Part 1: About the Wage Subsidy Scheme

1.1
Covid-19 emerged in late 2019. By March 2020, it had become a global pandemic. The Government responded with a range of measures to protect New Zealanders, including restrictions on people's movements to slow the spread of the virus. This had a widespread impact on the population and immediate financial impact on many businesses and their employees.

1.2
On 17 March 2020, the Government introduced the Wage Subsidy Scheme to support businesses affected by Covid-19 to retain employees. The Government intended that this would help preserve employment connections between employers and employees and provide income for employees even when they were unable to work.

1.3
In this report, we refer to the Wage Subsidy Scheme as "the Scheme". We use this term to refer collectively to all three stages of the Scheme:

1. the original wage subsidy;
2. the wage subsidy extension; and
3. the resurgence wage subsidy.

1.4
To date, the Scheme has been the largest area of spending in the Government's response to, and recovery from, Covid-19. By the end of December 2020, it had already spent more than $13 billion 1 of public money, excluding administration costs. The Government has estimated that the Wage Subsidy Scheme has indirectly supported about 1.8 million employees.

1.5
We completed our work before the Government announced the most recent stage of the Scheme in March 2021. Although we have not examined this latest stage, we understand that its design, and the way it has been managed, is largely the same as the earlier three stages.

1.6
Our audit looked at how effectively the Ministry of Social Development, the Inland Revenue Department (Inland Revenue), the Ministry of Business, Innovation and Employment, and the Treasury managed the Scheme. We did this to provide Parliament and the public an independent view and to help the public sector prepare for and operate any future subsidies.

1.7
In this Part, we describe:

• how the Scheme came about;
• the details of the Scheme; and
• the structure of this report.

How the Wage Subsidy Scheme came about

1.8
New Zealand first felt the effects of Covid-19 towards the end of January 2020, when international travel was disrupted.

1.9
On 2 February 2020, the Government introduced the first border restrictions to prevent people from bringing Covid-19 into New Zealand. People entering New Zealand were required to self-isolate for 14 days, and entry to people travelling from or through China was restricted to New Zealand citizens and permanent residents.

1.10
Treasury and Ministry of Business, Innovation and Employment officials were also considering the impact of Covid-19 on certain industries and regions and whether targeted income support might be needed. About this time, Ministry of Social Development officials began preparing advice on the income support that might be needed.

1.11
New Zealand confirmed its first case of Covid-19 on 28 February 2020. On 9 March 2020, Cabinet directed officials to develop targeted support options, prioritising some form of subsidy for the most adversely affected sectors. Those sectors included tourism and forestry.

The original wage subsidy

1.12
By mid-March 2020, the Covid-19 situation had escalated rapidly. The impact of Covid-19 was felt more widely in the economy. On 16 March 2020, Cabinet agreed to implement a temporary wage subsidy for 12 weeks. We refer to this first stage of the Scheme as "the original wage subsidy".

1.13
The Government announced the original wage subsidy on 17 March 2020 and allocated $5.1 billion to paying it. The original wage subsidy was not limited to any industry or sector.

1.14
In the following week, the Government increased its response to Covid-19. On 19 March 2020, the borders were closed. On 21 March 2020, the Government introduced a four-level Alert System to help control transmission of Covid-19.

1.15
The Alert System involved levels of restriction on people's movement, including across the border and the operation of businesses. Alert Level 4 was the highest alert level and required people to stay at home. However, people were allowed to leave their homes to obtain or provide essential services or exercise in their local area.

1.16
When the Government introduced the Alert System on 21 March 2020, it announced that New Zealand was at Alert Level 2. By 25 March 2020, the Government had implemented Alert Level 4 and declared a national state of emergency.

1.17
The various alert levels affected employers and employees. Although some could work from home under lockdown, domestic travel was restricted and many people were unable to work.

1.18
On 27 March 2020, the Minister of Finance announced some modifications to the original wage subsidy. These included a clearer expectation that employers would pass on money from the original wage subsidy to employees who could not work because of the lockdown. Employers also had to agree to keep employees in employment for the period of the original wage subsidy.

1.19
New Zealand remained at Alert Level 4 until 27 April 2020. It then moved to Alert Level 3, which still involved significant restrictions, until 13 May 2020.

1.20
On 11 May 2020, Cabinet agreed to extend the period of the original wage subsidy for a further eight weeks. We refer to this stage of the Scheme as "the wage subsidy extension". The Government publicly announced the wage subsidy extension on 14 May 2020 and allocated a further $3.2 billion to it.

The resurgence wage subsidy

1.21
The country returned to Alert Level 1 on 8 June 2020. Then, in early August 2020, new cases of Covid-19 were found in the Auckland community. On 12 August 2020, the Government placed Auckland into Alert Level 3 and the rest of the country into Alert Level 2.

1.22
On 17 August 2020, Cabinet agreed to a further stage of the Scheme. We refer to this stage as "the resurgence wage subsidy". The Government publicly announced the resurgence wage subsidy on 17 August 2020 and allocated a further $510 million to it.

1.23
At the same time, the Government announced that it also expected more businesses to become eligible for the wage subsidy extension. It estimated that this would cost an additional $1.1 billion on top of the $510 million allocated to the resurgence wage subsidy.

1.24
Applications for the resurgence wage subsidy closed on 3 September 2020. From 7 October 2020, the whole country was once again at Alert Level 1.

1.25
In December 2020, the Government announced that further support would be provided in the event of further resurgence of the virus. This would include an additional stage of the Scheme if there is a regional or national move to Alert Level 3 or 4 for seven days or more.

Details of the Wage Subsidy Scheme

1.26
Cabinet agreed the following criteria employers needed to meet to be eligible for subsidy payments:

• The applicant must operate a business in New Zealand that employs and pays the employees named in the application (including a business where someone is self-employed).
• The employees named in the application must be legally employed by the business and employed in New Zealand.
• The business must have experienced the minimum specified loss in actual or predicted revenue, and that loss must be attributable to Covid-19.
• The business must have taken active steps to mitigate the impact of Covid-19.
• The business cannot claim payment for any of the employees named in the application in combination with some other types of government support.

1.27
Figure 1 shows the loss in revenue thresholds that made a business eligible for subsidy payments, and the time frames for each stage of the Scheme.

Figure 1
Loss in revenue requirement to be eligible for subsidy payments

* Loss in revenue compared to an equivalent period in 2019. New or high-growth businesses could use an equivalent period from earlier in the year.

**Businesses could not receive a subsidy for a period for which they were already receiving certain other support in respect of a given employee.

***This was initially publicly announced as 50%, but it was reduced to 40% before the wage subsidy extension opened for applications.

Subsidy payments were at a fixed rate for each employee and were initially capped

1.28
Businesses meeting the eligibility criteria were paid $585.80 each week for each full-time employee and $350.00 each week for each part-time employee. Full-time work was defined as 20 or more hours' work each week.

1.29
When recommending these payment amounts, officials took into account median weekly earnings, the amount paid in previous subsidy schemes, and other forms of support, such as paid parental leave. In paragraph 5.22, we describe what happened when part-time employees' normal wages were less than $350 each week.

1.30
Payment to each business was initially capped at $150,000, regardless of the number of employees. On 23 March 2020, Cabinet agreed to remove this cap because of the need to support all employees affected by Covid-19, including those in large organisations.

1.31
Removing the cap increased the original wage subsidy's budgeted cost from $5.1 billion to $9.3 billion. Employers who had already applied could retrospectively apply for employees who had been outside of the cap.

1.32
Payments were made as a lump sum to each eligible business. Separate payments were made for each stage of the Scheme a business was eligible and applied for.

The integrity of payments depended on employer declarations

1.33
As part of its decisions about the Scheme, Cabinet noted that the Ministry of Social Development's intended approach to administering the Scheme had several characteristics:

• Employers would make applications for affected employees.
• Employers would be required to make a declaration when they applied that they:
  • met the eligibility criteria;
  • had discussed the application with named employees, who consented to sharing information in the application for the purposes of verification;
  • consented to the possibility of details in the application being verified with other agencies;
  • consented to the Ministry of Social Development publishing information about their receipt of the subsidy;
  • were aware that they might be audited and prosecuted for fraud if they provided false information;
  • 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.

  A "high-trust" approach

  1.34
  Getting support to employers quickly was an important part of the Scheme. It was the over-riding policy consideration behind the "high-trust" approach. The Government had previously used a high-trust approach to a wage subsidy for people affected by the Canterbury and Kaikōura earthquakes.

  1.35
  The approach is high-trust because applications were approved, and payments made, largely based on information applicants provided with limited upfront verification of its accuracy. We discuss this in Part 4.

  1.36
  Importantly, applicants did not have to provide information to prove their eligibility, they just had to declare that they met the eligibility criteria. This was not a written declaration – in most cases applicants checked the declaration box in the online application form.

  1.37
  It is not uncommon or inappropriate for governments to use high-trust approaches in emergencies to quickly provide support to people. However, these approaches increase the risk of fraud and error. Payments could be made to those who are not eligible or who fraudulently seek to exploit the high-trust approach.

  1.38
  This risk is increased because there is less focus on validation before payment. Instead, officials rely on the honesty and integrity of applicants, the ability of applicants to understand and assess eligibility criteria accurately, and the actual and deterrent effects of work carried out after payments have been made.

  1.39
  The trade-offs between speed, up-front verification, and post-payment assurance are critical matters to consider when determining how a high-trust approach should be implemented.

  The public organisations involved in administering the Scheme

  1.40
  The Ministry of Social Development, Inland Revenue, the Ministry of Business, Innovation and Employment, and the Treasury were the public organisations involved in administering the Scheme.

  1.41
  Figure 2 shows the main stages in the Scheme's implementation, from application through to payment, and the post-payment checking processes. Figure 2 also shows which public organisations were involved at each stage.

  Figure 2
  Stages of the Wage Subsidy Scheme's implementation and the public organisations involved at each stage

  Implementation stages	Public organisations involved at each stage
  Designing and advising on the Scheme	The Treasury, the Ministry of Social Development, Inland Revenue, the Ministry of Business, Innovation and Employment
  Receiving and processing applications	The Ministry of Social Development
  Performing pre-payment checks	The Ministry of Social Development, Inland Revenue
  Paying the subsidy	The Ministry of Social Development
  Publishing some recipient names	The Ministry of Social Development
  Receiving voluntary repayments	The Ministry of Social Development
  Performing post-payment checks, including complaints	The Ministry of Social Development, Inland Revenue, the Ministry of Business, Innovation and Employment
  Seeking repayments and taking prosecutions	The Ministry of Social Development
  Monitoring, reviewing, and evaluation the Scheme	The Treasury, the Ministry of Social Development, Inland Revenue, the Ministry of Business, Innovation and Employment

  Source: Illustrated by the Office of the Auditor-General.

  Structure of this report

  1.42
  Our assessment of how well the Scheme was managed comprised four main lines of inquiry. These lines of inquiry form the structure of this report:

  • Part 2 discusses whether the Scheme was effectively set up in line with the high-trust policy direction.
  • Part 3 discusses whether subsidy payments were effectively administered.
  • Part 4 discusses whether the integrity of the Scheme was effectively managed.
  • Part 5 discusses whether there was effective oversight, monitoring, and review of the Scheme.

  1.43
  In the Appendix, we outline the scope of our work, how we carried it out, and the limitations of our work.

  1: This is a net figure taking into account refunds at that time.