As at 2021 we were 37th in the world in per capita GDP measured on a purchasing power parity basis. We are dependent on a few commodity exports, and we lack knowledge-intensive manufacturing and services (KIMS) businesses that can export sophisticated and differentiated products, whilst retaining core business operations in New Zealand.
Our problems include low domestic savings rates, poor educational achievement, infrastructure deficits, low housing affordability, child poverty, and meeting the health and pension costs for an ageing population.
Our challenges result from short-term thinking leading to long-run problems. Much of New Zealand’s modern economic difficulties result from the cancellation in 1975 of the Labour government’s compulsory superannuation scheme, launched only in 1974. Removing compulsory saving from our retirement policy settings is felt today in our real exchange rates, and in the shallow and short-term capital available for new ventures and for infrastructural investment.
New Zealand’s policy settings have some strengths. These include macroeconomic stability and microeconomic flexibility. However, our productivity has stagnated for decades. Whilst we have long had high private debt, much of it mortgage finance, our public debt as a percentage of GDP has been low until recent times. However, our public debt is ballooning, fiscal consolidation is inadequate, and long-run fiscal forecasting shows our current policy settings are unsustainable.
Douglas (2024) argues that the “left” wants to increase dependency on the state while the “right” supports corporate welfare for favoured groups. He has been scathing about “middle class capture” and “institutional capture”, for example teachers unions. Douglas suggests a single overriding objective:
Our problems include low domestic savings rates, poor educational achievement, infrastructure deficits, low housing affordability, child poverty, and meeting the health and pension costs for an ageing population.
Our challenges result from short-term thinking leading to long-run problems. Much of New Zealand’s modern economic difficulties result from the cancellation in 1975 of the Labour government’s compulsory superannuation scheme, launched only in 1974. Removing compulsory saving from our retirement policy settings is felt today in our real exchange rates, and in the shallow and short-term capital available for new ventures and for infrastructural investment.
New Zealand’s policy settings have some strengths. These include macroeconomic stability and microeconomic flexibility. However, our productivity has stagnated for decades. Whilst we have long had high private debt, much of it mortgage finance, our public debt as a percentage of GDP has been low until recent times. However, our public debt is ballooning, fiscal consolidation is inadequate, and long-run fiscal forecasting shows our current policy settings are unsustainable.
Douglas (2024) argues that the “left” wants to increase dependency on the state while the “right” supports corporate welfare for favoured groups. He has been scathing about “middle class capture” and “institutional capture”, for example teachers unions. Douglas suggests a single overriding objective:
‘Real sustainable gains in living standards and opportunity for all NZers, with particular emphasis on the disadvantaged’
Much legislative effort and executive work programmes focus on overcoming information asymmetry, especially as it disadvantages buyers compared to sellers, or consumers versus producers. Moral symmetry between government and citizens is also needed. This requires citizen access to relevant, accurate and contextualised information on the same terms as government officials. That is, we need open government in practice not in rhetoric.
Past governments have used low skill migration, the wealth illusion conjured up by inflating housing prices, and glib slogans about rock star economies to mask the weaknesses in our core tradeable sector businesses.
The ways forward for New Zealand are:
- revising our foreign trade, security and defence policies to reflect new challenges
- redesigning our superannuation system
- reforming social and tax policy
- creating more effective competition and regulatory policy
- taking new approaches to industry policy.
Globalisation has lifted millions out of poverty. However, the Stopler-Samuelson theorem shows how production specialisation impacts on capital returns and wages. This means trade liberalisation creates winners, and also losers such as wage workers in import-competing industries. Globalisation can lead to more focus on foreign investor interests, and less on domestic working conditions or local environmental standards.
Australia expects New Zealand to invest more in Australasian and Pacific defence and we need to address these expectations. However, we also need to uphold our nuclear-free policy in the face of Australia’s plans to acquire nuclear-powered submarines.
New Zealand is committed to democracy and the rule of law, however our biggest trade partner and export market is autocratic China.
The United States and China need to cooperate to address global issues such as climate change and pandemics. However, increasingly they are locked in strategic conflict over key technologies, military capabilities, and the interpretation of international (including maritime) laws and norms.
The US may face a financial and currency crisis due to its trade deficits and public debt. However, history tells us to “never bet against the United States.” There is a “dark matter” theory that argues that much US IP is effectively hidden offshore for tax arbitrage or avoidance purposes. The real value of many American firms is therefore much higher than is shown in corporate reporting documents. In aggregate, the American economy is therefore bigger than what is shown in the national accounts.
Fracking technology has turned the US from a hydrocarbon importer to a net exporter. Recent rare earth discoveries in the US and elsewhere are big enough to break China’s monopolistic power over these resources that are so important in high tech industries.
China faces environmental and natural resource limitations, demographics that may lead to rising dependency ratios, and it may not escape the “middle-income trap” (see World Bank Group 2024).
New Zealand must avoid confrontations with China, remain a trusted partner of other democracies, and develop its own dual purpose surveillance and other technologies that can meet military and security as well as civil sector needs. This means more of the defence procurement budget being invested in New Zealand technology that meets our needs and creates niche opportunities in international markets. The models for this come from countries such as Turkey and to some extent Australia rather than from Britain and the US.
Changes to the superannuation system
The Labour government in 1974 introduced a compulsory superannuation scheme. This delivered a basic pension and required compulsory contributions of eight per cent of gross income – four per cent from employees and four percent from employers. Accounts were individualized and portable. The scheme was designed to lift savings and enhance investment in the economy, as well as supplement the basic pension.
Robert Muldoon’s election victory in 1975 saw the Labour Government’s compulsory scheme replaced with a universal scheme with age 60 eligibility and no contributory requirements. The late Brian Gaynor estimated that, had the 1974 scheme been retained, it would now be worth over $500 billion. We would have deeper, more differentiated, and more patient capital markets.
However, with the cancellation of the Labour government’s compulsory scheme in 1975 every New Zealand government has had to address the affordability of superannuation and the wider economic consequences of low domestic savings rates. Over the period 1992 to 2001 the entitlement age was lifted from 60 to 65. However, gross superannuation costs were 4.6% of GDP in 2011/12, 5% in 2022/23 and are forecast to rise to 5.4% in 2026/27.
The New Zealand Superannuation Fund (NZSF) was established through the New Zealand Superannuation and Retirement Income Act 2001. Michael Cullen’s intent was to use the NZSF as a tax smoothing device to help manage the state’s growing superannuation liabilities. After 20 years of establishment the NZSF was around $70 billion. Kiwisaver was launched in 2007, and as of 31 March 2023 its total balance was $93.7 billion.
New Zealand’s “pay-as-you-go” superannuation scheme discourages private
savings because it signals that government will guarantee future pensions. However, demographics and deteriorating government finances make “pay-as-you–go” look like a Ponzi scheme.
We need to make some retirement savings compulsory, on lines akin to the Superannuation Act 1974. A modest universal superannuation scheme as currently exists would be retained, perhaps with the age of eligibility rising with life expectancy. KiwiSaver would be made compulsory, with the contribution rising to (for example) around 5% for employees matched by a 5% employer contribution.
Social policy and tax reforms
Social welfare expenditure needs to move from welfare dependency to capability development. That is, it should teach people how to fish, rather than how to open a can of Salvation Army sardines.
Douglas (2024) and Douglas & MacCulloch (2019, 2018 and 2017) make strong arguments for welfare reform based on savings rather than taxation. Their thinking is close that of Singapore.
Singapore established its Central Provident Fund (CPF) in 1955. It is an employment-based savings scheme with employers and employees contributing a mandated amount to the fund to support retirement, healthcare and housing needs. As at December 2023, the CPF managed US$424 billion (S$571 billion) for 4.49 million account holders.
Compared to other OECD countries, New Zealand has relatively high taxation on business and capital incomes and low taxes on labour incomes. The variance comes from differences in how our retirement savings are taxed, and our limited use of purpose-specific social security taxes (ACC levies might be our only major example of such taxes).
“Nordic model” and Northern European countries have a focus on social equity and it seems odd that they often impose lower taxes on capital than on labour. The logic is that capital is needed to make labour productive. Higher corporate taxes that discourage capital investment can reduce labour productivity and this flows through to reduced wages (see Fuest, 2018).
More effective competition and regulatory policy
Failure in ensuring affordable housing, transport and water infrastructure is reinforced by competition policy weaknesses that allow rent-seeking and which stifle innovation in key markets. Key economic sectors are dominated by monopolistic businesses or lazy cartels. Vested interests discourage innovation and block new entrants to market. Examples include the electricity, retail and banking sector markets.
New Zealand’s banking sector is dominated by the big Australian banks, which dwarf New Zealand competitors. KPMG’s annual Financial Institutions Performance Survey (FIPS) reporting on the year ending 30 September 2023 showed that annual net profit after tax across New Zealand banks was $7.21 billion. Most of this profit goes offshore rather than being retained in New Zealand.
The FIPS shows housing lending continues to grow as a percentage of total New Zealand bank lending, reaching 69.94% as of the end of September 2023. Because of regulatory barriers to new housing development and underinvestment in infrastructure the enormous lending for housing does not bring forth much new supply but simply inflates the price of existing housing.
Kiwibank was established in 2002. It is New Zealand owned and has a market share of around 9%. Government has not invested the capital needed for it to grow and become a strong competitor in the Australasian market. Sam Stubbs has suggested that 49% of Kiwibank could be listed on the share market, with government retaining 51% ownership on the same mixed model as was applied to companies such as Meridian and Genesis.
New approaches to industry policy
From the founding of Glaxo in the 19th century New Zealand has always been good at creating new, knowledge-intensive businesses with global potential. However, it struggles to grow them to scale in international markets while retaining core competencies and benefit streams in New Zealand.
The gravity in international trade equation (Chaney 2013) holds that bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them. The “gravity equation” makes it harder for New Zealand to trade with the rest of the world.
Global value chains typically require intensive interaction and are regionally-based. New Zealand is remote from large international markets and therefore has limited scope for participation in global value chains and accessing the advanced technologies they draw on. However, digital technology should over time reduce the “tyranny of distance” and open up more opportunities for countries such as New Zealand.
New Zealand should make more use of procurement policies, drawing on lessons ranging from DARPA/ARPA in the US through to the achievements of Turkey in drone and related technologies.
Using large scale and multi-year government procurement programmes can achieve scale economies and longer-term work continuity. It would also foster economies of scope, that is opportunities formed by variety not volume.
Harvard University publishes an Atlas of Economic Complexity that ranks the complexity of a country’s exports. Economic complexity is a good proxy for prosperity. It also signals resilience, that is the more complex a country’s export mix the greater its ability to manage commodity-based economic shocks.
Economic complexity reflects a country’s past innovation performance. It also signals its generativity – the ability to create something new, and the willingness to promote the younger generations’ wellbeing and their long-term futures.
If the above policies were progressed effectively, we would see it in our rating in the Economic Complexity Index (ECI). This would reflect an economy more sophisticated and differentiated in products and services and which are less prone to trade barriers. We would also have many new sources of learning and knowledge application, spurring innovation in new fields, and in paths untrodden.
References and other reading
Chaney, T. 2013: The gravity equation in international trade: An explanation. NBER Working Paper 19285.
Douglas, R. 2024: New Zealand Budget 2024: There’s got to be a better way.
Douglas, R., & MacCulloch, R. (2019). A welfare reform for New Zealand: Mandatory savings not taxation. New Zealand Economic Papers, 1-35.
Douglas, R., & MacCulloch, R. (2018). Welfare: Savings not taxation. Cato Journal, 38(1), 17-33.
Douglas, R., & MacCulloch, R. (2017). Welfare: Independence not dependency. Centre For Independent Studies: Policy, 33(3), 9-17.
Fuest, C. 2018: Do higher corporate taxes reduce wages? Micro Evidence from Germany. American Economic Review Vol 108 No 2 (pp 393-418).
MacCulloch, R. (2019). Mandatory savings: The saviour of New Zealand’s welfare state. Policy Quarterly, 15(1).
Winsley, P. 2024 Recovering from New Zealand’s worst ever economic decision – the cancellation of the Kirk government’s superannuation scheme. Peter Winsley blog 8 Sept 7 2024.
Winsley, P. 2023: How to defend New Zealand without killing anyone (preferably). Peter Winsley blog. 6 October 2023.
Winsley, P. 2019: Children’s development accounts and our equity and productivity challenges. Peter Winsley blog. 26 January 2019.
Winsley,P. 2012: Moving from income support to active capability development. Peter Winsley blog. 7 August 2012.
Dr Peter Winsley has worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature. Peter blogs at Peter Winsley - where this article was sourced.
7 comments:
“New Zealand was one of the wealthiest countries in the world in the 1950s and 1960s”.
And then along came a ‘money changer’ (IMF) and offered and/or forced the Holyoake government into taking out a ‘too good to be true loan’. As it turns out, like in every other country beholden to the ‘money changer’ (IMF), that was the beginning of NZ’s downfall, and capture by foreign corporate entities.
"Much of New Zealand’s modern economic difficulties result from the cancellation in 1975 of the Labour government’s compulsory superannuation scheme", what a momentous year 1975 was. The rest of our economic woes stem from the Treaty of Waitangi Act as that has been bleeding us dry ever since and oh, that happened in 1975 too!
The rise of Identity Politics and its iron grip on NZ paint normal economic theory and practice as evil. The Left - largely illiterate in matter economic or financial - can only think in terms of wealth redistribution. No wonder savvy young people are leaving.
No mention of the pursuit of a myth in Net Zero that is costing us bigtime and no, compulsion is not something that clicks with real kiwis.
Ain’t that the truth.
Very fine article, Peter. I quote:
" If the above policies were progressed effectively, we would see it in our rating in the Economic Complexity Index (ECI). This would reflect an economy more sophisticated and differentiated in products and services and which are less prone to trade barriers. We would also have many new sources of learning and knowledge application, spurring innovation in new fields, and in paths untrodden."
Any suggestions for new fields for research and development and economic growth? How about further progress in medical technology? How about further development of companies such as Rocket Lab and associated space technologies?
David Lillis
Anonymous 22.03 has a very limited grasp of our economic history. How does s/he think the prosperity of the 1950s and 60s was generated. Off the back of the farmers is the obvious answer but it took more than the ability to grow sheep and cows to make us rich. The farmers were financed by foreign owned banks and foreign owned stock and station agents. The sheep and cows were killed in foreign owned freezing works, transported by railways paid for with foreign loans to ports whence they were taken to market by foreign owned shipping lines. Our farmers kept a lot of foreigners fed and clothed and made us rich, but that would never have happened without plentiful supplies of foreign capital. So lets not get carried away about getting "captured by foreign corporate entities". It has been going on since the nineteenth century and we are immeasurably better off as a result.
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