Economic performance

The second half of the Grant Robertson/Steven Joyce debate on Sunday was around things to do with overall economic performance and management.

On one thing they agreed: Winston Peters’ proposal that New Zealand should adopt a Singapore-style approach to monetary policy and the exchange rate isn’t an option for New Zealand.  I agree with them, and explained why in a post a few months ago.

Grant Robertson reminded viewers that John Key had promised to close the gaps between New Zealand incomes and productivity and those in Australia, noting that no progress has actually been made.   Steven Joyce likes to push-back by citing numbers that suggest that after-tax real wages have been rising faster here than in Australia.    When I’ve looked at that claim previously, a lot appeared to depend on which exchange rate one used to convert wages in the two countries into a common currency.  Using PPP exchange rates, the gap has actually widened a bit further.    Comparing wage series across countries isn’t that easy –  countries measure things differently, and things that are effectively part of remuneration (eg employer superannuation contributions) often aren’t included.

Personally, I prefer to focus on economywide measures, which are compiled in a consistent manner across countries.   Here is real GDP per capita for the two countries, indexed to 2007q4, just before the global downturn/recession began.

real gdp pc nz and aus

I could have started the chart a few quarters later, to coincide with the change of government.  Either way, no progress at all has been made in closing the gap to Australia.

Things look worse if we focus on labour productivity (real GDP per hour worked).

real gdp phw nz and aus aug 16

Best summary?  We haven’t lost much ground against Australia when we focus on GDP per capita, but since relative productivity has dropped away badly we’ve only maintained even that mediocre real GDP per capita record by working even longer hours on average.

But if the government’s record is pretty poor, it isn’t clear that the Labour Party is offering anything much different.   It is all very well to criticise the current government for making no progress in closing the gaps, but Labour doesn’t even seem to be talking about doing so.    Robertson did highlight the four or five years now of zero productivity growth, and talked of needing a plan for something different.  But it wasn’t obvious from anything he said, or anything I’ve read, quite what the plan is, that might be equal to the challenge.   There is plenty of talk of lifting skills –  but the OECD data already suggest New Zealand skills levels are among the very highest among advanced countries.    There is talk of a tax working group, with an apparent presumption that that is likely to lead to a capital gains tax.  And there is talk of R&D tax credits.  But I doubt anyone –  even those who support such measures – believes that they are remotely enough to make the sort of difference closing the gaps to Australia might involve.

Of course, the National Party’s position seems no better.  The Minister’s rhetoric is that people are voting with their feet and realising that the jobs and incomes are now here.  Sure, the annual outflow of New Zealanders to Australia has dropped, but it is still an outflow each and every year.   And no one seriously thinks other than that average incomes in Australia remain much higher than those here.  But it is tougher to get established in Australia at present –  that’s a bad thing for New Zealanders, not a good one.

Steven Joyce was touting the success of certain subsets of firms exporting from New Zealand.  It is perhaps easy to forget that the government has long had a goal of substantially increasing the export share of GDP (and, presumably, the import share, since we export to import –  sell stuff to other people so that we can consume ourselves).

Here are exports as a share of GDP.

exports joyce It is easy for one’s eye to go to those peaks in 2000 –  at a time when the exchange rate had fallen sharply – but even much more recently the trends haven’t been favourable.  Even the vaunted services exports are lower now as a share of GDP than they were 10 years ago, or than when the government came to power.   The Minister talked of “high-tech value-added manufacturing” as the future, but then overall goods exports are lower as a share of GDP now than at any time in the last 30 years.

Mr Joyce talked of a slump in global trade, as if our experience was just something like everyone else had experienced.  But even that isn’t true.     The share of exports in GDP for the median OECD country has increased by around 5 percentage points in the last decade.  In that decade before that, it increased by about 6 percentage points.

And for all the talk of services exports, here are exports of services as a per cent of GDP for New Zealand and the other small OECD countries.

services x small countries

Grant Robertson was prepared to go as far as to say that the exchange rate is “too high”.  Artificially lowering it wasn’t, we were told, the answer (and I’d agree, if by that he meant eg a Singapore-style monetary policy).  But there was no hint of how Labour thought a lower exchange rate might be brought about in a more sustainable manner.

New Zealand has faced some obstacles to growing the tradables sector of our economy in the last decade.  The earthquakes meant that real resources had to be used for other things –  repair and rebuild –  and other activities had to make room.  Policymakers have known this since the very days after the earthquakes occurrred.  The substantial amount of offshore reinsurance just reinforced the way in which the earthquakes represented a large shock skewing the economy for a time more towards the non-tradables sectors.

But what was extraordinary is that the same policymakers allowed, and cheered on, another even bigger non-tradables-skewing shock.

Here is a chart showing cumulative population growth since National took office, and the cumulative inflow of non-citizens (the PLT data, with all their pitfalls).

popn and immigration

We’ve had a 510000 increase in population over the term of this government, 421000 of which is accounted for by the net inflow of non-citizens.    The fertility and migration choices of New Zealanders would, all else equal, have given us only around 2 per cent population growth over the eight and half years, putting a great deal less pressure on

  • housing markets
  • other infrastructure
  • the physical environment, and
  • the tradables sector as a whole.

Remember that each new arrival need a lot more physical capital stock than is accounted for by the labour those people supply early on.   Policy has been deliberately skewing our economy away from the tradables sector.    We’ve had a net non-citizen migration inflow of almost exactly 300000 people in just the last five years.   With no productivity growth at all in that time, and an export (and import) sector shrinking as a share of GDP, and business investment pretty subdued too, one might reasonably ask ‘to what end?’ for New Zealanders.

We should be left wondering why, if we vote for them, either main party expects anything different than the mediocre economic performance of the last few years.   Gareth Morgan criticised Labour’s apparent lack of much policy substance  as “putting lipstick on a pig”.  It isn’t obvious that the National Party is even offering the lipstick.

And all this is without even repeating for the umpteenth time that the unemployment rate now is still higher than it was at any time in the last five years of the previous Labour government, at a time when demographics appear to be lowering the natural rate of unemployment.  Or the underutilisation rate of almost 12 per cent.      We should be able to do a great deal better for New Zealanders.

 

17 thoughts on “Economic performance

  1. Thoughts on any of TOP’s strategies? They don’t appear to have comprehensive views necessarily on trade, but they have some interesting policy. Attempting to cut the excess of capital flowing towards property sounds like a reasonable start at least.

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    • The thing I like about TOP is that they reckon we need a significantly different approach to get significantly different results. That said, I’m sceptical of some of their more important economic/tax policies. see, for example,
      https://croakingcassandra.com/2016/12/16/gareth-morgans-tax-policy/

      One point I make there is that we have house (and especially land) prices that are too high, but there is no sign that we have too many houses (suggesting we haven’t diverted excess real resources to housing). of course, if one thinks immigration is too high – as I think TOP do too – then changing that policy would mean needing to build fewer houses, which would free up resources for other uses.

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      • The immigration numbers come hand in hand with servicing the needs of a booming $15 billion export business in tourism and international students. It’s a service industry and the best service equates to more people rather than less. You can’t have one without the other.

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  2. New Zealand is a relatively young country which means the old money is just not available. Also New Zealanders tend to find their own way and is not usually involved with family money. This inevitably means that we are all starting with zero equity.

    In order to invest, the equity must come from either a successful business or a house that rises in value or from savings. But when you are saving then you are not investing which means more savings actually divert investments from the productive sector. To build a successful business you need access to equity because small businesses have a high failure rate without the support of strong equity growth. That’s why for many small businesses the equity is used to secure the working capital facility from the bank.

    If you look at a successful business like MacDonalds, the success of the model is in the real estate funded by the business cashflow. The business creates the cashflow in order to invest in the realestate. The MAcDonalds model uses the equity of the real estate and the business offers the cashflow to acquire the realestate. It boils down to the banks lending preference. Real estate provides a reliable security. A lot of business value is intangible and rather unreliable in terms of determining the value.

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  3. How about we look at what economic activity will maintain some kind of adequate living standards for NZ’ers?

    That’s always been the challenge, given our isolation and reliance on imported fuels and other raw materials and reliance on primary production of foodstuffs to earn export dollars. We don’t import to consume, we mostly import to keep all of that going. It’s been the challenge since the UK went for the EEC in the 70’s and since the introduction of neoliberalism by Labour in the 80’s.

    Kiwis have always had to leave to seek better prospects elsewhere, what is unusual today is more staying home and more coming back, increasing net migration on top of external migration. It’s an exercise in futility comparing with Australia, with their mineral wealth and vastly larger population, what we need to do is look at what we need to survive. I’d love to see politicians concentrate on that because if the question is have we survived global economic upturns and downturns we have done pretty well economically, but if the idea is we be a wealthy country and compete head to head with other countries that are vastly different and we will never compare favourably.

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    • I largely disagree, but just as a contextual reminder, we were once upon a time in the richest handful of countries in the world. It was still true as recently as about 1950. So NZers haven’t always had to leave, and only rarely did so, until our economic policy performance started going downhill.

      On Australia, it is well off the pace in terms of global frontier levels of productivity.

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      • Yes but that was when the UK brought all our sheep meat and all the wool went towards the Uniforms of the soldiers of the British Empire at whatever price that we would choose to sell it at. There was no competition. The UK was dedicated towards supporting the NZ colony with wealth and riches.

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      • No.

        The UK committed to buying all our produce during the wars themselves, but only then. Otherwise it was a matter of NZ sellers finding buyers, fending off proposed restrictions, trying to negotiate preferential access etc. In 1939, the NZ govt was very close to debt default – fended off only because the war was close.

        We had lots of produce, had had the new technologies re refrigerated shipping and dairy, and not many people. It was a recipe for prosperity. In fact, it largely still is, except that we have perhaps a couple of million people for the land.

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      • Kiwi’s have always left. For example, there were many men who went to war and never returned for both WW1 and WW2. NZ had the second highest rate of deaths of servicemen per capita in WW1.
        so our population was to some extent trimmed back rather than grown during those times.

        We simply do not spend sufficient money on R & D to make a difference. Japanese companies will spend 10% of income, NZ is mostly in the 1-2%. This busy body politics that dish out money for research holds us back. every company should be required to spend vigorously on R & D.

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      • What are you disagreeing with? You don’t say what. The 1950’s is a past era, the UK walked away in favour of the EEC in the late 60’s, NZ experienced the oil shocks of the 70’s and global high inflation/high interest rates. Economically the struggle has been to deal with those challenges as best we could and try and maintain some sort of living standard. Harking back to some time long ago isn’t context, we’ve got to look at the challenges we’ve faced since then and how well we’ve done with that and that we’re isolated and have historically had a small population. It’s not just economic policy divorced from everything else.

        I see someone below mentions Japan, but they are in Asia, have pretty much the highest population in the world and managed to benefit off the Cold War where they had the support of world powers who feared they would fall to communism. Economic policy there and their ‘miracle’ stemmed off completely different circumstances to us. Can’t compare really.

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      • What am I disagreeing with? That has been one of the long-term themes of this blog. We did a lot of crazy stuff for decades from the late 1930s, that made the NZ economy quite insular and inefficient, but that was mostly undone by the late 80s. The bigger, most consistent, misjudgement, in my view is the strong non-citizen immigration inflows we’ve encouraged for most of the post-war era (with a 15 year hiatus from the earl-mid 70s). In a country with low savings rates and limited natural resources, penalise severely by remoteness, it is a recipe that has undermined our per capita economic prospects. My story is outlined in this recent speech

        https://croakingcassandra.files.wordpress.com/2016/03/an-economists-scepticism-about-large-scale-immigration-to-new-zealand.pdf

        and in another from last year

        https://croakingcassandra.files.wordpress.com/2016/05/fabian-society-speech-20-may-2016.pdf

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      • Nz households have $161 billion in cash savings plus $53 billion in listed shares which is actually very good savings for such a small population.

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      • When we are feeding and handling waste of 10 million cows which is equivalent to feeding and not managing waste of 200 million people then it is not scarcity of resources but actually squandering resources.

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  4. All this talk about getting together a tax working group by Jacinda and Grant is just plain untruthful. They should just go and read the very detailed and very thorough study done in 2009/2010 by John Key’s independent Tax Working Committee. John Key’s National government in 2009/2010 had already completed a Tax Working group rather detailed 1 year working group between Victoria University, Treasury and IRD together with professionals like KPMG, Price Waterhouse, Ernest and Young, Deloittes and a whole bunch of lawyers and economists.

    The conclusion of the study was a very comprehensive Capital Gains Tax which was largely rejected by John Key as not feasible. The elements accepted by John Key was an increase in GST to 15% and removal of depreciation loading of 20% on new assets and removal of building depreciation and subsequently the introduction of the 2 year Bright Line test.

    https://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/pdf/tax-report-website.pdf

    The difficulty lay in the fact that a comprehensive CGT system only really works if it includes owner occupied property and if you pay tax on the unrealised capital gains. It also had to be fairly comprehensive which included all capital gains which means that the tax applies broadly to all capital gains, Win Lotto pay tax, inherit a property pay tax, sell a business pay tax, sell shares pay tax, sell a holiday home pay tax.

    The argument also is that the residential home has too much equity, also pay tax on the unrealised capital gains each year. This will mean that a home with all debt paid off will have a tax on the paid up equity each year. One of the key tax recommendation to move assets away from non productive assets into productive assets was to tax the unrealised equity in a persons house. This is what Jacinda and Grant will consider adopting because it is already clear what the outcome of a Tax Working Group will be. The exercise has been done. Jacinda and Grant are just being untruthful and underhanded.

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