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Raising living standards is core Treasury business

Page Updated: 9 Dec 2013

This article was originally published in the National Business Review on Friday 15 November

Dr Girol Karacaoglu is Chief Economist and Deputy Secretary (Macroeconomics, International and Economic Research) at the Treasury

In his recent article [National Business Review, 1 November], the respected Senior Fellow at The New Zealand Initiative, Dr Bryce Wilkinson, asks if the Treasury has lost its way with its adoption of its Living Standards Framework.

As the gatekeeper of the Crown balance sheet, advisor on the appropriate stance of fiscal settings, issuer of sovereign debt and the agency responsible for overseeing the quality of regulation-drafting, shouldn't the Treasury limit its energies to excelling at these critical functions, Dr Wilkinson asks.

I appreciate the NBR putting the spotlight on Treasury’s responsibilities and functions, for encouraging discussion on an interesting question, and for giving me the opportunity to respond.

I am confident that it is incumbent upon the Treasury, in its capacity as the Crown's primary advisor on economic, fiscal and regulatory issues, to have a transparent conceptual framework through which its analysts can methodically assess, compare and offer advice to governments on social and economic challenges. We publish background papers, workshop discussion and analysis of our conceptual framework in order to encourage feedback that, we anticipate, will inform and enrich our evolving approach.

I see this as an integral part of our business.

It complements, and is aligned with, the other vital roles which Dr Wilkinson correctly outlines as core responsibilities for the Treasury.

To be an economic advisor in modern times involves gathering evidence on how to practically advance human wellbeing, in all of its multifaceted dimensions, guided by real-world experience.

Establishing fit-for-purpose institutions, securing competitive markets, and facilitating the provision of appropriate incentives, do not represent an end to useful enquiry into how to go about raising people's living standards, even as we are confident the evidence is overwhelming that these are necessary foundations for the successful pursuit of national wellbeing.

The Treasury's Living Standards Framework (the Framework) is a tool to assist in the search for good quality public policies to respond to those circumstances where, for a myriad of reasons, the natural course of things leads to less-than-optimal outcomes across the dimensions which underpin living standards: material wellbeing, sustainability, equity, social infrastructure, and managing risks.

Our Framework does not prejudge the type of actions that are most suited to enhancing wider wellbeing under different circumstances: Total or partial ownership of assets and businesses, taxation settings, regulation, price-incentives, "nudging", and various types of private and public collaboration - these are among the policy options available to policy-makers where there is a case for a Crown response in support of market mechanisms.

In its capacity as an economic advisor, Treasury's modus operandi must always be evidence-based. Lack of easy quantification and measurement should never be sufficient reason to avoid tackling significant social and economic policy challenges. The choice of approach to policy options under different circumstances will always reflect the particular circumstances of each case.

Focus on outcomes

Our Framework is neither judgmental nor prescriptive about what constitutes "a good life", how it should be pursued, or what policies are appropriate in supporting it.

That is why, to address a concern of Dr Wilkinson, there is not much by way of policy prescription in our Framework documents.

The Framework is focused on how to facilitate strengthened outcomes: It identifies the key dimensions of these outcomes that we need to take into account in comparing alternative policy options available for addressing particular issues of concern in our democratic polity.

In framing our advice in the pursuit of broader wellbeing, we start with the stocks of capital that sit in the middle of our Framework: Human, Natural, Physical/Financial and Social.

Overall wellbeing is assisted by the various flows of goods and services that are generated by these four forms of capital.

Good economic policy is about working with market mechanisms towards growing, enhancing, shaping, and protecting these various forms of capital, for the wider benefit of society, and across generations. This is, in essence, the wellbeing framework promoted by the OECD as well.

To take a practical example, our advice on education policy is aimed at enhancing our stock of human and social capital.

By advising on education policies that will increase the quality of education delivered to students, and making sure that students who come from backgrounds of severe and persistent disadvantage are, in particular, given the opportunity to participate in and benefit from the education system, we aim to offer governments ways and means to positively enhance the four forms of capital underpinning living standards.

This does not mean, to address another of Dr Wilkinson's concerns, we have forgotten about welfare economics.

The welfare economics underpinning our Framework is grounded in social choice theory, a discipline concerned with arriving at overall judgments for social choice based on a diversity of perspectives and priorities – reflecting the values and priorities of the people affected.

In this context, there is no problem in recognizing and accepting that a plurality of perspectives and criteria will be brought to bear on policy discussions – and we will look to arrive at policy recommendations through evidence-based reasoning.

The Framework aims to assist Treasury analysts explicitly address the trade-offs in any course of policy action, and, perhaps more importantly, to explicitly explore how policy advice can be mutually reinforcing, highlighting that the five dimensions of our Framework are interdependent.

Our core business

Dr Wilkinson wants the Treasury to stick to its core business - contributing to improved economic performance, a more effective and efficient state sector and a stable and sustainable macroeconomic environment – and to do so effectively and efficiently.

There is no doubt in my mind that increasing the living standards of New Zealanders is core business for the Treasury, and to do that job well we will continue to reach out collaboratively with others to deliver well integrated and coordinated policy advice, and to ensure effective and efficient management of the systemic risks that this country may potentially be exposed to in the future.

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