National on the economy

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.

and

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.

and

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.

25 thoughts on “National on the economy

  1. Thanks for highlighting that National are actively inviting comment – I’ve been trying to figure out the best approach to “engage” (i.e. harangue) with National on a few points, and this looks like a good opportunity.

    Pity they haven’t released a foreign policy paper too (or did I miss it?)

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      • I find it sad as you have people on $1500 to $2000 (x 365 days/year) promoting it while people employed on contracts earning a minimum wage or just over have to do the saving. And it is the former who promote migration as the great saviour.
        The thing is we need a social contract whereby you know from day one what to expect.

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      • That’s what’s so moronic about NZ First’s posturing – most of their voters are already retired -i.e. 20 years older than those affected by the policy.

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      • Yes, it may not affect the current batch of grey power members but any club or society leadership do not think in terms of current members but also of it’s future members which grow in numbers each year.

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  2. Yes… a lot to like in terms of the framing and the ‘what’… now the focus needs to be on the ‘how’ and the work that needs to be done to create a better performing economy….

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  3. Well usually I read your articles and find myself agreeing with you sometimes reluctantly. This was a pleasant change since I read a report of the highlights of the National party’s discussion document a few days ago and came to much the same conclusions. So this time you are unknowingly agreeing with me.

    Searching for a highlight and despite your well turned phrases and typically lucid sentences the whole issue comes down to implementing some “”courageous policy””. Tackling superannuation shows both economic rationality and electoral bravery. I would be impressed except I can’t help remembering those nine years of missed opportunies.

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    • What you tend to forget over that National’s 9 years are 3 major earthquakes costing well over $30 billion, A hawkish RB governor hell bent on economic destruction pushing up real bank interest rates to 10% resulting in a deep recession and then followed up with a GFC. Complete decimation of the Risk Finance industries and the building sector. National was far too busy and cash strapped to have taken advantage of missed opportunities

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      • The two main issues for the National party govt were house prices and stopping exploitation of low wage immigrants [the latter for two reasons: firstly it is immoral and secondly it was rewarding hishonest businesses to the detriment of honest ones]. Both got worse on their watch. Both could have been tackled at virtually no cost. Too busy? They found time to discuss flags but no time to increase visa processing fees to cover the cost of employing more employment investigators. I’m glad you reminded me why I hate the Nationals.

        Liked by 1 person

      • Not sure why you hate Nationals. John Keys National party handed your children the tourist and international student industry that drove the hospitality sector to a $16 billion juggernaut every 12 months. Even with high migrant intakes there are still massive labour shortages leading to lowest unemployment rates for decades. You can’t do much with high house prices. Kiwis earn $180 billion in wages every 12 months. All we want to do is spend most of any spare cash is on new kitchens, bathrooms, extra rooms, expansive decking with pizza ovens and fire places. Go to London and you will see the same cycle of increasing house prices for the last 900 years.

        The flag and hair pulling was a low cost public distraction. Much cheaper and less gruesome than the gladiator games that the Caesar of the Roman empire employed to take the public off their day to day problems.

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      • Also the level of protests over building houses in NZ is just ridiculous. Look at poor Fletchers bleeding investors cash trying to build housing in NZ. I would not be surprised if they get out of building houses honestly in NZ. I would nor be surprised if the Chinese corrupt companies take over. They are the only ones that can dish out the cash to placate the separate Maori leaders and get any building done.

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      • As for me, I am a traditional Labour party voter as a wage earner who invested in property to fund my retirement.Obviously I changed to a John Key National party voter. But as a traditional Labour party voter, I would switch back once they drop their stupidity over CGT and stop lying about initiatives like kiwi no build and costing policy departments that are clearly designed to lie to the public typical of communist type propaganda.

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  4. If you want to massively boost productivity then:
    -Roll back health and safety legislation by 15-20 years, vast waste in hours for tiny reduction in accident related costs, appalling cost benefit ratio.
    -Eradicate the large overhead of pandering to self-nominated victims and cultural obsequience nonsense that permeates all larger (particularly public) organisations now. It’s not helping NZ get things done, just slowing work down.
    -End the massive on-site mitigation works required for all infrastructure/construction activities. Letting a bit of muddy water run-off or dust blow around or even the occasional small on-site slip or some mud on the road is pretty normal occurrence in nature during storms, the environment is very resilient to such things over a year or two, and in big scheme of things it just doesn’t matter. Huge money spend for next to no environmental benefit.
    -Roll back building regulatory regime 15-20 years, and move all liability for building problems onto owners, who can buy insurance if they like. Caveat emptor would remove council’s motivation for insane over-speccing (very poor cost benefit) of everything, and see purchaser-guided building work focus on things that really matter economically. A little maintenance every few decades as problems show up is far cheaper than building foundations that will endure for 2000 years (current status quo).
    -Pull pin on earthquake strengthening regulations. 10’s of billions spent with less than one life saved per year throughout most of NZ where the low density single level buildings are very low risk.

    Regulation without any consideration of economic cost/benefit has been a real problem in NZ of last few decades.

    Liked by 1 person

  5. I think we may be passing a Rubicon.
    1. Helen Clark says we may have to restrict tourist numbers.
    2. People realising we are the wee guy between China and the US rather than one of the main players.
    3. People talking about reducing CO2 when (as Chris Trotter reminded us recently) there is a problem within the problem and that is that carbon runs just about everything we do and so reducing it means a smaller population.
    4. Despite denials more and more people are (probably) becoming aware of crazy.
    a) The deluded idea of diverse peoples united under the doyen of Woman’s Weekly (Jacinda)
    b) The idea of biculturalism and relearning “true” history doesn’t heal the past it completely destabilises nationhood.
    https://unherd.com/2019/08/why-the-humanities-cant-be-saved

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  6. This may be a stupid question but alongside all the ‘standard’ policy prescriptions (of the like in the 2025 taskforce). What would the merits be in supercharging New Zealand’s savings, through the most savings friendly policies globally and shift the country’s Net International Investment Position to a meaningfully positive position? These same policies would encourage an aggregate pool of financial capital of $1 trillion+ to accumulate over a generation or two which could be used to acquire companies in markets that aren’t so small and remote (i.e go to the mountain rather than trying to move the mountain)

    I appreciate this would affect GNI more than GDP but it always seems to me incongruent that rather than trying to bring the world to us why don’t we ‘buy’ a lot more of the world and have the income flow to us?

    It might seem far fetched but it is probably simpler than trying to fill the country up with people and then crossing your fingers and hoping they establish globally competitive companies that trade internationally which the current approach appears to be.

    Liked by 2 people

    • Interesting question. I am a favour of tax policies that would bear less heavily on savings, but am wary of public policy actively promoting particular savings rates.

      Do bear in mind that in the current climate, and all else equal, a sharp increase in desired savings rates would drive the market-clearing interest rate much lower, and we are already closing in on the limits of conventional monetary policy.

      Having said this, my prediction is that were NZ to sharply and permanently reduce immigration we would, over time, find current account surpluses emerging: there would be huge pressure for population driven investment, and there would still be only limited opportunities here, and so people would tend to accumulate shares (directly and indirectly) in overseas assets.

      Liked by 1 person

      • Good points and thank you for your reply, perhaps changes in immigration combined with changes to treatment in savings (including those around capital accumulation in general) would make the most meaningful impact to prosperity here.

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  7. Michael, I do have to wonder if it was you who actually inspired much of the first part of their stated policy as it does seem very similar to what you wrote. On past performance, it seems unlikely to be their actual policy though.

    Part of the productivity difference here that I haven’t seen get much attention is our ratio of capital to labour expenditure. As you are no doubt well aware it’s quite low, in a way that seems to parallel our productivity rate. How likely is it that there is a link?

    Your mention of the 2025 Taskforce reminds me of how much stated vs actual goals can vary, as I do wonder if part of the reason you were such a big part of it was that you could be relied on to honestly state your well known beliefs, which may have shifted peoples thinking slightly, but would have been political suicide to implement.

    National’s actual belief may have been that a low wage economy was a worthwhile goal. I recall hearing of a minister touting it as a benefit of basing a business in NZ at an overseas function.

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    • The Nats’ document does talk about the “capital shallowness” issue. It is always something to be a bit careful with – sometimes it gets talk of in a rather mechanistic way, as if more physical capital would somehow be the answer (govt agencies, and the current govt also fall into this trap at times), rather than looking deeper and understanding better why firms have not regarded it as worthwhile to invest more heavily here, incl in more-capital-intensive production processes. The Nats would cite regulation and policy uncertainty, but I’d argue that the much bigger factor is the persistently overvalued real exchange rate (on my telling, itself an outcome of v high rates of immigration in a country with modest savings rates).

      Just on the 2025 Taskforce, I got involved only because (a) I was working at the Tsy at the time, and (b) had a longstanding relationship with Don Brash who chaired the Taskforce. The policy recs were the responsibility of the Taskforce members – appointed by the then govt – altho in many cases the expression of the analysis/argumentation was mine.

      Liked by 1 person

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