Part 2: Setting up the Wage Subsidy Scheme

Management of the Wage Subsidy Scheme.

In this Part, we describe:

Summary of findings

The Scheme was set up effectively, was in line with Cabinet decisions, and used a high-trust approach.

Officials' advice to Cabinet about the design of the Scheme was informed by similar (but much smaller) schemes for the Canterbury and Kaikōura earthquakes. Officials clearly identified the risks associated with the high-trust approach and the main trade-offs between:

  • ease of access to, and speed of, payment; and
  • the ability to control fraud, abuse, and error risks.

The high-trust approach involved payments to employers based on a declaration. By agreeing to the declaration, businesses stated that they:

  • met the eligibility criteria, including that their business had experienced the minimum decline in actual or predicted revenue to be eligible and that loss was attributable to Covid-19;
  • had taken active steps to mitigate the impact of Covid-19 on the business;
  • would notify the Ministry of Social Development if circumstances changed that affected their eligibility; and
  • would repay any amount that they were not entitled to.

Cabinet did not specify a requirement to verify each applicant's eligibility when they applied. However, Cabinet noted that applicants might be audited after receiving payment.

To meet Cabinet's expectations that payment would be made quickly, public servants worked extremely hard to develop and implement the Scheme in a short time frame and difficult circumstances.

The public organisations involved in administering the Scheme provided considerable resources (including, people, systems, and finances). This affected their capacity to perform some of their core services.

Officials drew on previous experience and provided advice on the risks of high-trust approaches

Similar income support schemes had been used previously to help businesses after the Canterbury and Kaikōura earthquakes. Although those schemes were smaller in scale and cost, limited to particular parts of the country, and restricted to businesses of a certain size, they still provided useful lessons.

For example, the Ministry of Social Development had administered the previous schemes and was aware that the system it used for those schemes was adequate and secure. The Ministry of Social Development also had previous experience matching information in subsidy applications with information that other public organisations held.

Cabinet wanted to pay as many eligible businesses and their employees as quickly as possible.

To meet Cabinet's expectations of speed, the Ministry of Social Development advised using a high-trust approach. A high-trust approach meant that much of the information an applicant provided did not have to be verified before making a payment.

However, officials did identify risks with a high-trust approach. We were told about discussions with Ministers and saw written advice about these risks. The advice identified risks of fraud or error with approaches that were poorly targeted or that involved limited entry barriers and quick payment.

Officials also provided advice on how to manage or mitigate these risks, including:

  • communicating recipients' obligations;
  • having a declaration;
  • future penalties for not meeting requirements at the start;
  • publishing recipients' names; and
  • a "significant ramp up" of anti-fraud and auditing activity after payment.

Officials also explored options with more targeted or capped arrangements that could reduce fiscal risks to the Crown.

The Wage Subsidy Scheme was implemented in line with Cabinet's decisions

Implementation of the Scheme reflected Cabinet's decisions, including the various changes that Cabinet made to the Scheme over time. With each stage, officials reflected Cabinet's changes to the Scheme in the declaration. The declaration became an important record of the eligibility criteria and applicant obligations.

As well as steps agreed to by Cabinet, the Ministry of Social Development also took an important step. From approval of the first payment on 17 March 2020, the Ministry decided it would verify some applicant information before payment. The Ministry carried out that work with assistance from Inland Revenue.

Although Cabinet did not explicitly require verifying applicant information before payment, it was, in our view, a responsible and effective operational decision. It reduced the risk of making payments to ineligible businesses and people. We discuss this in Part 4.

On 16 March 2020, Cabinet noted that the Ministry of Social Development, with the support of Inland Revenue, could develop more detailed criteria to determine potential revenue loss. The level of revenue loss is one of the main determinants of eligibility for subsidy payments. The Ministry subsequently provided clarification about:

  • how councils' rates revenue should be recognised for a financial year;
  • State sector organisations' third-party or commercial revenue reductions attributable to Covid-19; and
  • charities' revenue, including grants and donations.

The Treasury's advice and subsequent Cabinet papers identified audit of declarations as one way of mitigating some integrity risks. Although Cabinet agreed to the possibility of post-payment audits, the term audit was not defined.

By not defining audit, there was a risk that decision-makers, the public organisations involved in administering the Scheme, and the public might have different expectations of the post-payment work that could be, and ultimately was, carried out.

Public organisations' roles and responsibilities were clear

Ministers and senior officials decided that the Ministry of Social Development would administer the Scheme. This decision was not made until two days before the first applications were submitted and payments made.

The Ministry of Social Development had the ability to start making payments quickly (within five days) because it had carried out a similar function previously.

Consideration was given to whether Inland Revenue should administer the Scheme. Inland Revenue had functionality that could have been used, but it was about to release the latest stage of its Business Transformation Programme (which entailed systems being offline) and was approaching a busy time in the tax-filing cycle. Inland Revenue was later called on to carry out other activities related to Covid-19, including the Small Business Cashflow Scheme.

One of the intended benefits of Inland Revenue's Business Transformation Programme was giving Inland Revenue greater ability and agility to quickly implement policy changes and new policy. However, that ability and agility is not expected to be fully functional until the Business Transformation Programme is completed. It would have taken many weeks before Inland Revenue could make payments.

The timing of this decision gave the Ministry of Social Development a small amount of time to prepare. However, once the decision was made, the Scheme was quickly established. In our view, public organisations involved in administering the Scheme worked well together under challenging circumstances and time frames. This included consulting effectively about important decisions and connecting staff from the Ministry of Social Development with Inland Revenue to appropriately share information.

The public organisations involved in administering the Scheme were clear about roles and responsibilities. The Treasury had primary responsibility for policy work developing the Scheme. The Ministry of Social Development, Inland Revenue, and the Ministry of Business, Innovation and Employment were also involved in that process.

The Ministry of Social Development was responsible for processing applications and making payments. It continues to be responsible for pre- and post-payment reviews, investigations, and prosecutions to support enforcement.

The Ministry of Social Development also received and considered complaints about applicants' eligibility for the subsidy. Complaints continue to inform the Ministry's review and investigation work.

Inland Revenue supported the Ministry of Social Development to verify information. It assisted, and continues to assist, the Ministry in the review and investigation process.

Inland Revenue also received and considered complaints about applicants related to tax matters and acted on those where necessary. Inland Revenue continues to assist the Ministry of Social Development, and complaints about tax matters continue to inform its work.

Through its contact centre and employment services branch (which includes the Labour Inspectorate), the Ministry of Business, Innovation and Employment provided information on the Scheme to employers and employees by phone or email.

The Ministry of Business, Innovation and Employment also monitored and enforced compliance with employment standards when complaints brought those issues to its attention. It continues to provide information for employers and employees, and complaints about employment matters continue to inform its work.

Although the Ministry of Business, Innovation and Employment was responsible for co-ordinating complaints, all the public organisations involved in administering the Scheme received complaints and referred them to each other where appropriate.

Significant resources were required to manage the Wage Subsidy Scheme

The goodwill and willingness of public servants were critical for the Scheme's success. They worked exceptional hours in very difficult circumstances to support quick decision-making and, later, to process a large number of applications and make payments.

Public servants who worked on the Scheme faced challenges working from home, such as not having available direct peer support or some equipment or systems. Public servants also experienced some internet connectivity and technical challenges when remotely accessing systems. They also had to deal with distressed people who were facing losing their businesses and/or livelihoods.

Implementing the Scheme stretched the Ministry of Social Development's resources. At the beginning of the Scheme, any staff member who had a laptop who was not delivering another essential service became involved in processing applications.

We were told that, on a busy day, the Ministry of Social Development had more than 800 staff processing applications. In total, 1809 Ministry staff were given system access to process applications.

Supporting the Scheme also placed large demands on the Ministry of Social Development's call centre. On its busiest day, the Ministry had 183 staff available to answer calls about the Scheme. Between 17 March and 21 October 2020, the Ministry received 146,136 calls about the Scheme and managed to answer 124,685 of those.

About 100 additional Ministry of Social Development full-time equivalent staff have been working on targeted reviews of applications, following up allegations and complaints, and carrying out investigations. It is likely that between 40 and 50 Ministry staff who usually work on benefit fraud will be working on subsidy investigations for another 12 to 18 months.

The Ministry of Social Development made more resources available for its work on the Scheme over time. In late March 2020, Cabinet approved funding for the Ministry of $14.9 million for information technology (IT) improvements and 199 additional staff, including 10 "audit staff" to help it process up to 460,000 subsidy applications. The Ministry told us that it also used 11 full-time equivalent experienced compliance staff from the Department of Internal Affairs and 25 full-time equivalent staff from Inland Revenue. In August 2020, a further $400,000 of funding was agreed for the Ministry of Social Development for subsidy work.

The Ministry of Social Development also found ways to use staff more effectively. This included introducing weekend shifts and freeing up staff by making some of its processes more efficient (such as automating some aspects of verification work and emailing rather than phoning applicants for more information).

Using staff from across the Ministry of Social Development to work on the Scheme affected its capacity to carry out its main services. This included putting some existing investigations into benefit fraud on hold. However, some of these existing investigations would have been delayed anyway because of the Alert Level restrictions.

The Ministry of Business, Innovation and Employment used its existing Labour Inspectorate and wider engagement staff to educate employers, engage in dispute resolution, and manage complaints. An additional 10 staff – eight early resolution officers, one support officer, and one manager – were allocated to the Labour Inspectorate.

Ministry of Business, Innovation and Employment staff received training and support that was specifically about managing complaints about the Scheme. This included a detailed training manual, a question bank where they could look for similar complaints, and process documents.

Inland Revenue also used its staff to support work on the Scheme. At one point, Inland Revenue had nearly 200 of its staff members working on the Scheme. Some were paired with a Ministry of Social Development employee to support them in reviewing applications, and others answered phone calls from Ministry staff to check applicant details. Inland Revenue staff were involved in confirming employer status and employee numbers and determining the legitimacy of applicants who were seeking a change to self-employed status to obtain subsidy payments.

Like the Ministry of Social Development, Inland Revenue received additional funding for its work on the Scheme. Inland Revenue got $1.5 million approved in late March 2020 for supporting the Ministry in 2019/20. Inland Revenue also received additional funding in 2020/21. This additional funding enabled Inland Revenue to reprioritise staff to work on the Scheme.

The public organisations involved in administering the Scheme could not readily identify the total administrative costs of developing and managing the Scheme, other than the additional targeted funding made available to Inland Revenue and the Ministry of Social Development.

Using existing systems and staff with relevant skills helps mitigate fraud risks. It also reduces the need for additional training and upskilling. However, this also comes at a cost to a public organisation's main work.

In the Ministry of Social Development's case, resources will continue to be diverted from investigating benefit fraud for many months. We understand that the public organisations involved in administering the Scheme want to get back to their core services as quickly as possible. However, we are concerned that this will disincentivise continued efforts on post-payment integrity work. This work is important to provide assurance to Parliament and the public that reasonable steps are being taken to ensure that the significant public money associated with the Scheme has been spent appropriately. The Ministry has confirmed that it intends to use resources from Inland Revenue to assist with its integrity work on applications for subsidy payments, and Inland Revenue has agreed in principle to this.