The Prime Minister’s speech 10 days or so ago kicked off a flurry of commentary. No one much anywhere near the mainstream (ie excluding Greens supporters) questioned the rhetoric. New Zealand has done woefully poorly on productivity for a long time and we really need better outcomes, and the sorts of policy frameworks that would supports firms and markets delivering better material living standards for New Zealanders.
The Prime Minister asserted that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”. Assuming that these are shorthands for measures intended to durably and substantially lift economywide productivity growth (I saw a nice quote the other day from the Canadian Leader of the Opposition to the effect that no one talks about productivity per se except economists and friends of economists), one could only respond “good if true”.
We have been promised a “rolling maul” of new policy measures as the year unfolds. And the Minister of Finance (now rejoicing in the rather absurdly named additional title of Minister for Economic Growth -albeit perhaps no more absurd that the Economic Development title it replaced) went further in her press release announcing the Budget date and promising
It is a distinctly different emphasis than in her Budget-date announcement press release last year.
Nothing like building up expectations….and one hopes journalists will keep an eye on this set of promises.
I’d give this government credit for a number of steps that, at the margin, may help boost growth, productivity, and efficiency of the New Zealand economy. But it is hardly a case of everything working in the same direction: last year, for example, we had increased business tax rates (re building depreciation), increased taxes on inbound tourists, more restrictions of bank mortgage lending, passing up chances to overhaul key personnel at the Reserve Bank, and of course a Budget that, taken together, slightly widened the structural fiscal deficit. And it wasn’t as if the growth rhetoric wasn’t around last year (eg this quite respectable, as far as these things go, speech from March 2024).
Perhaps this time they really will deliver “bold steps” in May. I’m open to being convinced – and in this case would love to be wrong- but count me sceptical.
For various reasons:
- For all the rhetoric from the PM and Minister of Finance there is no specific goal which they are willing to use as a stake in the ground (even John Key for a short time would run the line that “our vision is to close the gap with Australian by 2025”),
- There was nothing in the National Party’s campaign material in 2023 that suggested either a deep understanding of the issues or a policy agenda equal to the sort of challenge New Zealand faces (and that was so even when there were some specifics I thought made sense),
- We are now 14-15 months into the government’s term – the election is next year – and not much has been done so far, no compelling narrative has been developed, no key government agencies have been overhauled and made fit for the challenge etc,
- Where are the advisers? It isn’t obvious that there are first-rate productivity-focused political advisers in ministers’ (or the PM’s) offices, and what about MBIE and Treasury? MBIE is a bureaucratic behemoth run by a former Air New Zealand HR senior manager (no, before Luxon’s time) and in appointing a new Secretary to the Treasury, and despite more fine words from Willis last year, the government ended settling for a recycled former Deputy Secretary, who is certainly skilled at managing upwards but would never have been mistaken for a bold and innovative policy reformer (or leader of such people/processes). Oh, and the Ministry for Regulation is headed by a non-policy recycled public sector chief executive, who didn’t seem to be particularly well-regarded in her previous chief executive role.
- The Budget is now a mere 3.5 months away. Based on standard timings Treasury will be finishing their economic forecasts by the end of next month and the Budget is unlikely to incorporate anything not decided by the end of April. Without excusing bureaucratic sludge, good policy processes take time, perhaps especially in a coalition government.
- And, of course, none of the three measures announced in the last 10 days look to add up to very much (Invest NZ – one wonders why this spin-out from NZTE is needed at all, and what private sector advisers can’t provide – the re-organisation of the CRIs, and the digital nomad visa)
There is, of course, some stuff in train that should in time prove helpful (for example, the RMA overhaul, although with the best of intentions it is likely to be years until we can be confident just how helpful – the original RMA having been understood at the time as a liberalising reform).
One can only assume that the word has gone out from the offices of Luxon and Willis to all ministers, and then all public service agencies, to pull together whatever they now can – and perhaps hold off on other announcements for a while – to enable a set of Budget announcements that can be dressed up as passably resembling “bold steps”. No doubt there is stuff in the works – there almost always is – so perhaps the net effect will even be positive (though with enough confidence to lift Treasury’s assumptions about real per capita potential GDP growth?) but I wouldn’t be holding my breath that it will be the real thing, or even begin to get to grips with the magnitude of the challenge. But – Trump ructions permitting – quite probably there will be some cyclical rebound in GDP growth in time for next October (for which the government will deserve no more credit than it deserves blame for the monetary policy induced recession last year),
On that note, the Sunday Star-Times yesterday ran an op-ed from Don Brash and me, prompted by some combination of memories of that goal of catching Australia by 2025 (Don chaired the taskforce and I provided analytical and drafting support) and the PM’s speech, trying not be to be particularly partisan (the failure – and the rhetoric, in varying volumes – has been common to all governments for decades). We ended the column this way.
For anyone interested, the full text follows:
When Don was young and Michael’s parents were young, New Zealand had among the very highest material standards of living in the world. It really was, in the old line, one of the very best places to bring up children. But no longer.
For 75 years now, with no more than brief interruptions, New Zealand has been losing ground relative to other countries. Australia and the UK pulled ahead of us, previously poor places like Singapore and Taiwan caught up and overtook us, and increasingly now the former eastern bloc countries (Slovenia, Estonia, Poland, and so on) are catching and overtaking us.
Don’t get us wrong: material living standards here are still well ahead of where they were in the 1950s, but if we were once a leader we are now a laggard. All too many of our people have seen better opportunities across the Tasman for themselves and their kids and have made the move. That’s good for them, of course, but a poor reflection on economic performance and policy back here.
For 40 years, successive governments have talked a good game about reversing that relative decline and closing the gaps that were opening up. In the earlier part of the period there were far-reaching policy reforms, which probably helped slow the rate of relative decline. In more recent decades, the ratio of talk to action has very much favoured talk. And that is so whichever of our main political parties has led the government.
In late 2008, nearly 17 years ago now, as part of a post-election agreement with ACT, the then government led by John Key announced a goal of catching up with Australia by 2025. A Taskforce was set up to advise the government on policy options that might enable aspiration to be turned into solid economic achievement. Don chaired that 2025 Taskforce and Michael wrote much of the Taskforce’s first report.
The report wasn’t well-received by the then government – in fact, the then Prime Minister openly dismissed it even before it was released publicly – but that didn’t alter the facts: New Zealand was lagging far behind Australia (and Australia itself wasn’t, and isn’t, a stellar economic performer).
It is now 2025 and over the intervening years – under successive governments, led by both main parties – no progress at all has been made in closing the gaps to Australia. If anything, and as measured by labour productivity (output per hour worked), the gaps have widened a bit further. Recently the Australian government has made it easier, and more secure, for New Zealanders – any of us, skilled or unskilled, young or old – to cross the Tasman. It isn’t that Australia has done particularly well economically in recent years – rather the contrary – it is just that New Zealand hasn’t even managed to match their underperformance consistently. Productivity growth – the only secure foundation for material prosperity – here dropped away further from about 2012.
This month we’ve heard a lot from the Prime Minister about the importance of economic growth. It is fine rhetoric and we entirely endorse his argument. Material prosperity – whether it is private consumption or better and more public services – rests on restarting sustained economic growth, which in turn rests on accelerated sustained growth in productivity.
This isn’t just about the ups and downs of the business cycle. Economic activity has been particularly weak in the last 12-18 months as the Reserve Bank has been getting on top of the inflation it inadvertently generated with too easy monetary policy during the Covid period. Now that inflation is falling and interest rates are dropping, we should expect a cyclical recovery. But a near-term bounce isn’t anything like enough; what we need is, say, 20 years of 2-3 per cent per annum productivity growth. Over the last decade, actual productivity growth has averaged not much more than 0.5 per cent per annum.
The Prime Minister announced a couple of small reforms in his speech this week. They may well be individually helpful, but small changes aren’t what will produce really big differences in outcomes.
We’ll watch with interest the promised “rolling maul” of reforms but aren’t confident that this government, any more than its National and Labour predecessors this century, is likely to respond on the scale equal to the challenge.
Sadly, it isn’t obvious either that the government has a public service with the energy, intellectual ferment, and concrete ideas that a willing government could pick up and run with. But some of the options that should be considered are pretty obvious: economics literature suggests that most of the burden of heavy taxes on business is actually borne by labour (in the form of lower wages than otherwise), and yet New Zealand – plagued by decades of low levels of business investment – has one of the highest company tax rates in the OECD, and takes a higher percentage of GDP in corporate income tax than almost any OECD country. Foreign investment in New Zealand remains harder than it should be, and is taxed more heavily than it should be.
We can choose to continue to drift, with just incremental reforms, as successive governments have done for 30 years even amid the fine talk. But if we do, more and more New Zealanders are likely to conclude rationally that there are better opportunities abroad, and for those who stay aspirations to first world living standards and public services will increasingly become a pipe dream.
It is a multi-decade challenge under successive future governments, but as the old line has it the longest journey start with the first step. We hope the Prime Minister’s bold rhetoric signals the beginning of a willingness to lay things on the line, to lead the debate on serious options, to spend political capital, for the serious prospect of a much better tomorrow for our children and grandchildren.
ENDS
NB: Since I saw a BusinessDesk column this morning claiming that 1950-type cross-country comparisons are unfair (much of continental Europe was still recovering from the war), it is worth pointing out that exactly the same could have been said of 1939. New Zealand had among the very highest material living standards among advanced economies throughout the first half of the 20th century.
croaking cassandra 
Thanks Michael. Much to ponder. What is the purpose of economic growth? What is the expected outcome for the ordinary bloke and bloket, wage dependent majority of people in a nation’s economy? Better pay? Access to better public services? Will their children have a better standard of living and quality of life? An increase in asset prices? Higher company profits? Is growth necessary? Is it the only model or imperative that could lead to positive economic outcomes? Should we think about it?
I’ve commented previously on the 2008 Brash report rejected by Key. As a Keynesian the answer to economic growth in a downturn seems obvious and proven – counter-cyclical fiscal policy.
Willis seems to be trapped between her inner Keynesian (macro-economics 101) and her readings of Hayek and Friedman and the general small-government economic talking points on the political right.
Resisting calls to her right for brutal and seismic cuts to government spending to enable lower taxes and a liberated and low-cost labor market (high unemployment will do that) to attract local and foreign ‘investors’.
And from the left – she has boxed herself in with ‘fiscal rules’ about the level of government debt to GDP and is avoiding any significant infrastructure spending. Typically, this would be a lever for the government to pull but it has ruled that out. Another lever would be growth in the public sector to bolster private sector surplus income, but the opposite is being undertaken by the current government. Will similar cuts be implemented in the 2025 budget? And will NZ economists, once again, underestimate their impact?
Over the longer term I suspect Willis inner Keynesian will be forced out of hiding – especially if the NZ economy has not shown any signs of recovery by the end of 2025. We shall have to see how things pan out.
BTW – an MMT prediction says that as the government reduces spending the private sector -households and business – have to take on more debt themselves to make up for the contraction in the money supply. And since the 80’s and 90’s this is what the graphs show across Western economies – as government reduces spending, private sector debt goes up.
The problem for Willis and Luxon is that levels of private sector debt in NZ are already very, very high and it is hard to see those levels rising significantly in a weak economy.
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Real wealth can not be generated by Goverments. Regulation only adds constraints to growth.Private entrepreneurs need opportunities.
The RMA reforms only addresses the built environment, in the process creating extra bureaucracy .This does not help anyone much..
The natural environment is still the same regulatory monster they created.
Sadly the debt issue will not go away.I suspect the way , probably the only way this Government will only deal with it is their usual tried and true method of paying lip service to controlling inflation but surreptitiously allowing even encouraging their debt to be inflated away.
One thing is certain,Governments will not stop deficit budgeting.And wage and salary increases are to be expected as time rolls around to the next election.There is political benefit in increasing wages and salaries pre election.
Savers and those on fixed incomes , particularly the elderly.will suffer as the Government effectively redistributes their wealth largely back to Government.
NZD is falling against USD. as the RB bank fails to focus on its core business. Further cuts in the OCR will exacerbate NZD weakness.
Thank you Mt Reddell for creating this blog.
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Real wealth can not be generated by governments? This depends on your definition of wealth – are you wealthy if you have 100 Kg of gold and you are on a deserted island with no government, no roads, hospitals, no established agriculture, legal system or labor market?
By definition a government is the collective agreement of a group of people to organize themselves and their interactions as efficiently as possible. A fiat currency is established through the imposition of taxes in that currency – as a side effect a common measurement of value is established which enables the simple interchange of goods and services – leading to a functioning economy. You have to go a very long way back in history to find a functioning economy with no established state or government type social structure.
If you were to define wealth differently – say as sitting on a deserted island with a fishing rod and a case of beer – then you might be onto something.
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Wealth. I was just discussing this a friend yesterday about his Herne Bay property. 2 Herne Bay properties yesterday sold for $26 million. Both sold millions above of their 2021 peak valuations in a supposedly dead property market in 2025. Does he feel any wealthier now he knows his property would revalue upwards? He answered, Not until he can sell up. He already derives a decent self employed wage of $200k that pays for his reasonable lifestyle choices. When is it enough? He said the answer is More. Why? Because he wants the freedom to be able to drop a thousand dollars on whatever spendup without feeling that it costs too much. And he does not feel that he has enough wealth until he has that freedom to spend $1000 without blinking.
The strange thing is I have the freedom to spend up $1000 on whatever without blinking even in this current weak property market with interest rates at 6%. But I do not feel wealthy. In 2021 my investments in property valued up to $15 million but currently took a dramatic tumble to $10 million. Total rental income is another $200k above my $200k wage. When interest rates were at 2% I had so much spare cash that spending up $20k on anything was pain free and without much thought or concern. But I do not feel wealthy. Why? a friend told he just took a holiday in Paris and stayed at the Bulgari hotel. He spent $150k in just a 2 week vacation for 3 people.
So wealth is a relative number and means different things to different people.
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Thank you for your comment.Real wealth ,while other definitions are possible, tha one most used is currency.The Reserve bank in some of its literature defines currency as a store of wealth. It is also a measure of wealth.This is generally accepted.
it is also the reason that stability and maintaining the value of the NZD should be the most important activity for the Reserve Bank. It is also hugely important for savers ( and the elderly)who worked all their lives to have a nest egg for retirement that retains its purchasing power.
inflation is not only a tax ( Friedman )it is also theft.
NZ is vunerable to currency speculation because of it small size and poor balance of payments This creates a reliance on yield.to maintain value.
Hope this clarifies my earlier comment,
l
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Thanks Rosecevans. And you’re right we do measure wealth in currency. The currency itself is a product of government and is used in an economy because the government demands taxes are paid in that currency. It is worth noting that the currency has to be created and spent by the government first before it can be taxed or saved – there is an assumption that the government depends on the private sector for revenue but that isn’t operationally or economically correct. (If you’re interested MMT does the deep dive on this)
I think the above should give us pause when we assume that the private sector is the main engine of an economy or generator of wealth. I don’t think this is true in any modern economy because the government or state is the foundation on which the private sector is built. Not the other way around. Without a fiat currency issuing state there is no modern economy.
Yes – the risk of inflation is real but it is also a surprisingly rare occurrence given the volume of deficit spending undertaken by modern governments since WW2 and especially in recent years. It’s also easy to manage – just plunge your country into a recession by aligning your fiscal policy with tight monetary policy and ramping up unemployment.
Despite the rhetoric about gold being the only real currency historically, that is not actually true. There are many historic examples of fiat currencies and the fundamental operation has not changed. A fiat currency has to serve 2 masters, as you point out, a medium of exchange and a store of value. But in the end it comes down to the real resource you can access with the currency at any given point in time that matters the most.
Trade and foreign exchange fluctuations obviously have an impact especially if you are exporting or importing a lot of your resources.
If I’ve got any of the above factually incorrect Michael will point that out – time permitting.
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Rosecevans, no the NZD is not reliant on yield to maintain value. It is about relative yield. If all other currency yields are higher or look like they will rise then the NZD with interest rates falling would likely fall in value relative to the other currencies.
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I haven’t left a comment on here for a while – back when I was more active you were advancing the view that much of the productivity issues are to do with high immigration and its knock on effects. The basic argument if I recall correctly is that the demand for housing and the consumables connected to setting up new households crowded out other forms of investment. I found that compelling at the time, but you haven’t said much more about this since then. Why is that? Migration levels have continued to climb, despite the fact citizens continue to leave.
I was back in NZ (from Germany where I usually live) for six months across 23/24, based in and around the Hamilton, Tauranga, Auckland triangle, and my distinct impression is that this what is happening. There is plenty of activity visible (even though the economy was in recession) but it is only house building and civil works to connect all the new developments. Without wanting to be critical of the migrants themselves (who have paid a lot and endured poor treatment by immigration NZ) most seem to be workers in the building industry, or involved in fairly low skilled service industries (Uber, restaurants). The more successful and enterprising ones rise up to NZs priestly caste of real estate agents, lawyers, and property developers.
And you can see that as soon as interest rates rise the entire economy tanks, because that is all there is. The NZ economy is like a heavy drinker who is dying from drinking, but also will die if they go cold turkey. It has reached a stage of impasse at the democratic level – neither of the big parties wants to do anything meaningful because to do so guarantees a recession which the other party will exploit. The only solution would be a grand coalition or agreement between National and Labour where both commit to winding down large scale migration (but it isn’t like that has been highly successful in Germany, leading here also to 15-20 years of lost opportunity to reform).
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On your question, yes I guess there has been a lot less emphasis here on immigration in the last few years. Probably the key factor was Covid, which so disrupted everything about productivity (incl the data) and immigration for several years that it wasn’t worth trying to write about the role of immigration in our longer term econ performance. In addition the champions of large scale immigration are quieter than they used to be (even the NZ Initistive and MBIE). Also, productivity growth in so many countries has been lousy in recent years so I haven’t wanted to look like I was using a NZ specific story for productivity problems that are much more widespread (altho Aus, Canada and UK have quite similar immigration flows to us). Finally, I guess I’m just writing less here, between a couple of years of mediocre health and my new commitments in PNG.
But my bottom line remains that I’d asked for the one policy I think would make the biggest favourable long term difference it would be lowering non-citizen residence approvals to 10-15k pa and maintaining that level for 20 yrs. This location is just v unpropitious for lots of highly productive activity supporting a population that is large (by our stds) and has kept growing rapidly. Actually I’d give the same advice for Australia.
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Interesting points Michael. I guess productivity is basically a math formula – the output per the cost of the time worked to deliver the output. Typically to get higher output the idea is that you invest in machinery, education or innovation. DeepSeek R1 for example – get the same result for a fraction of the input cost.
Increasing the pool of labor without having to invest in the machinery, education or innovation is another way to mathematically retain or increase productivity because you are lowering the cost of the time worked to deliver the output. Bigger labor, pool less demand and stagnant wages.
The point I would make about productivity is that it might not be all it’s cracked up to be when you consider that a tech company can have exceptionally high productivity when it’s valuation is in the billions of dollars and it employs a few thousand people.
Let’s say, for example, a social media company were to collapse wiping out all of that productivity and stock market value. What would happen? Not much – apart from some stock market volatility. Planes would continue to fly, roads would stay open, produce would continue to be available in the supermarket etc.
Now compare that to what would happen if a large farming or food distribution company collapsed? What happens if a major hospital in a dense urban area was shut down? Neither, healthcare or farming rank anywhere near some social media firms in terms of productivity. But which has more impact in the real world and which would you rather invest in as a country that is interested in lifting living standards for future generations?
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Last one – I promise. I just had another thought regarding Luxon’s obsession with FDI for growth. I think he knows that available domestic capital isn’t going to tempted into infrastructure or other projects in sufficient volume to make up for the overall planned contraction in government spending. FDI is then the only remaining option for adding to the money supply in the economy (1. if you aren’t using government deficits and 2. there is not new enough private sector investment or credit growth) to prevent economic contraction from taking place.
FDI was used widely in the UK for privatization and now they have the strange situation of a French SOE owning large parts of the UK’s water infrastructure and taking the returns they make from UK citizens to invest in French public services. There are similar patterns across multiple sectors like energy, transport, social care and telecommunications. A nation that doesn’t want to invest in it’s own basic infrastructure so governments from other countries in Europe do it for them.
I guess we have a similar scenario with our banks in NZ – sure their profits are taxed but where do those taxed profits end up – back in Australia. You could argue we benefit from the size, stability and highly regulated nature of the Australian banking system – which is evidentially true. So I guess DFI is a double edged sword at best. One that should be handled carefully and thoughtfully.
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