Month: December 2025

And that is that

Michael Reddell Uncategorized

About 15 years ago (partly thanks to a couple of years at Treasury, partly to the financial crises in the US and Europe) I started to get much more systematically interested in New Zealand’s disappointing and underwhelming economic performance, and in economic and financial history more generally. And as our kids were growing I was thinking about what to do next. The idea of writing a blog (it was still the heyday of economics blogging) appealed, focused on New Zealand economic (under)performance issues – something I obviously couldn’t do as a public servant. The kids were going to grow up fast and I wanted to be around more for them. My wife got to a position in her career where we could live fairly comfortably on one income and fortunately that coincided with Graeme Wheeler’s desire to be rid of me. And thus, with that double coincidence of wants, this blog launched on 2 April 2015.

Those who’ve followed the blog from early days may recall that for several years I was often writing twice a day, often six days a week. I had fairly voracious interests and the blog found a surprising (to me) number of readers. It also became more Reserve Bank focused than I’d ever envisaged (productivity etc matters a great deal more).

From time to time I’ve thought about how long to continue and in what form. Frequency of posts dropped off, through some combination of circumstances, including poor health for much of the last five years (weird fatigue, including post-Covid, that came and went to some extent but never seemed to go away) and other commitments. I was fortunate enough to be appointed to the board of the (central) Bank of Papua New Guinea two years ago, which has proved to be a big time commitment, and introduced something of a six-weekly cycle to posting here.

On the 10th anniversary of the blog earlier this year, I noted

Circumstances change and I’ve got busier. I have occasionally thought about shutting it down and doing other stuff – I had an outline on my desk when the BPNG appointment came through of a time-consuming project I’d still like to pursue. For now, various circumstances and considerations mean I’m going to try to discipline my public comment more narrowly. There has been an increasing range of things I’d like to have written about but it wasn’t possible/appropriate. For this blog that will mean primarily Reserve Bank things, fiscal policy, productivity and not much else, which was the original intended focus.

And now the time has come to discontinue the blog, at least as a forum for regular economic and economic policy commentary/analysis. I certainly haven’t lost interest in the issues, and the economic and institutional problems, here and elsewhere, haven’t gone away. But there have been a couple of influences. As I noted in April there has been an increasing range of things I couldn’t really comment on. Some of that was about the senior role my wife has held this year (eg largely avoiding things – many – her minister was responsible for). But longer-term my BPNG role, where I now chair the board’s financial stability and related issues committee, has also come to act as a constraint: I don’t find it as easy to comment much on things like bank capital, CBDCs, exchange rate regimes, financial market regulation, payment systems, emergency liquidity provision, failure management (or the IMF). I’ve also become increasingly uneasy about writing on central bank governance and related issues, even when specific issues are very different by country. I’d have stopped months ago if it hadn’t been for the whistleblower whose disclosures to me helped us get closer to the bottom of the Orr/Quigley stories.

So those were some constraints. But at least as importantly is the question of opportunity cost. I could have kept on writing this blog in some form or another more or less indefinitely. But time isn’t unlimited, and having given this ten years plus, I might have ten good years ahead. There are other things to do and focus on. As just one example, thinking more seriously about New Zealand’s economic and financial history, including in a cross-country context.

And, mercifully, in recent months my health seems finally to have fully recovered. I’m back to walking, fairly fast, an hour a day and getting home not exhausted. It is a very nice change to have that energy back.

I’m not going into some sort of economics purdah, but I won’t be writing regular commentary etc here at all. I will leave the website in place, and may occasionally add a post on some interesting economics book I’ve read or an aspect of economic history that takes my fancy. Perhaps also I’ll weaken very occasionally if some current issue really gets my goat, but this post is about tying myself to the mast. My intent is to stop, and to stay stopped.

And if I’m writing shorter pieces much of it may be more oriented towards my fellow Christians. I do have another blog, and I have started writing there again in the last couple of months. I intend to keep on with that, and to read more deeply in theology, biblical studies, and related societal issues.

Anyway, thank you to the everyone who has read the blog over the last 10+ years. It has, mostly, been fun, and stimulating. Writing has often clarified my own thinking and it has been great to have had an audience. I’ve enjoyed interacting with a range of people through blog comments and private correspondence. And I’m not going anywhere.

It is the church’s season of Advent. In the first few years of the blog I’d often include some explicitly Christian material to end my final post each year. So here I’ll leave you with the words of one of my favourite Advent carols.

Fiscal failure

Michael Reddell Fiscal policy, Uncategorized

Back in the far flung days – well, really only just more than two years ago – the National Party went to the election with a fiscal plan under which the government’s operating deficit would have been more or less closed by now. This was the table from that plan.

And in case you are wondering, the PREFU projections that provided the economic base for National’s numbers still had a negative output gap of 0.9 per cent of GDP for the 25/26 year, so it wasn’t exactly a rosy economic scenario. But the deficit was to be more or less closed by now ($1bn for the full year is a bit under 0.25 per cent of GDP, and by the second half of that year – which we are almost in – presumably consistent with a tiny surplus).

There will be an update with the HYEFU next week, but in this year’s Budget – where the government last made overall fiscal decisions – the deficit for 2025/26 was forecast to be $15.6 billion.

Now, to be fair, going into the 2023 election National wasn’t exactly making much of the structural deficits they expected to inherit (I recall at the time noting that there were few or no references to the deficit in the fiscal plan document). And, thus, I guess they’ve been consistent. When the deficit turned out to be more embedded than they’d expected – Treasury having badly misjudged how much tax revenue the economy was generating – National chose not to be any more bothered. They simply chose, in both budgets so far, to do nothing at all about closing the deficits.

This had been apparent in Treasury’s analytical numbers. They publish estimates each year of the structural deficit – ie the bit not amenable simply to the cyclical state of the economy.

This chart was from 2024 budget documents

History is as it is (or, at least, is estimated to be). The medium-term future numbers are, under any government, just vapourware (Treasury uses the future operating allowances the then Minister advises them, which need not bear any relationship to what is actually done when the time comes). But what I’ve highlighted is the move from one year to another, for the fiscal year to which the Budget relates. Thus, in the 2024 Budget Treasury had an estimate as to how big the structural deficit had been for 23/24 and then, given the hard decisions ministers were making, and getting parliamentary approval for, a forecast as to what the structural deficit would be for 24/25. As you can see, in that Budget, the government chose – they had these numbers and associated analysis – to take steps that, taken together, slightly worsened the structural deficit.

The picture from the 2025 Budget was much the same

For a second year in succession, this government’s Budget slightly worsened the structural deficit.

Of course, all the numbers are imprecise estimates, but they were the best estimates available to ministers when they made the Budget decisions.

And recall that a structural operating deficit is akin, in a family context, to borrowing to pay for the groceries even when the family’s employment and income position is pretty normal. A bad practice….for the family, and for the Crown.

It was the Secretary to the Treasury himself who told FEC last week that there had been no fiscal consolidation under this government.

Things haven’t got radically worse in structural terms, but all this has come on the back on deficits under the previous government, and the ever-increasing ageing population fiscal pressures that Treasury has (among other people) warned about for years.

Of course, it hasn’t suited politicians on either side of the aisle to acknowledge Rennie’s point. The government has repeatedly suggested that their fiscal consolidation efforts have helped considerably in bringing about the large cuts in the OCR over the last 16 months, while the Opposition has been content to suggest that something akin to a “slash and burn” approach explains the weakness of the economy over that period. The numbers don’t back up either side – which surely their smarter people actually knew? – because there has been no fiscal consolidation. Sure, the government has cut some spending, but those savings have been (slightly) more than outweighed by new spending. Consistent with that. core Crown expenses as a share of GDP for 2025/26 were estimated at Budget time to be 32.9 per cent of GDP, up slightly on the previous year, and a full percentage point higher than the last full year for which Labour had been responsible. All those numbers are in the public domain, but….politicians……. (In the last full year pre Covid, by the way, spending was 28.0 per cent of GDP.)

Ah, you might be thinking, but what about the interest burden run up by the accumulated deficits of recent years. Surely the incoming government was pretty much stuck with that, making overall expenditure cuts more difficult? And there is something to that, so in this chart I show primary spending (ie excluding the finance costs line from the core Crown expenses table).

It doesn’t really make much difference to the picture: primary spending is still a) far above levels for the June 2019 year (last pre Covid), and b) higher than in the last full year of the previous government, both as a share of GDP.

Spending levels aren’t really my focus. If governments want to spend more then so be it, provided they raise the taxes to pay for the spending. This government simply hasn’t done that, and so the structural deficits stay large, and have been widened a bit (an active choice, not a passive outcome).

In the last couple of days there has been something of a spat between the current Minister of Finance, Nicola Willis, and her National predecessor Ruth Richardson. It seems there is to be a debate between them, after the HYEFU numbers come out next week. But if no one ever really expected Nicola Willis to take anything like a Ruth Richardson approach to public finances, her comments yesterday (as reported in The Post, still seemed extraordinary.

Can the Minister really have been serious in suggesting that any fiscal consolidation – and recall she did none – would have come only at the cost of “human misery”? Fewer film subsidies for example? Or cutting the Reserve Bank budget back a bit more? Or…… (and there is a long list of new initiatives, all choices)? Really?

I’m not overly interested in relitigating the Richardson record, particularly in 1990/91. One can mount an argument that by the time National took office in late 1990, there was already a primary surplus – itself usually sufficient over time to bring finances into order – with the high interest costs themselves somewhat exaggerated (in terms of real burden) by the persistently high inflation of the previous few years. And, as it turned out, even the return to headline surpluses took place sooner than had generally been expected after the 1990 and 1991 fiscal cuts (I was co-author of a Reserve Bank Bulletin article that attracted the ire of Michael Cullen for suggesting that surpluses might not be too far away, and even we were too pessimistic). All that said, fear of large credit rating downgrades was a major consideration at the end of 1990 and into early 1991, and the second failure of the BNZ wasn’t exactly confidence-enhancing. (Then again, the demographics were much less unfavourable back then – in fact quite favourable for the following decade or so, given low birth rates during the Great Depression.)

But whether or not the full extent of the fiscal adjustments back then were strictly necessary is beside the point now. We have much better fiscal data and analytical models, and we have substantial structural deficits on which the government has chosen to make no inroads at all, all while also doing nothing about the medium-term demographic pressures on government finances. The Minister is quoted in the Herald this morning as suggesting (in effect) that the lady’s not for turning, and that she is keeping right on with her borrow and hope strategy – hoping, no doubt genuinely, that one day something will turn up and the deficits she has chosen to run will just go away. If they don’t, we are on a path that – persisted with – takes us in the same direction as, for example, the UK, once – not that long ago – an only modestly indebted advanced economy.

Cross-country comparisons of fiscal situations aren’t made easy by the way New Zealand presents its own data (useful for some purposes, but rendering comparisons hard). But twice a year the IMF produces a Fiscal Monitor publication with a range of indicators presented on a comparable basis across countries. This chart, using data from the October issue, shows the cyclically-adjusted primary balance for New Zealand and other advanced countries (these are overall balances, not operating ones). There are countries running larger deficits, but most advanced economies are running much deficits or even primary surpluses.

When it comes to deficits, the New Zealand government is choosing to do poorly on almost metric you choose to name (history, cross-country comparisons, expectations of the Public Finance Act). And it is choosing to do nothing about it. With an election year next year, not a time known for fiscal consolidation.

I had noticed reports that the Taxpayers’ Union was launching its own campaign on these issues, and the government’s fiscal fecklessness – choosing to do nothing about fixing a problem they inherited. I don’t have anything to do with that but while I was typing this a courier turned up with the props they are distributing to journalists and commentators. I’m sure we’ll enjoy their fudge.

Is it a fiscal fudge though? More like open and outright bad, and rather irresponsible, choices. We need something better.

Geoeconomics: fragmentation & the future of globalisation

Michael Reddell Trade

That was, more or less, the title of two events I attended at the University of Auckland last Thursday. With the help of generous funding from the Sir Douglas Myers Foundation (in particular), the university had been able to bring in a bunch of well-regarded overseas academics and prominent “public intellectuals” for several events focused on issues around the potential and actual disruption to economic globalisation as a result of overt political choices (notably, the tariff policies of recent US administrations). The key person driving the programme seems to have been Prasanna Gai, professor of macroeconomics at Auckland (and, of course, a member of the Reserve Bank Monetary Policy Committee, where he sets something of an example to his colleagues by actually being willing to deliver speeches and outline his thinking).

I gather there was a more technical academic-focused event on Friday, but the two events I attended were the full day workshop on “Geoeconomics and the Future of Globalisation”, and an evening public dialogue event “Geoeconomic Fragmentation: Challenges and Opportunities”.

The workshop was conducted on Chatham House rules so I can comment only on what was said and not who said it. Attendees were a mix of academics, market economists and the like, and public servants and people with official roles. I’m not quite sure why the presentations – mostly from academics – were non-attributable (several speakers drew on their published papers) but anyway, those were the rules.

The evening event featured two visitors, in dialogue (of sorts) moderated by Gai. The first was Andy Haldane, formerly of the Bank of England and now one of the great and good, whose op-eds on all sorts of interesting issues, and angles on those issues, pop up not infrequently in places like the Financial Times (one of those Brits you feel sure will end up with a knighthood or perhaps a peerage). And the second was Laura Alfaro, currently chief economist of the Inter-American Development Bank, on secondment from an academic position at Harvard Business School, and also a former minister in her native Costa Rica. I doubt I am seriously breaching the rules if I say that Haldane’s remarks at the evening event (see below) were very very similar to those at the earlier workshop.

The whole area of so-called geonomic fragmentation should be fascinating (indeed, one panellist went so far as to call it “the only topic”) After all, not only do we have Trump (and between his terms Biden, who didn’t exactly dismantle Trumpian protectionism from the first term), but issues around both the political and economic rise of China, the widespread use of unilateral US sanctions (a recent book on which I wrote about earlier in the year), and of course the intense efforts from some countries (including little old New Zealand) to use sanctions to put pressure on Russia and its ongoing war on Ukraine. In our own remote corner of the world, I presume New Zealand restricting aid to the Cook Islands over apparent geopolitical concerns won’t exactly be good for bilateral trade.

There were some interesting presentations. I particularly enjoyed a keynote address on global value chains and geonomics, and especially the way in which connections of individual firms are often more important to focus on than industries or countries per se (thus, the dependence of TSMC on single firms in Holland (ASML) and Germany (Zeiss)). We were also reminded that most firms that import buy a particular product from a single supplier, with little or no effective diversification, something extreme tariff uncertainty may change. This presenter also reminded us that up to 40 per cent of US trade now involves dual-use products where national security considerations can reasonably come into the mix. That lecture concluded with a reminder that trade policies will be shaped by whatever it is that governments want to maximise at a point in time, and there is no necessary reason why that goal should be maximisation of near-term GDP. National security considerations are to the fore much more than they were, or than was readily conceivable, in the 1990s and 2000s. But there was also a reminder that if private firms will never internalise all externalities, those same private firms will innovate quickly when the rules of the game change (thus China’s current chokehold on “rare earths” is unlikely to last long).

There were also useful reminders as to just how much the tariffs etc have changed trade between US and Chinese firms: China’s share of US imports has now dropped back to around where it was 20 years ago. And yet at the same time both Chinese exports and US imports in total have continued to grow. There was an argument made by several speakers that as yet there is little sign of overall globalisation having gone into reverse. In his evening address, Haldane was particularly strong on this claim, arguing that flows of goods, and people, and money (and even more so information) are at levels never before seen, and (more ambitiously) that the benefits of these flows were at least as large as economists like him had argued for (I was curious where he was going to find the evidence of the economic benefits of large scale immigration to his own country, it of the underperforming economy, but no one asked). Haldane argued that much of what was wrong with political tides, public mood etc, was that economists had underestimated the social and redistributive effects of globalisation. Count me rather sceptical, but Haldane – a technocratic social democrat – saw it as grounds for more and smarter government, to enable people to reskill, retrain etc. He was also openly championing industry policy – seeming to conflate legitimate national security issues with the rather more dubious of politicians and officials trying to pick winners (and wasn’t even that compelling on the national securituy side in suggesting a place for food protectionism). And if he was overall optimistic (self-described) he still saw risks of all falling apart, an unravelling of open trade, and risks around a crisis over high and rising public debt. Quite what the latter had to do with geoeconomics wasn’t clear to me.

Haldane was a funny mix. He seemed keen on international financial institutions leading the public dialogue on the benefits of globalisation (as if such agencies – IMF etc – commanded mass public trust…..), and also called on business to play a more prominent role (good luck with that). But when asked about the role of technical experts I thought he was to the point in asserting that they need to wear lightly what expertise they have, and be much more willing to own up to mistakes (“we all make them after all”). I don’t recall if he mentioned them specifically, but central banks seemed to be among those he had in mind. If you like citizen panels to deliberate on policy issues, Haldane too was keen. Quite what it had to do with the geoeconomic challenges wasn’t quite clear, although I think that he, like some other participants, were inclined to aa view that if only the public were made to see what was good for them normal service could be resumed (one speaker at the workshop was robustly, but shallowly, of that view regarding mass immigration). Quite how it took account of the activities of places like Russia and China wasn’t clear.

Of the evening speakers, I found Alfaro (from the IADB) much the more interesting, partly presenting work she’d done for a Jackson Hole paper a couple of years ago and in pushing back on some of Haldane’s enthusiasms (industry policy for example). Like many speakers she noted that the US protectionism was unlikely to dissipate quickly – that the political environment had changed, and that little about that was unique to Trump. She reported some results in which public respondents were very sceptical on trade, and retained that scepticism even when presented with apparently hard evidence of the benefits. She stressed the decoupling of trade between the US and China, but also argued that so far that had proceeded smoothly, often supported by banks to enable firms to reallocate business, and that there was little evidence of overall deglobalisation. As for whether the vaunted “rules-based-order” could re-establish itself, she placed considerable weight on the willingness, or otherwise, of the US to assume leadership in a multilateral context. I got the impression she was not optimistic.

There was quite a strong sense from speakers of hankering for a better time (perhaps 15-20 years ago). I was less convinced that this particular group of speakers had much to offer in thinking through the economics of geopolitics and associated fragmentation issues. No doubt they were experts in their own narrow fields, but perhaps those were more about “what are the effects and where do they show up” (interesting in its own right) rather than in how best, and when, to deploy economic policy instruments. China itself attracted very little attention – whether for example modern slavery issues and associated restrictions, political interference, alliance with Russia, threat to Taiwan, or whatever. Politics – geopolitics especially – just wasn’t the comfortable place for most of these presenters.

One speaker – who has a lot of published material in this area – was among those emphasising a standard result that if, say, the US imposes large tariffs on other countries they should not retaliate as doing so would only make the retaliating country poorer. On the assumptions in the model, of course that is sensible – overall, the cost of trade protection are mostly and ultimately borne by consumers in the country imposing the restrictions. But one of those assumptions – in fact a critical one – seems to be that trade policy retaliation does not then change, for the better, the behaviour of the original protectionist power. But there was no analysis of when and whether that might, or might not, hold. Alliances were mentioned a few times during the day, but never very systematically. One of the things that was striking to me back in March/April was the way countries seemed to make no effort at all to work together to push back on the rogue actor in Washington (in our part of the world, for example, Luxon and Albanese offered no vocal support to the Canadians). I have no idea whether a more concerted effort might have deflected Trump (perhaps it would have worsened things) but you might have hoped for more analysis of the issue.

It is easy for economists to simple wish that politics would stay out of the way, and derive results that assume it away. It is also easy to focus on GDP maximisation (or some less crude utility form of that), but – as above – much depends on what politicians actually want to maximise. No doubt modellers in August 1939 would have told us that retaliating against the next German aggression would only make us poorer – and of course, it did so dramatically, as massive cost of blood and treasure – but a handful of courageous countries (Britain, France, New Zealand, Australia, Canada, South Africa) concluded that it was a price worth paying for a better, but risky, outcome. No doubt when China invades Taiwan, modellers – and firms – will produce results showing that retaliation will only make the rest of us poorer. No doubt, but do we just sit by? Most of the West has chosen not to in respect of Russia even when, as in the New Zealand or Australian case, Russia poses little or no direct threat to us. In my view, we were right to do so. And then of course, which instruments work best, which risk being self-liquidating (eg concerns about US overuse of unilateral sanctions motivating innovative to reduce that exposure).

Finally, there was quite a strong sense that the workshop and dialogue were quite northern hemisphere focused. Amid all the upbeat reminders about the ongoing reach of globalisation I don’t recall anyone all day pointing out that, at least on trade in goods and services, globalisation in New Zealand has been going backwards for 20 years now, without anyone even consciously trying.

Lest I sound unduly negative, I enjoyed the day, caught up with people I hadn’t seen for a while, and appreciated the invitation. And surely the benefit of events like these is if attendees coming away thinking a bit deeper or broader themselves, even if a little orthogonally to the actual papers presented.

Productivity growth (or lack of it)

Michael Reddell New Zealand economic performance

In a post last week I included this chart of the latest annual OECD data on labour productivity, expressed in PPP terms.

It was grim, in a familiar sort of way. New Zealand’s overall economic performance has long been poor (the halcyon days when New Zealand was in the top 3 in the world relegated to the history books, and stories the older among us might have heard from grandparents etc). These days more and more of the formerly communist central and eastern European countries are passing us (Romania – highlighted – will probably do so in the next five years or so).

But it reminded me of the Prime Minister’s State of the Nation speech back in January, which was full of fine rhetoric about the need to do (much) better. He told us that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”.

At the time, I welcomed the rhetoric but rather doubted that the substance would come anywhere near matching it, pointing out that although in its first year the government had made some useful reforms (with productivity in view), in other areas they had taken things backwards. And they’d made no progress at all on fiscal consolidation which, while not in itself critical to productivity prospects, was not a great signal. Together with Don Brash (who’d chaired the 2025 Taskforce 15 years previously, when an earlier government’s rhetoric had briefly talked up closing those income and productivity gaps) I wrote an op-ed for the Sunday Star Times (full text in the previous link), lamenting the decades of aspirational cheap talk on the one hand and lack of realised progress (productivity gaps as large as ever or widening further) and ending this way.

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.

Where do things stand almost a year on? In cyclical terms, there isn’t much to show for the year. GDP growth has been on average weak (I’m assuming next week’s September quarter number comes out respectably), the unemployment rate has crept up a bit, business investment has been weak, and so on. But, for all the rhetoric and cheap attempts to either claim credit or cast blame, governments usually have little influence over short-term real economic developments, the more so in this era of operationally independent central banks. In our case, the weak economy mostly seems to have been the lagged effect of belated Reserve Bank actions to get inflation back under control, the Bank itself having previously misjudged (in tough circumstances) and let it get away on them. That, of course, doesn’t stop ludicrous government claims that falling interest rates have resulted from government actions and choices, or equally ludicrous suggestions from the left that somehow slash and burn fiscal policy accounted for the recent economic weakness. In short, there has been no fiscal consolidation. Don’t take it from me: I just use Treasury data and charts and the Secretary to the Treasury made exactly my point to FEC last week.

This year’s Budget was also (slightly) expansionary, increasing the structural fiscal deficit.

I noticed the other day a post from Don Brash in which he attempted an assessment of the government’s overall performance at the end of their second year. Don was interested in a wide range of areas, but it was the economic bits that interested me. (While noting the failure on fiscal policy) he scored the government reasonably well here.

Count me rather more sceptical. Overall, it looks to have been another year of a few useful reforms, some (modest) backward steps, and a much greater focus on attempting to gee up sentiment and activity (or appear to do so) before next October than any real drive to markedly lift New Zealand’s productivity prospects and performance over the coming decade (and thus, to the extent that good things are happening in schools, any overall economic gains are almost by necessity a decade or more away).

I’m a strong believer in much (and sustainably) lower real house prices (not just achieved by people consuming less house, less land) but, as Don notes, the Prime Minister isn’t. He claims to be keen on prices just rising less rapidly than they once used to. And although house prices have generally been falling in the last couple of years it still isn’t clear how much of that is more or less cyclical (unwinding the extraordinary 2020/21 surge) and how much might be structural. Productivity performance was pretty woeful a decade ago and real house prices now are no lower than they were then. Some economists believe that much lower house prices would themselves help materially lift productivity: I’m sceptical about that in our specific circumstances, and reckon improved housing affordability and responsiveness is mainly good (very good, if taken far enough) for its own sake. Young families on moderate incomes should be able to afford a basic house in our cities. It was so before and can be so again.

The government is tomorrow launching to great fanfare (huge lockup and all) its RMA reforms – one of the items the PM promised for this year back in January. We’ll see what that package looks like. In principle, reforms should be supportive of productivity growth. My story of New Zealand’s failure emphasises the apparently limited number of profitable opportunities here open to business (local or foreign) and if costly roadblocks can be removed the expected returns to opportunities will improve. More investment should follow.

But….it is a long road ahead. Whatever is announced tomorrow is not guaranteed to be what passes Parliament in (presumably) the dying days before the election next year. If there is a change of government (coin toss territory at present?), how likely is this particular package to endure? And, as we saw with the original RMA itself, what was initially seen as liberalising and enabling legislation turned into anything but, between the courts and successive lots of central and local government.

As for the government itself, we learned this year that the Minister of Finance had gone along with bizarre new Treasury schemes under which investment and regulatory proposals being evaluated by government agencies will use discount rates that are absurdly low and bear not the slightest relationship to the cost of capital. In the private sector, the government’s flagship policy in this year’s budget wasn’t about addressing the high tax rates on business income here but on subsidising firms to buy new capital equipment, with the biggest effective subsidy going to the sector (commercial buildings) they’d imposed a new distorting tax impost on only last year. So much for the efficient allocation of scarce resources, whether in the public or private sectors. Nor has there been any sign of top-notch appointments to any of the key economic agencies in the public sector – in the MBIE case, still no chief executive appointment at all. Small as such a reform might be, in an age of Trumpian tariffs the government hasn’t even gotten round to removing the remaining tariffs New Zealand has in place (including protection for the local ambulance building industry…of all things).

Looking back over the year it is a lot easier to be persuaded that what is driving the government – perhaps the Prime Minister in particular, and his “Minister for Economic Growth” is initiatives to grab a headline for a news cycle or two, with a focus mostly on next year’s election. We’ve had new film subsidies, new gaming subsidies, the taxpayer has been helping to buy a rugby league game for Auckland, and we’ve had the (laughable if it weren’t so bad) money thrown at the Michelin company to get their guide to cover New Zealand restaurants. Whatever you think of National’s new Kiwisaver policy, it isn’t going to shift the dial on productivity (where access to capital has never been the presenting issue, even if Kiwisaver changes ended up shifting national savings rates, itself questionable – to put it mildly). Headlines, and associated chirpy social media posts, seem to be where it is at, rather than a serious sustained reform effort, grounded in hardnosed analysis and New Zealand specific insights on just what has gone wrong here. What has seen us drift behind so many other countries.

It is one of those areas where I’d love for my pessimism to be wrong. There is a risk that after decades of failure it becomes too easy to be cynical about the latest efforts. But at this point, and two years into the government’s term, there is still little or no sign of things that are really set to turn out performance around. Inevitably a post like this has to be somewhat selective, but you could also look to the financial markets. Is there any sign, for example, of our stock market outperforming as investors markedly re-rate longer-term business (and profitability) prospects here? Not that I can see. And although our bond yields have been quite high by international standards for a long time – which is something one might also see if investment prospects were improving sharply – if anything those differentials are narrower now than they used to be.

The Prime Minister ended his January speech this way

But I’m afraid he and his Minister of Finance look as if they will slot in nicely with the sequence this old cartoon (which I first ran here almost a decade ago. Yes, there will be (may already be) a cyclical upturn, but the structural failings still lie largely unaddressed (and certainly unresolved).

A few charts updated

Michael Reddell New Zealand economic performance

Over the life of this blog there have been a few charts I’ve kept coming back to. There have been some of the obvious ones, for example around the persistent underperformance of the New Zealand economy on labour productivity. It takes a while for a fairly annual data to turn up on the OECD database, but here are the near-complete 2024 estimates.

Just two observations on that chart:

First, it would take a 74 per cent increase in average labour productivity in New Zealand to match the average across Denmark, Belgium, and Switzerland (3 small European countries, not heavily reliant on nature’s bounty – unlike, notably, Norway). That margin – the steep hill we have to climb – has slightly increased in the last decade.

Second, Romania isn’t in the OECD but back in 2017 I wrote a long post about Romania and suggested then that if the relative performance of productivity growth in the two countries over the previous decade continued in another 20 years they’d have caught us (the backdrop of course being the absolute mayhem left at the end of the Ceaucescu regime). On present trends now (last decade’s performance), Romania is likely to pass us in perhaps another five years.

Then there were the foreign trade charts I updated in a post last week.

In a somewhat related vein, every so often I’ve run a chart (first devised for New Zealand by the IMF) that is a rough and ready indicator of the split between the tradables and non-tradables parts of our economy (tradables here being the primary and manufacturing sector, together with exports of services).

This is the latest version

The dismal nature of the picture (and economy) is captured in that blue line. Not only has the pre-Covid level not been regained, but the per capita size of the tradables sector of our economy is way smaller than it was 20 years ago. Meanwhile, the non-tradables sector, after a Covid and overheated domestic economy interruption, seems to keep tracking upwards. It isn’t a sign of a healthy economy.

And finally in this brief update post, what about wages? Every so often I’ve included this chart.

People don’t seem to find it very intuitive, but when the lines are going up wage rates (captured by the LCI analytical unadjusted series) are rising faster than nominal GDP per hour worked. When I first did the chart, perhaps seven or eight years ago, of course what caught my eye was the (quite strong) upward trend over 15+ years from about 2000. I saw it as another way of casting light on real exchange rate or competitiveness issues, and as not inconsistent with the inward skew to the economy apparent in the previous (tradables vs non-tradables) chart. Whatever the causes, relative to the capacity of the overall economy to pay (or generate income), wage rates were holding up strongly.

The series is noisy (terms of trade fluctuate quite a bit, and the hours worked series is also a bit noisy quarter to quarter). But there is also no mistaking that the trend apparent up to the late 2010s, arguably right up to the eve of Covid, has changed since. Wages have actual fallen back relative to nominal GDP, whether on the private sector or whole economy wage measure. (And for those who insist on a partisan lens, it doesn’t appear to be a Labour vs National thing.) The fall back isn’t large, absolutely or relative to the previous rise, but equally it isn’t inconsistent with all those polls suggesting that “cost of living” is still the most front-of-mind public concern.

There is no overall intende message in this post, just that coming towards the end of another year it is worth standing back and reflecting on the more structural aspects of how the New Zealand economy is doing (there will always be cyclical swings). In summary, not well.

UPDATE:

A commenter noted that in the first chart above NZ was just ahead of Japan. On this measure, we have been much the same as Japan for getting on for 20 years now.