E. What should we think about when making policy decisions? - continued

One potentially relevant risk is the macroeconomic risk associated with having relatively low rates of national saving. The persistent shortfall of saving relative to investment in New Zealand means we have relatively high rates of borrowing from overseas lenders to fund New Zealand's investment requirements.[59] This is reflected in our large net foreign liability position, which makes the New Zealand economy vulnerable to shocks. One way of addressing this vulnerability would be to encourage more saving, either by individuals or by the Government. Higher government saving could be achieved by running persistent fiscal surpluses. Private saving might be encouraged through tax policy, policies relating to retirement income, and policies that affect the housing market.

The Treasury's Living Standards Pentagon also prompts us to think about social infrastructure. Social infrastructure is closely related to the concept of social capital - the degree of trust in a society and the ability and willingness of people to work together for common purposes.[60] Social capital is important in underpinning both economic growth and personal well-being and resilience. Social infrastructure is the environment that allows social capital to grow. Many of the key institutions that underpin social capital, such as the rule of law, the democratic system, and access to important services, are part of our social infrastructure. The way the Government handles these areas - particularly the extent to which people see these as trustworthy and fair - can materially affect the level of social capital.

One way of thinking about social infrastructure is by considering the evolving role of the Government in New Zealand. The Government has always responded to changing needs. After the Great Depression and Second World War, the role of government expanded beyond the existing "last resort" safety net to a more generous welfare system. By the 1970s, following decades of sustained economic growth, the prevailing view was that the welfare system should allow all New Zealanders to participate fully in society.[61] However, the economic upheaval of the 1970s brought increasing fiscal pressures, and governments of the 1980s and 1990s wound back aspects of New Zealand's welfare system. While it was not a change to what we normally think of as the "welfare" system, one of the most significant changes over the last 50 years might be that we no longer expect there to be full employment.[62]

What society wants will be affected by the composition of society. Our society will be more diverse in the future, and it will also be older. An older and more diverse population might not make the same choices as a younger and more homogeneous one.

Whatever changes we make, there will be winners and losers. This is nothing new. Governments have frequently redrawn the balance between protecting society's most vulnerable members, allowing everyone to participate in society, and rewarding individual effort. The goal is a society that is fair to everyone, but "fair" has meant different things at different times. Changing existing arrangements may be an appropriate and even necessary response to changed circumstances,[64] but if changes would harm some groups, they should follow public engagement processes to draw out the trade-offs and build some degree of consensus about the way forward.

Many options for managing long-term fiscal pressures involve trade-offs across different dimensions of the Living Standards Pentagon. Frequently, fiscal sustainability will need to be weighed up against equity, economic growth, or social infrastructure. But there will also be options that reinforce the different dimensions, such as economic growth that is widely distributed and sustainable, or risk management - whether to people, the economy or the environment - that improves the economic and social outcomes for the country as a whole.