The Prime Minister asserted that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”. Assuming that these are shorthands for measures intended to durably and substantially lift economywide productivity growth (I saw a nice quote the other day from the Canadian Leader of the Opposition to the effect that no one talks about productivity per se except economists and friends of economists), one could only respond “good if true”.
We have been promised a “rolling maul” of new policy measures as the year unfolds. And the Minister of Finance (now rejoicing in the rather absurdly named additional title of Minister for Economic Growth -albeit perhaps no more absurd that the Economic Development title it replaced) went further in her press release announcing the Budget date and promising
We have been promised a “rolling maul” of new policy measures as the year unfolds. And the Minister of Finance (now rejoicing in the rather absurdly named additional title of Minister for Economic Growth -albeit perhaps no more absurd that the Economic Development title it replaced) went further in her press release announcing the Budget date and promising
Click both images to view
It is a distinctly different emphasis than in her Budget-date announcement press release last year.
Nothing like building up expectations….and one hopes journalists will keep an eye on this set of promises.
I’d give this government credit for a number of steps that, at the margin, may help boost growth, productivity, and efficiency of the New Zealand economy. But it is hardly a case of everything working in the same direction: last year, for example, we had increased business tax rates (re building depreciation), increased taxes on inbound tourists, more restrictions of bank mortgage lending, passing up chances to overhaul key personnel at the Reserve Bank, and of course a Budget that, taken together, slightly widened the structural fiscal deficit. And it wasn’t as if the growth rhetoric wasn’t around last year (eg this quite respectable, as far as these things go, speech from March 2024).
Perhaps this time they really will deliver “bold steps” in May. I’m open to being convinced – and in this case would love to be wrong- but count me sceptical.
For various reasons:
- For all the rhetoric from the PM and Minister of Finance there is no specific goal which they are willing to use as a stake in the ground (even John Key for a short time would run the line that “our vision is to close the gap with Australian by 2025”),
- There was nothing in the National Party’s campaign material in 2023 that suggested either a deep understanding of the issues or a policy agenda equal to the sort of challenge New Zealand faces (and that was so even when there were some specifics I thought made sense),
- We are now 14-15 months into the government’s term – the election is next year – and not much has been done so far, no compelling narrative has been developed, no key government agencies have been overhauled and made fit for the challenge etc,
- Where are the advisers? It isn’t obvious that there are first-rate productivity-focused political advisers in ministers’ (or the PM’s) offices, and what about MBIE and Treasury? MBIE is a bureaucratic behemoth run by a former Air New Zealand HR senior manager (no, before Luxon’s time) and in appointing a new Secretary to the Treasury, and despite more fine words from Willis last year, the government ended settling for a recycled former Deputy Secretary, who is certainly skilled at managing upwards but would never have been mistaken for a bold and innovative policy reformer (or leader of such people/processes). Oh, and the Ministry for Regulation is headed by a non-policy recycled public sector chief executive, who didn’t seem to be particularly well-regarded in her previous chief executive role.
- The Budget is now a mere 3.5 months away. Based on standard timings Treasury will be finishing their economic forecasts by the end of next month and the Budget is unlikely to incorporate anything not decided by the end of April. Without excusing bureaucratic sludge, good policy processes take time, perhaps especially in a coalition government.
- And, of course, none of the three measures announced in the last 10 days look to add up to very much (Invest NZ – one wonders why this spin-out from NZTE is needed at all, and what private sector advisers can’t provide – the re-organisation of the CRIs, and the digital nomad visa)
One can only assume that the word has gone out from the offices of Luxon and Willis to all ministers, and then all public service agencies, to pull together whatever they now can – and perhaps hold off on other announcements for a while – to enable a set of Budget announcements that can be dressed up as passably resembling “bold steps”. No doubt there is stuff in the works – there almost always is – so perhaps the net effect will even be positive (though with enough confidence to lift Treasury’s assumptions about real per capita potential GDP growth?) but I wouldn’t be holding my breath that it will be the real thing, or even begin to get to grips with the magnitude of the challenge. But – Trump ructions permitting – quite probably there will be some cyclical rebound in GDP growth in time for next October (for which the government will deserve no more credit than it deserves blame for the monetary policy induced recession last year),
On that note, the Sunday Star-Times yesterday ran an op-ed from Don Brash and me, prompted by some combination of memories of that goal of catching Australia by 2025 (Don chaired the taskforce and I provided analytical and drafting support) and the PM’s speech, trying not be to be particularly partisan (the failure – and the rhetoric, in varying volumes – has been common to all governments for decades). We ended the column this way.
For anyone interested, the full text follows:
When Don was young and Michael’s parents were young, New Zealand had among the very highest material standards of living in the world. It really was, in the old line, one of the very best places to bring up children. But no longer.
For 75 years now, with no more than brief interruptions, New Zealand has been losing ground relative to other countries. Australia and the UK pulled ahead of us, previously poor places like Singapore and Taiwan caught up and overtook us, and increasingly now the former eastern bloc countries (Slovenia, Estonia, Poland, and so on) are catching and overtaking us.
Don’t get us wrong: material living standards here are still well ahead of where they were in the 1950s, but if we were once a leader we are now a laggard. All too many of our people have seen better opportunities across the Tasman for themselves and their kids and have made the move. That’s good for them, of course, but a poor reflection on economic performance and policy back here.
For 40 years, successive governments have talked a good game about reversing that relative decline and closing the gaps that were opening up. In the earlier part of the period there were far-reaching policy reforms, which probably helped slow the rate of relative decline. In more recent decades, the ratio of talk to action has very much favoured talk. And that is so whichever of our main political parties has led the government.
In late 2008, nearly 17 years ago now, as part of a post-election agreement with ACT, the then government led by John Key announced a goal of catching up with Australia by 2025. A Taskforce was set up to advise the government on policy options that might enable aspiration to be turned into solid economic achievement. Don chaired that 2025 Taskforce and Michael wrote much of the Taskforce’s first report.
The report wasn’t well-received by the then government – in fact, the then Prime Minister openly dismissed it even before it was released publicly – but that didn’t alter the facts: New Zealand was lagging far behind Australia (and Australia itself wasn’t, and isn’t, a stellar economic performer).
It is now 2025 and over the intervening years – under successive governments, led by both main parties – no progress at all has been made in closing the gaps to Australia. If anything, and as measured by labour productivity (output per hour worked), the gaps have widened a bit further. Recently the Australian government has made it easier, and more secure, for New Zealanders – any of us, skilled or unskilled, young or old – to cross the Tasman. It isn’t that Australia has done particularly well economically in recent years – rather the contrary – it is just that New Zealand hasn’t even managed to match their underperformance consistently. Productivity growth – the only secure foundation for material prosperity – here dropped away further from about 2012.
This month we’ve heard a lot from the Prime Minister about the importance of economic growth. It is fine rhetoric and we entirely endorse his argument. Material prosperity – whether it is private consumption or better and more public services – rests on restarting sustained economic growth, which in turn rests on accelerated sustained growth in productivity.
This isn’t just about the ups and downs of the business cycle. Economic activity has been particularly weak in the last 12-18 months as the Reserve Bank has been getting on top of the inflation it inadvertently generated with too easy monetary policy during the Covid period. Now that inflation is falling and interest rates are dropping, we should expect a cyclical recovery. But a near-term bounce isn’t anything like enough; what we need is, say, 20 years of 2-3 per cent per annum productivity growth. Over the last decade, actual productivity growth has averaged not much more than 0.5 per cent per annum.
The Prime Minister announced a couple of small reforms in his speech this week. They may well be individually helpful, but small changes aren’t what will produce really big differences in outcomes.
We’ll watch with interest the promised “rolling maul” of reforms but aren’t confident that this government, any more than its National and Labour predecessors this century, is likely to respond on the scale equal to the challenge.
Sadly, it isn’t obvious either that the government has a public service with the energy, intellectual ferment, and concrete ideas that a willing government could pick up and run with. But some of the options that should be considered are pretty obvious: economics literature suggests that most of the burden of heavy taxes on business is actually borne by labour (in the form of lower wages than otherwise), and yet New Zealand – plagued by decades of low levels of business investment – has one of the highest company tax rates in the OECD, and takes a higher percentage of GDP in corporate income tax than almost any OECD country. Foreign investment in New Zealand remains harder than it should be, and is taxed more heavily than it should be.
We can choose to continue to drift, with just incremental reforms, as successive governments have done for 30 years even amid the fine talk. But if we do, more and more New Zealanders are likely to conclude rationally that there are better opportunities abroad, and for those who stay aspirations to first world living standards and public services will increasingly become a pipe dream.
It is a multi-decade challenge under successive future governments, but as the old line has it the longest journey start with the first step. We hope the Prime Minister’s bold rhetoric signals the beginning of a willingness to lay things on the line, to lead the debate on serious options, to spend political capital, for the serious prospect of a much better tomorrow for our children and grandchildren.
ENDS
NB: Since I saw a BusinessDesk column this morning claiming that 1950-type cross-country comparisons are unfair (much of continental Europe was still recovering from the war), it is worth pointing out that exactly the same could have been said of 1939. New Zealand had among the very highest material living standards among advanced economies throughout the first half of the 20th century.
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. This article was sourced HERE
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