Economy Hub: How can economists measure well-being?

Hoping to improve well-being is a noble objective, but how do measure it and how do you know if you're moving in the right direction? Photo/123RF.

Treasury this week took the first step towards producing a "well-being" Budget next year, working new measures into its 2018 Investment Statement.

Under the Public Finance Act, the Treasury has to report every four years on the past, present and forecast future value of its assets and liabilities.

This year's statement showed that the Government's balance sheet was healthy and well-placed to handle adverse shocks. A net worth of $117 billion as at June 30, 2017, was forecast to rise to $160 billion by 2022.

But what made it interesting is that the 2018 version - He Puna Hao Pātiki - differs from the 2014 statement by using the organising principles in the Treasury's Living Standards Framework.

It includes a chapter on broadening the statement to include natural capital considerations.

This week Economy Hub talked to BERL chief economist Ganesh Nana about what well-being actually means to economists.

Nana outlined the " four capitals" approach that will determine Treasury's approach to economic policy: financial capital, human capital, natural capital and social capital (including cultural capital).

Nana argues that New Zealand has a rare opportunity to lead the world in implementing a "well-being" framework for economic policy, given the interest of the new Government.

There had always been talk about economics that is focused on making New Zealand better for our grandchildren, Nana said.

"But we've never actually done it and made decisions based on what's in it for our grandchildren. There's more to life than just GDP, life is more than just dollars or profitability."

The slug line for the Treasury Framework is inter-generation well-being.

Nana accepts there is a risk that it can start to seem a bit fuzzy, but says there are good business reasons for broadening the outlook.

"GDP is the equivalent of looking at your P and L [profit and loss statement] - your revenue minus expenditure," he says. "But that's only one year. As any sensible business person will tell you, your P and L actually relies on your balance sheet. You're relying on your assets for your revenue so you've got to make sure your balance sheet is strong and sustainable."

There were still political restraints around the process and there would be battles to fight with policy makers.

How far New Zealand went with the reforms would depend on "how courageous those in government and the lead officials were in pushing the boundaries", he said.