In December 2018, the Organisation for Economic Co-operation and Development (OECD) published a report calling for policymakers to look beyond traditional Gross Domestic Product (GDP) measures. GDP measures the value of all goods and services a country produces and is commonly used to represent a country’s health, although fails to report for the wellbeing of people. The OECD suggested that the inclusion of social considerations will not only reveal the true health of a country, but could also better shape policies to drive societal progress.
In New Zealand, Prime Minister Jacinda Ardern recently unveiled the country’s new approach to managing finances, entitled the ‘well-being budget’. The onus will now be placed on ministers to show not just how spending proposals will impact GDP, but also the impact on the environment, society and culture. The announcement also included a key target to reduce child poverty over the next ten years.
While this is the first explicit budget of its kind, several countries have already developed a ‘wellbeing framework’, dating as far back as 1974 (the Netherlands). In Australia, a wellbeing framework was first developed in 2005 by the Treasury Department. The framework, which was last revised in 2011, focusses on opportunities available to people as well as the sustainability of those opportunities. The Australian Bureau of Statistics also actively monitors 26 indicators touching on society, economy, environment and governance. Interestingly, despite the formulation of a wellbeing framework, the metrics are rarely utilised.
A study conducted by PIMCO, a large global fixed interest manager, found that social factors tend to be highly correlated with GDP and wealth conditions, which themselves are key drivers of sovereign risk. Intuitively, a country’s social capital – proxied by education, health, poverty rate and inequality among other factors – are likely to be highly relevant in determining productivity and, therefore, growth potential. A similar view is also emerging amongst credit rating agencies, which are starting to delve deeper into a country’s human capital (i.e. developments in education and health) when assessing a country’s risk – the rationale being that the wellbeing of the country’s people contributes to the country’s ability to meet its financial obligations. Ultimately, the credit rating will also lead to implications on the cost of government-issued debt.
While wellbeing indicators remain subjective and will vary between countries, the OECD report aims to highlight that a country’s economic performance needs to account for the wellbeing of the people. A wellbeing framework can help highlight issues to better drive policy decisions, with the hope that governments which put wellbeing at the centre of their agenda will enact their budgets more efficiently.