Writing, somewhat critically, the other day about the latest Productivity Commission paper got me thinking a little more about the Commission itself.
I welcomed the decision to set up the Commission, partly in the backwash to the then-government ignoring and thens disbanding the under-resourced one-off exercise in focusing on New Zealand’s productivity failures, the 2025 Taskforce. But I’ve long been fairly ambivalent about what it has become, and unsure what the future might hold.
It certainly isn’t anything personal. The longserving chair of the Commission, Murray Sherwin, was an old boss of mine and until recently we shared the misfortune of being trustees of the Reserve Bank staff superannuation scheme (he got off, I still serve penance). They’ve run numerous interesting seminars over the years. The people I’ve known there are smart and happy to engage. In fact, I was just on their website and clicked on a piece I thought sounded interesting only to find that it was a link to one of my posts.
The Minister of Finance must also have had some doubts. Papers just (pro-actively, but very belatedly) released show that shortly after the Minister took office he asked Treasury to conduct a review of the Commission, and they in turn commissioned David Skilling (independent consultant, now based in Singapore, and former head of the centre-left New Zealand Institute think-tank) to write a report. Remarkably, the Commission itself was not invited to provide input – and perhaps was not even aware the review was going on, since were it aware it would surely have provided input pro-actively. The Commission seems only to have been invited to comment on the final Skilling report, completed in June 2018. That seems a strange way to treat an agency that wasn’t evidently dysfunctional, was headed by a respected former senior public service chief executive and which at the time had a respected former Secretary to the Treasury as another of its longserving commissioners. Even if Graham Scott had once stood for Parliament on the ACT list, no one has seriously accused the Commission of being partisan (and if anything their inclinations often seem to lean in the direction of “smart active government”, of the sort centre-left parties have often favoured, with too little emphasis on “government failure”).
None of which is to criticise the Skilling report. I found it clarifying in a number of places and was pleasantly surprised to find myself agreeing with the bulk of his recommendations. He draws extensively on some recent OECD work reviewing institutions in various countries trying to do things somewhat similar to the Productivity Commission, with a focus – consistent with the emphasis of his consultancy firm – on small advanced economies.
As Skilling notes, the explicit model for our Productivity Commission was the Australian Productivity Commission, at the time a very highly-regarded body. But Australia is a much bigger economy than New Zealand’s (big economies tend to have relatively smaller export sectors), and although still some considerable way from global productivity frontiers, has nothing like the economywide challenges facing New Zealand. And there is the not-insignificant issue of resourcing: there aren’t that many economies of scale in policy analysis and associated research (policy issues are just as complex in fairly large as in fairly small countries) and yet our Productivity Commission has perhaps 20 staff, while the Australian Productivity Commission has about 170. That allows for a much greater depth and specialisation than is possible at the NZPC, no matter how able the individuals here might be.
Skilling usefully highlights that the Productivity Commission is not really focused on economywide productivity at all (“bluntly, it is a misnomer”). Rather, and rather like the Australian counterpart, it is really a detached (from day to day political pressures, or even just the immediacy of the urgent) policy advisory group on specific topics that take the fancy of ministers from time to time. Sometimes those are really important issues, other times they have the feel of topics it is good to be seen having someone doing, or even (the current “future of work” inquiry, which there are signs the Commission has struggled with) just as – in effect – a research resource for a political party’s next election manifesto. To be clear, topics are chosen by ministers, not by the Commission.
This “chip away at bite-sized topics” approach seems to have been deliberate. After all, the previous government (which set up the Commission) had no interest in serious reform on the sort of scale that made have made a really significant difference. 2.5 years in, neither does the current government.
It is an approach that probably makes a lot of sense in a country that was already at or near the global productivity frontiers. Whatever challenges you face in Belgium, Netherlands, Sweden, Denmark (let alone Norway) – and there are always areas where specific policies could be improved – you know that your overall economy (productivity) is already about as good as it gets anywhere. That simply isn’t the New Zealand situation: you’ll recall I’ve highlighted previously that it would take a 60 per cent lift in average labour productivity in New Zealand to match that leading bunch of countries.
Here, the approach taken to the Productivity Commission ends up serving as a distraction. There is a pretence of an institution devoted to the issue, to taking the whole thing seriously, but not the substance. If the Commission is to be kept as it now operates it might better be renamed, more prosaically as something like the Medium-term Microeconomic Advisory Group. But even then there is a real problem, in that because there is no sign that the Commission has a shared narrative, or model, of the bigger picture economic underperformance, causes and broad remedies, it is often hard to have much confidence in the specific recommendations they throw out, and whether they should be priority areas for a government interested in change. It also means they have no consistent framework underpinning their public communications. (There was a narrative document published a few years back – which I wrote about here – but it was still exploratory in nature, and although it was owned at the time by the Commission, it seems to have been more the thinking of the author, who has now left the Commission.)
This issue has become more stark over the years. When the Commission was set up there were two separate allocations of funding by Parliament: 90 per cent of the total funding was for specific inquiries initiated by Ministers, and the remaining 10 per cent was for the Commission’s self-directed research programme and related activities. That formal split, in parliamentary appropriations, has been discontinued, but in the context of a flat overall level of funding (the total level of funding is unchanged over 9 years – a period in which there has been not-insignificant total inflation), it is likely to be the discretionary activities that get squeezed.
As the Commission’s last Annual Report noted
The 2018-19 year ended with an operating deficit of $98 000, our second successive year with a deficit. The Board has been acutely aware that with rising costs, especially from remuneration costs, and an appropriation unchanged since the Commission commenced operations in 2011, we would eventually reach a point where spending would run ahead of our appropriation. In early years, our budgets provided for surpluses in order to build a small buffer of reserves. But we clearly face a decision about reducing costs and outputs should our business case for additional funding be unsuccessful. Decisions on funding will take place within the context of the review of our operations.
Given resource constraints we were no longer in a position to facilitate the Productivity Hub nor provide support to the Government Economics Network.
It has also been suggested that the Commission should have greater capacity to undertake wider ranging productivity-relevant research, exploring the nature, sources and characteristics of New Zealand’s poor productivity performance. Our capacity for such research remains limited. ….our capacity to pull resource away from our inquiry teams is quite limited. To provide more research output requires either an increase in funding or a reduction in inquiry outputs.
Of course, one challenge is that a generalist policy analysis function (essentially what the bulk of the Commission is doing) and something seriously focused on getting to the bottom of New Zealand’s longrunning economic underperformance might not sit that naturally together in the same small semi-detached organisation.
As all prudent government agencies must these days, if they want to impress ministers, they wave the flag for “wellbeing” (this from the front of the Annual Report)
Perhaps they will secure some more funding in this year’s Budget (though more policy advice might not be an election year priority).
Skilling’s report had four recommendations:
- a greater focus in inquiry topics on the external facing tradables sector of the economy (noting the centrality of outward-facing sectors to successful small economies)
- a more structured inquiry selection process, with more emphasis on criteria relating to economywide productivity,
- more flexibility in inquiry formats,
- more public reporting and analysis on overall productivity performance issues, including international benchmarking.
I generally agree (and will take the opportunity to note one of his suggestions for a specific area that would repay further work from the Commission: “important domestic issues, such as the impact of migration (and population) on New Zealand’s productivity performance”
But you can’t help thinking that there are severe limits on the value of any such agency (or any long-term thinking in major economic ministries such as The Treasury) unless and until some political leadership rises up that really wants to deliver something different for New Zealand, that takes seriously dealing with our economic failure. Of course, in an ideal world if/when that time ever comes those political leaders would find a rich and deep literature – from the Commission, from academics, from government agencies, from other researchers and commentators – on the issues and options for change. But why would politicians who are themselves indifferent want to spend much money on things they would do nothing with?
Part of my long-term pessimism about the Commission – quite independent of any individuals involved – involved reflecting on the fate of past New Zealand efforts and agencies. There was the Monetary and Economic Council, and then there was not. They produced some interesting reports in their time, but didn’t last much more than a decade. Same goes for the Planning Council, some of whose papers are still worth reading. What will make the Productivity Commission different? One difference is that it has its own act of Parliament, but that just means that it could be left to wither on the vine, funding gradually squeezed, good people no longer wanting to work for it, before one day someone tidies thing up and abolishes it. It does not have critical mass, it does not have specialist expertise (those generalist economic policy analysts instead)…..and there isn’t really much evident political appetite for excellent policy or the supporting analysis (even on the occasions – not always – when the Commission has delivered such). And if there were such an appetite, a revitalised Treasury would have the institutional incentives to seek to become the key provider (and in a small public sector, their arguments wouldn’t all be wrong).
There will be an interesting test just a little way down the track. Murray Sherwin’s second term as Commission chair ends next January and the government will need to find a replacement. The sort of person the government chooses (whoever is in government by then) could be quite revealing about the sort of future and role they see for the Commission. Sherwin is a very smooth and effective bureaucratic operator and effective manager – well-equipped for the sort of role the Commission has largely come to occupy – but if any government were serious about a greater focus on whole economy underperformance they’d probably have to be looking to a different sort of person to either Sherwin or to the other existing commissioners (able as they each no doubt are). I’m not holding my breath.