Technology comes to policymakers' help

ECONOMISTS and national budget makers have a new situation to reckon with - burgeoning welfare budgets. Over the past decade, many countries have had to step up steeply the allocation for support to the underclass. This has taken the form of cash benefits, healthcare subsidies, rebates on monthly expenses or subsidised supply of monthly needs, special support for education, tax reliefs, mass housing, etc. The number of heads has also multiplied, as country finance ministers cope with slow or no growth in income of the bottom percentiles of the population. That the issue has raised its head even in the face of benign inflationary conditions is part of the conundrum.

With huge outlays on such expenditures, the question remains as to what is the efficacy of these measures. At one level, there is the question of whether this becomes a permanent crutch. Equally pertinent concerns are whether the outlays reach the targeted people and whether there is inadvertent subsidy for the better off.

In recent times, India has taken on this issue squarely. The claimant groups are many - farmers, urban poor, educated unemployed, low wage workers, malnourished children, illiterates, people living in far flung under-developed geographies, government employees at the lowest cadre and some more. The size of these groups, the lack of a unified database covering all citizens and a government system that adopts a multilayered devolution system lead to important questions on how to maximise the efficacy of the schemes.

One fundamental issue is across-the-board subsidy. In most countries, government benefits are available to the whole population, irrespective of income and prosperity. The system has an inbuilt "free rider" pattern. School education is free (or nominal) in many countries, including Singapore. In Scandinavian countries, even university education is heavily subsidised. Water and electricity are subsidised in many countries for all domestic use.

Petrol and diesel continue to be sold at concessional prices in some markets, even when oil prices were high. Thus an owner of a fleet of Mercedes and BMW cars in Indonesia pays the same price for petrol per litre as a moderately paid government servant who may ride a scooter. In some Australian cities, rides on commuter buses and trams are free. Mass rapid commuter systems are priced uniformly for all users and often at concessional rates. All these instances result in significant benefits for the higher income groups, even if they are sometimes unintended. The fiscal support for these programmes usually comes from high taxes that are ploughed back for civic amenities and subsidies. Countries such as Singapore do not have that luxury as taxation rates are low. Yet, there is a deep welfare programme that cuts across income groups.

BABY STEPS

With persistent fiscal strains in countries such as India, baby steps were initiated to better target the schemes. India launched a voluntary programme for high income domestic consumers to give up subsidised cooking gas. Over 10 million households opted out under this scheme in a year. More mandatory provisions are expected. In the UK, tuition fees for higher education was gradually introduced from 1998. The system is based on means testing with needy students being supported with loan schemes, instead of direct subsidies.

Utilities are another major "subsidy" treasure. Among the OECD countries, US, Canada, France, the UK and Australia have relatively low electricity rates (under 20 US cents per kWh in 2011) whereas Germany and Denmark are at double that rate. They have fully priced the high cost of their energy, coming from renewable sources. (Denmark wants to move to an all-electric vehicle population by 2025). With average per capita income in OECD of over US$50,000, the utility subsidy is not uniformly need-linked.

Some of the benefits enjoyed by the higher income groups are intentional as countries seek to keep some services egalitarian. In many cases, it is also because of ease of administration. That is about to change. Technology can now assist in targeting benefits to individuals or households based on their income levels or other affordability surrogates. Countries are moving to become "smart nations". That means a digitally connected society with enormous scope for electronic data gathering. We still do not know the full potential of IoT (Internet of things) that would seamlessly link up physical activities and assets with data that can be manipulated unimaginably. With electronic databases of citizens and consumption patterns that can be dissected with Big Data analytics, countries are now in a position to "customise" benefits to match incomes, down to a family level. For instance, countries such as Singapore can plan an education fee model that rises progressively with family income, if it wishes to. This is not very different from the concept of progressive income tax or subsidised housing for the poor (and full priced housing for the rest). After all, a large private tuition industry thrives based on patronage from those who can afford it.

For easy administration (and to protect against misuse), India has delinked the cooking gas distribution and subsidy payment administration. Thus at the point of purchase, the service is priced fully and the subsidy is transferred directly to bank accounts, based on qualification criteria. Linking the citizen database and consumption history will lead to stronger alignment of fiscal benefits and needs and provide better bang for the buck.

In the UK, the new university fee model, in vogue for over 15 years, is estimated to rope in about £5 billion (S$8.9 billion) a year from local students, most of it coming from steady increases. Country financial managers may not be able to resist the temptation to embrace this new convenience, if politically acceptable ways are found.