Brian Easton says the Government’s plans to remove the wellbeing provisions in the Public Finance Act represents a reversal of the way society is travelling

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

I welcomed the Ardern-Robertson’s Government decision to focus on wellbeing in its budgets. It went on to amend the Public Finance Act to require the government to state the wellbeing objectives that will guide its Budget decisions. The Luxon Coalition Government has a bill before a parliamentary select committee to repeal that provision.

My support for wellbeing as a more relevant notion than simply income evolved over the years. I was taught that the main determinant of utility (the notion we had then for wellbeing) was material spending, which was a function of income; perhaps it was the only economic variable which mattered. The basic model was so pervasive it seems to be hardwired into many people’s thinking and many economists’ models. There were some obvious extensions such as goods and services supplied by other sources like the government and whether the decision unit is the person or the family, while a time dimension is needed, but they do not undermine the model.

The difficulty with the proposition is that in an affluent economy additional income does not seem to add much to individuals’ life satisfaction (caveats to come). There is an effect but it is tiny – doubling one’s spending power gives about the same lift to happiness as an average marriage. Moreover, using American data which goes back to the 1940s, it does not seem that the average level of happiness has lifted much even though average real incomes have about trebled.

There are two major caveats. It would seem that a lift in the incomes of the poorest fifth of the population will increase their life satisfaction. There is nothing in the research or this column to suggest that we should ignore poverty. Second, there is evidence that happiness rises with rising incomes in economies which are much less affluent than we are (so poor nations are right to pursue rising material incomes to improve wellbeing). That suggests that in the late nineteenth century when the equation between well-being and income was being bedded into economics, equating material satisfaction with life satisfaction may have been a plausible assumption. With growing affluence we have gone past that simple equivalence. Those who still cling to the first proposition may not be so much wrong, as they are a century out of date; their economic models are increasingly irrelevant to the challenges we face.

Sure, income is a relatively precise notion and economics knows quite a bit about how it increases. Wellbeing is a much less rigorous notion. Keynes pointed out that it is better to be vaguely right than precisely wrong.

The task facing twenty-first-century economists and other social scientists is to improve our understanding of wellbeing, based on evidence rather than a nineteenth-century dependence upon introspection and anecdote. Probably economics goes only so far. The wellbeing chapter of In Open Seas uses Maslow’s hierarchy of needs to show that the economy provides only the foundation of wellbeing, not its totality. It’s a humbler task than that which economists tend to claim; we can do it better.

Progressing these insights is not easy, but they are fundamental to thinking about the future of the economy. That is why the first analytic chapter of my In Open Seas is titled ‘Wellbeing’ and explores and extends these issues in far more detail than there is room for here.

This does not rule out economic growth measured, say, as hourly labour productivity. But we might expect that the benefits of growth to appear increasingly in fewer hours of paid employment rather than in increased material consumption and more expenditure on public goods. (I did not use the term ‘leisure’ because many seem to use much of the additional time in the non-paid labour force.)

I am not alone with these concerns. The New Zealand Treasury grappled with them under Bill English with its ‘living standards framework’ which had a pentagon of economic growth, sustainability, increasing equity, social cohesion and managing risks (here and here). I am not saying they got it right but that they recognised the issue. Treasury was responding to thinking at the OECD.

Where the Ardern-Robertson Government got its commitment to a wellbeing budget is not known. (Presumably Treasury advice was one source.) I am not sure that ‘commitment’ is the right word. While in office, it hardly did anything – such as the creation of new institutions – to bed in the notion and there was not much mention of it when Labour campaigned in the 2023 election. (One could argue that the success of its Covid campaign was a triumph of wellbeing being prioritised over narrow economic concerns, even though the unwinding was badly managed.) Whatever, I keep stumbling across overseas comments that the Labour Government was an international pioneer in promoting wellbeing: I wish.

The incoming Luxon-Coalition Government has been very uncomfortable with the approach. When the incoming National Minister of Finance, Nicola Willis, presented her first budget policy statement she grumpily footnoted that a ‘2020 amendment to the Public Finance Act requires the government to state the wellbeing objectives that will guide its Budget decisions’ and made but two desultory mentions. Her 2025 Budget Policy statement identifies three traditional (and worthy) overarching goals: building a stronger more productive economy, delivering more efficient, effective and responsive public services, and getting the government’s books back in order. It added that the goals are ‘the Government’s wellbeing objectives, as achieving them is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders’. We are back to judging wellbeing in narrow economic terms.

Labour also seems to have lost the wellbeing plot. In her post-2024 Budget speech, Labour’s spokesperson on finance, Barbara Edmonds, said her focus would be on household costs, small business, climate change and roads. There is a glancing mention of well-being, equating it with inter-generational issues. No doubt Labour will contest the removal of the wellbeing provisions from the Public Finance Act.

One infers from the Minister of Finance’s public statements that she is uncomfortable with the notion of wellbeing. She has said that she wanted the Treasury focused on economic and financial advice. But wellbeing is a subject which economists can – and must – advise upon, even if many are stuck within the old paradigm.

The Treasury supported deleting the wellbeing provision in the Public Finance Act, arguing in its Regulatory Impact Statement that ‘on balance, we consider [that] it is most likely to improve the clarity and effectiveness of Section 26M [about budget policy statements], without restricting flexibility. The introduction of the wellbeing requirements in 2020 have added complexity to how the Government can articulate their priorities and objectives, but it is unclear if they have brought about a clear increase in accountability that the changes initially intended.’ The RIS makes an allusion to the Treasury Living Standards Framework but it is unclear how that articulates with its decision. The impression is that there was a vigorous debate within Treasury with the balance favouring abolishing the extra work that is currently required.

But the issue will not go away. Economics and public policy has to struggle with the evolution of wellbeing and living standards and its implications. It is disappointing that the government is scrolling back its contribution. The likelihood is that there will be an increasing divergence between reality and the narrower economic public discussion. The Luxon Coalition Government’s ambition to get us back on track, appears to be getting us back past Bill English, possibly back to the nineteenth century.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.