a large amount of expensive subjective measurement to ensure that the social intervention is actually having an affect.

    1) I agree that those who need it most probably don’t have the skill or motivation to take advantage of the system. However targeting rental landlords maybe more successful. This however will lead to Fendalton housewives insulating their batch in Wanaka as they rent it out 6 weeks a year.

    2) No, smoking most certainly saves the taxpayer money. Smokers are most likely to die before reaching entitlement to NZ Super so save the taxpayers. They are also disproportionately Maori and on a lower income or full time benificiary, so the amount of taxes they pay whilst working is very little. (if any).

    This however is not my argument it was just illustrating my point that ….

    Investing in pre-primary and preventative healthcare is a worse than zero sum economically. Surely all the improvements in medicine over the last fifty years would have made healthcare cheaper and more efficient?

    Unfortunately not. Every year we spend more and more on healthcare and it is going to increase for a long time to come. A simple fact is we consume half our lifetime healthcare dollars in our final year of life, and sadly we all have a final year of life.

    So to conclude,

    1.There is no purely economic benefit in investing in very general preventative/pre-primary healthcare. (Their is of course a social benefit, but that’s not what you were arguing.)

    2. Those who will gain a real benefit from the home insulation scheme will continue to do so under the proposed changes. (Although stricter targeting of the poorest families may be beneficial) Those who are simply increasing the value of their properties at the taxpayers expense are missing out.

    3. The social bonds is a good idea in theory, but in practice may be difficult to implement when applying it to such an abstract and immeasurable outcome. As far as I can tell it’s only been used is prisoner prevention programmes?

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  11. Richard29 (377 comments) says:

    Not sure why the Economist link doesn’t work – it may be that you’ve gone over the monthly paywall maximum of five articles – if you clear cookies it resets and starts counting to 5 again. 🙂
    McKinsey have also got some stuff on SIB here:

    The folks at the NZ National Party disagree with you on preventative healthcare. Here is some election propaganda from them trumpeting the success of their Preventative healthcare initiatives including the insulation subsidies:

    The idea of a Social Impact Bond is that the companies delivering the contract design the best solution because they are paid based on measured outcomes rather than outputs. Not dissimilar to the private prison contracts with payment tied to recidivism rates. If the promised savings are not realised the investment loses money so they have an incentive to reconfigure the solution to maximise the return. Wealthy people wanting a subsidised bach get a lower subsidy (or none at all) and low income renters with children who have respiratory conditions get referred by their doctor and within a week somebody shows up at their house offering them a 100% subsidy.

    In terms of how do we measure the results – we have lots of stats available on healthcare, it should be easy enough to design a payment scheme based on improvement in specific stats. A couple of years ago we even had our investment banker Prime Minister lunching with Google and talking up the benefits of using big data and innovative funding models to deliver social services more efficiently – but then nothing came of it…

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  12. Richard29 (377 comments) says:

    “insulators are using it as a business boom”

    My read of things is that is exactly what the government intended with the Warm Up NZ policy.

    The policy was introduced in 2008 largely as a hands on Keynesian government stimulus to pump money into the economy and create employment (of course they didn’t describe it in those words because they are not Labour – but the result is the same).

    Installing insulation is not rocket science, most people are perfectly capable of doing it themselves. That means it’s the kind of job that a school leaver or somebody recently made redundant from manufacturing could pick up in half a day of training and be working independently within a couple of weeks, much like the guys holding the Stop/Go signs with all the Roads of National Significance work. I suspect this is why the policy requires the insulation to be professionally installed – well that and the risk that if you give somebody building product for half price they will probably just onsell it to builders at 75% of it’s market price and walk away with a tidy profit.

    Reducing the subsidy will result in a bunch of people getting laid off. This was inevitably going to happen sooner or later as the housing stock got upgraded and insulation hit diminishing returns. I’m guessing that National are hoping that the insulation labour force that have been trained up will be soaked up by building work in rebuilding Christchurch and the housing shortage in Auckland. It’ll be interesting to see whether that occurs, I doubt the skill set is completely transferable and also a lot of those people are not in Chch or Auckland and people don’t tend to pick up their families and move cities to find work to anywhere near the extent that economists spreadsheets say it would be economically rational for them to…

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  13. rg (215 comments) says:

    Time to get rid of a whole lot more untargeted assistanace. Universal Super, paid parental leave, kiwisaver subsidies, interest free student loans, etc etc.

    Taking money off people who can’t afford it and giving it to people who don’t need it is a folly of the National and Labour govts. It is good to see Nationsal are starting to see the error of their ways and are adopting a few of the ACT Party philosophies, not enough though.

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  14. CharlieBrown (1,768 comments) says:

    Anything that is targeted just causes more losers. What happens to the person that is just above the threshold – they are now worse off because they earn just a little bit more money than the people below the threshhold?

    Here is an idea – tax people less and let them spend the money. This is just WFF all over again, that nats are r-tards.

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  15. wiseowl (2,280 comments) says:

    Lets subsidise farmers.
    That would mean the country would get better export returns so our health would benefit and we would save so much in health care.

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  16. SPC (8,704 comments) says:

    The government is obviously taken with the greater returns from the subsidy to low income family home insulation.

    Thus targeting the programme there.

    However the area they are not covering, rental property, is where most low income families are.

    Labour and Greens are right to require this from landlords. Landlords so selfish they will not even invest (even with a partial subsidy) in their property to improve its value, but to whom National seems beholden – no CGT on rental property etc.

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