Massive cost blowout at IRD

In what is the largest example of government waste the Taxpayers' Union has exposed so far, we can this morning reveal that the Government is about to blow $163 million on back peddling 2013 changes to the IRD's child support system.

In 2013 the Government passed significant reform of the Child support system that, among other things, changed the formula for the calculation of child support, and how it is collected.

Last week the Government introduced a Bill to Parliament that includes a number of changes to the tax system. The Bill didn't go unnoticed, but the Government's PR machine focused on the changes to the GST system which we welcomed.

But amoung the 211 pages, the Bill proposes to roll back a number of the child support measures passed in 2013. These significant changes to child support, as far as well know, haven't received any public attention nor were flagged by the Government. This is presumably why no one has yet exposed the significance of the turn around, the reasons and the eye-watering amount it's going to cost.

In the IRD's Regulatory Impact Statement (a report which officials must prepare explaining the policy reasons behind a proposed law) is the following:

The original 2011 cost estimate for the programme to implement the [2013 child support] reforms was $30 million. As the legislation was developed and greater details on the specific changes were determined and finalised, a business case was prepared in 2012. The business case revised the estimated cost up to $120 million over the ten year period from 2011-12 to 2021-22 (costs in the latter half of the period cover ongoing depreciation, capital charges and ongoing additional staff costs to administer the modernised scheme). The increase reflected a greater appreciation of the complexity of the changes proposed by the new formula. One of the main assumptions in the business case was that the vast majority ofthe expenditure would be operating cost. 

During 2013 Inland Revenue re-assessed the time and costs associated with the programme and the assumptions underlying the business case. It became clear that the work could not be implemented, to the level of quality and certainty required, by the original legislative deadline. More time was required. Also, the assumption that the majority of development costs would be operating and not capital expenditure was proving to be incorrect as the reform was implemented. Capital expenditure comes with associated depreciation costs and capital charges leading to a higher overall cost for the reforms. If the correct assumption had been made in the business case, the cost of the reforms would have been much higher than $120 million. In early 2014, the legislative deadlines were delayed a year to allow time to complete the first phase to the standards required. The revised estimate of the project, including costs from the delay and the higher ratio of capital expenditure, is now $210 million for the ten year period from 2011112 to 2020/21. The majority ofthe higher cost is the depreciation and capital charge associated with the capital expenditure.

That's right the $30 million cost for implementing the child support reforms has ballooned to $210 million!

'Depreciation and capital charge associated with the capital expenditure' is bureaucratic code for an IT cost blow out

So what is the Government doing?

Clearly a $180 million (or 700%) cost blowout is an unacceptable course of action. That's what the U-turn in the Bill introduced last week will remedy right?  If only it was that simple.

Elsewhere in the same document, officials say:

The cost ofimplementing phase 1 and part of phase 2 of the reforms [contained in the new Bill] is estimated at $163 million. 

There will be an additional cost ofmigrating the reforms to the new "transformed" environment. 

What a complete shambles. $163 million is what it will take to implement the revised policy! An extraordinary cost - more than $100 for every New Zealand household with not a single dollar of it going to vulnerable kids or struggling families.

The Revenue Minster has some explaining to do. We hope that opposition parties will be ensuring this happens when Parliament return on the 10th.

Click here to read the Regulatory Impact Statement on the IRD's website.