The New Zealand Treasury has a vision of “working towards higher living standards for New Zealanders”. In performing its role as the government’s advisor on economic, fiscal and regulatory issues, Treasury has focused on how improved economic performance can enhance living standards. However, Treasury is also a central government agency and has oversight over all significant policy issues across the state sector. As such, it acknowledges that living standards are broader than income alone, and are determined by a wide range of material and non-material factors.
In order to ensure the term living standards is understood and applied consistently across all Treasury advice, Treasury has developed a descriptive framework to help guide policy analysis.
Figure 1. Treasury’s Living Standards Framework
The Framework recognises the following five key elements:
• 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.
• the sustainability of living standards over time is central to ensuring that improvements in living standards are permanent.
• measuring living standards directly using self-assessed subjective measures of well-being provides a useful cross-check of what is important for living standards.
The Framework is intended to be used as an input to the policy process, rather than a decision-making tool in itself. Its main value is in the way it encourages a broad understanding of living standards. When applied to policy advice, the Framework emphasises consideration of:
- Considering aggregate levels of the factors in the Framework is important because it allows Treasury to compare New Zealand’s living standards with those in other countries, and to track how they are changing over time.
• Distribution – now and into the future
- As well as considering aggregate levels of the factors, it is important to be aware of their distribution among individuals and groups in society. This allows Treasury to provide empirically-based advice to help governments achieve their distributional priorities. Distributional outcomes need to be considered in both a static and dynamic sense, and to take account of the long-term sustainability of living standards.
- Finally, identifying interactions among factors in the Framework is important. Some of these interactions are mutually reinforcing. For example, trust leads to voluntary exchanges and good economic outcomes that in turn reinforce the original trust. However, some interactions will require complex trade-offs. Natural capital, for example, can be consumed to build up physical and financial capital, but this may not be desirable where this results in reductions in non-substitutable stocks. Other trade-offs may occur between short and long term outcomes, between individual and societal outcomes, or between efficiency in increasing aggregate living standards and the equity of their distribution.
Decisions about acceptable levels of factors within the Framework, distributional outcomes, and trade-offs are political in nature and beyond the realm of policy advice. However, highlighting them will ensure Treasury’s advice is robust and theoretically grounded, and that governments’ decisions are well-informed.
Using the Framework – welfare reform
The Living Standards Framework is being used to support a range of different policy work being undertaken at the Treasury, including the long-term fiscal strategy to manage growing debt, skills and education policy, guidance on large investments across the state sector and hazardous substances and new organisms policy. One area of work that has benefited from the Framework has been advice on welfare reform.
The New Zealand Treasury is interested in working with other countries and international organisations to build support for a broad conceptualisation of living standards. The capital stock and flow framework, which includes consideration of distributional outcomes and subjective well-being, provides a useful basis for this. International co-operation will allow for a consistent approach within and across countries, and encourage debate about how such frameworks can be used to improve living standards of people throughout the world.