A few weeks ago I wrote a post surveying the range of fiscal indicators (local ones and IMF/OECD metrics) to look at recent New Zealand fiscal policy across time and across countries.
I included in that post this chart, which I had cobbled together using IMF April data for other countries and their estimates for New Zealand reported in the recent Article IV review (it was the indicator they specifically cited in suggesting a need for “frontloaded fiscal consolidation” in New Zealand.
A new IMF Fiscal Monitor has been released in the last few days. We now have consistent cross-country estimates, including numbers for New Zealand which will have taken account of the government’s sudden “get religion” line-on-a-chart cuts of a few weeks ago.
With those updates all round New Zealand is now “only” projected to be third-worst among the advanced economies next year, on current policy (ie assuming the government’s top down cuts are effectively implemented).
And how about over time?
We used to be better than the pack. But now we are a lot worse.
You can see that New Zealand’s primary deficit are barely smaller than those at the height of the Covid spend, a quite different picture than the median country. Out of curiosity I wondered where we ranked.
Most countries have very substantially improved their cyclically-adjusted primary deficits/surpluses. New Zealand, by contrast, is way to the right of the chart.
But what of The Netherlands and Denmark? They seemed a little puzzling. I wasn’t aware they had recent fiscally reckless governments. It turns out that Denmark ran primary surpluses right through the Covid – look at just a fiscal chart and you’d barely know there had been a pandemic – and is now running a roughly zero primary balance (cyclically adjusted). The Netherlands has gone from primary surplus pre-Covid to deficit in Covid and subsequently. But the IMF estimates that next year they will have a cyclically-adjusted primary deficit of 1.8 per cent of GDP. Not great, but nothing like as bad as New Zealand’s projected 3.4 per cent of GDP deficit.
Whichever party leads the next government there is a huge amount of fiscal work to do – including making real the “cuts” already included in the IMF numbers – all thanks to the extravagant fiscal choices of the current government in the last two (post big Covid spend) budgets.
Earlier in the week a journalist asked me for some thoughts on which political party in government had managed the economy better – in overall macroeconomic terms – over the years since we moved to MMP.
My initial response was that the answer would be pretty dull. Pressed to write something anyway, I outlined briefly why really there was not a great deal between them, at least without a great deal more in-depth study. And that shouldn’t be very surprising. After all, external shocks happen (overseas, or physical/climatic ones here), and cyclical macroeconomic management has been outsourced to the Reserve Bank over all that period, with very similar targets set by successive governments. Crude partisans might point out that (core) inflation went outside the target zone at the end – or so it appears likely – of both Labour governments over that period, but those failures are first and foremost on the Reserve Bank. Other crude partisans might point out that unemployment has been at its lowest right towards the end of both Labour governments, but……since that is basically the same phenomenon as the overheated economies that gave rise to the inflation problem, you are back with it being the Reserve Bank’s mistake again. One can argue, say, that the current government should have done more to sort out, punish, or even support (via fiscal policy) the Reserve Bank, but…..it is a sample of one event.
When I wrote something a bit fuller on this topic a few years ago, I noted that fiscal policy had also largely been a bipartisan success story. We might not have had a very successful economy, but when deficits have emerged governments of both parties have restated their commitment to surpluses, and had delivered. You could argue that National deserves a better rating there, having inherited large deficits in 2008 (as I’ve argued here before Labour had been badly advised by Treasury and did not think it would be leaving deficits) and returned to surplus. But actually if you look back at the 2009 and 2010 Budgets, contemporary Treasury estimates were that – starting from a deficit – they were expansionary. I’ve been quite critical of this government’s fiscal stewardship over the last couple of years, but…..nothing much in the campaign suggests any more urgency for or conviction about a return to surpluses from the other side.
But the backdrop to it all was that while, until quite recently, New Zealand – under governments led by either party – had done reasonably well on the stabilisation side of things (monetary and fiscal, and even with structural policies that kept the non-inflationary rate of unemployment fairly low), productivity (or the lack of it) was the elephant in the room. It has been for a long time, and still is (or should be).
We don’t have an official quarterly labour productivity series, but it is easy enough to construct one’s own. In this chart, I’m showing the average of production and expenditure GDP measures, divided by hours worked from the HLFS, all normalised and expressed in log terms. Expressing things in logs means that a slowdown in the growth rate is mirrored in a flattening of the curve. We don’t have long runs of official historical data in New Zealand, but this goes back to 1987Q2.
If you can easily see any great difference from governments of one party to governments of the other you are more eagle-eyed (or perhaps “motivated”) than I am.
But I did check anyway. One could go from the last quarter of the previous government to the last quarter of the next one, but….there is clearly noise and measurement error in the data, and nothing is that precise, so although I checked both, this little table uses annual data (eg average change from 1990 (last year of that Labour government) to 1999 (last year of that National government) and so on. Now, no one really believes that changes of government make a difference immediately, so this is illustrative more than anything.
Average annual growth in real GDP per hour worked (%) 1990-1999 National 1.1 1999-2008 Labour 1.4 2008-2017 National 0.9 2017-2023 Labour 0.7
Much the biggest story isn’t the difference between the parties, but the difference over time. Productivity growth in the last decade or more – under both governments – has been materially lower than it was earlier in the period – under governments of both parties. This is consistent with the factoid I’ve thrown around a few times in recent weeks: in OECD league tables for labour productivity we dropped six places – in a club of only 37 – in the last decade.
Here is the deterioriation illustrated graphically. Eyeballing the data it looked to me as though there was a break around mid 2010. So what I’ve shown is (a) the actual data per the previous chart, and (b) an extrapolation to now of the trend in the data from 1987 to 2010.
Roughly speaking the gap between the two lines as of now is equivalent to a 10 per cent loss of productivity (growth we would have seen if the previous trend had continued).
Note that all of this is simply New Zealand data. I have repeated often charts showing our deterioriation – or at best lack of catch-up – relative to other advanced countries. But this is us. And remember that we are so far behind the productive frontier economies – it would take perhaps a 60 per cent increase to catch them – that even to the extent world productivity growth slowed down (and it did, in the US from about 2005) there is no necessary reason why New Zealand productivity growth needed to slow. Our slowing was about New Zealand policy choices, passive or active.
It is depressing how little serious attention has been paid to these failures – and challenges – in the election campaign, and since politicians mostly display little interest our bureaucratic institutions don’t bother doing or supplying the hard analysis. Some are simply emasculated to that end – one could think most notably of what the current government has done at the Productivity Commission. Productivity really matters for our future material living standards, and even for the shiny baubles both main parties try to woo us with.
I’m not an ACT supporter – on quite different grounds – but here I would give that party some credit. Their policy document on productivity evinces a degree of seriousness about the issues that nothing from any of the other parliamentary parties has even hinted at. I don’t agree with all the specifics, and would probably disagree substantially on some, but….they write as though it matters. And that isn’t nothing (even if it can’t overcome my scruples about the party leaders’ values etc). In fact, a week or two back a reader not otherwise known to me got in touch and asked who I thought they should vote for if it was housing affordability and productivity that mattered most to them. Making clear that I was definitely not an ACT supporter myself, I nonetheless gave them an analyst’s answer: probably ACT, on both counts.
croaking cassandra 