Lifting productivity (and fixing housing, etc): what I’d do

When, a week or so ago, I wrote about how our political (and bureaucratic) leaders appeared to have given up hope, and to have lost any serious interest in turning around New Zealand’s dismal long-term productivity performance (and even worse short-term performance), and linked to my recent speech on such themes, a few commenters asked what policies I would implement, given the option.  One was specific enough to invite a “top 10 policies” list.

In what follows, I’m not suggesting that all these proposals are equally important.  It is also worth recogising that some are designed to directly improve economic performance, at least one is primarily about compensating some potential losers who might otherwise be a roadblock in the way of overdue reform, and some at improving confidence in our political system and associated institutions.   Part of what needs to accompany any significant reform package is a strong accepted sense that the politicians making the changes are working first and foremost in the interests of New Zealanders and their families, people of all ages, stages, and levels on the socioeconomic scale.  Change is, almost inevitably, costly and disruptive to some –  one reason why it doesn’t happen –  but people can be ready to accept disruptive change if they recognise it as something we do together, rather than something being done to them.

Some of these policies were included in a call to embrace radical reform I outlined (and elaborated on more than I can do in this longer list) shortly after Jacinda Ardern became Labour Party leader.

  1. Cut the residence approvals target from the current 45000 per annum to a range of 10000 to 15000 per annum (in per capita terms, something similar to policy in the United States
    • within the residence policy, eliminate the preferential Pacific and Samoan quotas, to focus solely on skills, refugees (and foreign spouses of NZers)
    • make temporary work visas (maximum three years) generally available, subject to the employer paying an annual fee to the Crown of $20000 per annum per worker, or 10 per cent of salary whichever is larger,
    • eliminate most work rights for foreign students (other than Master/Phd)
    • remove the substantial subsidy for foreign PhD students
  2. Move to a Nordic system of taxing income, in which income from capital (profits, interest etc) is taxed at a considerably lower rate than income from labour (and considerably lower than at present –  say 15 per cent).
    • a progressive consumption tax would also have considerable appeal but (a) hasn’t been tried anywhere, and (b) a shift to such a system has major distributional implications.
    • eliminate R&D grants and/or tax credits.
  3. Legislate to allow two-storey houses to be built, at the owner’s discretion, on any land (subject only to narrow exclusions around, say, flood plains or serious land instability).
  4. (To the extent not inconsistent with 3 above) legislate to entrench existing planning restrictions at a neighbourhood level, while allowing neighbourhoods to vary such restrictions on a 75 per cent favourable vote of affected land owners.  (As a reminder, such provisions would parallel to a considerable extent the covenants that are voluntarily established on-market for many private residential developments.)
  5. Because I would expect 1 and 3 above together to result in a sharp sustained reduction in house and urban land prices, establish a compensation scheme under which, say, owner-occupiers selling within 10 years of purchase at less than, say, 75 per cent of what they paid for a house, could claim half of any additional losses back from the government (up to a maximum of say $100000).  It would be expensive but (a) the costs would spread over multiple years, and (b) who wants to pretend that the current disastrous housing market isn’t costly in all sorts of fiscal (accommodation supplements) and non-fiscal ways.
  6. Establish a Commerce Commission inquiry (or a Royal Commission if necessary) to get to the bottom of why building product prices appear so high in New Zealand, not ruling out direct government intervention in the market if the issue is found to be primarily one of lack of sufficient competition.
  7. Lift the age of eligibility for NZS to 68 (increasing by, say, four months a year, so that it would take nine years to get to that age) and beyond that index the age to future improvements in life expectancy.
    • tighten the residency requirements, so that receipt of full NZS would require 30 years of residence in New Zealand itself (and not treating, as at present, residence in Australia as counting as residence in New Zealand for these purposes).
  8. Institute a congestion-pricing regime for Auckland and Wellington.
  9. Reinstitute interest on student loans, perhaps at a government bond rate (still in effect concessional), while lifting amounts that can be borrowed
    • replace fee-free policy, with a somewhat more generous robustly means-tested student allowance for high-achieving students.
  10. Consider instituting a universal child allowance (radical as this may sound, it was an option covered in the 2025 Taskforce report)
  11. Replace the Secretary to the Treasury, appointing someone with a mandate to build an excellent institution, providing robust advice on lifting economic performance.  The Prime Minister or Minister of Finance can’t do it alone, and the current Treasury doesn’t appear to be up to, or that interested in, the job.
  12. Wind-up the New Zealand Superannuation Fund, using the proceeds to repay public debt
    • consider shifting ACC to a pay-as-you-go basis (public money-pots are corrosive of good government and a wise allocation of resources)
  13. End industry assistance (such as film subsidies), except when the government is purely a vehicle for collecting and enforcing industry levies to fund themselves).
  14. Since this package would be likely to be net fiscal negative (at least in the short-term), adopt as a medium-term target an operating deficit of 1 per cent of GDP, and be willing to allow net debt (currently around 7 per cent of GDP) to rise to 25 per cent of GDP.  (A modest deficit of that size will be consistent with stable debt to GDP ratios over time.)
  15. Prioritise a substantial improvement in water quality in streams and rivers.
  16. Require postal ballots of residents for all major new items of local authority spending (some size threshold to be determined, perhaps relative to annual rates revenue), and establish provision for recall petitions for members of local authorities.
    • prohibit local councils from undertaking investments in individual commercial operations.
  17. Overhaul the Official Information Act, to provide for pro-active release of major documents (notably Cabinet papers) as the default standard, and to amend existing provisions frequently used to delay or prevent release of official information (with parallel changes to the LGOIMA for local government).
  18. Mandate the (all but real-time) disclosure of all political donations in excess of $200, and ensure that the political donations law is written in such a way that it encompasses (for example) donations through charity auctions.
  19. Prohibit former politicians and senior government officials taking paid roles in organisations controlled, directly or indirectly, by foreign governments, and impose a three-year stand-down period on any former minister taking a position in an enterprise s/he was involved in regulating (directly or indirectly) as a minister.

There are all sorts of other policy changes I’d no doubt be happy with, and whole areas I haven’t even touched on.  One is infrastructure finance. I have no particular problem with the interesting ideas that are around on innovative vehicles (used in the United States) allowing infrastructure debt to be tied to the specific landowners where the development is occurring, rather than as a general charge on local councils).  But on my set of policies, expected population growth for the country as a whole would drop to something less than half a per cent a year, reaching zero before too long (as the total fertility rate is now well below replacement) so that action on that issue is much less pressing than if we continue with the deeply flawed “big New Zealand” policy of successive governments.

I haven’t mentioned emissions targets either, but such targets would be hugely easier, and less costly and disruptive, to meet under this set of policies, than under the set we are actually operating.  I haven’t mentioned capital gains taxes: I don’t really believe the case for them has been made, but equally a well-designed CGT probably won’t do much harm.  But with the land market fixed, there wouldn’t be much revenue, at least from the housing side (which attracts so much attention).  Having fixed the land market, one could even follow the US example and include owner-occupied houses in a CGT net (with rollover relief): again it would raise very little revenue, but it might better meet some people’s sense of fairness.

The macroeconomic bottom line of this set of policies I would expect would include:

  • affordable houses,
  • materially lower real interest rates (relative to the rest of the world),
  • a substantially lower real exchange rate,
  • materially more business investment (including foreign investment), especially in the tradables sector, and in time
  • higher exports and imports as a share of GDP,
  • higher productivity, and
  • higher wages.

And a New Zealand that was really working for New Zealanders.

Thoughts/comments/reactions welcome.


Over-egging the pudding

Yesterday it was one of our leading political journalists suggesting of the proposed agreement between the EU and New Zealand

But a free trade deal with Europe has the potential to be transformative for the entire country, with the potential to grow this little rock-star economy even further.

And today on Stuff we find Business New Zealand’s chief executive Kirk Hope, suggesting that such a deal would be the “holy grail” (this is in fact the headline in the hard copy version), and ending by asking

Could now be NZ’s long-awaited hour?

That scale of benefits is about as well-grounded in fact, and unlikely, as the creative literature around the grail itself.

It would be one thing if a genuine free-trade agreement were in prospect –  although even then the scale of the possible would scarcely be transformative for New Zealand –  but Kirk Hope, and everyone else from the Minister on down, knows it isn’t.

But he seems determined to keep up the spin

Such deals are central to NZ’s prosperity

Well, no.  There are, probably, some modest economic benefits that have flowed from some of deals done over recent decades, but not even MFAT would claim for the China-New Zealand deal the scale of benefits Kirk Hope wants to claim (the entire increase in New Zealand exports since then).   Such assertions are nonsensical, without foundation, and arguably worse than that.   People discredit the worthy, indeed noble, cause of free trade with such over-egged claims.

And ‘central to our prosperity” in a country that has experienced barely any productivity growth for five years, and where overall exports and imports as a share of GDP have been shrinking?

Then there is the questionable, not entirely straightforward, representation of New Zealand’s trade with the EU countries.

New Zealand is well known as an agricultural producer, but we are more than just that – our services trade to the EU made up 41 per cent of our total exports in 2017.  These ranged from the education and training industry to financial and insurance services, alongside professional services such as engineering and architectural consultancies.

Well, yes, no doubt.  But as I pointed out yesterday by far the largest component of New Zealand services exports to the EU (or the euro-area) is in the form of Europeans taking holidays in New Zealand.  Export education also ranks quite high on the list.  Neither is likely to be affected at all by any EU-New Zealand deal.

Canada and the EU reached an agreement a few years ago (the Comprehensive Economic and Trade Agreement), still not fully in force because of obstacles in the ratification process.  I had a quick look round to see what the estimates were of the gains to Canada.

I found a study by the Canadian Parliamentary Budget Office. It won’t be the last word by any means, but equally it wasn’t just done by a couple of backroom opponents of the deal.  This is some of what the study says of that deal

  • CETA will lead to some gains for Canada, but they will be modest.
  • Canada and the European Union have different tariff levels going into the agreement. Canada’s tariffs are higher on average (weighted). Canadian and European exporters both faced tariffs greater than 10 per cent on almost 500 products (Harmonised System, 6-digit level).
  • Canada will gain in terms of increased economic output (almost $8 billion, or 0.4 per cent of GDP, over the long term) and investment (0.6 per cent of GDP), even though the trade balance deteriorates. Greater specialisation and increased production efficiency lead to net economic gains.
  • The diversion of trade to the EU will reduce Canada’s exports to the United States by more than a billion 2015 dollars over the long term. To the rest of the world, by another third of a billion dollars.

The predicted gain (in the quantifiable areas) to GDP is 0.4 per cent (not very different from the 0.5 per cent estimate –  from an EU study –  bandied around in talk of a New Zealand deal), for a country that is reducing its tariffs by more than the EU will be.  That wouldn’t be the case in a New Zealand deal –  and recall that tariffs mostly hurt the citizens of the country that imposes them.  It is also good to see, amid all the talk of possible increased EU-NZ trade, estimates of the extent of trade diversion: one of key risks/costs of such preferential agreements.

None of this is to suggest that the Canada deal is bad for Canadians (or Europeans for that matter), just that if there are gains, they are small.  It is most unlikely to be any different for a New Zealand-EU agreement.    And whatever the trade effects, reaching behind respective borders to constrain the freedom of governments to regulate, or not, is pernicious, chipping away at the flexibility of elected governments.  That might be part of the raison d’etre of the EU hierarchy, but it isn’t supposed to be the New Zealand way.

Perhaps the clue to this over-egged, utterly unconvincing, piece is in the final paragraph.

To pull off an FTA with the EU would be an outstanding achievement for this still-new Government.

Anyone can do a deal, the question (as yet unknown) is the character and quality of any deal.  But from the tone of that final comment, one might deduce that Hope’s column is more about trying to curry favour with the new government –   business and the government being offside on various other issues –  than it is about serious analysis.  Stuff should probably have charged him for the sycophancy: advertising space rather than the business op-ed pages would have been a better positioning for it.

(What was going to have been today’s more substantive post will be along later.)