The big Treasury experiment

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Possibly obscured by all the activity surrounding the new Government and the changes in National Party leadership is the start of a massive and fundamental shakeup of how Treasury measures the economy.

The concept of “natural capital” and the Living Standards framework which will bring a broader view of the economy into Treasury’s reporting has already been enthusiastically endorsed by Finance Minister, Grant Robertson.

And National’s new Finance spokesperson, Amy Adams, says she has some common ground with Robertson “ in saying that economic strength is critically important to deliver all of the things that are important to New Zealanders,”

Earlier this week Treasury Secretary, Gabriel Makhklouf, set out some early thoughts on how Treasury might use the concept of natural capital as it works towards defining the Living Standards Framework which Robertson says will be used in preparing the 2019 Budget.

He said that traditionally economists focussed on the factors of production --- like land and labour --- which can be empirically and numerically measured and which form the basis of most goods and services.

Instead, he said the Living Standards Framework would try to measure the "four capitals" --- natural, human, social and financial/physical "which collectively I like to describe as our economic capital."

The financial/physical capital is relatively easy to deal with --- that includes the old “factors of production”.

But the other three pose huge challenges.

“What we are now doing is taking wellbeing indicators and looking at how to actually apply them in policy development and resource allocation,” he said.

“This is world-leading.

“No other country has done this before.

“No other country has progressed the idea of integrating living standards measures into public policy development from the conceptual to the concrete.”

Already Treasury’s work is beginning to attract international attention.

Writing this week in the Sydney Morning Herald, Peter Hartcher, talking about the Living Standards Framework said: “The new Prime Minister (Jacinda Ardern)  is planning a world first that could once more make New Zealand a social laboratory for the world.”

“If Ardern can sensibly pioneer a way to transform modern economies from GDP-centric systems to ones that put human wellbeing at the centre in a systematic way, she might do a lot more than improve living standards in NZ

“She just might revitalise the vision and purpose of social democracy everywhere.”

So Makhlouf, in his speech, set out to define one of the capitals, “natural capital.”

“Natural capital refers to all aspects of the natural environment

“It includes individual assets such as minerals, energy resources, land, soil, water, trees, plants and wildlife.

“It also includes broader ecosystems – that is, the joint functioning of, or interactions among, different environmental assets, as seen in forests, soil, aquatic environments and the atmosphere.”

Treasury will attempt to put a financial value on natural capital.

This then would inform the hard choices that have to be made about the environment.

“There are not infinite resources to devote to protecting nature, so hard choices need to be made about using or conserving natural resources,” he said.

‘Some bits of nature cost more than others to protect, and some are valued more highly than others because they yield more benefits.

“Economic valuation informs choices, but as a resource’s price reflects the relationship between its supply and demand for what it provides, value also depends on accurate measures of the physical extent and condition of natural resources.

“Such definitions are still relatively vague, but they give a flavour of what measures of natural capital need to capture.”

Clearly valuing an indigenous forest which is protected from all commercial activity will be a challenge.

“We have adopted what’s called the Total Economic Value (TEV) framework for how we think about the overall value of natural capital,” he said.

“This framework identifies the value people derive from not just using but also from not using natural capital, and also allows for various valuation alternatives, such as quantitative, qualitative or a mix of both.”

But it is early days.

“There is a lot we don’t know.

“The quality and comprehensiveness of data are not yet good enough to inform an overall value of natural capital or its sustainability.

“But does that make our Living Standards Framework work a waste of time right now?

“The answer is an emphatic no.

“The work going on now by the Treasury and many others helps to build understanding.

“It allows us to identify what information needs improving in order to achieve what we want from our natural capital.”

The Third International Conference on Wellbeing and Public Policy will be held in Wellington in September.

The conference will bring together world-leading scholars and organisations to share the latest developments in their work on wellbeing and its application to public policy. T

Robertson says it “will provide valuable insights for policies to raise living standards of all Kiwis, and help promote New Zealand as a world-leading proponent of wellbeing research>”

But it will the first part of that sentence that will be important.

The whole Living Standards Framework may begin in the abstract, but it will have to provide concrete and tangible returns if it is to be a political success.

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