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Working Towards Higher Living Standards for New Zealanders

3  Treasury's Living Standards Framework

In developing the Living Standards Framework, Treasury has drawn on the ideas discussed in the previous section.

The Framework acknowledges that income and economic production are important determinants of living standards, but recognises the drawbacks of relying on measures such as GDP as a proxy.

It draws on the economic concept of utility, which incorporates a broad range of material and non-material factors that underpin living standards. However, it recognises that utility is not the only value relevant to living standards, which is consistent with views of Sen, Nozick and others. Other important factors are included, the most salient of which are individual rights, freedoms and capabilities.[9] These factors are often positively related to utility and thus have an instrumental value, but they are also important for living standards in themselves. Similarly, while the Framework is primarily focused on end-states or outcomes it also attaches value to fair processes, such as the rule of law.

While the overall level of living standards in New Zealand is a key priority, Treasury recognises that the living standards of each individual New Zealander are also important. Therefore, Treasury looks not only at aggregate living standards but also at their distribution across the population. Doing so allows Treasury to provide empirically-based advice to governments to help them achieve their distributional priorities, and ensures policies are targeted to where they have the greatest impact on people's living standards.

The sustainability of living standards for both present and future generations is a key part of the Framework. This acknowledges Treasury's stewardship role of ensuring the next generation is endowed with "whatever it takes to achieve a standard of living at least as good as our own and to look after their next generation similarly" (Solow, 1992, p.15).

Finally, the Framework recognises that people's subjective assessment of their own standard of living is important, and it therefore draws on insights from the subjective wellbeing literature.

In summary, the Framework recognises the following five key 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 subjective measures of wellbeing provides a useful cross-check of what is important for living standards.

The Framework describes a broad understanding of living standards, which is appropriate given Treasury's role at the centre of policy making in New Zealand. While broad, the Framework is not intended to be comprehensive or prescriptive, and there may be important values that are not included. Some have been excluded because they are not directly amenable to public policy (such as the weather), and others because they are not common concerns in policy issues that the Treasury deals with (for example, the intrinsic value of the environment as distinct from its instrumental and amenity benefits).

Notes

  • [9]This approach, which recognises a wide range of values which are important to individuals, is similar to the one described and used by the Australian Treasury (2004) in their Wellbeing Framework.
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