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.


57 thoughts on “Lifting productivity (and fixing housing, etc): what I’d do

  1. Send immediately to the PM, Minister of Finance, Min Economic Development and all other related Ministers, and CC all major news outlets.


    • With 10 industrial strikes so far under the Labour government in 7 months of office, it is clear that workers have become embolden by the tightening in immigtration policy thus far. Clearly the Labour government has opened a Pandoras box. The latest strikes with the nurses asking for an 18% pay increase as a base minimum to get to Australia’s pay structure and the government offering 3% per annum. Plan for a DHB strike in July. It is a forgone conclusion. Next will be the Police strikes that follow and bus drivers, train drivers. Forget about public transport it is going to be too unreliable. How does striking workers actually add to the productivity equation?


    • Grant Robertson has already reversed National plan to cut taxes. Therefore there will not be any tax cuts so forget about 15% tax rates. It is never happening under a Labour government. You have to vote ACT party for that and it looks like ACT party will disappear at the next election.


  2. Fantastic list, I agree with almost all of it. Main differences.
    – keep NZS but turn it into a non-profit Kiwisave option for private savings
    – limit credit available for housing speculation (eg first home buyers must have 10% down; investors must have 65% equity).
    – carbon tax.


  3. Fair enough, altho if you fix the land market, and remove population pressure as well, housing speculation isn’t likely to be much of a problem (houses are things to live in, and there are plenty of them – oh for that day!)


    • The current Unitary Plan allows for a Permitted activity of 3 dwellings after the environment court ruling which means that no Resource Consent required for suburban dwelling and urban dwelling zones which is most of the Auckland housing stock. Therefore your 2 dwelling concept already exists under the Unitary Plan. It does not change the rate of building as Auckland Council Inspectors are statutorily duty bound to protect ratepayers. Therefore do not expect Auckland Council inspectors to relax the inspection process. The courts have made Auckland Council fully liable for the leaking building saga which is costing ratepayers hundreds of millions in court case losses and they will ensure that they inspection process continue to be legally robust for infinitum detail that is required to pass lawyer scrutiny.


  4. Some reforms of the RMA and associated legislation like the Building Act is required to help re-direct capital from housing and remove process costs. Changes like having to have an interest greater than the public interest to participate in planning processes and consents, Removing the blocking mechanisms local authorities use to slow applications. Finding better solutions to infrastructure installation delays in new subdivisions. To name a couple.

    I would like to see company tax reduced, even removed. The problem of individuals forming companies should be relatively easy to police.


  5. On the company tax point, for resident business owners company tax is mainly a withholding tax (because of the imputation regime), so just cutting the company tax rate mostly helps foreign investors.

    I don’t disagree with the sentiment of your other suggestion, but it is an area I know too little about (including how much is a legislative problem, and how much a council admin one. There is a pretty damning column on the Akld council admin in today’s Herald.


    • Your statement that company tax rate is mainly a witholding tax is a totally innacurate description of company tax and Imputation The imputation tax credit reserve is to prevent double taxation where the company profits get taxed at 28% and then, dividend distributions to shareholders would be taxed again at 33% above $70k earnings if there is no imputation credit reserves. A imputation credit reserve just records that the company had already paid tax at 28% and therefore any subsequent dividend payment should only attract a tax of 5% for distributions above $70k. Otherwise shareholders will end up paying an effective tax of 61%, then who will invest in a business in NZ?


      • I don’t think we are disagreeing about anything. The imputation system – which i generally favour – avoids double taxation for NZ resident shareholders, and means the ultimate taxation of profits generated by businesses is at the shareholders’ individual marginal tax rates. Thus, company tax itself isn’t particularly relevant (and so cutting it, in isolation, won’t change incentives re NZ owned businesses).


      • Actually you won’t prevent people from investing, instead you effectively make Companies redundant as a holding structure in NZ and instead see the use of Special Purpose Limited Liability Partnerships which is currently mainly used by Overseas shareholders that can’t use the NZ Imputation Tax Credit Reserves and therefore gets double taxation.


    • So you are happy for me as a tax resident of Australia for nearly 20 years but still a citizen of NZ to vote in NZ General Elections? I wouldn’t be – particularly as 90% of Government business is around how much tax is collected and where it is distributed.


      • Not really, but in agreeing to the suggestion I was assuming the same restrictions apply as at present (ie have to have been in the country once in the last 3 years – as I’m sure you have). The point of the suggestion was to narrow down eligibility which at present includes anyone resident here (not on a temporary visa) for more than a year. I’d happily tighten the rules further, to exclude NZ citizens who don’t live here, although finding an operationalisable rule might be a challenge.

        Liked by 1 person

      • As Michael comments you are really only allowed to vote if you have been inside NZ at some time recently (sorry I do not know the actual rules)
        The above rule is ignored by some who think they have long term absence.
        Considering the current rules on permanent residents the law needs a serious review and policing.


      • From a Universal retirement income purpose, New Zealand treats Kiwis living in Australian as New Zealander residents anyway in which case, the usual 10 year stand down period does not apply. This does mean that 600,000 kiwis in Australia can return at any time and are eligible for NZ Universal Superannuation even though you may not have paid any NZ taxes for the last 20 years.


  6. Michael if there was a clear majority support for these changes, that could be relied on to remain supportive through an extended policy implementation and adjustment period, then I would agree with it.

    I think your economics is mostly very sound. For instance, I think you have proven that the economic benefits of NZ’s high immigration rate are not what the ‘boosters’ have claimed. The only economic quibbles I would have relate to spatial economics and are more of the nature of clarifying points rather than complete disagreement (I will clarify the quibbles in the next comment).

    The difficulty with making a broad set of policy reforms -especially one affecting our urban areas and private properties, where the vast of majority of New Zealander’s live, is maintaining a sustained level of political support.

    It is generating and sustaining the political support for your proposed changes that I have the most concerns. Your proposed reform agenda would firstly get offside the ‘pro immigration’ supporters and then you would scare the ‘homevoters’ with a rapid change to their property values. In your scheme the ‘costs’ would be imposed in the short term, in a way that is real and tangible to specific groups, whilst the benefits would be diffuse and long term. Given these considerations, unfortunately I cannot see how the ‘politics’ of what you are suggesting could work.


    • If you have a low income and own a house by the skin of your teeth will a two story house block sun? it would be better if the state owned the land and people bought a right to occupy. That way the state could redevelop in an organised versus hodge-podge way? As in Singapore.


      • Sorethumb -isn’t that a bit like the story of a person who is lost, so they ask someone for directions and the response is, ‘well if I wouldn’t start from here if I was you’.

        There are literally millions of private property titles in NZ, how do you propose to convert them into leaseholds?


      • Yes I think it is weird. If the sections are going to be that small, why not do away with the side yards -attach the houses together, build 2-3 stories high to reduce the building footing size and increase the amount of garden space? That way more attached houses could be built, each with bigger gardens, than the rubbish in Wigram.

        You would think a developer in a competitive market would build a variety of housing types for the different market segments. Something like half the development being more affordable attached housing and the other half being bigger sections/higher priced stand alone housing.

        I think the reason this doesn’t happen is a lack of competition. The developers know they have a local monopoly on the sale of new houses. They can produce high priced rubbish when there is rising demand because the market has little choice other than to pay for it. When demand falls away -the developers and construction companies just drop their ‘tradesman’ contractors and reduce their costs to a minimum. Then they wait a few years for the cycle to start up again.

        There is no long term investment in quality, innovation, labour productivity….. -it is really depressing.


      • Recently travelling from Bradford to London to Hampshire and back to St Pancras (NE Central London) and Eurostar through Kent and most of the housing seems far more compressed than your Wigram subdivision. The UK and Northern France may be wealthier than NZ but they certainly squeeze people in. Now in Lille and it may be worse than South London. As a member of a garden society it is noticeable that members are elderly; gardening is not an activity for the young and heating costs.many families with children rarely see the children actually in the garden. Maybe the Wigram developer is giving people what they want. However Brendon is right that short terraces utilises land better, saves on building walls and roofs while reducing heating costs.
        I wish I had grown up in this country.


  7. It is a reasonable concern. My compensation scheme is designed to mitigate that risk, as is the entrenchment of the existing suburban planning laws.

    I guess my take is that you have to be offering enough attractive stuff to enough people, and compensating in some cases, to be able to limit the damage from those offering strong opposition on particular points. That is a challenge with any possible package of reforms, not just mine.

    But part of any reform has to be finding a courageous group of leaders willing to face down initial opposition, in a (well grounded) belief in the medium-term benefits, and a willingness to go out of office if those benefits aren’t realised soon enough.

    Liked by 1 person

  8. Spatial economic quibbles.

    Re 3. Is essentially removing the urban growth limit. Economically this is about reducing the marginal cost of supply for extensification (the outward growth of an urban area) down to his true cost by removing artificial restrictions. The problem is that zoning is not the only restriction. Zoning also reflects areas where there is available infrastructure capacity. A big part of that equation is transport. The last government spent $8 to 9 billion on RoNS, which were essentially a road subsidy to expanding urban areas in Auckland, Tauranga, Hamilton and Christchurch -but other than Christchurch it did not work -even when the government got involved directly are created Special Housing Areas -most of which were adjacent to subsidised State Highways. More work needs to be done on infrastructure finance -the special purpose vehicles you mentioned Michael.

    Re 8. Congestion road pricing -this is needed to work alongside new forms of infrastructure financing to send the correct pricing signals -it should be applied to other growing urban areas too, such as Greater Christchurch.

    Re 4. “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.)”

    I have a proposal along similar lines which would greatly improve the economics of the intensification margin, which I discuss here.

    Greater intensification like I propose leads to a downward shift in land percentage values but does not affect absolute per square metre land values. It therefore is less disruptive to the wider property market.

    Re 5. Compensation scheme. If more of the housing/urbanisations reforming load is provided by 4, which benefits existing urban landowners then there is no need for a compensation scheme and political opposition is reduced.

    If readers are wondering about the viability of the scheme to address the housing crisis. I am not claiming it is a ‘silver bullet’. But it could lead to a significant improvement in housing supply. Auckland for instance has in the order of 10,000+ residential blocks. If just 6 a year choose to intensify in the way I discuss in my article then that provides an additional 1000 new houses to the Auckland housing market a year -a 10% increase in what it is currently building (based on consent figures).


    • Thanks Brendon. I guess where we differ – at least for practical purposes – is that I want to see land prices collapsed, and make it feasible for young families on moderate incomes to do as my parents did 55 years ago, and acquire a house with a decent backyard etc

      Of course, for those who want a different sort of lifestyle that is fine, but we don’t see much evidence of that as a major revealed preference of NZers (eg our provincial cities and towns aren’t spawning lots of high rises or terraced dwellings).


  9. Its a fine list of ‘reforms’… really when isn’t a Govt of any stripe doing ‘reforms’… however, I’m not clear on what any of this has to do specifically with increasing the rate of productivity growth… which is the headline… more specifically, what do you propose to extra more units of value from any given units of input… labour/capital etc… lowering costs is certainly part of the issue – namely the stupid building costs…

    I’m not seeing much in the way of direct productivity strategies….


    • It is in the combination of the lower interest rates, lower exchange rate, lower population growth rate, and lower capital taxes, which would reverse the way the economy has skewed inwards. Successful high performing economies with high productivity growth tend to be highly outward oriented.

      Many of the rest of the measures are either fiscal financing (to cover the tax cut) or worthwhile reforms which in combination might make an overall package politically feasible (in the right hands).


    • NZ towns and cities housing markets create a barrier to entry for the local labour market. The only affordable housing markets are the unsuccessful places. Unaffordable housing markets can be seen as a ‘tax’ on productive labour that do not own property. This causes a distortion in resource allocation, which has productivity (and inequality) implications.


  10. Writing from Europe where I’ve returned for a holiday after a four year break. My gut judgement after two weeks in France, Belgium and the north and south of England is that NZ’s wealth is standing still while in these countries it has moved forward or putting it differently our productivity is treading water still while other countries are swimming ahead. This is what you ave been saying for a long time but with numbers to support your argument. My gut judgment
    We will be returning to Auckland although my PI wife has been checking out house prices and murmuring about the benefits of living in the Pennines. When we return I will be suggesting to my educated children that they could consider working overseas.

    Productivity does matter.


    • Bob you would not be the first to pack up your bags and leave NZ because you or your families package of *benefits* is better elsewhere.

      Productivity is important.

      But it would be a shame to see you go Bob -if you do go. I like your curiosity and willingness to engage….


      • Bendon, I will be the last to leave NZ. Totally wedded to the place now. Besides NZ needs me here to ameliorate your passion for intensification. OK population densities in cities will increase, that is inevitable and necessary and it is better done in a thoughtful way based on your kind of intelligent analysis than leaving things to random chance combined with irrational bureaucracy. However the old fashioned stand alone house with garden with a parked car or two has ts charms too. Just ask any recent immigrant from an Asian city whether if given a choice they would prefer an apartment.

        My children include a qualified social worker, an apprentice builder and a logistics manager for a Korean electrical goods company: all three might prefer more disposable income and I couldn’t argue against their emigrating other than I’d miss each and every one.

        Maybe we should ask Jacinda where she expects her child to be living in 25 years time.

        Liked by 1 person

      • Bob if I have done my sums right. If Auckland produced houses at its current rate (about 10,000/year) all by my favoured intensification rate of 5 new for 1 old. It would take 40 years to knock down a quarter of Auckland’s stand alone housing stock.

        I do not think we will see the end of stand alone housing in Auckland in our or even our children’s lifetimes!

        Liked by 1 person

    • Your family’s thoughts echo my own for many years: I’m not going anywhere (no rights anyway) but I’ve always wondered if in good conscience I could encourage my kids to stay. that used to be a hypothetical, and then more or less by accident we got two of them foreign passports, but it is increasingly getting to the point where they will soon be very real conversations.


  11. I would think that 10,000 would still be too high (well at least for a decade), about 2000 a year might be better, It would be interesting if companies must tender for work Visa and the successful applications become public record (more transparency would help resolve some of the cheating issues).

    For stability in the South Pacific(& at the end of the day a great many will be displaced to here by the end of the century anyway), they (the common people) need access to income which isn’t really accessible locally, seasonal and temporary visas preference will likely be far more beneficial to NZ than much of the donations the government makes to the islands.

    You fail to address that part of the housing problem that relates to the fact that it is more profitable to build larger (& hence more expensive to purchase), a nonlinear floor area tax would help with that, it could be applied to both new builds and existing (to encourage conversion of larger hoses to flats) to drive the market toward more practical sized houses (how many people really need a 300 sq meter house).

    Why just raise the pension to 68. How about from 60 on, one can be granted the pension on medical grounds (unable to physically work, etc), 65 available subject to be means testing (including benefits from trusts), from 70 all are eligible. Otherwise one just ends up loading up ACC & social welfare with people who should really be on the pension.


  12. 1. Cut the residence approvals – yes but manage the immigration rate to maximise gdp per capita growth, don’t set a specific level. I still think the RBNZ is the best arbiter as it can balance interest rates, immigration rates (aggregate demand) & inflation.

    2. Cut capital taxes to zero, but then ensure all realised end gains (capital gains) accruing to individuals, trusts etc are treated as income and taxed as income.

    2a. Progressive consumption tax – yes

    3. Change the RMA to allow any density as long as the effects are mitigated. This will mean amalgamating titles to achieve building heights that don’t block sunlight.

    4. No, covered by 3. Ban covenants and sunset all existing ones.

    5. No

    6. Yes, but give the Commerce Commission the powers to look at all markets & measure the Herfindahl-Hirschman Index – HHI and breakup the market players where the index is not showing enough competition.

    7. Yes, but reduce the 30 years to 10 years.

    8. Yes & possibly Christchurch + allow councils in other cities to levy all long term parking to manage commuter parking demand

    9. No. Student debt seems a failed policy given the extent of outstanding debt on the government books. The younger generation already face absurd house prices which will still take some time to adjust down.

    10. Yes

    11. The productivity commission is doing ok if the government bothers to implement the findings

    12. Unsure.

    13. Provide industry assistance where the business case shows its justified

    14. Unsure

    15. Needed but not productivity related

    16. Yes & require proportionate business cases for all major spending. The postal ballot can be during the long term and annual plan consultations & also allow online voting.

    16a. Require all government departments to do proportionate business cases on all major spending.

    17, 18 & 19. Yes but not necessarily productivity related.

    Add 20. Require all local and central government to be process & productivity driven (they have to clearly define & know all processes). Their job should be for any given process to a) reduce time, b)improve quality, or c) reduce price/cost, or d) change the process completely (this is innovation), for all processes, while taking into account any externalities in their decisions – i.e. cant simple cost cut.


  13. Comments/Reactions: Happy with your policies – you were asked for 10 and generously provided 19 – I’d vote for them even if some seem tangential to productivity.

    Especially delighted by universal child allowance – I was beginning to think I stood alone on this issue.

    “”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).””. I wouldn’t give even this restriction to local government; just insist on insurance; say a 40 year guarantee with every new building that specified the risk of flooding and land instability and all other building flaws. If anyone is foolish enough to buy a property with a high probability of flooding then so be it.

    Subsidising foreign PhD’s does seem irrational but there was a recent article in the Spectator by Robert Tombs explaining the benefits Camberidge has achieved by being a magnet for foreign PhD students. It does depend on the details such as English language, academic reputation and ability to create and be employed by high tech companies.

    Having looked at the data a figure of 10,000 to 15,000 permanent residents seems to me to be the minimum that could be fairly imposed at present. We have discussed this before. However it is worth pointing out to those who like the diversity and other benefits immigrants bring that this is still a generous number of immigrants.
    Almost every Kiwi has one or two acquaintances who are immigrants and this will not change. In fact the sociology of immigration means that there will be fewer immigrants clumping together into enclaves so native – immigrant interactions may actually be higher with fewer immigrants.


  14. Hi Michael
    “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)”

    You need challenging on this, from all sorts of angles, but especially productivity.
    1. Since 1965 (Nobel-prize winners Samuelson, Peter Diamond, and Phelps) it has been understood (in theory) that a pay-as-you-go funded retirement scheme reduces the capital stock in an economy, and, when an economy is dynamically efficient, it reduces the welfare of all generations other than the first receiving the additional retirement benefits. All empirical evidence suggests NZ is a dynamically efficient economy (the return to investment exceeds the growth rate of the economy). Hence a PAYGO funded retirement scheme is likely to be reducing the wealth owned by New Zealanders, and, when capital is less than perfectly mobile across borders, the capital stock in NZ. PAYGO retirement schemes are a substitute for the accumulation of wealth via capital accumulation and it is not clear at all how this is likely to lead to higher productivity. They also have the side effect of shifting the costs of retirement on to future generations who become burdened by much higher taxes than they would have to pay if under a save-as-you-go system (I think this undesirable although it is obviously considered desirable by some people, and my personal preferences don’t count).

    2. You could have a SAYGO system which raises current taxes (relative to PAYGO funded levels) to repay government debt so that taxes do not have to be so high in the future. Essentially, this means the government reduces debt rather than holding a portfolio of assets in the Super Fund (but in both cases imposes higher taxes now than are required by a pay-as-you-go funded retirement scheme). Will this raise productivity? Probably not. To provide the same amount of funds for the future, you would need higher taxes now because the Super Fund in all probability will earn more than the cost of debt – a lot more. The average return to capital has exceeded the interest rate on debt for a very long time. Would the funds be better managed by the private sector? It depends. In theory, a government fund has the ability to outperform private funds because they have less liquidity risk and can invest in a portfolio of high returning long term assets without worrying so much about liquidity crises. (There is a large theoretical literature on this point.) In practice, Government funds do very well – the ACC fund and the NZSF rountinely outperform private sector averages. So theory and practice both suggest that a well managed fund can outperform the private sector and in doing so reduce the taxes needed to fund superannuation. That is the positive side – and it is very positive . The negative side happens if political interference in the funds sees the money wasted or spent on frivilous projects unrelated to investment potential and that this waste offsets the gain coming from the ability to invest in long term private sector assets. This depends on the governance of the project. There is no evidence of problems in NZ yet – and the solution is strengthen governance.

    3. Sure, there are reasons to dislike any government provided superannuation on liberty grounds (although I strongly support it as a means to reduce poverty in old age, but that is just my personal opinion.) There are reasons to prefer some sort of compulsory saving scheme (again, a system that has many advantages, but these often go back to personal preferences about people benefiting from the savings they make, and also the likley improvement in long term wealth distribution.) But productivity grounds? The potential of lower long term taxes, higher capital stock, and better returns from capital is a heady mix. You must have very strong opinions about the possibility of political capture to worry about it on productivity grounds.

    4. Economic theory strongly suggests that PAYGO funded programmes that are directed towards young people (eg education) have the potential to raise investment, capital stocks (in this case education capital), and productivity. Paygo funded programmes that are directed to old people (retirement income and increasingly health) reduce capital stocks. The recent history of the developed world has been one where programmes for old people have grown much faster than programmes for young people, and this is set to continue. This suggests the golden age where PAYGO funded government spending raises productivity is over – it is over because programmes are increasingly for old people not young people. It is time the government took this change seriously and started worrying about the huge costs paygo funded programmes for old people place on young people and future generations. And if can’t find a way to overcome the governance issues surrounding the management of large funds, it should think seriously about compulsary savings schemes (with insurance or other risk sharing) as a way of getting the advantages of save-as-you-go funding.

    5. The private secor used to use PAYGO funding for retirement income – middle aged people provided resources to their parents in old age in return for getting resources from their kids in turn when they were old . This scheme has become significantly less popular and replaced by SAYGO personal retirement schemes (you save for your own retirement). I presume you wouldn’t argue that private SAYGO retirement schemes should abandoned on productivity grounds……



    • Andrew
      Thanks for the (as always) thoughtful comments. I probably didn’t help myself by putting my list of policies all under the “productivity” heading, even though I noted in the text that some measures were as much about “draining the swamp” of the NZ political system. I put NZSF partly in that category (and one other minor motivation was reducing gross govt debt, given that my reform package would involve an increase in net debt).

      On the economics I don’t think we are far apart at all. I don’t even think we are on personal preferences for a system which keeps people out of poverty in old age, which I think NZS does well. I’m keen to keep NZS, although do strongly favour raising the age of eligibility (for all sorts of reasons, including fiscal).

      Our difference is around the specific place for the NZSF. Personally, I see any connection between it and NZS as just political branding. NZSF is just a set of govt-owned financial assets, and one can’t really put ribbons round particular pots of money.

      From an overall Crown perspective, the govt would have substantial equity assets even if NZSF was wound up (and especially once one gets out to a general govt perspective). The govt is also an implicit equity stakeholder in all NZ business, through the income tax system (altho I recognise that a shift to a Nordic system would reduce that effective stake). The case for the govt having formal equity exposures would be very strong if govt generally were funded by lump sum taxes (say) but it isn’t.

      Perhaps I’m wrong here, but it seems implicit in what you are saying that you think the existence of nZSF has raised national savings rates. If so, I’m sceptical (altho open to persuasion), as I’m unpersuaded that the compulsory private system in Australia has had any material effect on national savings.

      Re governance, I take a much less sanguine view than you do. Both the Kiwibank deal and the carbon initiative smack more of politics, and (in the Kiwibank case) of soft inside deals. The latest push to get involved in light rail seems to fit the same bill, as did Adrian’s revelation of his frustration around Chch. And the Fund is only going to get a lot bigger from here, on current policies, with all the attendant risks of bad and worse deals.

      I’m also sceptical of the body politic’s willingness to live with steep losses, at just the time when other cylical fiscal pressures will be at their most intense. One shouldn’t hold positions in markets that the ultimate controlllers can’t comfortably (attitudinally) ride thru the ups and downs of markets. That problem is on track to get worse.

      If NZSF continues I would at very least argue for it to be banned from any investment in NZ in which it holds more than a 5% stake, and prohibited from doing direct deals with govt entities (central govt or SOEs).

      I’m much more ambivalent about ACC. I think they have done well, with much better risk-adjusted returns than NZSF and less politicisation. My stance on ACC is influenced as much by a long-term reluctance to see accidents treated materialy differently by the state than long-term illness (for example).

      Thanks again for the comments. I might elevate this exchange into a separate post at some point.



  15. Thanks Michael, I have been somewhat persuaded by Gareth Morgan’s arguments that labour is shouldering too much of the tax burden, capital not nearly enough and that is not fair and it is exacerbating wealth inequality.

    Is your 2 at odds with that? Perhaps a plug for “trickle down”?

    I wonder if along with a reduced tax rate for capital you’d agree with broadening the net to include all capital – above some threshold – including the family home/imputed rent? And might you think a Comprehensive Capital Income Tax superior to a CGT.


    • I don’t have a major objection to including imputed rent in the tax base, although to do so we would need to allow interest deductability for owner occupiers. CGT itself is largely an irrelevance (and won’t raise much revenue) for most people once the land market is fixed up.

      My 2 is at odds with Gareth’s analysis, but he is very “fairness” focused and not that focused on the efficiency benefits of not taxing heavily your most mobile factors (business investment, esp foreign business investment).


  16. #11 – the legacy

    Musicologists – Nov 2012
    We have a number of staff hailing from different parts of the globe and employ people from a range of disciplines and experiences. Along with economists, we’ve got qualified biologists, psychologists, anthropologists, sociologists, musicologists, and others.”

    Saving the Kiwi – the bird that is – July 2015
    It’s all in the advisories and who is doing the advising
    Saving the kiwi is ‘not aligned with Government priorities’


  17. All very sensible and compelling, though, this political headline did pop into my head:

    ” Vote The Productivity Party – pulling up the drawbridge, slashing land values and taxing workers more than wealth – for a brighter tomorrow”


    • yep, that is the problem. It is why it needs a really able political leader to make the case – as much on feelings as analysis – and take people with him/her.

      I can envisage other packages that get us some of the way there, almost by accident. For example, the immigration change alone would make a major difference in my view.


  18. Immigration and tax are the two main ones. Housing reform might also help (there are reasonable theoretical grounds to think so, altho I’m sceptical of the connection in NZ).


  19. I do consider all the ideas you’ve presented on your post. They’re really convincing and can certainly work. Still, the posts are very brief for novices. May just you please extend them a little from next time? Thanks for the post. cfgkbkceacbadded


    • I will always welcome a request for longer posts (most of mine seem too long as it is)! I’ve covered many of the points in my list in individual posts on occasion in the past, but will see if there is a sensible way of grouping these measures and bringing them together in a series of posts explaining why and how they are in the list, and how they fit in with others.


  20. Not being an economist, I haven’t read the arguments against investment income taxation before, but they make sense! But do those arguments equally apply against a CGT?


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