Scottish Government

CHAPTER SIX COST - BENEFIT ANALYSIS

6.1 INTRODUCTION

This section considers the costs and benefits of the Working for Families Fund, comparing the actual impacts with what might have happened if there had been no WFF programme. It considers some of the public expenditure costs and benefits of WFF, and then presents a small comparator (control group) study to help estimate what may have happened without WFF. Finally changes in childcare provision were considered.

6.2 KEY FIGURES ON COST OF WFF

Clients achieving 'Hard' Outcome / Transitions

Out of the 5808 clients joining WFF, 1022 entered full- or part-time employment (847 of whom had not been in employment at the time of their registration) (Table 5.3.1). Of these, 463 entered full-time employment (418 of whom had not been in full-time employment at the time of their registration) and 559 entered part-time employment (467 of whom had not been in part-time employment at the time of their registration). A further 324 sustained employment, 173 improved employment and 808 entered or completed training (over 6 months) or education. As discussed elsewhere these figures under estimate the effect of WFF, as recently registered people would not be expected to have had a transition into employment by the end of March 2006.

Budget for scheme

• £20 million over the two years 2004-06 - £10 million pa.
• Table 6.2.1 shows the actual spend for WFF, indicating that a considerable lead-in time is required for a programme such as this, as the budget was greatly under spent in Year 1, but almost fully spent (91%) in Year 2. The Actual expenditure over the two years was: £12,367,485.

Table 6.2.1 Actual Spend

• The budget was £10m pa, so there was a considerable under-spend in 2004/05 as projects took much longer than originally anticipated to gear up . However, expenditure in 2005/06 was fairly close to the original budget. There are clear lessons on the need to allow adequate time for the development of new projects, the setting up of structures and partnerships with other key actors, and the recruitment of staff etc. A lead-in time of at least six months may be needed once the decision to grant funding to LAs has been made and communicated to them.
• Given the short time that WFF has been operating, great care must be taken with the cost figures.

6.2.1 Costs

Unit costs

The cost per client (total cost divided by total client numbers) varied by LA area partly due to different types of clients, levels of support offered ( e.g. whether they were sustained or limited contact clients) and different local circumstances etc. In addition the costs per client appear to be much higher during the start up phase (and so those LAs who were slower to start than others may exhibit higher average costs over these two years) . The costs decreased significantly once LAs had passed the first, start-up, year and the variation between LAs decreased considerably. Hence a more accurate picture is presented by the Year Two figures (2005/06) where costs per client were £1955 (compared to £2841 in Year One). These figures should not be taken as a totally accurate cost of supporting a client, as those depend upon the type of clients, when they registered, how much support they received, the costs of other non- WFF public support they received for training etc., and how the costs were allocated between years. However, these aggregate figures do give some indication of costs.

Cost per 'Hard' Outcome / Transition

Counting only the 'Hard' Outcome / Transitions ( i.e. excluding other activities such as short term training etc.) then the cost of Transitions was on average £3386 over 2004-06. Some clients had more than one Transition (see below). Note also that this overstates the cost per Transition as on average it takes three months for a client to reach a Transition, so if all clients registering in the last three months were excluded then the cost would fall. If the Transitions in the last 9 months of 2005/06 were compared to the average costs for 9 months of that year then the cost per Transition would be £2317 .

Cost per client who experienced a 'Hard' Outcome / Transition

If we consider just those clients who achieved a Transition (rather than the number of Transitions themselves) then the costs per client who had a Transition was £5109 over the two years (this excludes clients who only did short term training). However, if only 2005-6 is considered, then 2289 clients had a Transition, so the cost per client who had a Transition would be £3987. This assumes that 2005-6 was a 'typical' year. These costs exclude the training and other costs provided by non- WFF support, and also were single year costs (clients may get support for more than one year). Hence they do not reflect full cost of making a Transition.

Effects of additionality, deadweight, displacement and substitution

When considering the effect of WFF we need to deduct what might have happened anyway ( i.e. we should only look at the 'additional' impacts of the policy). Hence deadweight, displacement and substitution need to be considered.

The figures in the previous section assume zero 'deadweight' ( i.e. outcomes which would have occurred without intervention), so the results may overstate the impact of WFF as some parents would have gained, or moved towards, employment anyway. However, the Control Group (see below) suggests that this deadweight is likely to be relatively small during the period of Phase 1.

'Substitution' effects are where some WFF clients will take jobs that may have gone to other people and so substitute for other job seekers. Many of the jobs taken by WFF clients were relatively low entry level posts, so some substitution may occur (although if these jobs would have been taken by, say, in-migrants form the EU Accession countries or elsewhere, then there would not be substituting for UK residents). There is no clear evidence on any substitution effects. The number of lone parent benefit claimants in WFF areas fell at greater rates than in Great Britain, but at the same rate as the rest of Scotland (May 2004 to May 2006) ( NOMIS, 2006).

In addition 'displacement' means some firms may get an advantage from employing WFF clients and this could lead to job losses in competitors). There are no reliable estimates for displacement, but displacement in WFF is likely to be small. ⁴⁷

Overall an additionality rate of 50% was used as suggested in the New Deal for Lone Parents evaluation. ⁴⁸ Using this figure the cost per WFF transition would be £7,974.

It is worth noting that these figures do not incorporate the considerable future positive outcomes that are likely to be achieved by WFF clients (which are expected to be high due to the nature of the clients), life time earnings of clients, family and personal benefits and other benefits due to getting or changing employment, and education etc. (see below under Public Expenditure). The WFF figures are also considerably influenced by the low Glasgow cost figure (which may perhaps be attributed partly due to the presence of a strong existing employability support infrastructure, the use of a particularly effective WFF model and its very effective management, and possibly economies of scale).

Benefits

The main financial benefits of those getting work were their increased incomes (life time earnings, as well as short-term wages and Working Tax Credit etc.) However, in the longer term the people may get pay rises and/or improve their jobs and careers, so the income is likely to grow for many of these clients.

It should be noted that the substantial 'soft' outcomes ( e.g. short term training, greater employability skills, more confidence etc.) were not included in these calculations. These were likely to lead to better lifelong earnings and to non-money costs and benefits (as parents achieve improved mental health, suffer less depression, or feel better, as do their children). In addition those parents that were better educated will have associated benefits for their children and have more prosperous careers etc. (and arguably better careers etc. for their children, possibly helping to cut inter-generational disadvantage). Each of these will lead to long-term benefits that were likely to be large. There may be some positive effects from this on reducing spending on health and other social services etc. Of course, there may also be some costs due to the negative effects of working ( e.g. stress for working parents).

In addition to the 'Hard' Outcome / Transitions, WFF directly 'creates' a large number of jobs in the LAs and projects through people working for directly and indirectly for WFF. There will also be some multiplier effects of the WFF expenditure (as WFF workers, clients and childcare providers spend some of their extra WFF related income on other things such as additional shopping). These effects have not been taken into account in the above figures.

On balance, therefore, taking into account for deadweight, displacement and substitution, it is considered that the costs per transition estimate will be slightly higher than if these are not included. In addition the positive effects of progress towards work in the short term and the likely benefits to income and health in the longer term may be significant.

6.3 COMPARATOR STUDY - CONTROL GROUP

In order to estimate what might have happened if there had been no WFF programme, 107 randomly chosen parents across the 10 LA areas were interviewed. This provided a control group (similar people living in similar, generally disadvantaged, areas but who had not received support from WFF). The sample was spread among the 10 WFFLA areas approximately in proportion to the WFF clients in each LA. None of them had participated in WFF. All but six of the interviewees were currently considering employment (94%). Hence we can compare what happened to them with what happened to WFF clients and so identify a very rough estimate of deadweight effects ( i.e. outcomes that would probably have happened anyway, even without WFF). ⁴⁹

In terms of characteristics the sample was close to, but not exactly the same as, the WFF population. The control group was actually closer to the Scottish than WFF average in terms of proportions of single parents, age of children and qualifications. Hence, in general the WFF clients would be expected, if anything, to have fewer successful 'Hard' outcomes or transitions (especially due to their low qualifications, lone parent status and younger children) than the control group.

However, the results indicated that there was little change in the circumstances of the control group, whereas the WFF clients showed considerable progress . This suggests that we can be reasonably confident that most, or at least a very large part, of the net increase in employment, training or education of WFF clients could be attributed to a large extent to the WFF programme, and Deadweight may be relatively small.

Other forms of comparison are also worth exploring, for example, measuring the relative performance of WFF against other employability programmes focussed on those further from the labour market. This comparison is not straightforward due to key difference in types of clients, circumstances, outcomes, policies and methodologies of different programmes. WFF, in particular, serves a specific range of client groups. The closest equivalent Scottish employability programme of recent years is probably the New Futures Fund ( NFF), Phase 2 of which was evaluated in 2005. This programme aimed to improve the employability of jobless people on Benefits, particularly those aged 16-34 and was therefore working with a particularly vulnerable client group. The evaluation to October 2004 shows that, in terms of outcomes, 51% of NFF clients achieved a positive output on a broad definition, with 15% of these entering employment or self-employment. ⁵⁰ These were broadly comparable figures to WFF overall, with WFF performing better in terms of moves into employment. It could be argued that many NFF clients might have been more vulnerable than WFF clients, however, on the other hand, the time period for Phase 1 period of WFF has been quite short and many WFF clients will need a long time period to achieve progress, so further outcomes for clients are expected. (These have since been achieved as measured in the on-going Phase 2 evaluation). So on balance, the results for Working for Families appear broadly comparable with those for NFF.

Further Cost-Benefit work will be carried out during Phase 2 when there will be a longer period of data for analysis.

6.4 PUBLIC EXPENDITURE

Based upon the actual figures gathered in the study and estimates of taxes and benefits paid we estimated the effects of the WFF programme on client incomes, potential tax receipts by the Treasury and the reduction in benefit payments resulting from clients moving into work. The data were based upon all those who registered by 30 September 2005 and comparing their average characteristics with those who made a Transition by 31 March 2006. The gap of six months has been chosen because the average length of time between Registration and Transition is 3 months, so assuming a fairly normal distribution, most people who were likely to have a Transition in a reasonably short period will have had one between registration and six months later, i.e. by 31 March. So the data seek to compare roughly a 'normal year' (note the period before 30 September 2004 had relatively few clients and was in the start up phase, and these clients were included) . Given the time the project has been going, we would expect these figures to change over time.

The average weekly wage of those working at point of Registration was £139.40 and at Key Transition was £144.55 ( i.e. people seemed to be getting entry or low level jobs before WFF and those on WFF were getting similar jobs - as expected).

The weekly increase in Gross pay due to WFF clients moving into work is estimated at £4,270,773 pa, including £435,000 income tax and national insurance payments. In addition to this increase in taxes paid (which is likely to increase over time), there will also be a decrease in government spending on benefits for people moving into work. Estimates were made for decreases in Income Support and other Benefits payments, although many of those finding work will receive Working Tax Credit so total benefits/ tax credits paid by the Exchequer are unlikely to fall by much. The net effect on public expenditure is likely to be small (especially given the average low level of wages).

In terms of Job Seekers Allowance, it is estimated that savings to the Treasury were in the order of £577,000. This is based upon taking an average weekly payment of Job Seekers Allowance of £57.45 and calculating the savings for the Exchequer of not paying those moving from JSA. Issues of Lifetime earnings cannot be accurately calculated as data do not exist.

So overall the effect of the initiative in terms or taxes and benefits, excluding the cost of WFF, may be relatively neutral. However, long term benefits ( e.g. life time earnings of clients) are not included and are likely to be significant. Psychological and other benefits to parents and children etc. were not measured but are likely to be high.

6.5 IMPACTS ON CHILDCARE

In evaluating WFF we have felt it would be important to consider the impact on childcare provision including the overall supply of places, the availability of flexible places etc. One of our concerns was that a possible negative impact of WFF might be to drive up prices in childcare, while not necessarily increasing the supply of childcare places compared to what would have happened if WFF had not been implemented. In the longer term the market may increase the supply of childcare places. If this were the case our concern is that WFF may have resulted in the following:

• greater expenditure for all parents due to WFF pushing prices higher
• greater expenditure for WFF and other projects and
• WFF clients potentially displacing other needy non- WFF parents from existing childcare places .

In order to try to estimate if this had happened, the Scottish Executive Education Department Annual Census of Children's Daycare and Pre-school Education Centres was examined. Unfortunately the collection methods changed for 2006 so these data were not compatible with earlier years and so could not assist in any comparison from year to year. This is particularly a problem as most of the impact of WFF, in terms of new clients, was in 2005-06, so it is not possible to accurately compare this year with earlier periods.

Overall, there is no evidence or reliable data on whether WFF caused any displacement (whereby some people who formerly had childcare might be 'pushed out' by WFF clients or that childcare prices were pushed higher due to WFF).

It is unfortunate that the change in methodology prevented detailed evaluation of the childcare impacts of WFF. It would be helpful if the gathering of more detailed national and local data on childcare provision and up-take could be considered.