The Productivity Commission

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)

NZPC wellbeing

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.

31 thoughts on “The Productivity Commission

  1. You say NZ is 60% behind leading nations’ productivity and something should be done about it. Then on the other hand you frequently argue that given our location many areas of high productivity are impossible to maintain (we are too far away from our markets and too far away from the interpersonal interactions needed to be world leaders). So it is possible that given our geographical handicaps we are ‘already at or near the productivity frontiers’ in many areas. If so many investigations by the productivity commission would be reporting minimal potential for productivity growth. For example maybe NZ simply cannot process and export its dairy products as effectively as Denmark so we shouldn’t try.
    During my two decades in NZ growth has been in services such as healthcare, tourism and education. Are these bound to be low productivity areas? Tourism is a significant activity in Switzerland but I had no impression that it was employing low paid or transitory workers.

    Liked by 1 person

    • The economy of Switzerland is driven by the manufacturing industry which contributed 25.6% of its GDP in 2017. Switzerland is one of the world’s largest exporters. Roche and Novartis, two of the world’s largest biotech companies. The country is also involved in the manufacture of food products (like Nestle) and chemicals used in the construction sector such as roof coating chemicals. The largest construction materials’ company in the world is the LafargeHolcim Group.

      Most of its exports are high tech finished products which are sold at premium prices. Examples of these exports are precious jewelry, watches, vaccines, arms & ammunition, medicaments, and orthopedic appliances


      • Unless cleaners, shop assistants, bus drivers and waiters are considered highly skilled and are highly paid in Switzerland, they would be low paid and transitory.


      • GGS: Admittedly based on staying just a few days of tourism and having no knowledge of local languages my impression was the shop assistants and waiters and probably the cleaners were Swiss and whether or not that is true if they received salaries in line with the prices charged they might be poor by Swiss standards but sure were wealthy by New Zealand’s. I didn’t see areas of cheap housing or old cars and bicycles parked at the railway stations, there were no equivalents to our cheap fast food and $2 shops. Certainly there was a morning flood of German commuters going into Switzerland but they were well dressed and did not look like the usual low paid workers we have in New Zealand. I expect there are figures somewhere that either prove or disprove my hypothesis.


      • Bob, I was in Zurich for my New Year holidays. I stayed in Uto Kulm in a very nice hotel with the highest point views of the sunrise and sunset of the Swiss Alps and the city of Zurich. The staff was pretty much all migrant workers. I spent days along the River Limmat in the city central. The small shops and restaurants are a real mix of countries.

        A Google search shows that 29.7% of the population in Switzerland in 2017 are migrants compared to NZ of only 26%. So you are wrong.


      • GGS: your experience was different to mine; my knowledge of Zurich was merely changing trains and I suspect your tourist expenditure was much higher than ours. Friends who wished to migrate to Switzerland (admittedly decades ago) found the requirements of their immigration system demanding. Certainly the very wealthy and highly talented can get into Switzerland. It would explain their relative wealth compared to New Zealand if their immigrants were more often found working in hi-tech export industries while to many of ours especially Auckland are scattered in low paid service employment such as fast food and cheap retail.


      • I can’t see any productivity differences in having your bedsheets made each day, my toilets cleaned and soiled towels picked off the floors, carpets vacuumed and my beer bottles and snack crumbs cleaned from tables between my NZ holidays and my Zurich Uto Kulm holidays. A European holiday excluding the long distance airfare is actually much cheaper than NZ if we compare what a Swiss Kroner can buy versus what you can buy in NZ with a NZ dollar. Our NZD has been discounted by 45% and that makes a Swiss holiday expensive for New Zealanders but if you are earning Euros or Kroners, a holiday here in Switzerland is cheap.


    • Of course, my story is that a key part of the answer is to stop using policy to drive up population in such an unpropitious location. Doing that would enable us to move closer to the global frontiers, lifting living standards for those of us here.

      But the key point is really that there is no agreed narrative – whether that it is simply impossible for us to hope to be right up there (even though we once were), or on other explanations for why we have got here. And mostly, official agencies aren’t making the effort to get to such a narrative (Prod Comm has done some work, as I noted) and the politicians aren’t really interested.

      Note that wages in all sectors will be influenced by the options across the entire economy. In Norway, you would expect tourism workers to be paid a lot more than Fijian tourism workers – partly as a result, tourism to Norway will be very expensive.


      • Winston called for a population policy in the House this week. However – fool me once shame on you, fool me twice, shame on me


      • Minsk

        The Handbrake awakens – Peters calls for an immigration policy discussion

        Meanwhile in Newsroom …. is this news, fake news, click-bait, opinion, muddying-the-waters, or stirring

        Coalition landmine awaits in residency range call
        Labour and New Zealand First are considering whether to abandon a 20-year-old practice of limiting total residency approvals at between 37,000 and 47,000 a year. Dileepa Fonseka reports this much-delayed and politically explosive decision is due before the election. /endquote


      • Minsk, voters have a short memory. This is actually the 2nd time NZFirst and Winston Peters have been re-elected promising to cut immigration. So shame on you. He is having a third desperate attempt to fool the gullible public again.

        Liked by 1 person

  2. “important domestic issues, such as the impact of migration (and population) on New Zealand’s productivity performance”

    No party is interested in this subject as it is most likely to show that they have scammed the New Zealand public for decades. Plus they are scared of the outrage from the Twitterati should the answer be unpalatable.

    Liked by 2 people

    • The answers to your question are here – from The Productivity Commission

      Click to access Productivity-by-the-Numbers-2019.pdf

      Examine tables 4,5, and 6 (particularly for Auckland in table 6 page 21)

      Table 6
      AKL population 2000-2017 increased 38% absolute, share of national population increased 40%, change in share of NZ-wide GDP +40%, but change in AKL share of National GDP per capita 85%

      Migration is failing AKL where the bulk of migrants head for – it’s not the assumed boon

      Table 4
      Check out the sectors that are dragging – Services, Education and Training, Health Care and Social Services

      Liked by 1 person

      • Outside of Auckland, all they did was add a cow to increase productivity. Unfortunately we have reached peak cow at 10 million dairy and meat cows generating $17 billion in GDP compared to Auckland’s 1.5 million monkeys generating $75 billion in GDP. I think Auckland monkeys are a lot more productive than cows.


      • Perhaps I should have said no party wants to acknowledge the figures as it could lead to the exposure of the immigration story of goodness we have been sold over the decades as a misrepresentation of the truth.

        Liked by 2 people

      • Your top industries are in services, Health, Aged Care, Tourism and surprising Tech software development and support services. All of which need more people not less. So unless you have automated materials manufacturing or you can Robot automate services and hope that those $2 million robots can do the job cheaper than a human monkey can. If Apple did not need China’s or Vietnam’s mega human factories and could automate and run its factories in the USA cheaper, it would.


  3. It seems obvious that you would increase the resources of the PC to enable that deep body of research to exist for the time when a reform minded part comes to power.

    I totally get why the average voter does not care about the somewhat abstract concept productivity. What I don’t get is why the “elites” (top politicians, civil servants, business leaders, journalists and UHNW) also do not care about productivity.

    Liked by 1 person

    • The two just might be connected. As a politician you might be rationally unwilling to champion the issue if you cannot are a compelling narrative of what went wrong and what should be done.

      That would be the positive story anyway, but then you are still left with the indifference of the top ranks of the public service etc. But they aren’t these days recruited to care about such things.

      Liked by 1 person

      • It is not very compelling for government when you tell voters that your government wants industry to automate for higher productivity and the jobless will earn less than a minimum wage on social welfare payments and live in cars or motels.


  4. 1) Disband the productivity commission and role it into treasury with the funding. Its pointless having additional administrative dead-weight overhead.

    2) Widen the scope of the treasury to ensure that:
    i) it has to undertake research & reporting on best practice to lift NZ’s total welfare (or which productivity is a component). This includes as needed tendering out work where the expertise doesn’t lie within Treasury
    ii) It has to address the areas where the biggest marginal gains are possible first.

    3) Widen the scope of treasury to ensure that it has a publicly facing webpage where all this research is available to all New Zealanders & politicians. The info should be tiered – kpis, exec summaries, detailed reports.

    Liked by 1 person

    • We all know the numbers. More research is not an answer. It just creates more numbers of what we already know. The problem is what role does government play in directing where their billion dollar tax subsidies go. At the moment the multibillion dollar tax subsidies are going into Think Big in the primary industries in the form of free roading leading nowhere so that Fonterra can collect milk. Free irrigation. Free clean up of dirty waterways. Free border controls. Free R and D through CSIR. Free disease controls. Free emmissions tax credits. Etc etc.

      The government only forked out $90k for the initial R and D for the creation of Rocketlab.and the future of launching rockets and manufacturing space rockets in NZ and this is now a $1.7 billion industry in NZ. Imagine if the NZ government had spent $50 million or even $500 million? We probably would be colonising Mars by now.

      Liked by 1 person

      • That’s where the productivity solution lies. It is as simple as a Prime Minister with the guts to say something like “We are going to invest in automation robots in every industry”. Unfortunately the productivity solution is in robots and no one really wants that future.


      • The point is to make the best practice research available to all political parties/public so that they can apply more pressure on the government of the day.

        But agreed the issue lies with the politicians – they have to legislate the changes.

        Democracy is broken, it is not longer by the people for the people.

        We need to align the financial incentives of politicians with doing the best for all , and make them accountable. At the moment the financial incentives lie with the donations they get.

        1) Amend the legislation so that politicians are paid in proportion to the marginal total welfare gain per capita (including externalities) their enacted policies bring about. [its going to be more complicated than this as it will also mean looking at the distribution of welfare effects as well]. No welfare gains, no pay.

        2) Unless its a war, emergency or crisis, make it illegal to pass legislation that decreases marginal total welfare gains per captia.

        3) Ban corporate and organisation donations (i.e. stop the pork barrel politics). Corporations & organisations aren’t people. They are simply groups of people with vested interests who already get an individual vote. The only people who should be

        4) Limit individual donations to a small maximum fixed amount, with all donations publicly tabled.

        4) Financially coercing politicians into passing best/better practice legislation will over time remove the subsidies & distortions which make us all worse of.

        5) I also noted in comments on another article, for MMP to work the amount of policy influence a party should have should be proportional to the % of vote it gets. There needs to be legislation past to require coalition agreements to meet this requirement. In NZ at the moment the tail wags the dog.


      • KiwiOverseas: I usually approve of your comments so your latest comment came as a shock.

        Please do not write ‘democracy is broken’; happy for our democracy to be described as ‘unwell’ or ‘crippled’ but once something is broken it is replaced. On another blogsite one otherwise intelligent contributor is continually saying the same about the incompetance of our democracy and using it as part of a sycophantic support for the rule of the Chinese Communist party.

        1) You would be passing power to whoever estimates marginal total welfare gain per capita. Your ‘per capita’ could lead to policies good for the average but deeply unfair. Good policies often have long term benefits. Tying pay to some measure of performance would lead to short term thinking and would under value the robustness of a policy. For example some countries have policies to ensure trade is not over-dependant on a single other country; that seems sensible to me given current concerns but you are proposing a policy that would bias our MPs against that policy. You are also over estimating the significance of pay to MPs. We all know many MPs who would be better of outside politics, John Key was only one example.

        2) That removes morality from politics. You would have been making it illegal to abolish slavery.

        3) & 4) Too easy to avoid when so few are members of political parties. Fifty years ago 10% of Kiwis belonged to a party and now it is under 1% so obviously the obsessed and nutters are disproportionately influencing our politics. It is quite possible that it is only the donations from businesses and corporates that are slowing down the implementation of crazy policy.
        I have become reluctantly convinced that the only way to make democracy work effectively is to finance it with public money via some form of political voucher (say $10 per voter which can be donated to their party of choice). It goes against the grain to use tax-payers money but note my $10 per voter would still be cheaper than selecting a new flag or all manner of dumb infrastructure investments.
        In line with my beliefs about the obsessed and nutters I intend joining a party myself before the next election; it is difficult to decide which is the least unpalatable option on our polical menu.

        4 (again) – subsidies to business do make for economic distortions; they are based on the idea that politicians know better than businesses. But there are rare occasions that is true; maintaining rarely used country roads and subsidising schools and post offices in remote towns and villages gets my support despite rarely leaving central Auckland.

        5) That still applies in a FPP electoral system; notice how small cliques in the labour and conservative parties in the UK were tails wagging their dog about Brexit.


      • Democracy is working. We have MMP with a 3 headed monster of a government that tells lies, is the most corrupt government NZ has ever had with a Prime Minister that calls lies, is inept and clueless as aspirational and the dumb NZ public just laps it up and decides she is just so amazing.


      • My apologies. I keep forgetting it is actually a 4 headed monster. Our demorcracy is MMP plus 7 guaranteed Maori seats.


  5. Hi Bob,

    In response.


    “democracy is broken” – My comment was made in the context of democracy itself, not in comparison to other systems.

    “You would be passing power to whoever estimates marginal total welfare gain per capita” – No, political parties would still by free to develop whatever policies they want. Companies get measured on financial performance. Governments should get measured on social cost/benefit performance (within the bounds of financial sustainability)

    “Your ‘per capita’ could lead to policies good for the average but deeply unfair” – in 95%+ cases very unlikely.

    “Tying pay to some measure of performance would lead to short term thinking and would under value the robustness of a policy.” – No, because the effectiveness of the policy itself would be measured on a discounted long term horizon. Treasury already adopts this approach for social cos benefit assessment.

    “You are also over estimating the significance of pay to MPs” – No, most of our MPs wouldn’t be in parliament without the salary & its far better than the current situation of total misalignment of incentives.

    2) “You would have been making it illegal to abolish slavery.” – I don’t see the point. Having slavery doesn’t raise raise total welfare & its fair distribution so couldn’t be a policy. Otherwise I was simply trying to note that in times of crisis other actions may take precedent.

    3) Agreed, I’d be happy for politics to only be publicly funded.

    4) “But there are rare occasions that is true; maintaining rarely used country roads and subsidising schools and post offices in remote towns and villages gets my support despite” – Yes and on a social cost / benefit assessment (not financial) there would be a case for some things like these.


    • Well I agree with most of your responses but with quibbles here and there. The real concern is the idea the ‘democracy is broken’ [and its common partner ‘capitalism is broken’]. Democracy has been tried many times; it probably is the default in small villages and among hunter gatherers worldwide however it is a very fragile plant – look at the countries that declare themselves to be ‘the democratic republic of …’, or Germany prior to their election of Hitler and Russia before the Bolsheviks took power.
      I know what you mean by ‘democracy is broken’ but to adopt a phrase ‘we’ve never had it so good’; now imagine all the things that can go wrong from pandemics to nuclear war and from oceans rising 10 metres to an 80% collapse in the Auckland housing market – then your comment would be adopted by precisely the politicians we least need to give power. So please tone it down a little because you may be more influential than you think.


      • When I referred to our MMP plus 7 guaranteed Maori seats as a 4 headed monster, it shows that democracy is working in NZ. That is what democracy is about, giving the people a voice and some rights to voice those rights. However getting agreement to action is the hardest part of democracy because everyone has to compromise. Life is never fair and human nature is to want more, never satisfied. So far we have not killed each other and our protests are very peaceful. Of course our police are really tough no nonsense highly disciplined and scary to maintain peace. Also we pay out billions in general Social Welfare payments and racist based Treaty of Waitangi Social Welfare payments as the price to be free of violent protests.

        Look at Paris or recently in Hong Kong, nice people can be inherently violent.


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