Good Economics: New Zealand’s focus on living standards and social capital to navigate crisis

For Caralee McLiesh, Chief Executive and Secretary of the New Zealand Treasury, good economics is all about raising living standards for people. Her aim? To deliver better outcomes for citizens. Her method? To embed systems-thinking and multiple measures of economic wellbeing in more holistic policy tools and frameworks. Having worked around the world, including in Botswana, Australia, the United States and now in New Zealand, Caralee has seen first-hand the direct effects of economic policies on communities. She is the first woman to hold the position of Chief Executive and Secretary at the New Zealand Treasury, and began the challenging role of leading one of New Zealand’s most powerful government agencies only a few months before the COVID-19 pandemic began. She spoke with Sarah Novak about her vision for the future of fiscal policy, the power of incorporating the “other capitals” in economic frameworks, and what comes next for the Treasury in New Zealand.

Caralee began her professional life in the private sector before launching into a diverse and successful career in the public service. Trained in finance and economics, she speaks of bringing what she learnt from those domains to her work in Australia, and now to New Zealand’s fiscal policy and the public finance system. For Caralee, the motivation she derived from her various roles in the public service has always been linked back to the core purpose of achieving better outcomes for citizens. That purpose, however, can sometimes be difficult to achieve. In the public sector, she says, “the work was at least as interesting and challenging as the work I’d been doing for private sector clients because the incentives are sometimes more complex and outcomes are difficult to measure.” At the same time, the work was highly rewarding: “the public service is about working to improve peoples’ lives and it’s a real privilege to feel that the work that you’re doing is contributing to your community in some way.” That sense of contribution and purpose were themes that she returned to regularly during our conversation.

The many forms of capital: New Zealand’s Living Standards Framework

The New Zealand Treasury has been focusing on embedding alternative measures of economic success and wellbeing into policy for many years now, most famously through the world-leading Living Standards Framework. Caralee cites this as one of the key reasons why she was keen to make the move to New Zealand and take up her current role.

“I think [The Living Standards Framework] is a recognition that the public sector needs to focus on a broad set of outcomes in advising on policy. In many places around the world we’ve seen a shift away from what is known as managerialism, which is a really strong focus on accountabilities, outputs and efficiency.” The Living Standards Framework is a key enabler of that shift. It provides an alternative approach, as it “requires us to look beyond measures of material wealth and consider human, social and natural capital, broader wellbeing outcomes, risk, and distribution.”

Caralee doesn’t see this as an entirely new approach to economic thinking, however. There are aspects of traditional economics that can be applied to contemporary challenges. “The Living Standards Framework in my mind is classical welfare economics: we want to enhance wellbeing, but it pushes us to think about the different dimensions of wellbeing or welfare. I don’t see these developments as something that replaces a lot of the past—to me, there’s an important connection to some strong principles of traditional economics and policy work.” 

Rather than being an exercise in reinventing the wheel or simply adopting the latest trendy economic framework, Caralee sees the Living Standards Framework as a meaningful engagement with the best of existing economic policy, with a clear and demonstrable link to achieving better economic outcomes.

The Living Standards Framework requires us to look beyond measures of material wealth and consider human, social and natural capital, broader wellbeing outcomes, risk, and distribution.

One core tenet of the Living Standards Framework has been a shift away from directly measurable outputs, to more holistic metrics spanning multiple dimensions of economic wellbeing. These include natural, social, and economic capital, forming a more comprehensive picture of wealth. Caralee sees her time at the World Bank as a formative period where she gained an appreciation for this particular economic ethos. While at the World Bank, she saw an “increased focus on outcomes-based budgeting… where there was a growing recognition of many different dimensions of poverty and a growing emphasis on measuring the distribution of income and wealth when evaluating economic success and risks.” 

The power of this approach, she says, is that it is citizen-centric: sensitive to complex realities, and tailored to citizens’ needs. “I think there is a growing trend of looking at outcomes, not outputs, and also taking a really comprehensive view of what outcomes matter to people. That’s exciting because that gets us back to our purpose: what are we here for? What outcomes are we seeking to achieve? What really matters to people? As public servants we need to keep that big picture in mind.”

Trust in government and responding to the pandemic

Caralee began her role as Treasury Secretary only a few months before the COVID-19 pandemic started to ramp up. Though Treasury Secretaries are well-used to dealing with crises, this was perhaps one of the more unusual scenarios that she might have prepared for. Yet, she says, it gave her an interesting perspective on the role of a Central Agency in building trust in government—and shed new light on the power of accounting for multiple capitals under the Living Standards Framework. 

“One of the hallmarks of New Zealand’s response to the pandemic,” Caralee argues, “has been really strong social capital: following the rules and looking out for each other, while still engaging in debate and challenging perspectives.” Not only is social capital worth measuring, then: it is possibly one of the key explanatory factors in New Zealand’s successful pandemic response. 

I asked Caralee what she thought were the driving forces of this strong level of social capital, and she pointed to trust and transparency. “In New Zealand we have really high trust in government. Trust has grown over the last year: now it’s 69%, a growth of 18% from the same quarter in 2019. So it’s quite remarkable, when you see some countries where there’s been an erosion of social capital. It’s been the opposite, here in New Zealand. Trust is generated when it’s clear to citizens that government is acting in their interests, and I think that’s been helped in New Zealand by the reliance on science, on facts, on experts, and the willingness to have experts very engaged in public debate and participating in the policy process.” 

Caralee mentions that during the height of the pandemic in New Zealand, especially during the lockdown of early to mid-2020, trust was generated through a deliberate exercise in scrutiny and transparency around the policies that were being developed. “Parliamentary scrutiny of the pandemic response [was key], particularly during that initial period of lockdown [when the Treasury was] regularly turning up to Select Committees of Parliament to explain [policies] at the same time that we were developing [them] in some cases. Having a free press, and the Official Information Act is a great strength of the system here: the principle of availability of information unless there is a good reason to withhold it.” 

It’s not just transparency but also active participation that matters. Caralee sees legislation, such as the Official Information Act, as key part in achieving this. The Official Information Act gives citizens access to government information unless there is a good reason to withhold it. “The primary purpose of the Official Information Act is to promote citizens’ participation in government and to encourage accountability of Ministers. It encourages more public debate, more engagement on policy issues. I think it absolutely is a part of the high trust [in New Zealand].” Important, then, that the country’s central economic agency measures and accounts for social capital.

Trust is generated when it’s clear to citizens that government is acting in their interests, and I think that’s been helped in New Zealand by the reliance on science, on facts, on experts, and the willingness to have experts very engaged in public debate and participating in the policy process.

Embracing complexity through systems-thinking

Even beyond recovering from the “black swan” event that was the pandemic, Caralee sees the Living Standards Framework as building general system-wide resilience that puts New Zealand in a better place to respond to the next crises, in whatever shape or form they might come. That resilience is also built, she says, through embracing complexity. “Thirty years ago in economic policy we were dealing with heavily regulated markets and market controls. Now our context is different: there is a growing recognition that the sorts of challenges that people care about now are much more complex.” 

The case for change is clear: a highly globalised economy provides us with a suite of new “wicked” challenges from climate change to poverty to pandemics. As Caralee puts it, these things “don’t have simple solutions: they require us to think more broadly about the outcomes that we’re seeking to achieve, but also the different ways in which policy levers and public sector agencies need to work together to be able to address that.”

Another way of putting this is, of course, systems-thinking: bringing a range of people, skills and tools to bear on interdisciplinary, cross-cutting challenges that span many parts of society. Caralee points to the Public Service Act reforms being led by Peter Hughes as a good example of systems-thinking (see CPI’s interview with Peter Hughes for more on this). Caralee says: “The Public Service Act unifies the public service around a common purpose, principles and values. It creates new mechanisms and has practical tools to help agencies to work together, [such as] interdepartmental Executive Boards and joint ventures… That’s about agencies working together towards collective goals and joining forces, collaborating to bring together different areas of expertise to be able to deliver on those goals.” 

Caralee also mentions The Treasury’s continued commitment to citizen-centricity, engagement and transparency, pointing to trends overseas in digital government initiatives as “a way to make government much more accessible to citizens as well as really drive efficiency and connectedness, and support systems thinking.”

In the meantime, the Treasury is supporting key legislative changes to encourage this cooperation: Caralee points to New Zealand’s increased focus on wellbeing that have been implemented through changes to the Public Finance Act to refocus on wellbeing outcomes. “Recent changes to the Public Finance Act require the Minister to articulate wellbeing priorities at the start of each Budget and measure, regularly, progress towards those priorities.” This means that the entire Budget process, which determines how much funding is allocated to different agencies and projects each year, will now include a focus on achieving cross-cutting wellbeing goals. It’s a strong approach, Caralee argues, because “when you have dollars attached to those goals, then there’s a pretty strong incentive for agencies to work together effectively.”

The way forward

So what’s next for Caralee and the Treasury? Top of mind, of course, is supporting New Zealanders and their economy to recover from the pandemic. For the Treasury, this is both a challenge and an opportunity to push harder towards important long-term goals. As Caralee puts it, “the world’s just been through this once in a generation—once in a hundred-year—shock. We now have an opportunity. Treasury’s advice is arguably as important as it ever has been: to ensure we have a strong economic recovery that supports intergenerational wellbeing, and helps us to address not just the immediate impacts of COVID, but also some longstanding challenges as well.”

The Treasury has recently revised its strategic plan and is looking ahead to continue to advance its work on wellbeing and the Living Standards Framework, as well as further embedding a new framework called He Ara Waiora, which takes into account Te Ao Māori (the Māori worldview) in Treasury’s wellbeing work. This, says Caralee, “really helps us to deepen our understanding of policy and it brings new dimensions to the work.” As practical and future-focused as ever, Caralee brings it back to the reform of the New Zealand health system that is impending for the next few years. “We’re asking the question: how do we think about manaakitanga (care or support) in the health system? That led to a conversation about person-centric care.” 

As the head of a busy Central Agency responsible for a range of economic, social and environmental challenges, as well as playing a key role in responding to a global pandemic, Caralee certainly has her work cut out for her. Yet her leadership, grounded in the principles of the Living Standards Framework and leading-edge economic thinking, certainly seems to put her in good stead.