Economic health check Shamubeel Eaqub on NZ’s finances
Weaknesses may undermine the outward health of Kiwi financials, writes Shamubeel Eaqub.
The New Zealand economy appears to be in good health. But how much of this is real? Scratching beneath the surface reveals a weaker story and one big, old problem that remains unresolved.
The economy grew by 2.5 per cent over the past year and the unemployment rate is 4.9 per cent. Both very respectable measures of broad economic strength. But the detail is less flattering. Since late 2015, economic growth has increasingly relied on population growth, rather than increasing prosperity of the population. GDP per person, a rough proxy for living standards, has been growing at a sluggish rate of less than 1 per cent per year. During the ‘normal’ parts of the economic cycle – outside recessions and the immediate recovery period – GDP per capita grows at an average rate of 2.3 per cent a year.
Nevertheless, the economy has been growing strong enough to create loads of jobs. The unemployment rate is under 5 per cent. Historically, this would point to strong wage growth. But wages over the past year grew by just 1.6 per cent and the cost of living rose by 2.2 per cent.
Something does not add up. Why do we have a seemingly strong economy and labour market, but wages and living standards are not improving as fast as we expect?
The answer lies mainly in our long-standing problem of low productivity growth.
Our low productivity performance is well documented. Our GDP per capita was higher or close to Australia, and even the US, until the mid 1960s. Since then, there has been a growing wedge. From almost nothing in the 1960s, to a quarter lower against Australia and a third lower against the US.
This even underpinned the 2008 National Party election campaign – to close the NZ-Australia wage gap by 2025. A deal with the ACT party set up the 2025 Taskforce to bring forward the big ideas to close the gap. The taskforce and goals to catch up with Australia have long been abandoned.
A report by the OECD, a club of mostly rich countries, focused on this last week. Everything about New Zealand’s rules, regulations, social safety nets and a welleducated population, suggests we should be much richer. There is an inherent sense of optimism, that New Zealand has the potential to be much better off.
Being small and far away matters, but that doesn’t explain why we are trailing behind. We work long hours, but we aren’t showing much for it.
The OECD suggests we do more to increase our global connections through more foreign, direct investment. I suspect this will be hard to sell to the public. There is an inherent mistrust of foreign investment in New Zealand. Whether in houses, farms or businesses, without a rigorous and transparent register of foreign interests, this idea will not fly.
We should also lower corporate tax rates to encourage more investment. Lower tax rates reduce tax revenue, so we should collect taxes from a wide base, including capital. There is little political appetite for a big change in the tax system to fully include wealth.
We should unlock fast-growing, urban centres by giving local authorities access to more funding linked to their growth, and the ability to use funding mechanisms like congestion charging.
Hallelujah! This will be music to the ears of fast-growing areas like Auckland, Tauranga and Queenstown – the costs of growth are piling up on local government, but the fiscal benefits are going to central government.
We have many small, uncompetitive and expensive industries. When visitors and new migrants complain of how expensive things are in New Zealand, they aren’t wrong. Our competition law needs to deal with the effects of uncompetitive markets, not just a legal intent of anti-competitive behaviour.
The OECD finally suggests greater government support for research and development, particularly in collaboration between research institutions and business, presumably to ensure the research is relevant and opportunities to commercialise tapped.
There is a long list of ideas on how New Zealand can change to unlock its productivity. The 2025 Taskforce had some good ideas. The Treasury has been banging on about this stuff for years.
But they are a departure from the status quo. Policy and regulatory reform is a simmering mess of gradualism. Difficult, unpopular and controversial changes that may unlock long term changes seem out of grasp for our political class.