Individual Budgets in Welfare-to-Work: A red herring?

1. Individual Budgets in Welfare-to-Work: A red herring? Ian Mulheirn Social Market Foundation 23 July 2008

2. A spectrum of ideas Individual budgets and personal accounts aim to • empower individuals; • Join-up services at the point of delivery; and • make providers focus on the individual to attain better outcomes. What exactly is meant by ‘individual budgets’ in welfare-to-work? Jobcentre/ contractor decides Accredited providers only Unrestricted individual budgets Advisor-assistance Individual gets proportion of remaining budget on finding work Advisor-controlled budget Virtual budgets

3. Are IBs appropriate in the welfare-to-work context? Five key questions are relevant 1. Is a ‘successful outcome’ an objective or subjective judgement? 2. Is there a problem of agency? 3. Can the individual make informed choices? 4. Who sets incentives and what is the impact on outcomes? 5. How easy is efficient allocation of resources?

4. 1. Is success objective or subjective? What is the desired outcome? Is success binary or continuous? Is it measurable? And who can measure it? Sustained employment is objectively verifiable. Binary outcome. Job satisfaction correlated with sustainability

5. 2. Is there a problem of agency? Agency problem occurs where there is more than one party interested in the outcome, but decisions rest with one. Individual’s decisions have an impact on the taxpayer (c.£6,500 per year for childless single person in LA housing). Individual as agent of the taxpayer.

6. 3.Can the individual make informed choices? Informed choice in most markets stems from repeated choice. Consequences of ill-informed choice are greater in binary settings. One-off nature of the decision means that, first time, it’s hard for the individual to know ‘what works’.

7. 4. What is the appropriate focus for providers? Under individual budgets, providers have incentives to supply what the individual wants. Two parties. What the individual wants may not be what employers want. Providers focus on processes not outcomes.

8. 5. How easy is efficient allocation of resources? How easy is it to ensure that the most money goes to those who need it most under an Individual Budget system? Element of chance in when one finds work. Apparently similar people may need very different levels of support: can lead to over-spend on some and under-spend on others.

9. The Flexible New Deal Attributes 1-4 of welfare-to-work mean that it lends itself to outcome-based commissioning: • Under FND prime contractors are rewarded with outcome payments for achieving sustained employment outcomes. • ‘Black box’ process means that contractors have the flexibility to allocate resources as necessary. What does this all mean? If individual budgets are better at achieving employment outcomes – an empirical question - prime contractors will implement them.

10. £ Per client Proposed: graduated outcome payment Marginal cost of helping clients in caseload Proportion of caseload into work 100% Graduated payment under FND Question 5 points to the need for more flexibility in use of resources in welfare-to-work • Appropriate resource allocation may not be obvious ex ante, as required under individual budgets. • Graduated outcome payments needed. Payment for each client rises as provider gets further into caseload. • Allows providers to shift resources around to the people who turn out to need the most support. FND proposed flat fee