Girol karacaoglu

1. © The Treasury
New Zealand’s Economic & Fiscal Outlook,
Treasury’s Long-Term Fiscal Statement, and
Treasury’s Living Standards Framework
September 2013

2. © The Treasury
Short-Term
(next five years)
Economic and
Fiscal Outlook

3. © The Treasury
Five Key Judgements
§ International Economic Situation
§ Effects of the Drought
§ Canterbury
§ Terms of Trade
§ Monetary Conditions
3

4. © The Treasury
Global Context

5. © The Treasury
Global Outlook steady ...
-1
0
1
2
3
4
5
6
2000 2002 2004 2006 2008 2010 2012 2014 2016
Years ending 31 December
Annual average % changeAnnual
Forecast
Trading Partner Growth

6. © The Treasury
Global Economic Forecasts
2012 2013 2014 2015 2016 2017
Actual Forecast Forecast Forecast Forecast Forecast
Australia 27% 3.6 2.7 2.9 3.0 3.0 3.0
China 17% 7.8 8.0 7.6 7.3 7.0 7.0
United States 11% 2.2 1.7 2.4 2.5 2.5 2.5
Japan 9% 2.0 1.0 1.4 1.1 1.0 1.0
Euro area 8% -0.5 -0.4 1.0 1.2 1.3 1.4
United Kingdom 4% 0.3 0.7 1.4 1.8 2.0 2.0
Canada 2% 1.8 1.6 2.3 2.4 2.5 2.5
Other Asia* 23% 3.8 4.3 4.7 5.0 5.0 5.0
Trading Partner Growth (TPG) 100% 3.5 3.4 3.8 3.8 3.8 3.9
TPG - Consensus (April 2013) 3.5 3.5 3.9 4.1 4.1 4.0
TPG - IMF WEO (April 2013) 3.5 3.5 4.1 4.2 4.3 4.4
* South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India
2013
weights

7. © The Treasury
Changing export and import markets
Exports Imports

8. © The Treasury
... and risks have receded a little
• Euro area officials have helped settle the
debt crisis a touch
• US avoided the “fiscal cliff”
• China is experiencing modest slowdown

9. © The Treasury
Domestic Outlook

10. © The Treasury
Growth outlook influenced by supportive
and constraining factors...
On the supportive side:
– The Canterbury rebuild
– A high terms of trade
– Low interest rates
– Less risk-averse households
and firms
Factors constraining growth include:

11. © The Treasury
...but the overall economic outlook is
similar to the Half Year Update
-4
-2
0
2
4
6
8
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
Quarterly
BEFU HYEFU
Annual average % change
Forecast
Real GDP growth

12. © The Treasury
Growth to be driven primarily through
Investment and Consumption...
-4
-3
-2
-1
0
1
2
3
4
5
6
2012 2013 2014 2015 2016 2017
Years ended 31 March
Exports Total consumption
Non-residential investment & stocks Residential investment
Imports Total GDP (annual average growth %)
Percentage point contribution to annual real GDP growth

13. © The Treasury
Summary
(March Years, %)
2012 2013 2014 2015 2016 2017
Actual Estimate Forecast Forecast Forecast Forecast
Economic (March years, %)
Economic growth 1.9 2.5 2.4 3.0 2.6 2.2
Unemployment rate 6.7 6.9 6.0 5.9 5.5 5.2
CPI inflation 1.6 0.9 1.9 2.0 2.0 2.2
CA balance -4.4 -4.8 -4.8 -5.2 -5.8 -6.5
Fiscal (June years, % of GDP)
Total Crown OBEGAL -4.4 -2.9 -0.9 0.0 0.3 1.0
Net debt 24.3 27.1 28.4 28.7 28.1 27.3

14. © The Treasury
...and in an international context, growth
looks good
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Forecast trading partner growth (calendar years), % change
2013 2014 2015Source: Treasury

15. © The Treasury
Relative growth performance has also improved

16. © The Treasury
...but there is still a large gap to close
GDP per capita (Index)
1970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020111970
1970
1972
1972
1974
1974
1976
1976
1978
1978
1980
1980
1982
1982
1984
1984
1986
1986
1988
1988
1990
1990
1992
1992
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
8012016020080
80
120
120
160
160
200
200
Australia

17. © The Treasury
Export volume growth is affected by the
drought...
-20
-16
-12
-8
-4
0
4
8
12
16
20
2000 2002 2004 2006 2008 2010 2012 2014 2016
Quarterly
Exports Imports
Annual average % change
Forecast

18. © The Treasury
...but higher dairy prices will support a
turnaround in the goods terms of trade
900
1000
1100
1200
1300
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Quarterly
Index (1995/96 = 1000)
Forecast

19. © The Treasury
Labour market is expected to
strengthen over forecast period...
-2
-1
0
1
2
3
4
2
3
4
5
6
7
8
2000 2002 2004 2006 2008 2010 2012 2014 2016
Quarterly
Unemployment rate Employment (right scale)
% of labour force
Forecast
Annual average % change

20. © The Treasury
... while inflationary pressures pick up
-3
-2
-1
0
1
2
3
4
5
6
7
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
CPI inflation Tradables Non-tradables
Annual % change
Forecast
Quarterly

21. © The Treasury
Low interest rates and the Canterbury rebuild
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
Quarterly
Real residential investment Excluding Canterbury rebuild
$billions (in 1995/96 prices)
Forecast

22. © The Treasury
Risks
• Risks more balanced compared to HYEFU
• Global uncertainties remain
– Fiscal adjustments
– Monetary policy
– China and impact on Australia
• Domestic risks
– Mother nature - earthquakes and drought
– Saving behaviour and exchange rate

23. © The Treasury
Current Account
1615141312111009080706050403020100
0
-2
-4
-5
-7
-9
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
% %-pt deviation
Current Account Deficit as %of GDP
PREFUforecast BEFU2012forecast
BEFUless PREFU(RHS) Forecast date

24. © The Treasury
Higher investment drives current account
deficit ...

25. © The Treasury
... higher investment drives current
account deficit
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% of GDP
Current account Current account ex Canterbury rebuild

26. © The Treasury
1987Q21987Q31987Q41988Q11988Q21988Q31988Q41989Q11989Q21989Q31989Q41990Q11990Q21990Q31990Q41991Q11991Q21991Q31991Q41992Q11992Q21992Q31992Q41993Q11993Q21993Q31993Q41994Q11994Q21994Q31994Q41995Q11995Q21995Q31995Q41996Q11996Q21996Q31996Q41997Q11997Q21997Q31997Q41998Q11998Q21998Q31998Q41999Q11999Q21999Q31999Q42000Q12000Q22000Q32000Q42001Q12001Q22001Q32001Q42002Q12002Q22002Q32002Q42003Q12003Q22003Q32003Q42004Q12004Q22004Q32004Q42005Q12005Q22005Q32005Q42006Q12006Q22006Q32006Q42007Q12007Q22007Q32007Q42008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q22011Q32011Q42012Q12012Q22012Q31987Q2
1987Q2
1990Q3
1990Q3
1993Q4
1993Q4
1997Q1
1997Q1
2000Q2
2000Q2
2003Q3
2003Q3
2006Q4
2006Q4
2010Q1
2010Q1
040801201602000
0
40
40
80
80
120
120
160
160
200
200
TradableNon-tradable
Non-tradable
Tradable
Tradeables and Non-tradeables

27. © The Treasury
Long Term Economic Outlook
Why am I an optimist?
§ Food
§ Education
§ Tourism
§ Health
27

28. © The Treasury

29. © The Treasury
Falling Poverty in Asia

30. © The Treasury
Falling Poverty in Asia

31. © The Treasury
Key Questions
§ How can we exploit this opportunity?
§ What economic and social outcomes are we aiming for?
§ How can government policy help us make progress
towards the achievement of these outcomes?
§ How do we know if we are succeeding?
31

32. © The Treasury
Fiscal Strategy

33. © The Treasury
Overview of fiscal strategy
• Restore Government’s financial strength,
reduce vulnerabilities
• Restrain expenditure growth
• On track for 2014/15 OBEGAL surplus
• Target net debt below 20% of GDP by 2020
33

34. © The Treasury
Budget Decisions

35. © The Treasury
• Responsibly managing the Government’s
finances
• Building a more productive and
competitive economy
• Delivering better public services within
tight fiscal constraints
• Rebuilding Christchurch
Government’s economic plan

36. © The Treasury
Budget 2013 - $5.1bn in operating
initiatives, $1.5bn in capital
$3,600
$893
$313
$303
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Budget 2013 operating spending, $ million
Net new spending Savings Revenue Contingencies
0.0
0.5
1.0
1.5
2.0
Budget 12 Budget 13 Budget 14 Budget 15 Budget 16 Unallocated
Future Investment Fund spending profile, $ billions

37. © The Treasury
Four-year Plans
• $800 million allowance divided up
• Most Votes directed to plan on the basis of
no new funding
104
150
350
60
50
86
Emissions Trading
Scheme
Education
Health
Welfare
Contingency
Unallocated

38. © The Treasury
New spending
-500 0 500 1000 1500 2000
Health
Education
Growth Package
Emissions Trading…
Social Development
Canterbury…
Housing
Tertiary
Other
New contingencies
New revenue
$(millions) over four years
Reprioritisation Net Savings to the centre

39. © The Treasury
Other
• Significant ACC levy reductions signalled
– $300m in 14/15
– $1 billion in 15/16
• Superfund contributions deferred until
Net Debt at 20% of GDP
39

40. © The Treasury
Future Investment Fund
• $6 billion to be smoothed over the next few
Budgets for new capital spending
• $1.5 billion of spending in Budget 2013
0
0.5
1
1.5
2
Budget 2012 Budget 2013 Budget 2014 Budget 2015 Budget 2016 Unallocated
Expected Future Investment Fund spend
?

41. © The Treasury
Government share of rebuild now $15b
Local
infrastructure,
$2.4 billion
Crown assets,
$1.6 billion
Land zoning,
$1.2 billion
Christchurch
central rebuild,
$0.9 billionOther recovery
costs, $1.5
billion
EQC and other
Crown entities,
$7.6 billion
Net earthquake-
related expenses
$15.2 billion

42. © The Treasury
Fiscal outlook
Revenue, Expenses, OBEGAL,
Net debt, Net worth

43. © The Treasury
From record deficit to surplus...
0
10
20
30
40
50
60
70
80
-25
-20
-15
-10
-5
0
5
10
15
2000 2002 2004 2006 2008 2010 2012 2014 2016
$ billion$ billion
Years ended 30 June
Core Crown residual cash OBEGAL Net debt (RHS)
Forecast
-2
-1
0
1
2
3
4
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
%ofGDP
FiscalYears
Fiscal Impulse Expansion
Contraction

44. © The Treasury
...via slower spending growth
26
28
30
32
34
36
2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18 2019/20
Core Crown revenue & expenses, % of GDP
Core Crown expenses Core Crown revenue
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2004 2006 2008 2010 2012 2014 2016
New Operating Spending per Budget, $ billions

45. © The Treasury
Total Crown OBEGAL
-10
-8
-6
-4
-2
0
2
4
6
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027
Budget 2013 Half Year Update 2012
% of GDP
ForecastsActuals Projections
Year ended 30 June

46. © The Treasury
Tax revenue increases by $14.5b
-
5
10
15
2014 2015 2016 2017
Individuals Corporate GST Other
$bi
lli
on
s
Cumulative change relative
to 2012/13 fiscal year

47. © The Treasury
Core Crown expenses grow $5.5b
(but grow slower than tax revenue)
-4
-2
0
2
4
6
8
2014 2015 2016 2017
$billions
Budget2013 Futureallowances Socialassistance Financecosts
Earthquake Other Totalincrease
Cumulative change relative
to 2012/13 fiscal year

48. © The Treasury
$75m OBEGAL surplus in 14/15
OBEGAL = total Crown revenue less total Crown
expenses
-12
-10
-8
-6
-4
-2
0
2
4
6
2012 2013 2014 2015 2016 2017
SOE Crown Entity CoreCrown OBEGAL

49. © The Treasury
Core Crown residual cash
-8
-6
-4
-2
0
2
4
6
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027
Budget 2013 Half Year Update 2012
% of GDP
Year ended 30 JuneActuals Forecasts Projections

50. © The Treasury
Net debt peaks: 28.7% of GDP in 14/15
Borrowing
$ 32b over
next four years
Borrowing
costs
$ 3.5b per
year roughly
the same as
total annual
spending on
law & order
0
5
10
15
20
25
30
35
0
10
20
30
40
50
60
70
80
2003 2005 2007 2009 2011 2013 2015 2017
$billions
Year ended 30 June
Net debt ($b) % GDP
Forecast
% of GDP

51. © The Treasury
Core Crown Net Debt
-10
0
10
20
30
40
50
60
70
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027
Budget 2009 Budget 2009 without policy response
Half Year Update 2012 Budget 2013
% of GDP Year ended 30 June

52. © The Treasury
Affording Our Future
The Treasury’s 2013 Statement on the Long-Term Fiscal Position
What’s the story and why does it matter for you?

53. © The Treasury
Background
• The Public Finance Act requires Treasury to
publish a Statement on the Long-Term Fiscal
Position at least every 4 years
• Must relate to a period of at least 40 years
• The 2013 Statement was presented to Parliament
on 11 July
• Together with about 40 background papers,
Affording Our Future is available on Treasury’s
website

54. © The Treasury
Population growth (%)
-1.0
0.0
1.0
2.0
3.0
1950 1970 1990 2010 2030 2050

55. © The Treasury
Dependency ratio 65+ to 15-64
People
15-64
2010
2060
People
65+

56. © The Treasury
Changing balance between work/
remaining life for males turning 65

57. © The Treasury
Slowing growth of the labour force

58. © The Treasury
Key economic assumptions
• Trend productivity assumption of 1.5% growth in output per
hour worked per annum from 2020 (versus 1.1% for the
last 40 years)
• Average weekly hours worked assumed at 33.2 hours
(compared with 34.6 hours over the last 35 years)
• Assumes an average annual consumer price inflation rate
of 2% (the midpoint of the current inflation range target)

59. © The Treasury
Long-term fiscal projections –
cost pressures
% of nominal (GDP) 2010 2020 2030 2040 2050 2060
Δ
(% points)
Health 6.9 6.9 7.9 9.1 10.1 11.1 4.1%
Superannuation (NZS) 4.4 5.3 6.5 7.2 7.3 8.0 3.6%
Education 6.2 5.2 5.1 5.1 5.1 5.2 -1.0%
Other Op. Allow. Covered (eg. Justice) 8.3 7.4 7.4 7.5 7.5 7.6 -0.7%
Non-NZS Welfare 6.8 4.9 4.6 4.3 4.1 3.9 -2.9%
Debt-financial Costs (DFC) 1.2 1.9 2.6 4.3 7.1 11.4 10.2%
Total Expenses 33.9 31.6 34.1 37.5 41.2 47.2 13.4%
Revenue (majority tax) 30.2 32.3 32.6 32.5 32.5 32.6 2.4%
Operating Balance (R-E) -3.7 0.7 -1.6 -5.0 -8.7 -14.7 -10.9%
Balance excluding DFC
“Primary Balance” -2.5 2.6 1.0 -0.8 -1.7 -3.2 -0.8%

60. © The Treasury
Major spending areas and
aggregate revenue
0
5
10
15
20
25
30
35
40
45
50
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
% of GDP
Super
Welfare
Health
Education
Other
Finance costs
Revenue

61. © The Treasury
NZ Super uncertainty around the median
4
5
6
7
8
9
10
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
95th percentile
75th percentile
50th percentile
%ofGDP
25th percentile
5th percentile

62. © The Treasury
Primary balance uncertainty
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
95th percentile
75th percentile
50th percentile
%ofGDP
25th percentile
5th percentile

63. © The Treasury
The recent history of
government debt
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
%GDP
Net government debt as a % of GDP
"Prudentdebt"
requirement
introduced

64. © The Treasury
Treasury’s long-term projections
are a “what if” scenario
• Treasury’s projections do not include the long-
term consequences of the Government’s fiscal
strategy (the May 2013 FSR)
• Rather, they use a “Resume Historic Cost
Growth” scenario from the 2015/16 fiscal year
(first full fiscal year of new Parliamentary term)
• Point is to show how expense categories might
grow in the future, using the past as a guide

65. © The Treasury
What exactly is the “Resume
Historic Cost Growth” scenario?
– Historic growth rates per recipient in different
expense categories; plus
– Current legislative settings (e.g. for welfare
benefits and NZ Super); plus
– Assumptions about future demographics; plus
– Assumptions about future economic factors

66. © The Treasury
The “Resume Historic Cost
Growth” scenario shows:
• If we allow expenses to grow in accordance with
the “Resume Historic Cost Growth” scenario from
2015/16
• And collect the same amount of tax as in recent
history (29% of GDP)
• We’ll face a growing gap between revenue and
expenses, which we’ll need to borrow to fill

67. © The Treasury
What is different from last time in
terms of our methodology?
• We have made a much greater effort to involve
experts from outside Treasury this time
• We have revised up assumptions for rate of
growth in non-NZS Welfare, Health and
Education expenses based on us having a much
better handle of what has happened in history

68. © The Treasury
Key Conclusions from “Resume
Historic Cost Growth” projections
Error! Unknown document property name.
% of nominal GDP 2010 2020 2030 2040 2050 2060
Healthcare 6.8 6.8 7.7 8.9 9.9 10.8
NZ Super 4.3 5.1 6.4 7.1 7.2 7.9
Education 6.1 5.3 5.2 5.2 5.1 5.2
Law and order 1.7 1.4 1.4 1.4 1.4 1.4
Welfare (excluding NZ Super) 6.7 4.8 4.4 4.2 4.0 3.8
Other 6.5 5.6 5.7 5.8 5.9 6.1
Debt-financing costs 1.2 1.8 2.5 4.2 7.1 11.7
Total government expenses 33.4 30.8 33.4 36.9 40.6 46.8
Tax revenue 26.5 28.9 29.0 29.0 29.0 29.0
Other revenue 3.2 3.0 3.2 3.2 3.3 3.6
Total government revenue 29.7 31.9 32.2 32.2 32.3 32.6
Expenses less revenue 3.6 -1.1 1.2 4.6 8.3 14.3
Net government debt 13.9 27.4 37.1 67.2 118.9 198.3

69. © The Treasury
Important quote: NBR 19/07/13
• “Treasury’s chief economist, Girol Karacaoglu,
says: “We know that the [long-term net debt
projections] will never happen. Crown debt levels
won’t be permitted to rise to above 200% of
GDP. In practice, governments would balance
the budget by reducing spending and/or by
raising revenue.”
• I won’t quote you the next sentence ....

70. © The Treasury
Background Papers
• Affording Our Future was informed by specialists
from across the public service, academics and
independent experts – I’m very interested in your
views
• Strongly recommend you read the Background
Papers Supporting the Statement – these are on
our website. They cover Health, Long-Term
Care, Education, Welfare, Tax etc

71. © The Treasury
FSR versus LTFS
• You may have noticed net Crown debt is projected to be
higher in 2020 in Affording Our Future compared with the
Government’s commitment of no higher than 20% of GDP
in its May 2013 Fiscal Strategy Report
• That is because Treasury projections capture scale of
potential expense pressures, based on historic rates of
expenses growth re-asserting themselves from 2015/16,
versus this Government’s commitments should it be
responsible for the annual budgets through to 2020
• The Government’s approach is more fiscally prudent and
more fiscally constrained than recent governments

72. © The Treasury
Adjusting early, pays big
dividends over time
• Stick with the current fiscal strategy (or a different equally prudent
alternative) until 2020, before letting historic rates of Crown expenses
growth per recipient to re-assert themselves thereafter : Net Crown
Debt would be around 39% in 2059/60 and rising
• Maintain fiscal strategy until 2016/17 before you let historic expense
patterns progressively re-assert themselves: Net Crown Debt would
be around 124% of GDP in 2059/60 and rising
• Maintain fiscal strategy until we return to surplus in 2014/15, but then
turn on history (from 2015/16) : Net debt would be around 198% of
GDP by June 2060 and rising)

73. © The Treasury
Putting that into a graph ....
0
10
20
30
40
50
60
1997 2002 2007 2012 2017 2022 2027 2032
Net government
debt as % GDP
"Resume Historic Cost Growth" scenario from 2015/16
Current fiscal strategy to 2016/17, then "Resume Historic Cost Growth" scenario
Current fiscal strategy to 2019/20, then "Resume Historic Cost Growth" scenario

74. © The Treasury
The current fiscal strategy
NZS Non-NZS benefits and
transfers
Operating Allowance
controlled expenses
Debt-financing costs
(DFC)
0
1
2
3
4
5
6
7
8
Annual average %
growth
1996/97 to 2011/12 2012/13 to 2019/20

75. © The Treasury
The Illustrative Options
• Different governments might make different choices to meet the long-
term fiscal challenge – that’s why the Statement analyses some
illustrative examples of policy changes that future governments could
consider to address long-term fiscal issues, including:
– Options to increase taxes
– Options to constrain growth in health spending
– Options to constrain growth in spending on NZ Super
• There are many, many more in the Background Papers Supporting the
Statement
• ... And an on-line long-term fiscal calculator at
http://nzpublicfinance.com/ltf-calculator-introduction/

76. © The Treasury
It isn’t just about money ...
Increasing
Equity
Social
Infrastructure
Sustainability for
the Future
Economic Growth
Managing
Risk
Living Standards

77. © The Treasury
Treasury’s
Living Standards Work Programme

78. © The Treasury
Treasury’s Vision
To be a world class Treasury
working for higher living standards
for New Zealanders.
78

79. © The Treasury
The OECD
79

80. © The Treasury
Better Life vs. GDP
80

81. © The Treasury
Income Inequality and Social Problems
81
Japan
Sweden
Norway
Finland
Denmark
Belgium
Austria
Germany
Canada
France
Netherlands
Spain
Switzerland
Greece
Ireland
Israel
Italy
Australia
New Zealand
UK
Portugal
USA
L o w High
Worse
Better
Income inequality
Indexofhealthandsocialproblems
Source: R. Wilkinson and K. Pickett, The Spirit Level – Why Equality is Better for Everyone.

82. © The Treasury
NZ Indicator Rankings
82
Indicator Full Sample Ranking Full Sample Percentile OECD 24 Country
Ranking
OECD 24 Country
Percentile
GNI(pc) 28 / 182 15 22 / 24 92
GDP(pc) 25 / 189 13 19 / 21 90
LifeExp 19 / 193 10 12 / 24 50
Fem/Male 132 / 194 68 21 / 24 88
HDI 5 / 187 3 5 / 24 21
EPI 14 / 131 11 11 / 24 46
EcoFprint 22 / 25 88 20 / 23 87
Eco-Glob 21 / 144 15 10 / 24 42
Soc-Glob 30 / 198 15 20 / 24 83
LS-HPI 9 / 25 36 9 / 23 39
OECD-BLI 4 / 33 12 4 / 23 17
LS-Mean 48 / 94 51 18 / 24 75
LS-Sdev 65 / 94 69 22 / 24 92
Gini 51 / 135 38 21 / 24 88
Table 3: New Zealand Indicator Rankings (full sample and 24 OECD countries)
A low ranking and a low percentile implies a comparatively high level of wellbeing.
Source: A Grimes, L Oxley, N. Tarrant. “Does Money Buy Me Love: Testing Alternative Measures of Wellbeing,”
Motu Working Paper (forthcoming), July 2012.

83. © The Treasury
Distribution
within the
population
and over
time
Subjective Wellbeing
The Living Standards Framework
83

84. © The Treasury
Fundamentals – WHAT is it all about?
What is “improving standards of living” all about?
It is about increasing the freedoms of individuals to enjoy the kinds
of lives they wish to live. [Amartya Sen’s concept of justice and human rights. ]
Need to focus on achieving this across society and across
generations – that is what equity and sustainability are all about.
84

85. © The Treasury
Using LSF to Guide Policy Advice
§ Practical
§ Focused
§ Measureable
85

86. © The Treasury
Increasing
Equity
Social
Infrastructure
Sustainability for
the Future
Economic Growth
Managing
Risk
FINANCIAL &
PHYSICAL
Financial Wealth
Housing
Infrastructure
NATURAL
Climate
Biodiversity
Water
SOCIAL
Institutions
Trust
HUMAN
Skills
Health
Living Standards
86
A Proxy Social Welfare
Function for NZ

87. © The Treasury
Key Policy Question
Instead of thinking of trade-offs between the five corners of the
living standards cobweb, can we come up with policies that
make these corners mutually reinforcing – so that we can
create an expanding dynamic cobweb?
87

88. © The Treasury
020Status quoPolicy change
Policy change
Status quo
88
Note: This is intended to demonstrate how the diagram could be used, rather than a Treasury view of the
recommendations

89. © The Treasury
WHAT should be the focus of government-policy
interventions (in support of market processes) –
Government Roles?
89
• Providing opportunities
• Building capabilities
• Improving incentives
• Removing obstacles
Higher
Living
Standards
Capabilities
Obstacles
Opportunities
Incentives
All of the above are about maintaining and building:
• physical/financial capital
• human capital
• social capital
• natural capital

90. © The Treasury
Current Policy Levers: BIM
90
• Providing opportunities
• Building capabilities
• Improving incentives
• Removing obstacles
Higher
Living
Standards
Capabilities
Obstacles
Opportunities
Incentives
• growth-supporting infrastructure
• support business-led R&D
• work-based training
• youth agenda
• welfare reform
• labour market reform
• tax reform
• education reform
• wide access to health care
• international linkages programme
• removing international trade and
investment obstacles
• improving economic stability
• improving public-sector productivity
• work on long-term fiscal strategy
All of the above are about maintaining and building:
• physical/financial capital
• human capital
• social capital
• natural capital

91. © The Treasury
Policy Tools
§ Fiscal Tools
§ Government Expenditure
§ Taxes
§ Public Debt and Public Loans
§ Regulatory Tools
§ Regulations
§ Authorisations
§ Other Tools
§ Ownership
§ Contingent Liabilities
§ Nudging or Cajoling
91

92. © The Treasury
Increasing
Equity
Social
Infrastructure
Sustainability for
the Future
Economic Growth
Managing
Risk
FINANCIAL &
PHYSICAL
Financial Wealth
Housing
Infrastructure
NATURAL
Climate
Biodiversity
Water
SOCIAL
Institutions
Trust
HUMAN
Skills
Health
Living Standards
92
How might we
measure progress
for New Zealand?
• NNI / capita
• NII position of NZ
• Reducing crime rate
• Reduction in social welfare dependency
• % of population below 50% of median income
• Difference in the PISA score between the top and
bottom 10% of students
• gross capital formation
• GHG emissions tonnes/capita
• % aged between 35-34 with
tertiary qualifications
• World Bank government effectiveness indicator
• World Values Survey: social trust indicator

93. © The Treasury
93
Reduces intergenerational equity
Increases within generation equity
Example: Effect of a PAYGO-funded expansion of New Zealand Superannuation
Reduces investment risk
Increases wage growth risk

94. © The Treasury
Example: Effect of a SAYGO-funded expansion of New Zealand Superannuation
94

95. © The Treasury0
0
20OECD averageNZ 2000NZ 2010
NZ 2010
NZ 2000
OECD average
Example: NZ's performance compared to the OECDExample: NZ's performance compared to the OECD
Example: NZ's performance compared to the OECD
Economic
Growth
Sustainability
for the future
Increasing
Equity
Social
Infrastructure
Reducing
Risks

96. © The Treasury
Example: Living Standards Assessment: Risk Management
Method: Increasing the freedoms of individuals to enjoy desired lifestyles
Elements: Physical Human Social Natural
Capital Capital Capital Capital
Risks Earthquakes Crime Welfare dependency Climate Change
e.g. Floods Ill health Economic crises Biodiversity risks
Eruptions Skill Deficiency Education failure Erosion
Infrastructure disrepair Civic society failure
White elephants
Mitigations Insurance Education Policy Welfare Reform Emissions
Trading
96

97. © The Treasury
Next Steps
§ USE IT
§ Encouraging various teams within Treasury to trial the framework and share
what they learn with other teams.
§ Encouraging teams within Treasury to work with people from across the
public sector in developing and using the framework, and associated
measures.
§ PROMOTE IT
§ Ongoing presentations to various audiences (universities, public sector
agencies, ...) to explain the work and seek feedback.
§ DEVELOP IT
§ Ongoing work to set up teams, within Treasury and across the public sector,
to progress research and measurement within each “corner” of the cobweb.
§ Sharing what we learn by trying with all so that we can improve ways in
which we can enhance the framework for better policy guidance.
97

98. © The Treasury
1. BACK TESTING OUR ADVICE USING THE
LIVING STANDARDS FRAMEWORK…

99. © The Treasury
2. MEASURE THE 5 DIMENSIONS FROM
1950…
Joey Au and Amy Thomson (Statistics New Zealand)

100. © The Treasury
3. WHICH DIMENSION ARE POLICIES
FOCUSED ON?www.gen.org.nz
3. IDENTIFY WHICH DIMENSION(S) OF POLICIES
WE ARE CURRENTLY FOCUSED ON…
Olga Pleijte, Joey Au and Ricky Utting (Treasury)

101. © The Treasury
4. WEIGHT THE 5 DIMENSIONS OF THE
FRAMEWORK
0
1
2
3
4
5
6
7
Economic
Growth
Sustainability
for the Future
Increasing
Equity
Social
Infrastructure
ManagingRisks
StatusQuo Option A
0
1
2
3
4
5
6
7
Economic
Growth
Sustainability
for the Future
Increasing
Equity
Social
Infrastructure
ManagingRisks
StatusQuo Option B
Option A Option B
they are equal
this onethis one
Joey Au, Andrew Coleman (Treasury) and Trudy Sullivan (University of Otago)
HUGE thanks to Paul Hansen (University of Otago) and Franz Ombler (1000Minds)

102. © The Treasury
5. DEVELOP THE LIVING STANDARDS HUB /
COMMUNITY
www.gen.org.nz
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