Treasury to advise on living standards when analysing policy decisions

By Alex Tarrant

Treasury's policy advice will include greater consideration of living standards after the central government agency devised a formal 'Living Standards Framework' to use when formulating advice to Ministers.

The framework, realeased on the same day as the OECD released its Better Life Index, will highlight how human, social, natural and financial capital flows will be affected by a given policy, and how the flows related to each other, Treasury says.

Treasury had in the past focussed on how improved economic performance could enhance living standards, it says in a paper written by Ben Gleisner, Mary Llewellyn-Fowler and Fiona McAlister.

"However, while economic performance certainly contributes to raising material living standards and will continue to be a core focus, Treasury’s role as a central agency with oversight of issues across the entire state sector requires recognition that there are a broad range of factors that contribute to people’s standards of living. Thus, in its broadest interpretation, ‘higher living standards’ encompasses all the objectives of the state sector," it says in the paper.

Over the last 18 months Treasury said it undertook research to improve its understanding of living standards, to help it better determine the effects a given policy decision could have on the wellbeing of various groups in society and their standards of living.

"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)," it says in the paper.

"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," it says.

"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," it says in the paper.

'Not some road to Damascus recognition for Treasury'

Treasury Secretary John Whitehead said in a speech that the framework would mean a shift in how Treasury formulated advice.

"I want to begin by saying that the Treasury has not experienced some Road to Damascus type recognition of the importance of measures other than GDP," Whitehead said in his last public speech before leaving for a position at the World Bank at the end of the month.

"I know the sceptics will take that with a grain of salt.  But the truth is that we have been wrestling with this topic for some time now.  I can remember when living standards were first proposed as our vision.  The now disbanded Growth and Innovation Advisory Board, created in 2002 to provide independent advice on growth issues, immediately asked the question:  Why not well-being or quality of life?" Whitehead said.

"Well, I don’t think there is any point in getting into a semantic wrangle over the issue.  I believe the framework we are publishing today shows that the way we interpret living standards is probably quite similar to concepts of well-being, though we do focus the framework on particular values that are consistent with our role as the government’s lead advisor on economic and fiscal policy.

"The reality is that the framework reflects, in a number of ways, what Treasury has been advising over the last 10 years or so.  This is not a sudden lurch into new territory, however, it does seek to establish a broader intellectual basis for our work - one that provides a guide for how we should be thinking about the complex and multidimensional nature of living standards," Whitehead said.

"The framework will therefore mean a shift in how Treasury formulates its advice.  At the same time I, and the Treasury at large, would like to see a shift - hopefully quite a noticeable shift - in the way that we are perceived externally.  I see that as an important part of this exercise," he said.

(Updates with Whitehead comments, link to paper)