What the Treasury’s Living Standards Framework means for the public sector

Speech delivered by Struan Little, Secretary to the Treasury to the IPANZ Deloitte Public Sector Conference

E nga mana, e nga reo, e nga tai e whā. Tēnā koutou, tēnā koutou, tēnā koutou katoa.

Context and challenges#

Until fairly recently, New Zealand measured its success largely in economic and fiscal terms such as GDP, and our public finance system was regulated by a 30-year old piece of legislation, the Public Finance Act.

Using just those economic and fiscal measures of success, our public finances are strong. New Zealand’s public debt is relatively low, compared with other countries, and the government is running operating surpluses.

But we know that many people have been left behind or left out of the country’s economic success. Many New Zealanders have low wellbeing in multiple areas.

We face big, complex, long-standing problems that we need to solve, such as poverty, homelessness, climate change, issues with mental health, environmental degradation and disruption from new technology.

The Treasury wants to help tackle these problems, by working towards higher living standards for New Zealanders.

This supports the Government’s vision of improving New Zealanders’ wellbeing, aiming to give New Zealanders the capabilities to live lives that have purpose, balance and meaning for them.

GDP is and will remain important. At its core, a wellbeing approach is about ensuring the broad range of factors that matter to New Zealanders are central to our definition of success and drive our decision making.

After all, economic growth isn’t an end in itself, but a means through which we can deliver greater prosperity to people, and better living standards over the longer term.

The role of the Living Standards Framework#

The Treasury developed the Living Standards Framework (LSF) to strengthen the robustness and rigour of our advice about lifting living standards. The LSF helps us to do that by providing a framework to systematically consider the broader impacts of our advice.

The Treasury has been developing LSF since 2011. However, this work has been stepped up since 2017 to support the current Government’s wellbeing approach. In broad terms, the development of the LSF has covered three stages:

  1. Developing the core technical components of the Framework so that we have a shared understanding of what helps achieve higher living standards to support intergenerational wellbeing. The framework identifies:
    • 12 wellbeing domains or factors that matter for New Zealanders’ wellbeing
    • four capital stocks, which are the foundations of current and future wellbeing
    • the importance of resilience to enabling the country to respond to shocks, as well as the distribution of wellbeing (for example, across population groups and regions).
  2. Developing an LSF Dashboard of wellbeing indicators to support measuring and tracking changes in the wellbeing domains set out in the Framework (the focus during 2018).
  3. Considering how we practically apply the LSF to inform decision-making and investment decisions (the focus during 2019 and 2020).

Where have we given real effect to this approach?#

So what do we expect to see if our advice takes a broader approach using the LSF?

  • our advice draws relevant links between policy choices and impacts on New Zealanders' living standards, and identifies interdependencies and trade-offs
  • our advice takes a range of impacts into account, in particular those that may have been underplayed in the past – for example, robust distributional analysis, impacts on social norms, consideration of natural capital, and robust risk analysis
  • our advice identifies and quantifies (and where possible and relevant, monetises) the wider costs and benefits of proposals, and
  • we make sure that the data and evidence we use to support our advice link back to measures that are meaningful for living standards.

This will be harder not easier. So where have we given real effect to this approach?

Making it real – for the Porirua community#

I want to turn now to an example of where we are putting the wellbeing approach into practice, using robust cost benefit analysis to underpin investment decisions.

The LSF is helping to make it real for people living in eastern Porirua.

Parts of Porirua are very deprived – with more than 2000 state houses that were built at least 50 to 60 years ago, a significant gang presence, high levels of crime and very poor health and education outcomes.

The Treasury was asked to develop a business case as to whether the Government should invest in the regeneration of Porirua.

Why did taking a wellbeing approach make a difference?#

First I want to emphasise that we still used existing and established tools – the better business case framework and cost benefit analysis.

  • Where the project was different, was in applying the Living Standards Framework. This made a difference to the economic analysis of the options, and supported a benefits framework that captured the broad range of impacts expected from the investment.
  • For an investment like Porirua, impacts are distributed across government. A typical siloed approach means that opportunities to enhance wellbeing or deliver better value to the taxpayer are missed.
  • This means that if the business case had considered just the fiscal and economic impacts, the optimal outcome would be not to invest, and to just let the area continue to deteriorate – because the cost of the housing outweighs the fiscal benefits.
  • With this business case, we sought to look at benefits from the perspective of the affected community. This meant looking at the regeneration as an investment in health, education, safety and economic prosperity that is enabled by housing, infrastructure and community development.
  • Using cost benefit analysis enabled us to consider fiscal, economic and wellbeing impacts. For example, warm, safe and dry housing can reduce hospitalisations. This has a fiscal saving to the taxpayer from not having to pay for the hospital visit, an economic value from the increased productivity of that person, as well as the value the individual would place on not going to hospital – and we used international evidence to quantify those impacts.

We also had some key learnings from taking this approach:

  • the first is that it reinforced to us that it isn’t easy
  • it took many heads together to make it work, and to prove that it could deliver long-term, intergenerational benefits that will lift living standards and wellbeing for the eastern Porirua community.
  • and we learned that the availability of baseline data is critical, and the quality of your intervention logic is key to the quality of cost-benefit analysis
  • the cost benefit analysis needs to be even more rigorous than when you’re just taking into account fiscal impacts – this is because you need to be very clear about the impacts, and in particular, to ensure that wellbeing benefits are not overstated.

Maintaining living standards through an economic downturn#

Here is a second example of putting the LSF into action:

The Treasury regularly revisits its advice on macroeconomic stabilisation policy, and how government should respond to a major shock like the Global Financial Crisis (GFC) or another earthquake.

Applying a ‘living standards’ approach to these issues encourages us to think beyond just aggregate economic output. In our most recent analysis of this, the success measures for the economic policy response were widened to consider, in addition to the effect on economic output:

  • maintaining economic resilience – preventing the creation of systematic risks in the financial system, and maintaining the economy’s ability to withstand future downturns
  • retaining human capital – avoiding unemployment or underemployment and the loss of skills associated with those
  • achieving equity – considering the distributional effects of different policy options.

Taking into account this wider set of success measures shifted the focus of our advice. It exposed the wide set of trade-offs that Ministers would have to face in making choices about macroeconomic stabilisation – for example, weighing the impact an increase in public debt might have on our resilience to future downturns, against the ability of fiscal policy to offset some of the distributional impacts of recessions.

This has allowed us to provide more nuanced, detailed advice, which reflects the fuller impact of macroeconomic policy on living standards.

What has to change in the public sector management area, and why?#

I’d also like to talk about some other fundamental changes that we are working through to re-orient the system towards a wellbeing approach, and which the Minister is keen to see implemented as quickly as possible. 

His view is that a wellbeing approach requires a system-wide change in how the public service works in New Zealand, so we are:

  • taking a wider view, with deliberation (CEs)
  • collaborating across sectors and government (role of Boards, strategic plans)
  • investing in wellbeing priorities.

This means we have a programme of legislative and financial framework changes underway, including:

  • Public Finance Act (PFA) amendments. Requiring Ministers to be clear about their wellbeing objectives, alongside fiscal objectives, within the current principles-based framework of the legislation. Plus periodic Treasury reporting on the state of wellbeing in New Zealand based on its best professional judgement (rather than being prescriptive about the measurement framework or indicators, which may become out of date).
  • Baseline reviews. Targeting our analytical resources and properly analysing the relevant data to get a robust view of sustainability, risk, and value in key government sectors - looking at all spending rather than just the marginal increase through the Budget.
  • Appropriations. Reducing the focus on compliance around managing small pools of funding, to create space for a more strategic focus on priorities and value. Less detail but higher-quality measures should help us see the wood instead of the trees on performance, although this remains one of the most challenging areas to tackle.
  • Institutional change. This is where the Government is bringing related parts of the system together such as housing, urban form and transport in the Urban Development Agency, or in the case of the Infrastructure Commission, to require – specifically – a long term view and sequencing of infrastructure projects across agencies to be undertaken.
  • Decision making systems – our tools and levers: CBAx, Better Business Cases (BBC), and Regulatory Impact Statements (RIS).

Underpinning all of this is the need to continue to improve our indicators and measurement – but it’s equally important to ensure that we have systems in place to monitor and report on what impact we are having.

In some ways, this is the most important part – the need for agencies to have the capability to implement a wellbeing approach – and we are only at the start of that journey.

How do you ensure rigour in this approach?#

A critical success factor for the Living Standards Framework – and for the broader wellbeing approach – is to be sure that we are using it consistently, with rigour. We don’t have a definition for that yet, but we’re keen to explore what it might mean, and to learn from the Budget process and more strategic planning and reporting.

I do have some thoughts about it, which I’ve shared with the Treasury’s staff, and I’m happy to share with you.

For me, rigour is about four things:

  • being clear on outcomes (hypothesis testing)
  • using reputable methods, data and empirics to evaluate outcomes.

And you also need to have:

  • dynamics and behaviours – and this is often where the real action is
  • being value-free/neutral (authors’ political leanings are in agreement with econometric results).

What did the Wellbeing Budget process tell us about rigour? What can we learn from it?#

My view is that it was imperfectly rigorous. For me, the decision-making tools were way less rigorous than the processes. So, the CBAx had little real impact, despite looking rigorous. (It is a useful tool, by the way and can add real value).

What added rigour to the Budget were the processes – having only five priorities to ensure trade-offs, using science advisors who integrate empirics, and using decision-making teams to get consideration (Ministers, Tier 2 staff).

The Wellbeing Budget made the priorities-setting part of the Budget process much more rigorous than previous Budgets – applying the LSF framing and analysis to determine where investment would give the greatest impact, bringing in data and expertise.

That flowed through into the rest of the process. So while we didn’t use tools to automate the prioritisation between competing bids, we ensured Ministers and officials’ groups had wellbeing information to inform the package development and decision-making, and we could more clearly see if the packages were addressing what Ministers had aspired to during the priorities-setting phase.

Compliance can often feel like rigour, but it isn’t.  We recently spoke with around 200 officials across the public sector about longer-term strategic planning and reporting, and what you think works well, and what doesn’t. From the feedback that we got, rigour can come from several things:

  • involving people in the process of understanding the problem and designing possible solutions
  • part of it comes from trying things to see if they work, before rolling it out more widely
  • part of it comes from stopping something we know is no longer delivering its objectives.

So what does this mean in practice?#

Engaging inside and across agencies, to:

  • think about the strategic risks, challenges and opportunities facing New Zealand
  • think long (about the medium-long-term) and think broadly, beyond the boundaries of portfolios or agency silos.

It’s also about:

  • presenting Ministers with scenarios, advice, and choices to meet our goals (and not just the choice to increase agency funding year after year, which we see a lot, and is unsustainable and frankly uninspiring)
  • developing plans that have rigour and multi-year pathways (underpinned by milestones and indicators)
  • having genuine focus on delivery of those plans and the tracking of progress in subsequent years – this happens in some agencies but not consistently enough.

What is in it for the public service?#

So what’s in it for us, as public servants? What does a “broader” approach mean?

The different kind of thinking that the LSF represents aligns very well with the Spirit of Service, and to solving some of the problems that most vex New Zealanders, and hold people back from living the kinds of lives that they want to lead.

It provides a way for us to think systematically about the broader impacts that we can apply alongside our traditional analysis frameworks.

The changes being made to the legislation and the public finance system will allow us to step away from the current very prescriptive approach, and give us more flexibility, and the ability to work together more easily.

It’s about trying to fix some of the frustrations that we’ve all experienced, whether it’s about the way our budgets and appropriations are structured, or working better together, without throwing away all of the good parts of the frameworks that have been developed over time and that we work within.

It’s about recognising that while economic growth is important, we can also take into account social cohesion, sustainability, and equity, whether it’s about the environment, or about the country’s finances.

These are big, previously intractable problems that we are trying to solve, and the broader wellbeing approach gives us some new reading glasses, that will allow us to look further afield, and to see the wood as well as the trees – and even the sky and the birds as well, without losing sight of the ground we’re standing on.