Why Wellbeing?

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The Government’s plans to remove the wellbeing provisions in the Public Finance Act represents a reversal of the way society is travelling.

I welcomed the Ardern-Robertson’s Government decision to focus on wellbeing in its budgets. It went on to amend the Public Finance Act to require the government to state the wellbeing objectives that will guide its Budget decisions. The Luxon Coalition Government has a bill before a parliamentary select committee to repeal that provision.

My support for wellbeing as a more relevant notion than simply income evolved over the years. I was taught that the main determinant of utility (the notion we had then for wellbeing) was material spending, which was a function of income; perhaps it was the only economic variable which mattered. The basic model was so pervasive it seems to be hardwired into many people’s thinking and many economists’ models. There were some obvious extensions such as goods and services supplied by other sources like the government and whether the decision unit is the person or the family, while a time dimension is needed, but they do not undermine the model.

The difficulty with the proposition is that in an affluent economy additional income does not seem to add much to individuals’ life satisfaction (caveats to come). There is an effect but it is tiny – doubling one’s spending power gives about the same lift to happiness as an average marriage. Moreover, using American data which goes back to the 1940s, it does not seem that the average level of happiness has lifted much even though average real incomes have about trebled.

There are two major caveats. It would seem that a lift in the incomes of the poorest fifth of the population will increase their life satisfaction. There is nothing in the research or this column to suggest that we should ignore poverty. Second, there is evidence that happiness rises with rising incomes in economies which are much less affluent than we are (so poor nations are right to pursue rising material incomes to improve wellbeing). That suggests that in the late nineteenth century when the equation between well-being and income was being bedded into economics, equating material satisfaction with life satisfaction may have been a plausible assumption. With growing affluence we have gone past that simple equivalence. Those who still cling to the first proposition may not be so much wrong, as they are a century out of date; their economic models are increasingly irrelevant to the challenges we face.

Sure, income is a relatively precise notion and economics knows quite a bit about how it increases. Wellbeing is a much less rigorous notion. Keynes pointed out that it is better to be vaguely right than precisely wrong.

The task facing twenty-first-century economists and other social scientists is to improve our understanding of wellbeing, based on evidence rather than a nineteenth-century dependence upon introspection and anecdote. Probably economics goes only so far. The wellbeing chapter of In Open Seas uses Maslow’s hierarchy of needs to show that the economy provides only the foundation of wellbeing, not its totality. It’s a humbler task than that which economists tend to claim; we can do it better.

Progressing these insights is not easy, but they are fundamental to thinking about the future of the economy. That is why the first analytic chapter of my In Open Seas is titled ‘Wellbeing’ and explores and extends these issues in far more detail than there is room for here.

This does not rule out economic growth measured, say, as hourly labour productivity. But we might expect that the benefits of growth to appear increasingly in fewer hours of paid employment rather than in increased material consumption and more expenditure on public goods. (I did not use the term ‘leisure’ because many seem to use much of the additional time in the non-paid labour force.)

I am not alone with these concerns. The New Zealand Treasury grappled with them under Bill English with its ‘living standards framework’ which had a pentagon of economic growth, sustainability, increasing equity, social cohesion and managing risks (here and here). I am not saying they got it right but that they recognised the issue. Treasury was responding to thinking at the OECD.

Where the Ardern-Robertson Government got its commitment to a wellbeing budget is not known. (Presumably Treasury advice was one source.) I am not sure that ‘commitment’ is the right word. While in office, it hardly did anything – such as the creation of new institutions – to bed in the notion and there was not much mention of it when Labour campaigned in the 2023 election. (One could argue that the success of its Covid campaign was a triumph of wellbeing being prioritised over narrow economic concerns, even though the unwinding was badly managed.) Whatever, I keep stumbling across overseas comments that the Labour Government was an international pioneer in promoting wellbeing: I wish.

The incoming Luxon-Coalition Government has been very uncomfortable with the approach. When the incoming National Minister of Finance, Nicola Willis, presented her first budget policy statement she grumpily footnoted that a ‘2020 amendment to the Public Finance Act requires the government to state the wellbeing objectives that will guide its Budget decisions’ and made but two desultory mentions. Her 2025 Budget Policy statement identifies three traditional (and worthy) overarching goals: building a stronger more productive economy, delivering more efficient, effective and responsive public services, and getting the government’s books back in order. It added that the goals are ‘the Government’s wellbeing objectives, as achieving them is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders’. We are back to judging wellbeing in narrow economic terms.

Labour also seems to have lost the wellbeing plot. In her post-2024 Budget speech, Labour’s spokesperson on finance, Barbara Edmonds, said her focus would be on household costs, small business, climate change and roads. There is a glancing mention of well-being, equating it with inter-generational issues. No doubt Labour will contest the removal of the wellbeing provisions from the Public Finance Act.

One infers from the Minister of Finance’s public statements that she is uncomfortable with the notion of wellbeing. She has said that she wanted the Treasury focused on economic and financial advice. But wellbeing is a subject which economists can – and must – advise upon, even if many are stuck within the old paradigm.

The Treasury supported deleting the wellbeing provision in the Public Finance Act, arguing in its Regulatory Impact Statement that ‘on balance, we consider [that] it is most likely to improve the clarity and effectiveness of Section 26M

[about budget policy statements]

, without restricting flexibility. The introduction of the wellbeing requirements in 2020 have added complexity to how the Government can articulate their priorities and objectives, but it is unclear if they have brought about a clear increase in accountability that the changes initially intended.’ The RIS makes an allusion to the Treasury Living Standards Framework but it is unclear how that articulates with its decision. The impression is that there was a vigorous debate within Treasury with the balance favouring abolishing the extra work that is currently required.

But the issue will not go away. Economics and public policy has to struggle with the evolution of wellbeing and living standards and its implications. It is disappointing that the government is scrolling back its contribution. The likelihood is that there will be an increasing divergence between reality and the narrower economic public discussion. The Luxon Coalition Government’s ambition to get us back on track, appears to be getting us back past Bill English, possibly back to the nineteenth century.

Taking Economics

This entry was posted in Political Economy & History, Pundit, Regulation & Taxation on by .

ACT ‘s neoliberals are still trying to sneak in a change to the constitution.

When ACT – the Association of Consumers and Taxpayers – was formed, its then party leader, Roger Douglas, with an optimistic exaggeration which marked his time as Minister of Finance, announced that he was sure it would get more than 50% of the vote. Its share of those on the electoral roll averaged about 3% across the ten MMP elections.

A major factor in its voter share has been how well the National Party is seen to be performing. There are a number of ironies here. By gifting a seat (mainly Epsom) to ACT, National has ended up in an uneasy coalition with ACT (and NZ First). It has also probably cost National funding, for ACT is exceptionally generously supported by the wealthy.

ACT’s lack of political support from the public for the core ideas of its neoliberal founders has led it to spread its interests.* Under the leadership of Richard Prebble it added ‘law and order’ populists; more recently it has absorbed the gun lobby. Not all its initial supporters were enthusiastic, but there are so few New Zealanders who are neoliberal that they need allies.

Its current leader, David Seymour, who has just become deputy prime minister, is best classified as a libertarian. Perhaps that explains his outstanding achievement of the End of Life Choice Act. As a minister he has handled the Pharmac portfolio effectively, but much as a conventional conservative politician would. He has been less successful as minister of early childhood education. (Curiously Luxon took a more ‘neoliberal’ approach of shifting responsibility onto individuals when he said that parents should provide their children lunch by an apple and Marmite sandwiches – presumably without butter.) His promotion of charter schools would be supported by neoliberals, but is as much libertarian. His Ministry of Regulation has brought out the mouse of reducing regulation of hairdressing.

Seymour may not know much economics. Most of his economics statements could have been written by Chatbot, but that is true for a lot of what purports to be New Zealand economic commentary. (The approach of ACT’s deputy-leader, Brooke van Velden, is a neoliberal economist constrained by political reality. Whatever you think of it, you know where she stands.)

ACT was founded as a party advocating neoliberal economics; neoliberal economists still advise it, even if many of its members do not always appreciate the economics they are signing up to.

Very often what may seem to be a populist cause involves ACT sneaking in its neoliberal agenda.  It campaigned in the 2023 election on an interpretation of Article Two of Te Tiriti o Waitangi that ‘the New Zealand Government will protect all New Zealanders’ authority over their land and other property’ which has hardly connected with either the original text or the intentions of those who were agreeing to it. It only makes best sense as a neoliberal attempt to slip into New Zealand law the ‘takings’ issue discussed below.

This principle two was so out of touch with history, that it was replaced in the bill that went to Parliament by ‘Rights of hapu and iwi Maori – the Crown recognises the rights that hapu and iwi had when they signed the Treaty/te Tiriti. The Crown will respect and protect those rights. Those rights differ from the rights everyone has a reasonable expectation to enjoy only when they are specified in Treaty settlements.’

(I leave others to explain the force of this Article 2 had it been passed into New Zealand law, since in the 185 years following the signing of Te Tiriti the Crown repeatedly failed to uphold it.)

Seymour, the libertarian, has campaigned on the importance of the third principle: ‘All New Zealanders are equal under the law, with the same rights and duties’. If he really meant that was his sole commitment, he would advocate the principle being incorporated in, say, an amendment to the Bill of Rights Act.

The latest neoliberal attempt to shape the constitution is ACT’s Regulatory Standards Bill, which is before Parliament at select committee. Their crucial notion is in subsection 8(c) ‘Taking of Property’, which reads

legislation should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless –

 (i) there is a good justification for the taking or impairment; and

 (ii) fair compensation for the taking or impairment is provided to the owner; and

(iii) the compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment.

Put simply, Clause 8c(ii) says that the government has to compensate the owner for any loss of value to their property from its action. Perhaps this is an extreme example, but suppose a government budget had a measure which resulted in share prices falling. The courts might rule under 8c(ii) that the government had to compensate the shareholders for the loss. That could be true if the measure was as direct as the introduction of a capital gains tax, but it might also apply if the share market disliked the deficit track the budget announced.

I explored the direct notion with an example. (At that stage – the bill had not been introduced to Parliament – the proposal was simpler.) This column looks at some wider issues.

However, if a measure – say the revised deficit track implied in the Finance Bill – resulted in a rise in share prices, there is no offsetting clawback to the government. The effect of the legislation is to protect property owners from the downside of government while leaving them to benefit from the upside. (Remember the vision of socialising losses and privatising profit?)

A useful test of proposed legislation is to consider its impact had it been introduced earlier. Suppose it had existed in 1984. It would have prevented almost all the legislation introduced under Rogernomics. Ironically, ACT’s first two leaders – Douglas and Prebble – were the chief instigators of the changes. Is their party now denying them?  In the time since the bill was introduced to Parliament, the Government has passed legislation with ACT’s approval which would cost them a fortune if the Regulation Standards legislation was in force.

Or consider what would have happened had the principle of compensating all takings been practised since 1840. Māori property rights have been repeatedly breeched since then. Perhaps Māori would support the bill if it had a clause which said its provisions should apply back to 1840.

In effect, the act would be a new treaty which set out property arrangements just as te Tiriti o Waitangi did. It would wipe out all past uncompensated property actions of the Crown, starting afresh, an action of much merit as far as all the major beneficiaries of the unjust actions would be concerned.

The legal meaning of ‘property’ has evolved over the years. Intellectual property laws were primitive in 1840. What actual property rights means in the Bill would be a matter to be settled by the courts.

Economics and law may diverge as to what is meant by property rights, so this paragraph has to be cautious. During the debate introducing the bill, MPs talked of ‘private property’. However, the courts may have a wider, or a narrower, interpretation. For instance, they might deem that what Iwi call their ‘kaitiakitanga rights’ – their guardianship of the environment in their rohe – are property rights under the takings provision.

The Finance and Expenditure Select Committee, which is dealing with the bill, has only one lawyer among its 11 members (ACT’s Todd Stephenson). It is hardly competent to deal with the constitutional issues the bill raises. Yet the bill was not referred to the Justice Select Committee – one may assume that Seymour was burnt by its treatment of the Treaty Principles Bill. Parliament has given the public but 20 working days to make submissions.

Is this another case of neoliberals trying to sneak in a revolutionary constitutional change, as was the original intention with their Treaty Principles Bill? Will Seymour argue the case for ‘good regulation’ diverting the public’s attention from the Bill’s critical purpose to increase property rights – as he did with the Treaty Principles Bill? Is a group of neoliberals, who at best got 6.8 percent of those on the enrolled to vote in 2023 – and probably a lot less given ACT’s support from other lobbies – levering its position in parliament to pursue its minority vision, without explaining to the public what it is doing? Sounds like Rogernomics repeating itself. As David Lange said of neoliberals ‘rust never sleeps’.

* As this was going to press I found this review of Hayek’s Bastards: The Neoliberal Roots of the Populist Right by Quinn Slobodian, which argues that Hayek’s vision has been corrupted. I have yet to read the book, but I don’t think any ‘corruption’ of New Zealand ACT is quite the form that Slobodian analyses, but the reasons may be similar. 

Economic Bullies

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Monopsonies – dominant purchasers – need to be restrained as much as monopolies – dominant sellers. That is what pay equity is about.

This column is not about you-know-who. There are many other political bullies offshore; sometimes there are local ones, as when a politician attacks a group which cannot defend itself or a cabinet minister has a crack at local government. Nor is it a column about personal bullying such as at school, in social media or in the workplace – unacceptable though such bullying is.

Economic bullying occurs when an economic agent with market dominance imposes on others. Its most familiar form is the monopoly, the dominant supplier of some good or service which uses its position to extract ‘super-normal’ profits, often with a poor service. The alternative is competition, where there are sufficient alternative suppliers so the customers can go elsewhere. If there is insufficient competition, the state often intervenes to regulate the market competition. (Sometimes no business is dominant, but a handful of firms – of oligopolists – behave in a way which gives them a collective monopoly power to overcharge.)

However, this column is about a monopsony where the agent dominates a market by being the sole or major purchaser rather than being a monopoly seller. (The term ‘monopsony’ was introduced by Cambridge economist Joan Robinson, who would have been a Nobel economics laureate except for political reasons; prizes are not always awarded to the most worthy by a monopoly panel.)

The conventional monopsony is the business which employs workers for whom there is little alternative work. So just like a monopoly, it can increase its profits at their expense. The traditional means of offsetting such monopsony power is for the workers to unionise. The union is a monopoly with a countervailing power to the monopsonist. That is not a perfect solution, but it is better than leaving the monopsonist to exploit workers.

For various reasons, including changes to the law, unionisation is less widespread nowadays. Partly to offset this, there has been until recently a more active raising of the minimum wage, which is a floor price for labour.

The biggest monopsonistic employer is central government. It is sometimes the sole employer of an occupation, can be the largest employer by far, and very often its funding also sets remuneration rates in the private, local government and voluntary sectors. Among the affected occupations are those in education, healthcare, libraries and social work. Each is dominated by women (as Joan Robinson might have ironically observed).

This is not the same issue as equal pay, where women in the same job as men were discriminated against. In the above occupations, men working in them also have their working conditions depressed, which discourages them seeking careers there and so increases the concentration of women in the occupations. (Some 47% of female workers are in occupations where 80% or more of the employees are women.)

Note that there are occupations where the government is the direct (or indirect) remuneration-setting authority but it is unable to use its monopsony powers. Were it to treat doctors as it treats nurses, they would all move off overseas. Lower skilled women are less internationally mobile. A major issue is whether there are alternative employments to escape the monopsonist’s power. Many workers can leave an exploited occupation, but they lose using their – often socially valued – skills.

In this case the government is behaving just like a business, minimising its costs. Its benefit is not profit, but lower taxes. Taxpayers are the ultimate beneficiaries of the government using its monopsony power.

Should the government use its power to bully? That is a political decision. My impression is that the majority of the public says it should not, although many might not be as enthusiastic if they understood a ‘no’ meant higher taxation.

There has been legislation to offset the bully-power. In 2020 the Ardern-Robertson Labour Government amended the Equal Pay Act to replace the government using its monopsony to set wages by an alternative wage-setting process called ‘pay equity’, where remuneration is set so that there is similar remuneration between occupations in which different work is deemed to be of the same ‘value’. It is another irony that the Luxon Coalition Government has just repealed the pay-equity process (without even going through the select committee), using its monopoly power in Parliament to legalise using its monopsony power in labour markets. (Here is an example of application of the principle is the 2017 pay-equity deal for aged and residential care workers.)

Any comparison of the ‘value’ of different occupations is fraught with difficulties. To give a simple example, suppose the government was a monopoly supplier of oranges and used its market power to set their price. (The example is not quite a parallel, since one does not have to consume oranges – not as true for, say, healthcare.) Suppose it was decided that the government power to set the price of oranges should be replaced by pricing oranges to make them of equal ‘value’ to other fruit with the same characteristics. Except that there is no fruit quite like an orange. (OK, there are mandarins but assume that the government is a monopoly supplier of them too.) Any price-setting exercise is going to be complex and contentious.

It is even more complicated in the case of an occupation. The approach is to break down each job into components of efforts, skills, responsibilities and working conditions and compare each component with a job in the labour market where it is more competitive. The individual components in an occupation will be numerous and some will be unique or near unique. Sometimes the private sector comparison occupation seems weird but it may be only looking at a single component and other occupations will be used for other component comparisons. Then there is the complicated exercise of combining the individual comparisons.

Yes, the exercise is difficult but that is not a justification for the state, or any other monopsony, using its power to suppress workers’ wages, any more than a monopoly should be allowed to use its power to hike prices. That’s my opinion, anyway. I abhor all bullies.

 Note. The Treasury estimates the fiscal savings from repealing the pay equity legislation is $1.8b in the 2025/26 fiscal year. That is sufficient to fund its Investment Boost initiative costing $1.7b and have a little bit over.

Budget 2025

This entry was posted in Macroeconomics & Money, Political Economy & History, Pundit on by .

Perhaps the state of the economy is not as sound as we are being told.

There was an odd little story over the 2025 Budget, hardly worth relating except that it tells something about budget politics. The original invitations to the lockdown, the meeting which gives a preview of the budget to the media so they can prepare for the release of what is a complicated set of documents. (Lockdown rules mean their reporting is embargoed until the budget is delivered in Parliament.) However, the usual invitation was not extended to analysts – economists often based in organisations such as the NZCTU and NZ Initiative – who have the skills to dissect the budget. Perhaps there was something to hide or the government was trying to manipulate public understanding. There was an outcry and the government promptly backed down. The lockdown went ahead, much as it has done for forty-odd years.

Of course, a budget is a political document but it is founded on the Treasury’s independent account of the economy, Budget Economic and Fiscal Update (BEFU). They set it out without comment. The politicians try to frame perceptions.

Hence the minister’s description of the 2025 budget as being a ‘Growth Budget’. It is hard to draw that conclusion from Treasury’s economic forecasts. The economy seems to be in the recover phase of a standard cyclical recovery, but the economic track after is markedly below what it was before the current downturn – perhaps by 6%.

Distinguishing the upswing from the long-term trend is critical. Remember the distress of the Bolger Government when the strong upswing ended and the economy toddled along a low growth path? * (It was just before an election.)

Moreover, the Treasury projections do not see any catch up, and their projected labour productivity growth rate is about 1% p.a. which is below the long-run trend of 1.4% p.a.. (In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)

Illustrating the difficulties of raising the growth rate, the minister highlighted the ‘Investment Boost’ policy, costing an average $1.6b year, which lifts the per capita GDP growth rate by .05% p.a. over the next five years (i.e. from 1.275% p.a. to 1.280% p.a.)  and by a similar amount over the following 15 years. In two decades GDP is expected to be 1% higher because of the new policy.

In fact, there are signals that the economy will struggle with even that projected growth rate. Much has been made of the government’s measures to boost social, housing, social and transport infrastructure. Without adequate infrastructure, economic growth will stall.

The Treasury projects that its property, plant and equipment (excluding specialised military equipment and cultural and heritage assets) will increase 11.1% in real (that is, excluding price changes) terms between June 2025 and June 2029. Real GDP is expected to rise 11.2% so the public sector investment is barely keeping up with, rather than driving, growth.

Even so, to fund this investment the government has had to restrain public consumption to outraged responses from those sectors which have suffered.

This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth’s level near 40% of annual GDP. In June 2025 it is expected to be at about 39.9%, down from 43.2% in June 2024 and 45.3% in June 2023. For a technical reason, Treasury does not really forecast the ratio for June 2029 but I estimate it to be about 35.5%, well below its target ambition. **

That means that the government is still borrowing to sustain public and private consumption. (Public consumption directly, private consumption insofar as the government can raise taxes to maintain its public consumption ambitions.)

As a result the net-debt-to-annual-GDP ratio remains high. It is currently 42.7%, which is higher than at any time in the last decade. In 2029 it is expected to be 45.5% of annual GDP. Contrast that level with the target of 30% (but I remind you I would accept a higher rate, were the government funding infrastructure). It is also moving towards the 50% ‘ceiling’ where it is thought lenders would get concerned. As the Minister has stated, such high debt levels leave little leeway to borrow to ease us through the next large shock. ***

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The commentariat focused on budget winners and losers – as they always do. Little attention was given to the underlying issue that despite the government’s cheerfulness it had little room to manoeuvre – that there had to be serious losers. By highlighting them the commentariat obscured the main economic issue – the poor underlying economic performance and that it was not improving.

This column reports a gloomier picture of the state of the economy than the Luxon Coalition Government is trying to sell. But it is based on the professional judgments of the Treasury economists and accountants. Their forecasts will be near the professional consensus; the Treasury is just more expert, informed and detailed. Even if the government’s 2025 budget sales pitch succeeds, it may find itself struggling with the 2026 one, a few months before the next general election.

* Not only the government. One editor complained that nobody warned him of the distinction between cyclical recovery and long-term economic growth. Ironically, a few years earlier he had banned from his newspaper the economists who were already giving that warning.

** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices inflate as the same rate as GDP.

*** Treasury’s draft 2025 Long-term Insights Briefing reports that the 2010-1 Canterbury earthquakes had an identifiable fiscal impact of 11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%. The briefing gives no estimate for the 1996 Wool Price shock, nor the 2008-9 GFC shock.