On Monday the National Party released their “The Economy” discussion document, the latest in a series of such documents they’ve published in recent months as they move towards setting policy for next year’s election. The documents actively invite feedback, and if one should be sceptical of crowd-sourcing policy programmes mostly it seems like a worthwhile initiative.
A few weeks ago I was quite critical after Simon Bridges’s conference speech about the apparent lack of recognition of the structural failings of the New Zealand economy, let alone of any hint of a serious strategy that might reverse the decades of underperformance.
But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing – not a word – to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments – led only by National and Labour – have presided over. There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.
Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards. And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development)
I went on to note that National appeared to be glossing over the fairly woeful overseas trade performance: exports and imports have been shrinking as a share of GDP.
I’m much less critical of the discussion document. This line appeared on the first page, the leader’s own statement
New Zealanders’ productivity and income levels have fallen behind countries we once had similar income levels to, like Australia, the United States and leading European economies.
And from Paul Goldsmith’s opening
Improving productivity remains New Zealand’s most important economic challenge and the ideas discussed in this paper provide ways to meet that challenge, with the goal of raising incomes for all New Zealanders.
National understands that significantly lifting productivity is the only way to materially improve New Zealanders’ living standards. Increasing productivity means we can produce and sell more of what the world wants, at better prices, using fewer resources.
Good stuff. And he goes on
New Zealanders’ living standards will not improve by simply redistributing what we
already have. Instead, we need to be absolutely focused on lifting New Zealand’s relatively weak productivity levels.
New Zealand’s core economic challenge is to lift our relatively weak productivity. To do that, our economy needs to become more internationally competitive. The world does not owe us a living. We are a small, isolated country far from global markets, which creates both opportunities and challenges.
The only way to materially improve the living standards of New Zealanders over time is to become more productive. Higher productivity means more in the back pockets of New Zealand families. New Zealand’s productivity is a more productive and competitive economy that lifts household incomes approximately 30 per cent below the top half of the OECD and 25 per cent below Australia. New Zealanders also work more hours a year than any countries in the top half of the OECD. In 2017, for example, workers in Denmark, Germany, the Netherlands and Norway worked 300 hours less than New Zealanders.
Since the late 1990s, New Zealand’s productivity growth rates have been similar to that of the top half of the OECD. We need to be doing better to catch up and close the gap. That’s hard. It requires a relentless focus on productivity growth.
National is ambitious for New Zealanders and believes we should target higher rates of productivity in order to close the income gap with countries like Australia, the United States, Canada and leading European economies.
There was even talk of adopting a productivity growth target.
On foreign trade, we read this
New Zealand is a small country with a domestic market of only about five million people – so we depend on trade for generating greater prosperity. Trade supports over 600,000 jobs across our country, and is responsible for a higher standard of living and better quality of life for New Zealanders.
However, New Zealand has a relatively low exports-to-GDP ratio compared with other small, advanced economies. Lifting our exports will take further improvement but create new jobs and raise incomes.
So the rhetoric and some of the framing isn’t bad at all. They could have made the same points even more brutally:
- relative to the top tier of OECD countries (US, and leading half-dozen north European economies), productivity (real GDP per hour worked) has kept on slipping (in the last 25 years, productivity here has fallen from around 65 per cent to 60 per cent of those in the top-tier OECD countries while in, for example, Poland it has risen from around 30 per cent to around 55 per cent),
- New Zealand has managed hardly any productivity growth at all over the last five years, and
- not only are foreign trade shares (exports and imports) low for a country our size, but they’ve been shrinking.
But even if Simon Bridges in his introduction did note of the previous government “we didn’t everything right”, to have done so might have prompted too many hard questions about National’s own record.
What of the policy proposals and ideas?
I found a reasonable amount to like:
- they haven’t fixed on a public debt target yet, but I liked the articulation of the flow fiscal goal (“Governments should aim for balanced budgets over time, so that surpluses in the good times offset the bad times”). With little evidence of an overheating economy at present, that should have them arguing for a balanced budget now, not for surpluses,
- I was pleasantly surprised that they remain committed to lifting the NZS eligibility age, and to introducing a somewhat more demanding residence requirement. They should have gone further on both fronts (my thoughts on NZS here) – said from the perspective of a household where my wife is 10 years younger than I am and still won’t be affected by National’s proposed change. But we should be thankful for small mercies: on this issue, National has moved decisively on from the Key irresponsibility.
- I like the idea they are toying with of adjusting for inflation the interest earnings and interest payments that are tax assessable/deductible. Various people, including at times the Reserve Bank, have argued for this for years. It is just and right to do so, but……there isn’t that much in the issue.
- I like the mention of possibly using congestion pricing on some parts of the roading system.
- I am encouraged that they are willing to think seriously about the possibility of lowering the company tax rate (although disquieted by talk of favouring small businesses through the tax system). That said, given our imputation system, a lower company tax rate benefits foreign investors (we would generally benefit from more of such investment), and if they are serious about addressing this issue – and productivity growth – substantively then they need to think about options for lowering the taxation of capital income earned by New Zealanders as well. Whether they have the political skills to manage the narrative around that sort of proposal is, at very least, an open question.
- The talk – not specific in this document – of a proper overhaul of the RMA and serious liberalisation of the urban land market is encouraging. The ability of the next generation to afford decent houses (and gardens etc – the sort of place most New Zealanders seem to want) depends on it.
- And I like the idea of a much tougher approach to new regulation, and some sort of commitment to reducing the overall volume of economic regulation. On that count, I like the (adopted first in parts of Canada) idea of eliminating two old regulations for each new regulation (ie a shrinking cap on the volume of regulation itself). There are risks around such an approach once it in turn becomes bureaucratised – ministers and bureaucrats will game the system skilfully, so it would need serious leadership from the top, and sustained follow-through – but for now the value is in the signal it sends.
And there is other stuff I like, often undoing bad calls by the current government (eg the ban on new oil and gas exploration and the planned labour reforms – I found this note valuable on the latter). There was even talk of possibly unilaterally lifting all remaining New Zealand tariffs, recognising that tariffs tax New Zealanders.
They were even surprisingly muted on immigration. I thought this line from early in the document was quite cleverly drafted, with the focus on creating a climate in which New Zealanders no longer want to leave permanently.
New Zealand is also competing with the rest of the world for skills. If we aren’t internationally competitive our best and brightest leave for overseas and our living standards worsen relative to the rest of the world.
And if I disagree, quite firmly, with their paragraph on immigration itself – after all, we have one of the highest levels of workforce skills among natives of any OECD country
Immigration can help to deliver a more skilled and willing workforce. National understands the benefits of sound immigration policy from an economic, social and cultural perspective. The skilled migrant levels should match industry needs and the administration of visas needs to be prompt and predictable. New Zealanders must be at the front of the queue for the jobs created by our growing and changing economy, but immigration will remain an important complement to that growth.
at least the “critical economic enabler” gung-ho rhetoric is gone, and this paragraph is a long way down the document.
Of course, there is other stuff I didn’t like. Their section on regional development is about as devoid of a serious framework – real exchange rate anyone? – as anything from Shane Jones. They still seem enamoured of big taxpayer subsidies to “glamour” industries (screen grants), and when they talk of privatisation it is never about efficiency or competition or accountability or things like that, but rather silly arguments about freeing up cash to spend on other things (when, as they know, the Budget is in surplus and the debt is low). And they seem tantalised by the idea of more infrastructure spending without offering much assurance that the sort of schemes they might proceed with would be any better – in economic return terms – than those of the previous National government. Perhaps I’ve mentioned that there was next to no productivity growth economywide over the last five years or so?
But when I got to the end of the document, I guess my overriding reaction was a bit similar to my reflections on the reports of the 2025 Taskforce (the body set up by the previous National government to provide analysis and recommendations on closing the income and productivity growth gaps to Australia – by 2025, a date that mocks us now). I had quite a lot of involvement in that process, and largely wrote the first report. I also largely agreed with most of the recommendations the Taskforce themselves made – very few of which were ever adopted. And yet, as I reflected on the report in the months after it was released, I became increasingly convinced that, sensible as many/most of the recommendations were, they weren’t enough to make a decisive break in New Zealand’s economic and productivity performance. Some important things were missing (although at the time I wasn’t really clear, even in my own mind, what they were).
Quite a few of things National is proposing look sensible. The general direction looks sensible. The rhetoric is better than it was – although, by itself, such rhetoric is cheap, and is the sort of thing most Oppositions for 25 years have eventually come round to saying. But the scale of the policy response they are talking about is simply incommensurate to the scale of the problem (much of the policy mix they are suggesting is carrying on a broad approach they adopted in government, and productivity growth was very disappointing then). For New Zealand average labour productivity to match that in top-tier OECD countries would require a 60 per cent lift from where we are. That is simply huge. Huge problems are rarely successfully answered with small changes (even a succession of them).
And so my challenge to National is along the lines of that the rhetoric is great, and I hope it reflects a shared sense that New Zealand’s long-term economic performance really is deeply disappointing, and has not sustainably improved – relative to other advanced countries – for any prolonged period for many decades now. As they say, that has real implications for us, our children and our grandchildren, for the material living standards – and public and private services – we can achieve for the population as a whole.
But if you are serious, and you really mean what you say – all those good quotes I posted earlier – you need to keep thinking harder, digging deeply, consulting broadly and testing and evaluating the proposals and analysis put to you. Great ambitions need to be matched by excellent analysis, courageous policy, and skilful management of the political challenges. Perhaps for many in the National caucus, winning the next election is all that matter, but I’d urge the party, and its members, not to focus on the small ambitions, but on the really big challenge that, successfully confronted, would so much transform New Zealand for the better, for almost all New Zealanders.