As a conservative, monarchist and Christian, I had been encouraged by the political success of Tony Abbott, and quite seriously underwhelmed at the idea of Malcolm Turnbull becoming Prime Minister of our closest ally, major trade and investment partner, and more generally the most similar country in the world to New Zealand.
On its own the latest round in the Italian-style revolving Prime Ministership in Australia wouldn’t have prompted a post on a blog that is mostly about economics and public policy issues. But reading stories this morning in which the incoming Australian Prime Minister is quoted as praising John Key’s economic management was just too much. Turnbull is quoted as saying
“John Key has been able to achieve very significant economic reforms in New Zealand by doing just that, by taking on and explaining complex issues and then making the case for them. And I, that is certainly something that I believe we should do and Julie and I are very keen to do that again.”
I grabbed a piece of paper from my bedside table and starting trying to jot down on the back of the envelope the “very significant economic reforms” in New Zealand over the last seven years.
It was a short list. I couldn’t think of any.
Perhaps Turnbull had in mind the tax package of 2010? Some of it might have been useful, but (a) it was pretty small in the scheme of things and (b), as the Treasury pointed out at the time, the net effect of that package was to raise the average tax rate on business income, not lower it.
From almost seven years of a Key-led government, I managed a few other small useful items for the list of reforms:
- Some modest welfare reforms (but 10.3 per cent of the working age population – and one in three Maori – is still on working age welfare benefits)
- Partial privatisations (of minority stakes only) in several state-owned companies
- The wind-back of Kiwisaver subsidies (but, on the other hand, policy is now to make Kiwisaver compulsory)
- The establishment of the Productivity Commission
- Some very modest reforms to the Resource Management Act
- Some modest labour market reforms (probationary periods)
- Minor planned changes to the anti-dumping regime.
No doubt there are others, but if anyone can point me to a “very significant economic reform” undertaken in New Zealand since November 2008 I’d be grateful. I don’t count closing the fiscal deficit. It is welcome of course, but we’ve had persistent deficits despite record high terms of trade, and simply closing a deficit is not itself an economic reform. Weak wage pressures across the economy have made fiscal management a lot easier than might have been expected.
And the problem with even the list above is the list of measures that could appear on a “steps backward” list:
- Higher effective corporate tax rates
- The debacle of the earthquake-strengthening legislation
- The continuing debasement of our skills-based immigration system, both in the way it is administered and in formal announced policy.
- New overlays of financial market regulation
- The re-establishment of direct government controls over who banks can and cannot lend to
- The continuation of a regime of “corporate welfare”, including for example the Sky and Tiwai Point deals, and the smell that the Saudi sheep deal gives off
- The degree of central government control of the Christchurch repair project, involving both wasteful projects (some of which may not finally go ahead), and the way central government has artificially boosted land prices and impeded the prompt redevelopment of the central city.
- The continuing apparent decline in the rigour of public sector policy advice, and in the use of robust cost-benefit analyses in underpinning policy decisions.
- Increased first home buyer subsidies.
- Undermining housing affordability with mandatory insulation etc requirements for rental properties
- Continuing increases in minimum wages, from very high levels (relative to median wages) at a time when unemployment is quite high, and policy was supposedly oriented to getting people off welfare.
- Heavy investment in the newly state-repurchased loss-making Kiwirail
But, mostly, the story is just about the failure to do anything much. I’ve previously quoted some quite-inspiring Key lines from a speech just before the 2008 election.
I came into politics because I believed New Zealand was underperforming economically as a country. I don’t think it’s good enough that so many New Zealanders feel forced to leave our country each year to seek higher wages in Australia. I don’t think it’s good enough that our average incomes lag so far behind the rest of the world. And I think it’s unforgivable that the Labour Party has done so little to address these fundamental challenges.
I believe that a very big step change is needed in our economic performance to ensure New Zealand can make the most of its considerable potential. Growing the economy of this country continues to be my driving ambition. I stand before you today ready to deliver on that ambition for New Zealand.
You have my personal commitment that if I am elected Prime Minister in eight days’ time I will work tirelessly over the next three years to deliver the stronger economic future our country deserves.
That commitment was made just before the Prime Minister was elected. A year later, in its first report in late 2009, the 2025 Taskforce, established (and then abolished) by the current government included on one of its front pages another aspirational quote from John Key, now well-established as Prime Minister.. The quote the 2025 Taskforce used (from the SST of 8 Nov 2009) was “Our vision is to close the gap with Australia by 2025”
Fine words, but there has been almost no action.
Fine words, but with no tangible results. New Zealand has made no progress in closing gaps with Australia over the seven years John Key has been Prime Minister – not on GDP per capita, not on national income per capita, and not on productivity either. If anything, we’ve drifted further backwards. I put lots of charts in this post last week, but here are just a few reminders:
Real GDP per capita for the two countries, where we’ve done a little worse than Australia.
And here is real GDP per hour worked.
Of course, our Prime Minister has won three successive elections, the last two rather narrowly, and that must sound quite appealing to the backbenchers in marginal seats in the Liberal Party’s caucus. But if Malcolm Turnbull is serious about economic reform – which frankly seems unlikely – he shouldn’t be looking across the Tasman for inspiration and example.
croaking cassandra 
A minor correction: Tony Abbott calls himself a Christian. That’s not quite the same as actually being a Christian.
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The direct reference in my opening sentence was to me, not him, but I am happy to regard both Kevin Rudd and Tony Abbott as serious fellow Christians.
http://www.biblesociety.org.au/news/tony-abbott-profile-in-god-they-trust
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“New Zealand tourism is “on a roll”, with experts predicting the country’s second top export earner to take over from dairy in the near future.
Dairy earned $12 billion in the June 2015 year, down from almost $16b last year, according to Statistics New Zealand.
Spending by international visitors increased $2.4b to reach $11.7b this year.”
As the Minister of Tourism, John Key is a winner.
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any connections you can draw between the current uptick in tourism and reforms put in place by the government (bearing in mind that services exports as a share of GDP are coming off a very low base, and have not got back to where they were in 2007/08)?
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Record 3 million tourists is not a record?
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I think the number is, but that is a bit like saying the level of real GDP is a record too (which it is). Growth rates have been pretty poor for a long time, and altho the last year is good there is a long way to get back to , say, the trend path for the decade prior to around 2003.
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With regards to Tourism , I wonder how much of the increased spend can be attributed to the cost of the underlying product – Queenstown stay costlier than Paris
http://m.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11507011
Air fares are cheap now partially as a result of cheap oil from the current production glut – this won’t last forever.
NZ may be gradually pricing itself out of the market – Europe etc has fiords and glaciers too, Latin America has great potential for increased inbound tourism.
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International Tourist Expenditure
2007 – $9.2 billion
2008 – $9.4 billion
2015 – $11.7billion
How is $11.7 billion International tourist expenditure not a record compared to 2007/2008 because clearly it is???
http://www.stats.govt.nz/browse_for_stats/industry_sectors/Tourism/tourism-satellite-account-2013/summary-results.aspx
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John Key National government dropped Building Depreciation as a tax deduction saving around $500 million in tax refunds through building depreciation to reduce investment distortions.
Also from 1 October 2015 will introduce a 2 year bright line tax on the sale of property to curb speculation.
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The first of those is how taxes on corporate income rose….
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Company tax rates was dropped from 30% to 28%
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Key’s main triumph has been in convincing National supporters that nothing can be done and that the best that can be hoped for is a decline that’s slower than that which would be provided by the other team. When expectations are low, it’s easy to meet them.
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You know why I think it is? I think the top few people in Cabinet came of age in the 1980s where the view on the Right was all we needed to do was privatize everything and get rid of the welfare state. But focus groups tell them that agenda isn’t popular so they think there’s nothing to do except run a balanced budget. They’re also secretly a bit Keynesian though and worry what will happen to demand if they stop spending money. They seem to lack the imagination, and perhaps are a bit old, to see there’s a whole world of economic reform that could be done without gutting the welfare state.
Take drones. One of the obvious low hanging fruit would have been to pass legislation freeing up use of drones for small item delivery. Instead they brought in rules making it illegal to fly over private land. Progress on land reform, the sharing economy etc hasn’t been much better.
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At least in NZ, I don’t think “getting rid of the welfare state” was a pressing concern in the 80s – after all, the unemployment rate historically had been extremely low, and the rise of invalids and DPB beneficiary numbers was very recent. There was so much really distorted econ policy to sort out (tax; labour market, protection, govt businesses and so on)
But I think that early experience was still scarring. English and Nick Smith entered Parliament in 1990, on the back of one of the biggest landslides ever, and then the Nats almost lost office three years later. Add in the PM’s chief of staff, who was (from memory) head of the National Party research unit at the time, and it is pretty searing. And Key and Joyce didn’t come into politics with a policy vision
And then there is the absence of a really strong second tier – no really smart intellectually able ministers coming thru, pushing their depts. and senior colleagues for innovative ways to really make a difference. In that sense, my impression from a distance is that the Aus Liberal Party is better positioned.
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Thanks Michael, and have a great holiday.
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I think you probably hit the nail on the head with your last point: John Key has been very politically successful. That is very appealing indeed to the centre right over here (and conflating the issue with being successful economically helps them sell the message).
I don’t think you should underestimate how much the electorate over here misses an economically sound government which we haven’t seen since the early Howard years (and enjoyed for some 20 years or so before that). I’ve said to lots of other Liberal voters that I’d give all the cabinet to just have Keating or Hawke back, two reformist Labour Prime Ministers – and the reaction is generally agreement. Many of us over here look across the ditch and feel reminded of early Howard.
And don’t go underestimating the achievements of even those modest Kiwi reforms. Tony Abbott couldn’t achieve anything like any of those, but Turnbull might.
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John Key National government put in place additional macroeconomic tools for the Reserve Bank such as LVR restrictions which moved the RB from using its sole interest rate tool otherwise we would be dealing with much higher interest rates now.
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You say that as if it has been a positive. Ask home buyers what they they on LVRs. Remember that the LVRs were raised in response to rising house prices in Auckland. If you live outside Auckland you might like to explain why you are forced to pay for the housing bubble there.
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John Key National government also
1. Got us a seat on the UN Security Council.
2. Signed a Free Trade Agreement with Korea
3. Auckland’s merger of the local councils to become a supercity
4. Winning NZ as the shared venue for the Rugby World cup and hosting the final
5. Balanced the treasury books whilst funding a Christchurch rebuild
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It would be more accurate to say that Key didn’t stop the RB using LVR controls (there was no change in legislation to make it possible). I put this on my “steps backward” list, but clearly we differ on that.
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Actually the LVR tool has been very effective in controlling bank behaviour. Without that tool back in 2002 right up to 2007 bank lending got rather crazily out of control. I recall at the time Low Doc loans became commonplace where you could specify your earnings and got friendly valuations without any checks. When Allan Bollard started raising interest rates rapidly it encouraged more savings.
What a lot of economists forget is that more savings to a bank equates to a liability and the interest paid on those savings is a cost to the bank. This effectively translated to increasing liabilities and increasing costs to a bank creating bank instability. In order to balance increased savings, a bank needs to lend out. Lending to a bank equates to assets on the books and the interest charged equates to income. When the RB pushes interest rates upwards too rapidly, a bank panics and all manner of controls is dropped in order to get the lending up and to increase profits. Rapidly rising interest rates have unintended consequences and runs counter to bank stability.
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1 isn’t really an economic issue
2 is probably a modest useful reform (and some other FTAs, altho note the Aus Productivity Commission view that these bilateral agreements could be a backward step)
3. Is probably a backward step economically, eliminating any regulatory competition
4. Pretty sure winning the venue was under the previous govt (and in any case, RWC is hardly a structural econ reform – but a good party)
5. As I noted, more or less balanced (despite record terms of trade). Most of the fiscal cost of Chch was upfront, in the 10/11 govt accounts.
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Being successful does not mean making huge changes. Huge changes have unintended consequences. It is about taking small positively incremental steps regularly.
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Yes, I have some sympathy with that. And if the small useful reforms list were notably longer than the backward steps – or if we were actually closing the gaps – I hope I would be among the first to applaud. But neither conditions holds, at least on my assessment of the policies I listed.
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One of the common elements to the Hawke/Reagan/Thatcher reform eras was that NGDP ran pretty hot in that period. I suspect it would be easier to introduce reform at the political level if you had a CB governor committed to maintaining growth in nominal incomes.
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I like the idea, but I do recall a couple of very savage recessions in the UK and the US in the early years of the respective leaders. Hawke had the good fortune to ride the recovery from the 82/83 drought and the post financial liberalisation boom years – with a recession only at the very end of his term.
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Oh yes, the John Key government, bringing the Sir Peter Jackson’s, Hobbit series to NZ through ridiculous tax concessions but great for tourism.
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Michael – would it not be fairer to show GDP per capita starting in December 2008, when Key became PM, rather than Dec 2007 – a year before he did.
If you do that then very roughly NZ appears to have gone up 8% and Australia 6%.
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Fair question, but I would say not really. In Dec 2007 both economies were running fairly hot, and then we had a recession which Australia largely avoided. Simply counting from Dec 08 would count as benefits from astute management just the bounceback from a severe recession.
More generally, there are lags and so probably you wouldn’t want to look at anything much before the end of 09 for the impact the current govt made.
But my real point isn’t the precise comparison – one can always debate starting points – but that 7 years on there is no real progress in closing the gap. If the gap has narrowed by 2 percentage points in 7 years to widened by 2 percentage points, that is largely margin of error stuff, that could well yet be revised away.
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In 2007 Australian lending interest rates were a full 1% to 1.5% lower than NZ.
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By the way, Sydney’s Daily Telegraph has, in the space of a few pages used the following headlines this morning: “Smiling Assassin”, “The Mal Who Would be King”, “Malcolm Turncoat”, and in respect of J-Bish, “Bridesmaid Revisited”.
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Yes indeed, the AU news-media are a lot more savage, and demanding, and don’t let go
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New Zealand would do a lot better if we did not have a rich man syndrome and turn down development projects. Projects that rich Nimby groups have turned down to the detriment of all New Zealanders. You can’t blame John Key National government when we have nutcase economic saboteurs running wild in NZ.
1. Reject $100 million hotel in Dunedin
2. Reject $400 million Rugby Stadium at the Auckland waterfront
3. Reject Ports of Auckland wharf extensions preventing large cruise ships from berthing costing Auckland hundreds of millions in years to come
4. Reject $240 million Fiordland monorail in favour of bird and fish habitat
5. Reject $1.1 billion Les Mills Britomart train station project funded by private investments and instead put in a $400 million Christine Fletcher replacement funded by ratepayers.
6. Reject ironsands mining in South Taranaki seabed to the tune of 5 million tons of iron ore exports that will cost the community hundreds of millions of dollars in favour of fish habitat
7. Reject Canterbury seabed mining of 1.5 million tonnes of phosphorites which will cost the community hundreds of millions
8. Reject $2billion Meridian windfarm, project Hayes in Otago
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Agree with you on many or even most of those.
I could add to the list allowing state schools to run this anti-business propaganda screed http://storyofstuff.org/ as a science lesson for 12 year olds, with no context or counterbalance.
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A quick look at the storyofstuff site seems to show Sermon on the Mount ideas; not sure what your objections are, unless you think Christianity is entirely congruent with capitalism. Has this site being mandated as part of the curriculum? Or just a teacher doing their own thing?
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You have to add the $500 million Sky City Convention centre as a plus even though the contracts look like a sieve and allows Sky City to reduce the size or walk away from the deal. But you would have to blame Crown lawyers for not ensuring a watertight contract.
Wonder why no one or press journalist mentions that Sky City can threaten to walk away because they have already got the most important part of the deal and that is the TVNZ land/building, part of a land swap arrangement as part of the deal, just across the road from Sky City that they are converting to a hotel which they swapped with the government.
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I’m with Stephen Franks on that deal. Perhaps it is good to have the convention centre built – but the economics rarely stacks up – but doing such deals undermines the quality of our institutions, which are a material part of what underpin our long-term prospects.
http://www.stephenfranks.co.nz/our-constitution-and-crony-capitalism/
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As noted by Fran O’Sullivan from the beginning, “economic transformation” was never of interest to this National Government – all the buzz was “competitiveness and productivity” from the get-go. So their tendency toward picking winners (irrigation, immigration, pushbike trails, fiber to the curb) and making deals (SkyCity, Warner Bros, Saudi sheep) seems to be a part of the Key/Joyce DNA.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10552789
Problem as I see it – they focus on competitiveness at the expense of productivity. Probably because they [think] they understand it better.
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