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Distributional outcomes

Treasury's vision is higher living standards for New Zealanders. This implies a focus on both aggregate levels of living standards and also on their distribution across individuals and groups, both within and between generations.

When thinking about distributional outcomes, Treasury is mindful of distinguishing between normative and positive approaches. Normative approaches seek to identify what constitutes an equitable or fair distribution of resources across society. This is essentially a question of political economy and philosophy, the answer to which differs according to one's fundamental values and views of human nature. As such, there are many different theories of distributive equity. For example, utilitarians, while not prioritising distribution, do allow for the redistribution of resources to those who stand to gain the greatest marginal utility from them (unless the efficiency costs of doing so will reduce aggregate utility or welfare), whereas Rawlsians prioritise resources to the least advantaged in society. Libertarians argue that equity exists only where people are entitled to keep whatever they produce or gain from their talents, irrespective of distributional outcomes. Strict egalitarians view inequality of outcomes as a violation of equity, while resource egalitarians focus on equality of opportunity.

Where normative approaches ask what the distribution of living standards should be, positive approaches ask what the distribution is. They also consider whether there is evidence to suggest that a particular distribution poses social or economic problems and the effect different policy interventions may have on how living standards are distributed.

Treasury takes a positive approach to distribution as opposed to a normative, value-based one. This approach is appropriate to Treasury's policy advisory role, as it allows the organisation to provide advice on the distributional priorities of the government of the day, while maintaining an apolitical position that is grounded in empirical economic analysis.

Treasury's advice on distribution has tended to emphasise the inefficiencies that result from having living standards distributed in ways that prevent some people from fully participating in the economy and society. This has led Treasury to advise targeting policy interventions towards those at the lower end of the income distribution, in particular those with long-term and multiple barriers to developing and using their human and social capital, for whom additional assistance will have the greatest marginal impact. Essentially, Treasury focuses on improving the social mobility of the long-term disadvantaged. However, Treasury also emphasises the efficiencies that can be gained from lowering tax rates to those with higher living standards.

More recently, Treasury has been investigating the possible relationship between relative rather than absolute income and wealth, and poor social and economic outcomes (see Wilkinson and Pickett, 2009). While empirical evidence of causation remains inconclusive, both historical and contemporary events demonstrate that societies in which the benefits of growth are captured by a minority can face considerable social, economic and political upheaval. This suggests that relative inequality, where combined with high absolute levels of poverty and a lack of political transparency and democracy, should be a concern.

Treasury believes that analysis of the distribution of living standards is fundamental to good policy advice. Understanding and analysing the distribution of wealth, income and other outcomes across society gives analysts a fuller picture of living standards than is gained from relying on aggregate measures alone. Such analysis ensures policy interventions are targeted to where they will have the greatest impact, and enables Treasury to advise on the most cost-effective way of achieving governments' distributional priorities.

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