The near-term fiscal outlook is brighter than expected. Treasury now forecasts a $6.8 billion deficit in 2026-27 – down from the $11.4 billion predicted at the May Budget – while higher tax revenue is expected to reduce government borrowing by $15 billion over the next four years.
That gives parties a firmer basis for costing the promises now being made on the campaign trail, in an economic environment somewhat brighter than that of the last election.
In 2023, New Zealand was struggling with weak growth and high inflation. Three years on, inflation has fallen substantially and the economy has returned to growth. GDP increased 0.2% in the June quarter, following 0.9% growth in March, and was 1.7% higher than a year earlier.
Still, as yesterday’s update also highlighted, the recovery remains fragile. Annual inflation has climbed back to 4.1%, while Treasury is warning that the global oil shock poses a renewed risk to both inflation and economic growth.
Perhaps even more importantly, beyond those immediate pressures lies a problem that neither an economic recovery nor a change of government can quickly fix: New Zealand’s long-standing productivity problem.
The elephant in the room
Productivity is ultimately about how much value an economy can produce from its workers, capital, technology and resources.
Higher productivity allows wages and living standards to rise without people simply working longer hours. It also increases the resources available to fund health, education, infrastructure, superannuation and other public services.
New Zealand has struggled on this measure for years. Treasury estimates productivity growth averaged around 1.4% a year between 1993 and 2013, but just 0.2% over the following decade.
OECD data also show New Zealand’s output per person remains well below that of the most advanced economies, with little sign of the gap closing.
In 2023, New Zealand was struggling with weak growth and high inflation. Three years on, inflation has fallen substantially and the economy has returned to growth. GDP increased 0.2% in the June quarter, following 0.9% growth in March, and was 1.7% higher than a year earlier.
Still, as yesterday’s update also highlighted, the recovery remains fragile. Annual inflation has climbed back to 4.1%, while Treasury is warning that the global oil shock poses a renewed risk to both inflation and economic growth.
Perhaps even more importantly, beyond those immediate pressures lies a problem that neither an economic recovery nor a change of government can quickly fix: New Zealand’s long-standing productivity problem.
The elephant in the room
Productivity is ultimately about how much value an economy can produce from its workers, capital, technology and resources.
Higher productivity allows wages and living standards to rise without people simply working longer hours. It also increases the resources available to fund health, education, infrastructure, superannuation and other public services.
New Zealand has struggled on this measure for years. Treasury estimates productivity growth averaged around 1.4% a year between 1993 and 2013, but just 0.2% over the following decade.
OECD data also show New Zealand’s output per person remains well below that of the most advanced economies, with little sign of the gap closing.
From the cost of living and a health system under extreme pressure to the role of the Treaty of Waitangi and how best to tackle climate change, the coming election involves some big choices.
This article is part of The Conversation’s Election 2026 series: expert analysis of the major policy debates and the big challenges New Zealand’s next government will face.
So how did New Zealand get here? There’s no single explanation.
We can blame a combination of long-running weaknesses: low wages, weak competition, declining educational performance, slow uptake of new technologies, alongside shallow capital markets, high energy costs and barriers created by planning and regulation.
New Zealand also faces some unavoidable disadvantages, such as its small domestic market and geographical isolation.
Many of these problems feed into each other. A small market makes it harder for firms to grow to scale, while weak competition can reduce the pressure to innovate.
Limited access to capital can hold back investment in technology and growing businesses. Planning and infrastructure constraints make development more difficult and expensive, while skills shortages can slow the adoption of new technologies.
The result is an economy that has relied heavily on adding more workers and people to generate growth, while investment and productivity have lagged.
Making room to grow
How might New Zealand fix its productivity problem? Again, there’s no single solution, but rather a combination of policy reforms that might work together.
Arguably, New Zealand needs more investment per worker and better access to finance for firms looking to grow and innovate.
Greater competitive pressure can encourage businesses to adopt technology, cut costs and develop new products, while access to international markets gives productive firms room to grow.
Removing barriers to housing, energy and infrastructure development can lower costs and make investment easier.
Better educational outcomes, stronger links between training and industry, and faster uptake of new technology can help firms get more from the people and resources they already have.
But improvements in investment, skills, infrastructure and innovation can take years to show up in productivity figures – one reason they can be difficult to sustain politically.
That is worth remembering as the election campaign produces policies aimed at the cost of living, housing, tax, immigration and the size and role of government.
Supermarket policy proposals, for example, claim to improve competition and reduce food prices, yet have hardly any effect on productivity.
Similarly, a wealth tax is principally about how wealth is distributed. Immigration policy mainly affects labour supply as well as demand for housing and infrastructure. Land-value taxation can change incentives around land use, while a universal basic income is primarily concerned with income support.
A better test for economic policy
These policies should be judged on what they are designed to achieve.
But if parties present them as answers to New Zealand’s economic malaise, another question needs to be asked: will they help the economy produce and innovate more?
That means looking past the immediate appeal of an election promise.
Does it address a genuine structural problem? What does the evidence tell us? What incentives does it create? Who pays? What are the likely flow-on effects? And what would have to be given up to fund it?
Then there is the longer-term question: how does it fit into a credible plan for raising productivity?
A policy can improve household incomes or reduce inequality without lifting productivity, and may still be worthwhile for those reasons. Equally, reforms that raise productivity can take years to improve incomes and may carry short-term costs. The two should not be confused.
New Zealand has made progress in restoring economic stability since 2023. The harder task is increasing how much the economy can produce over the long term.
After a decade of weak productivity growth, isolated regulatory changes or small programmes are unlikely to shift the dial. Sustained improvement will require progress across investment, competition, skills, technology, energy, infrastructure and regulation.
As parties compete for votes, their economic policies should be judged partly against that longer horizon.
New Zealand’s productivity performance will ultimately help determine how quickly living standards can rise – and how much future governments can afford to provide.
Dennis is a Senior Lecturer in Economics at the University of Otago, the Vice President of the New Zealand Association of Economists, Editor-in-Chief of New Zealand Economic Papers and Associate Director of the University of Otago’s Economics PhD Programme.
This article is republished from The Conversation under a Creative Commons license. Read the original article
2 comments:
You have nailed it. And it is so easy to fix it is embarrassing.
Before China's big spurt of growth since the 1980s, China asked Japan how they were so successful with 10% real growth every year back then.
Japan told them the secret. It is present in Germany and the US but not in NZ or Britain.
Japan had literally thousands of small local banks. These small local banks lent money to small local businesses to invest in plant, equipment and process improvement.
So China changed from one central bank to tens or hundreds of thousands of local banks and look at the result.
NZ's root problem is that we need 1000 small local banks. These banks will create new credit through local loans to small local businesses and they will use that new money to invest in improved productive capacity.
I am a process improvement expert. I have been doing it for 25 years. It is embarrassingly simple and effective in improving productivity. In Europe there were plenty of jobs for large corporations. But in NZ there are none. I had to pivot to IT.
But the root cause is the banks. A process improvement expert can only be hired if the company can raise the capital to pay him. And there is no money to be had from 4 big banks that are only interested in very big deals.
The thing that strikes me about this article is that the author appears to be ignoring the (mainly) self regulated parts of our economy - the tourism, livestock farming and fishing industries.
I could include Forestry in that group but these days it has become a pawn in the hands of ideologues who care little about creating an economic environment that ensures the surpluses rin this country when the good times roll
He is almost certainly confining his remarks about poor productivity to the public sector and those industries that can be bribed at election time.
And given the current boom times in the self regulated sector of the economy, one might expect the result of the upcoming election would be a forgone conclusion.
But unfortunately the overseas income generating part our economy (the bit that allows us to repay debt, stay solvent and continue to build new hospitals and schools ) is run almost exclusively based on the hard work, survival instincts and entrepreneurial skills of those who work in the export sector
The trouble is that numerically - those people don’t normally matter when it comes to election time unless the party that represents them manages to gain an influential spot in the governing coalition and consequently the results are rarely a reflection of all their hard work.
In a democratic society where each vote has equal value, the result is too often open to manipulation by politicians who couldn’t care less about who ultimately pays the bills when our overseas economy hits the wall.
The old adage of “promises made should be promises kept” means nothing to them.
Sadly, apart from a few, their main purpose in life appears to be in gaining access to the Treasury Benches and stay there by doing whatever it takes, including if necessary, squeezing the life blood out of self employed aspirants through over-regulation and taxes..
Unfortunately, we don’t have this problem on our own.
Most of the Free World markets are also over-regulated and, as a result, those economies that are booming are almost all being led by businessmen and women who know what it is like to risk their own momey.
You can’t make this up.
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