Thursday, May 16, 2024

Michael Reddell: Words and (in)actions

When I wrote yesterday morning’s post, highlighting how poorly both New Zealand and its Anglo peer countries have been doing in respect of productivity in recent times (ie, in the case of New Zealand, Australia, and Canada even worse than usual), little did I know that the Prime Minister was about to announce a bold new economic performance goal. I wasn’t even aware he was giving a pre-Budget speech yesterday.

But there it was

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Now, read it carefully. If it were just the first sentence in 1. it would be largely devoid of content. Even pessimists, with long experience of the underperforming New Zealand economy, probably reckon that the average level of productivity in the New Zealand economy will be higher in 2040 than it is now (these are the sorts of lines that go up over decades, under all but the most adverse circumstances). But the Prime Minister doesn’t stop there. The second sentence is clearly a statement about relative performance: the Prime Minister’s “vision” is for a New Zealand where there is a net return of New Zealanders (after 50-60 years of trend (often large) outflows), because they can have a “better life” here and aren’t driven to move abroad by the lure of “higher incomes” there. His “vision” seems to be that economic growth in New Zealand over the next 16 years will be so strong that we’ll have matched – perhaps even exceeded – what is on offer abroad. As we all know, by far the largest net outflow of New Zealanders is to Australia. The “vision” seems to be to catch Australia.

Wouldn’t that be great? Australia is far from being a leading-edge economy but it is the easiest exit option for most New Zealanders, and has done much better than New Zealand for decades now. For those who are into trans-Tasman rivalries, it must be quite embarrassing for our country to have done so much worse than them, when for many decades we pretty much level-pegged.

As for the PM, he reminded us of his firm focus (“resolutely and unapologetically”) on “delivery”

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So having set out a bold vision what is the Prime Minister offering as a policy programme to achieve it? It isn’t, after all, a small ambition. (By my reckoning, using IMF data, catching Australia’s GDP per capita by 2040 would require New Zealand’s per capita real growth rate to exceed Australia’s by about 1.45 percentage points each and every on average for 17 years – so if Australia managed 1 per cent average per capita real GDP growth, we’d have to average almost 2.5 per cent year in year out. Over the last 17 years we’ve managed about 1 per cent per capita real growth.)

The Prime Minister does lay out some substance on the early days

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Personally, I’d give a tick to almost all those (but not too keen on allowing small panels of Cabinet ministers to decide which private sector projects get favoured treatment). It is mostly good stuff. But to a first approximation what it mostly does is undo stuff the previous government did and restore something like the policy set of 2017. But if productivity growth in the years up to 2017 was less bad than it has been here – and in Australia and Canada – more recently, we weren’t making any progress then either in closing gaps to the rest of the advanced world. And where it is still mostly prospective (“charting out a course of systematic RMA reform”), it is welcome, and sounds good, but…..we’ve heard lines about fixing the RMA before, including from the previous National government.

And that was sort of the problem with the entire economic strand of his 2040 vision. It brought to mind this

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I hadn’t previously noticed the transition from “concrete goal” to “vision”, but whatever the language, it all made no difference whatsoever.

The Taskforce that was set up to advise on meeting the 2025 goal noted at the start of its first report that there had been a lot of talk over the years.

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(I don’t suppose the Taskforce really believed that last couple of sentences, but…..the Prime Minister himself had been party to setting a “concrete goal” so he might as well be treated as taking it seriously.)

Of course, it all came to nothing and nothing about the goal (whether “concrete goal” or “vision”) was achieved. (I had some part in assisting the 2025 Taskforce, but the substantive issue is not the Taskforce, but the goal – which is what would greatly have benefited New Zealanders had it been seriously pursued. It wasn’t.)

Here is the summary chart, comparing GDP per capita (in PPP terms) between the two countries since 2007 (just prior to the severe recession on 2008/09). There are two different measures, but they both tell the story: no progress at all has been made in the intervening years to closing the gap in real GDP per capita to Australia.

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In the short-term governments (government policy settings) can’t do much about the terms of trade, but generally Australia’s have been stronger than ours.

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Productivity is more amenable to policy settings. If anything the gap has widened over the period covered by the original 2025 goal (these lines are indexed to a common value at the start of the period. Using annual OECD data, in PPP terms, the average level of labour productivity in Australia is about 28 per cent higher than that in New Zealand, larger than the gap in real GDP for capita (the latter also reflecting the higher employment rate in New Zealand).

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Who knows if Mr Luxon is any more serious about his “vision” – laudable on its own terms – than John Key was about the 2025 goal. No doubt both of them would be quite happy if things happened to have turned out that way (wouldn’t we all) but Key and his government did nothing even close to being equal to the task to make it happen. There seems little basis – whether in PM’s speech, his campaigning last year, or anything about what his government is and isn’t doing now – for believing it will be any different this time. Most likely, it is just another positive-sounding rhetorical line that will disappear, even from prime ministerial speeches, almost as soon as it appeared.

It would be great to be proved wrong on that, because the people who pay the price of empty political aspirational rhetoric never matched by policy seriously equal to the task aren’t Prime Ministers, who eventually move on to gilded retirements, but the children and grandchildren of ordinary New Zealanders.

If, as he should be, the Prime Minister is serious about that aspiration of New Zealanders (net) coming home not just because mountains and beaches make it a nice place for many to live, but because economic performance means you don’t have to leave for a higher income, the concrete policies need to start matching the rhetoric. In the PM’s own words, delivery matters.

Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.

1 comment:

Andrew Osborn said...

If you're "not too keen on allowing small panels of Cabinet ministers to decide which private sector projects get favoured treatment" exactly who would you prefer to make that decision?

These are our elected representatives, and I would sooner have them make the decision rather than a judge or a bureaucrat.

When I was still working, I was closer to the coalface than an economist working for the RB and I can regale you with stories of projects and products we developed here, which were then moved offshore because it was all too hard to implement in sunny NZ.

Even worse, I ran a project many years ago with a small company whose entire business was packing up process plant and shipping it to Queensland! They told me the tax and employment subsidies in Queensland made it more profitable to make a product in Queensland even when both the raw material and the customer were in New Zealand.

In summary, if the current government has any balls, they will indeed achieve Luxon's vision and so far, they've made a good start.