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Working Towards Higher Living Standards for New Zealanders

Treasury's Living Standards Framework

In summary, the Framework recognises the following five elements:

  • there is a broad range of material and non-material determinants of living standards (beyond income and GDP);
  • freedoms, rights and capabilities are important for living standards;
  • the distribution of living standards across different groups in society is an ethical concern for the public, and a political one for governments. It also has efficiency implications, into which empirically-based economic analysis can provide useful insights;
  • the sustainability of living standards over time is central to ensuring that improvements in living standards are permanent, with dynamic analysis of policy needed to weigh up short and long-term costs and benefits; and
  • measuring living standards directly using self-assessed subjectivemeasures of wellbeing provides a useful cross-check of what is important to individuals.

To incorporate a broad range of material and non-material factors, distributional concerns, and dynamic considerations, Treasury has used a 'capital stocks and flows' approach as the basis for its Framework. This approach borrows the concept of capital from economics - traditionally used to refer to financial and physical assets (such as buildings and machines) that produce future flows of productive services. The notion of an asset that can be built up for future use has subsequently been broadened to include natural capital (OECD, 2001a), human capital (Schultz, 1961; Becker, 1964), and more recently, the importance of social capital (Coleman, 1986; Kulig et al., 2010).

Figure 1 - Treasury's Living Standards Framework
Figure 1 - Treasury's Living Standards Framework.

The Framework includes a range of different stocks within financial/physical, human, social and natural capital. It recognises that these stocks create flows of goods and services that contribute to the living standards of New Zealanders, and that when people 'use' certain capital stocks and flows, this can affect other forms of capital (and their associated flows). The distribution of these effects may differ across the population and through time. For example, increased investment in skills could increase future flows of employment and income across the population. However, this investment could reduce the financial wealth of government or require a reduction in other government-provided services, all of which would also have effects across the population.

The Framework is intended to be used as a complementary input to the policy process, rather than an analytical, prioritisation or decision-making tool in its own right. When applied to policy advice, the Framework emphasises consideration of:

  • Levels

    Considering aggregate levels of the factors in the Framework is important because it allows Treasury to compare New Zealand's living standards with those in other countries, and to track how living standards are changing over time.

  • Distribution - now and into the future

    As well as considering aggregate levels of the factors, consideration of their distributionacross individuals and groups in society is also important.

  • Interactions

    Finally, identification of the interactions among the factors in the Framework is crucial. Some of these interactions are mutually reinforcing synergies, while others imply the need for trade-offs.

Ultimately, decisions about acceptable levels of factors within the Framework, distributional choices, and trade-offs between competing goods are ethical and political in nature and are therefore not amenable to definitive policy solutions. However, highlighting these choices and trade-offs will help ensure Treasury's advice is robust and that governments' decisions are well-informed.

As a contribution to an evidence base for such advice, Annex 1 of the paper presents data on the stocks and flows illustrated in the Framework. Comparisons are made with other OECD countries and also, where applicable, across the New Zealand population.

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