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1  A living standards perspective on the long-term fiscal outlook

In performing its role as the government's lead advisor on economic, fiscal and regulatory issues, the Treasury works towards improving the living standards of New Zealanders. In its broadest interpretation, improving living standards is what the objectives of the state sector are all about. A key focus of the Treasury is to improve New Zealand's economic performance, as a driver of living standards.

The Treasury's Living Standards Framework

Numerous factors affect New Zealanders' living standards – for example: health, education, the environment, and freedom – many of which have value beyond their contribution to material comfort.

The Treasury uses its Living Standards Framework to incorporate a broad range of factors, distributional perspectives, and dynamic considerations. This framework is based around four types of capital stock: financial and physical capital; human capital (e.g. health and skills); social capital (e.g. institutions and trust); and natural capital (e.g. water and biodiversity).[1]Collectively these capital stocks comprise "comprehensive wealth".

Firms, households, and the government combine these four capital stocks in various ways to generate flows of goods and services that are consumed by people and enhance their living standards. In turn, the flows can influence the capital stocks. Figure 1.1 illustrates these stock and flow concepts, with examples of the flows that matter for well-being.

Figure 1.1 – The Treasury's Living Standards Framework: Capital stocks and well-being flows
Figure 1.1 - The Treasury's Living Standards Framework: Capital stocks and well-being flows   .

The approach is similar to the Organisation for Economic Co-operation and Development (OECD) well-being framework.[2] Both approaches build on the work of Stiglitz, Sen and Fitoussi on the measurement of economic performance and social progress.[3] The Living Standards Framework is also based on research emphasising that public policy can improve people's lives now and into the future by enhancing the capabilities and opportunities – as well as the incentives – of individuals to pursue the lives they value.

In the Treasury's view, good public policy enhances the capacity of the four capitals to generate well-being if it:

  • is sustained or enhanced, not eroded by current generations at the expense of future generations (sustainability)
  • is shared equitably in a way that sustains or enhances the capitals (equity)
  • allows for a cohesive society, where all people and groups respect others' rights to live the kinds of lives they value (social cohesion)
  • is resilient to major systemic risks (risk management)
  • generates material well-being (economic growth).

The Treasury uses the five dimensions above in analysing the impacts of policy choices. For example, the 2013 Statement on the Long-Term Fiscal Position applied the five dimensions to the analysis of policy choices around increased taxation, restricting government spending, and changes to New Zealand Superannuation policy settings.

Identification of the interactions in the Living Standards Framework is crucial, but challenging. Some of the interactions are mutually reinforcing, while others imply trade-offs. Decisions about acceptable levels of distributional outcomes and trade-offs are ultimately political in nature and thus beyond the realm of policy advice. However, highlighting these issues ensures that the Treasury's advice is robust and that government decisions are well-informed.

Notes

  • [1] See: www.treasury.govt.nz/abouttreasury/higherlivingstandards; Treasury (2011) Working towards higher living standards for New Zealanders. New Zealand Treasury Paper 11/02; Girol Karacaoglu (2015) The New Zealand Treasury's living standards framework – Exploring a stylised model. New Zealand Treasury Working Paper 15/2; Daniel Weijers and Udayan Mukherjee (2016) Living standards, well-being, and public policy. Background paper prepared for this Statement.
  • [2] See OECD (2015) How's Life? 2015: Measuring Well-being.
  • [3] Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi (2009) Report by the commission on the measurement of economic performance and social progress. The Commission: Paris.
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