Environmental accounts: the future for a balanced budget

Environmental accounts: the future for a balanced budget

ESSA Writers
April 25, 2014

As May rapidly approaches, it is once again time for our annual love letter to GDP.

The budget, and Treasurer Joe Hockey’s accompanying speech, will undoubtedly be a growth and debt obsessed exercise like every other, and around the nation the States and Territories will be following suit with their own.

This annual update on the state of our national accounts has become the defining moment for both the economy and the Government in any given year – a chance to brag about good performance, lambast the failures of predecessors and dramatically announce the path that the nation’s finances will follow in coming years.

However, Simon Cuznets – the man to whom we owe the very first definition of GDP – was wary of how it might be used, and he himself warned in 1934 that “the welfare of a nation can scarcely be inferred from a measurement of national income”.

It is the opposite assumption that underpins our budget process.

In focussing on aspects of our economy such as trade, investment, surplus projections and debt levels, the national accounts miss out on the elements  that are harder to measure in monetary terms, but are just as important for economic growth.

Stocks of forestry, minerals and fresh water, as well as more abstract factors such as biodiversity and pollution, make up what is described in ecological economics as ‘natural capital’. While these vital resources might be abundant in many cases, in most they are finite and fast depleting.

All of these environmental stocks play a vital role in our economy, providing materials for production and even the conditions for life, but remain noticeably absent in our economic conversations, our undergraduate textbooks, and especially our national budget.

Yet the field of ecological economics, which studies the interactions between human activity and the natural environment along with the impacts of these over time, has existed since at least the 1980s, with a well-regarded academic journal and an international society dedicated to the topic.

While it may still be young, the field focuses on thinking about human economic activity as occurring within a constrained ecosystem, rather than simply utilising resources from an undiminishing stock. This means giving problems of sustainability and resource depletion a proper economic basis, and in turn, allowing for much more rigorous analysis of how they can be solved.

To build this kind of thinking into the nation’s economic dialogue, big changes will need to be made, and the best place to start is the budget.

Thankfully, Australia is already taking the first tentative steps in this direction. In 2010, the Federal Government launched the National Plan for Environmental Information Initiative, with the Bureau of Meteorology and the Department of Environment jointly coordinating an investigation into how we can improve accounting and information gathering practices.

Last year, this initiative produced the Guide to Environmental Accounting in Australia which recommended that Australia adopt the United Nations backed System of Environmental-Economic Accounting.

The System provides rules, classifications and methods for doing what was once thought impossible – accounting for the levels of, and changes in, the natural environmental stocks which provide the basis for human life on earth.

They mean that it is now feasible to take the next step of integrating these measurements and transfers into the wider economic conversation, and the ways in which we understand the health and prospects for improvement in our economy over time.

In 2012, the Australian Bureau of Statistics set the value of Australia’s natural capital at $4,574 billion, amounting to more than half of Australia’s total economic wealth. That’s a big part of our economic reality, whether Joe Hockey mentions it on budget night or not.

Let’s hope that one day he does.