So much company tax, so little investment

Almost 10 years ago I stumbled on this chart in the background papers to Australia’s tax system review.

Chart 5.11: Corporate tax revenue as a proportion of GDP — OECD 2005

Aus company tax as % of GDP 2008

I was intrigued, and somewhat troubled by it.   New Zealand collected company tax revenue that, as a share of GDP was the second highest of all OECD countries.   And yet New Zealand:

  • didn’t have an unusually large total amount of tax as a share of GDP, and
  • had had quite low rates of business investment –  as a per cent of GDP –  for decades, and
  • as compared to Australia, just a couple of places to the left, New Zealand’s overall production structure was much less capital intensive (mines took a lot of investment).

And, of course, our overall productivity performance lagged well behind.

Partly prompted by the chart, and partly by a move to Treasury at about the same time, I got more interested in the taxation of capital income.   After all, when you tax something heavily you tend to get less of it, and most everyone thought that higher rates of business investment would be a part of any successful lift in our economic performance.  That interest culminated in an enthusiasm for seriously considering a Nordic tax system, in which capital income is deliberately taxed at a lower rate than labour income.  It goes against the prevailing New Zealand orthodoxy –  broad-base, low rate (BBLR) –  but even the 2025 Taskforce got interested in the option.

Flicking through the background document for our own new Tax Working Group the other day I came across this chart (which I haven’t seen get any media attention).

company tax revenue

It is a bit harder to read, but just focus for now on the blue bars.   On this OECD data New Zealand now has company tax revenues that are the highest percentage of GDP of any OECD country.   A footnote suggests that if one nets out the tax the government pays to itself (on businesses it owns), New Zealand drops to only fourth highest but (a) the top 5 blue bars are pretty similar anyway, and (b) it isn’t clear who they have dropped out (if it is just NZSF tax that is one thing, but most government-owned businesses would still exist, and pay tax, if in private ownership).

So for all the talk about base erosion and profit-shifting, and talk of possible new taxes on the sales (not profits) of internet companies, we continue to collect a remarkably large amount of company tax (per cent of GDP).  Indeed, given that our total tax to GDP ratio is in the middle of the OECD pack, we also have one of the very largest shares of total tax revenue accounted for by company taxes.

The Tax Working Group appears to think this is a good thing, observing that it

“suggests that New Zealand’s broad-base low-rate system lives up to its names”

There is some discussion of the trend in other countries towards lowering company tax rates, but nothing I could see on the economics of taxing business/capital income.  It is as if the goose is simply there to be plucked.

There are, of course, some caveats.   Our (now uncommon) dividend imputation system means that for domestic firms owned by New Zealanders, profits are taxed only once.  By contrast, in most countries dividends are taxed again, additional to the tax paid at the company level.    But, of course, in most of those countries, dividend payout ratios are much lower than those in New Zealand, and tax deferred is (in present value terms) tax materially reduced.

And, perhaps more importantly, the imputation system doesn’t apply to foreign investment here at all.   Foreign investment would probably be a significant element in any step-change in our overall economic performance.  And our company tax rates really matters when firms are thinking about whether or not to invest here at all.  And our company tax rates are high, our company tax take is high –  and our rates of business investment are low.  Tax isn’t likely to be the only factor, or probably even the most important –  see my other discussions about real interest and exchange rates – but it might be worth the TWG thinking harder as to whether there is not some connection.

Otherwise, as in so many other areas, we seem set to carry on with the same old approaches and policies and yet vaguely hope that the results will eventually be different.


The boondoggle

Earlier this week, Kiwirail released its most recent half-yearly financial result.  Once again, the taxpayer was poorer for their operations.   They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report


In other words, no returns to shareholders at all; in fact losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before).  So roughly a quarter of their overall costs are not covered by income.   As an organisation –  and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do –  and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed.  Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital.  But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line.  Rail volumes had been low and falling –  some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable.  But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

 In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it.

There are, apparently, going to be a lot more logs to move in the coming years.  In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.

“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago.  In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs.  Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed?  But, if so, where is evidence?  None was published yesterday.   We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant –  don’t we have an ETS supposed to deal directly with pricing emissions? –  and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive.  A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.  I’ve only looked through the Gisborne/Hawke’s Bay list, and none of it fills me any confidence.   What, for example, is central government doing on this?

The Provincial Growth Fund will provide $2.3 million to redevelop the Gisborne Inner Harbour as part of a wider tourism investment programme.

If, as the Minister claims,

“Tairāwhiti is brimming with potential and untapped opportunities

you would have to wonder why the private sector, and the local authorities, don’t seem to think them worth spending money on.  (On my story, a materially lower real exchange rate would help quite a bit, but the government shows no sign of addressing that.)

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand.   The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First.  This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful.  It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister –  with a vote base to maintain –  is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.  

hen again, the Secretary to the Treasury might quite like the idea of paying to reopen the Napier-Wairoa line.  I’ve told previously the story of Gabs Makhlouf, fresh off the plane from the UK, lamenting that the one thing New Zealand hadn’t sufficiently taken from the British Empire experience was to invest more heavily in rail (in response, assembled Treasury officials were not quite being sure where to look).

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects.  Spraying around $5m here and $5m there –  $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another  step along that path.

Robertson on productivity: not much basis for confidence

I’m not going to write much about the Productivity Hub (Productivity Commission, MBIE, Treasury, and Statistics New Zealand) conference yesterday on “Technological Change and Productivity”.   Not all of it was even about productivity, not all of it was even relevant to New Zealand (there was a genuinely fascinating presentation from a US academic on the economics of wind and solar power, which must matter a lot if half your power is generated from fossil fuels, but rather less so in a country where 90 per cent of power is hydro-generated).   And there was lots of focus on micro data on firm (or agency) level productivity, even though no work in that area has yet been shown to shed much light on the large gap between economywide average productivity in New Zealand and that in most other advanced OECD countries.   But the “Reddell hypothesis” did get a (positive) mention from the platform, when the Productivity Commission’s Director of Economics and Research, Paul Conway, reprised some of the thoughts from his 2016 “narrative”, highlighting the likely importance of the macroeconomic symptoms: persistently high real interest rates (relative to other countries) and a high real exchange rate.   Conway suggested that we should focus much more on bringing in highly-skilled migrants, and that if that led to a reduction in total numbers that might well be a good thing.     With 47 MBIE people among the 200 or so (mostly public service) registrations, I don’t suppose that proposition commanded universal assent, but there wasn’t any further open discussion.

I couldn’t stay for the final session, but fortunately that speech has been made widely available.  The Minister of Finance gave an address on “The Future of Work: Adaptability, Resilience, and Inclusion”.   At one level, I was pleasantly surprised: there was more about the productivity challenges New Zealand faces (our overall underperformance) than I’d expected.  And if I’m sceptical about the Treasury Living Standards Framework, and attempts to build policy around “well-being”, I couldn’t really disagree with the thrust of this line from early in the speech

Improving productivity is key to improving wellbeing. By producing more from every hour worked, businesses become more profitable, incomes rise, and workers’ wellbeing rises as time is freed up and purchasing power rises.

And it was good to have the new Minister of Finance remind us that productivity growth (lack of it) has been a longstanding problem in New Zealand.  Although even then he seemed inclined to underplay the problem: for example, basically no productivity growth at all for the last five years.   And he noted that GDP per hour worked is now around “20 per cent below the OECD average”.   But since the average includes places like Turkey and Mexico, and a group of countries (ex eastern bloc) which weren’t market economies at all 30 years ago, it might be better to highlight the point I made in yesterday’s post:   for New Zealand to catch up with the G7 economies as a whole, we’d require a 50 per cent lift from current levels (assuming those countries had no growth at all), and to match that group of highly productive northern European economies (France, Belgium, Netherlands, Germany, Switzerland and Denmark), we’d need more like a two-thirds increase.   Even to catch Australia –   which lags some way behind the OECD leaders –  would take a 40 per cent increase in economywide productivity.   That lost quarter-century won’t be regained easily.

But it is one thing to recite these numbers (early in one’s term as Minister of Finance).  As even Robertson put it

I am most certainly not the first New Zealand politician to both highlight the challenge of low productivity, nor to say that we will address it.  So the proof will be in what we actually do. 

And what is on that “to do” list?   And that is where it gets a bit disconcerting.

There are a couple of the reviews underway

Our Tax Working Group and the reforms we are making to the Reserve Bank Act are an important part of setting the path to a more productive economy.  That focus on improving productivity is at the heart of the terms of reference for both these reviews.

No serious observer believes that the sorts of changes foreshadowed for the Reserve Bank Act –  desirable as the general thrust might be –  will make any difference whatever to the trend level of productivity in New Zealand.  Monetary policy just isn’t that potent.  As for the Tax Working Group, a (limited) capital gains tax might, or might not, be a good idea but I’d be surprised if anyone believed it would make a very material difference to overall economic performance (and, after all, much of the TWG documentation has a prime focus on fairness).    For all the talk about “too much investment in housing” recall –  as the Minister doesn’t in his speech –  that a key element of government policy is building lots more houses.  Resources used for one thing can’t be used for other things.

What else is the government planning?

The government has committed itself to the goal of a net zero carbon economy by 2050.  This is an essential shift for New Zealand away from an economy that hastens climate change to one that is more sustainable and develops New Zealand’s strategic advantages.

We will need to ensure this is a just transition where affected industries and communities are given the support to find new sustainable growth opportunities.

Again, you might or might not think this is a worthwhile goal, but it isn’t going to lift economywide productivity relative to what would have happened without the net zero goal.   Even the Minister is here focused on smoothing transitions, minimising disruption.

Then there is skills.

The Future of Work was the catalyst for our three years’ free training and education policy. One of this Government’s key policies is to provide one year of free post-secondary education or training, gradually progressing to 3 years by 2025.

So in a country where the OECD data suggest that the skill levels of New Zealand workers are already among the very highest in the OECD, the government is going to spend rather a lot of money (all funded by taxes, with their deadweight costs), in the expectation that a marginal cohort of people who would not otherwise have invested in formal training/education will now do so.  Most of the immediate gains will go to people who would in any case have gone to university (or done other comparable training)  –  I’m expecting my kids to be in that category –  and most of the people who take up formal training who otherwise would not have done so, are likely to well below the leading edge in terms of productivity potential.    If there are gains at all economywide –  which seems unlikely, but I’m open to persausion –  they will almost certainly be pretty small.  It is mostly a middle class welfare policy, not a productivity policy.

Then there is regional development policy

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First.  This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

The details of the Fund are to be released shortly and will provide some of the most significant development of our regions in decades.  These will be driven from the ground up, with the Government as an active partner.

If it ends up less bad than a boondoggle we should probably be grateful.  It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister –  with a vote base to maintain –  is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.   At very very best, it is all rather small beer.  Recall that we need a two-thirds lift in economywide average productivity to catch those northern Europeans.

It goes on

It is my strong belief that the most critical element to New Zealand succeeding in the Future of Work is a renewed social partnership between businesses, workers and the government. 

If we look at Germany as an example, union members often sit on company boards as part of the decision-making process, ensuring that employee wellbeing is considered alongside high-level corporate profit and financial targets.

One of my goals as Minister of Finance is to develop this new partnership at a system-wide level to promote a combined work stream on how we can apply these lessons to other industries and sectors. 

Maybe the Minister doesn’t see this sort of stuff mostly affecting productivity performance.  But if not, what will?

Perhaps R&D.

In the Coalition Agreement with New Zealand First we have set a target of hitting an R&D spend of 2% of GDP in ten years. That’s more than a 50% increase in R&D investment relative to GDP over that time and will make a significant contribution to improving our productivity.

Officials say that this is an ambitious goal. We believe this can be done, with the Government incentivising such vital work by the private sector.

Minister for Research, Science and Innovation, Megan Woods, has already begun work on overhauling New Zealand’s R&D regime, with Ministers set to discuss officials’ initial findings later this month. We are committed in the first instance to restoring R&D tax credits to give firms some certainty about their investments.

But, as with earlier comments the Minister made in his speech about relatively low rates of business investment, there is no suggestion that the government has thought about what it is in the economic environment that leaves private businesses –  pursuing profit opportunities where they find them –  unwilling to spend more, whether on R&D or investment.

It was interesting that the Minister of Finance chose to highlight comparisons with Germany in his speech.  As I’ve pointed out in an earlier post,  Germany doesn’t have an R&D tax credit (actually of those successful northern European countries I highlighted earlier, neither does Switzerland) –  although the senior OECD official whose seminar I attended the other day, who didn’t seem wildly enthused about the merits of such tax credits, did note that the German government is under business pressure to introduce such a scheme because, eg, France and the Netherlands have them.

There are stories galore about what gets claimed for under R&D tax credits, and one person at the seminar the other day indicated that the Australian government is currently looking to wind back its R&D tax credit, having realised that a significant amount of money is being rorted.  If free tertiary education is (largely) welfare for middle class parents and their children, R&D tax credits look like welfare for the owners (often foreign) of businesses.    The R&D spending already happening would, presumably, have taken place anyway, so if there is to be a tax credit in respect of that spending it is pure gift (on top of the advantage of being able to immediately expense anyway).   There will be significant incentives to reclassify some activities as R&D that weren’t previously (because there was no advantage to doing so).  Some of that will bring to light genuine R&D spending that wasn’t previously visible – slightly tongue in cheek, the OECD official noted this was one advantage of R&D credits.   Other spending won’t really be R&D at all, and IRD will be engaged in a constant battle to hold the line.  And perhaps there will be some additional R&D work undertaken that wouldn’t otherwise have occurred.  But surely –  a bit like the increased teritary participation that will flow from fee-free study –  most of that will be, almost by definition, the least valuable, most marginal, activities; the stuff not worth doing without a subsidy?

It is, frankly, a bit hard to believe that even the best R&D tax credit –  and I gather MBIE officials are working hard to limit any abuses and wasteful transfers in the forthcoming tax credit –  will be a transformative part of the story.

Let’s go back to those northern European countries, with a slide from the OECD official’s presentation:


France –  third bar from the left –  has some of most generous government support for business R&D of any country in the OECD database, including a generous tax credit.   That support has materially increased in the last decade, but it was still fourth highest in 2006 (the white diamond).   Germany (DEU) has low overall government support, and no R&D tax credit at all.     These are both advanced industrial economies, situated right next to each other, with lots of trade between them.   And here is OECD data on the respective levels of real GDP per hour worked.

fr and ger

Identical at the start, identical at the end, and never –  through the whole period (Mitterrand, absorbing East Germany or whatever) – any very material deviation between the two lines.  It is the sort of relationship –  univariate and all –  that makes it more than a little hard to take seriously suggestions that introducing an R&D tax credit here will make any material difference to our relative productivity performance.

And here is the OECD data (for 2015) on R&D spending in each of those six highly productive northern European countries, and New Zealand.  “BERD” is business expenditure on research and development.

R&D spend n europe.png

Remember that Germany and Switzerland are the two of the northern European group that don’t have R&D tax credits, and provide little direct government support to business R&D.   I’m not suggesting any sort of perverse relationship  –  a lot probably depends on the specific sectors businesses in particular countries concentrate on – but it should at least be a little sobering to reflect that the two countries in that grouping with no R&D tax credits have higher rates of business spending on R&D than any of the other countries in the group (even with all the incentives that such credits create to classify spending as “R&D”).  One might wonder if the big French incentives –  increased in the last decade –  might not have been sold on the basis on “we are lagging behind Germany in R&D spend” and need to “do something” to catch up.

Mostly, a reasonable hypothesis still looks to be that firms will invest (including spending on R&D) when it appears to be profitable for them to do so.  If so, it might be better to spend some more time understanding what holds firms back –  addressing issues at source if possible –  rather than just throwing more government money at a symptom.  There isn’t much sign the government has done anything more than highlight a few trendy symptoms, rather than really engaging in an integrated narrative of New Zealand’s economic performance.  The Minister of Finance concluded his speech yesterday

I want us to re-write our productivity story, so that New Zealand becomes a leading example of a sustainable and productive economy in which everyone gets a share of economic success.

It is a worthy aspiration –  shared, no doubt, by a long line of predecessors stretching back decades –  but there is little sign of the sort of serious thinking –  or even engagement with the full range of symptoms (eg weak export share, high real interest rates, high real exchange rate, physical remoteness and yet rapid population growth) – that would provide much reason for confidence that they might yet devise an effective strategy to respond to the specifics of New Zealand’s situation.

And since a common response whenever I write along these lines is “but what would you do differently?” here are links to a version of my story given to a business audience , a version given to the Fabian Society, a more recent version to a general audience.   In the margins of the conference yesterday, one person commented that he thought one problem was that few officials had read my original paper, prepared a few years ago for a Reserve Bank/Treasury-hosted conference, which puts the basics of the argument in a standard two-sector (tradables and non-tradables) analytical framework, here is the link to that paper too.





More than a quarter of a century behind the advanced world

I’m spending today in a conference organised by the Productivity Commission and various government departments on technological change and productivity.  Yesterday afternoon I went to a seminar at the Productivity Commission at which one of the conference speakers, a senior OECD official, was speaking on technology, “innovation policy” etc.  It had been billed as something that would address the huge gap between New Zealand average productivity levels and those in much of the rest of the OECD.  In fact, it hardly touched on that issue at all, and much of the discussion had the feel of analysis and advice for the OECD grouping as a whole, and particularly its more advanced members (the speaker himself was Dutch), rather than for a laggard country.

For New Zealand the biggest challenge, by far, is –  as it has been now for some decades –  catching-up again.  Decades ago we were at or near the frontier –  economic frontier that is, rather than physical remoteness –  with per capita incomes in the top 2 or 3 in the world.  These days, probably a few New Zealand firms are at or near the frontier, but the overall New Zealand economy lags quite badly behind.

My favourite base for comparison is real GDP per hour worked.  Levels comparisons are really only approximate, but using OECD data –  based on the 2010 purchasing power parity (PPP) exchange rates –  here is how New Zealand’s real GDP per hour worked compared to the OECD countries that have higher average productivity than we do.   You could discount Ireland to some extent –  there are some measurement/classification issues around their tax system, and in truth productivity in Ireland might be nearer German or Dutch levels. On the other hand, I don’t show Slovakia which, on this particular metric, went past us a couple of years ago.

GDP phw Feb 18

As it happens, of the 23 bars shown, the G7 countries’ total is the median observation.  Our real GDP per hour worked in 2016 was only 67.6 per cent of that for the G7 group of countries as a whole.  In other words, it would take a 50 per cent increase from here –  with no change in those countries – for us to catch up again.   If we take the subset of countries from Belgium to Germany, it would take about a two-thirds increase in our average productivity to catch up again.  When the OECD data series starts –  1970 –  average productivity here was about equal to that of the G7 countries as a whole.

Another way of looking at these same data is to look at when other countries reached the level of productivity New Zealand had in 2016 (37.5 USD per hour, expressed in real 2010 terms, converted at PPP exchange rates).

Some of the other OECD countries first get to that level in the early-mid 70s (Luxembourg, Switzerland, Netherlands, Norway).  Two only got to our current level in the mid 2000s (Iceland and Japan), but of course even that leaves us at least a decade behind.    The G7 countries as a group got to our current level of real GDP per hour worked in 1990, and the median country (as per the chart above) got to our current level of real GDP per hour worked in 1989 –   27 years, or just over a quarter of a century, ahead of us.  Jacinda Ardern would have been in primary school then.

One can’t too much weight on the precise numbers/data –  different conversion rates will produce somewhat different gaps –  but the gaps are huge, and we –  in aggregate – are a long way behind.  I’m hoping –  but am not optimistic –  that today’s conference might help shed some further light on the matter.  I’d settle for some hardheaded realism about how far behind we now are –  lagging the core of the advanced world (the countries we usually liked to compare ourselves too) by a quarter of a century now.

And, of course, the idle hope is that some political leaders might (a) care and (b) set about doing something about closing the gap.  Productivity is the foundation for prosperity, and many desirable social goals.  It isn’t everything of course –  even if, in economic terms, it is almost everything in the long run.   But in all the hoopla about the first 100 days of the government, or even its challenges for the next thousand, there wasn’t any sign of a determination to reverse these decades of underperformance.  Sadly, although there were a few references to the productivity failure during the campaign, the new government seems to have lost interest even faster than their predecessors did.

Remote regions, immigration, and prosperity

A couple of years ago I did a post on some remote and very small places, many of which had quite a lot of land and very few people.  My point was to suggest that New Zealand was quite unusual in having so many people in such a remote spot, all the more so when much of the population growth had been accounted for by deliberate immigration policy.    As readers will know –  apart from anything else, I keep pointing it out –  over at least the last 70 years, productivity growth here has been pretty poor and we’ve drifted a long way down the global league tables.  My proposition is that the two stylised facts aren’t unrelated.

At the time of the earlier post, my young daughter was fascinated by a book on remote islands.   At the moment –  a bit older now –  she’s got really interested in Wales and keeps telling me all sort of interesting snippets.  But talking with her about Wales reminded me that at the time of the Lions Tour last year I’d been meaning to write a post highlighting just how little population growth there had been in some of the outer reaches of the United Kingdom.

More generally, I’d been thinking about how global studies attempting to assess the economic impact of immigration focus on comparing across countries.  In some ways, that makes sense –  data are often easier to come by, and countries control immigration policies.    But I suspect there is information in the experiences of remote regions.   After all, if there were typically really good economic opportunities in remote regions, people in a country are free to move there.  The population of the United States, for example, has risen by over 200 million people in the last 100 years –  through a mix of immigration and (mostly) natural increase.  Those peope have been free to locate themselves where the best opportunities are.   One can think of parts of Canada or Australia in the same way.  And if our politicians had made different choices in the 1890s, we could simply have been part of the Australian Commonwealth, and it seems unlikely that the economic opportunities here would have been much different if that choice had been made.

Here I’ve focused on the last 100 years or so.   Why?  Mostly because just prior to World War One New Zealand had probably the highest (or 2nd or 3rd highest) GDP per capita of any country in the world (per the historical tables put together by Angus Maddison).  But it was also some decades on from the first big waves of colonial settlement (whether here, Australia, Canada, or the mid-west and west of the United States).  At around 1 million people in the 1911 Census, New Zealand was already a functioning country of reasonable size (not large, but there are many smaller countries even today).

In this table I’ve focused on population growth between the Census nearest 1910 and the most recent Census (in most cases 2010 or 2011, but in New Zealand 2013).   The chart shows the percentage increase in population for these remote regions of countries, plus that for New Zealand  (Nebraska gets chosen as a “remote” US area mostly because I happen to have been there a few times.)

remote regions

Australia and Canada (and the US) have had rapid national population growth rates, but these remote regions  (Nebraska, Newfoundland, and Tasmania) have had much lower population growth rates than New Zealand.  (And, on checking, each of those three have lower population densities now than New Zealand does.)   But given that all of these regions have small populations, relative to the respective nation’s total population, there would have been nothing to stop lots of people gravitating to the remote spots if there was real evidence of good economic opportunities for many people in those places.

It has, after all, happened in some remote regions: West Australia for example, now has about 10 times the population it had in 1910, presumably attracted by the mineral resources that mean West Australia has the highest GDP per capita of the Australian states.    And two really remote parts of the United States –  which I didn’t show on the chart, partly because they were settled so much later (not admitted as US states until 1959) –  are Hawaii and Alaska.  Both have had faster population growth than New Zealand over the last 100 years (although between them only around 2 million people in total): in Alaska’s case no doubt the oil resources attracted people (Alaska also has among the highest GDP per capita of any state).

But over that hundred years –  or any shorter period you like to name really –  New Zealand (like Wales, Northern Ireland, Tasmania, Nebraska, or Newfoundland) has had no big natural resource discoveries, or asymmetric productivity shocks specifically favouring our location.   Like those places, we’ve only had the skills of our people and the instititutions we’ve built or inherited (in the case of this group a fairly-common Anglo set) to make the most of, and to overcome what appear to be the resurgent disadvantages and costs of distance/remoteness.  Our birth rates won’t have been much different over long periods, and New Zealand like all these places –  the Shetlands most extremely of the places on my chart –  have seen outflows of our own people.  The big difference here is immigration policy, which has actively sought to substantially boost the population.

Try a thought experiment.  Say the New Zealand and Australian governments had simply combined their respective immigration policies over the last 100 years or so  (eg if New Zealand was offering 45000 residence approvals per annum and Australia 200000 –  similar to the current policies –  the two countries simply said we’ll issue 245000 residence visas and the arrivals can go wherever they like), what would have happened.   By construction, the total population of the two countries would have been pretty much the same as what we actually see (5.4 million in 1910, and about 29 million now) but what would the distribution look like?     We know that in Australia –  given the same choice –  the remote region with a mild climate and no big new natural resources (Tasmania) saw much weaker population growth than the rest of Australia.   Why wouldn’t it be the case that New Zealand would have experienced much the same phenomenon?    At Tasmania’s population growth rate for the last 100 years we might now have a population of around 2.5 million.   After all, for almost 50 years now native New Zealanders have (net) been relocating to (the non-Tasmania) bits of Australia, so why –  given the free choice –  wouldn’t the migrants –  facing a free choice at the point of approval –  have done so too?

Would we have been better off?    The migrants who went to Australia instead presumably would have been –  both judged from revealed preference (they made the choice) and that incomes in Australia are higher than those here.  I’d argue that the smaller number of New Zealanders probably would have been economically better off as well.  Natural resources are still a huge part of the economic opportunities in these remote islands –  perhaps still 85 per cent of our exports –  and those limited resources would be spread across a considerably smaller number of people.  For those who simply prefer “more people” for its own sake, perhaps they’d have been worse off –  but then such people could have self-selected for Sydney or Melbourne (as Tasmanians of a similar ilk do, or people in Newfoundland who wanted to be part of something big self-select for Toronto).

I’m not suggesting something conclusive here, just that people pause for thought, and reflect on what questions the experiences.    For a remote place we aren’t particularly lightly settled, and especially not as a remote place without the sort of abundant natural resources of –  say –  a West Australia.  We’ve had no distinctive favourable productivity shocks, and we’ve long lost any claim to be the richest (per capita) country on earth.  It is no surprise that some people want to move here –  plenty would want to move to Nebraska if it had its own immigration policy like ours – but there isn’t much evidence, from experience of other remote regions, to suggest we benefit from them doing so.   Without big new natural resource discoveries, remote places –  regions, territories  – in the advanced world  tend to have quite weak population growth rates.  It isn’t obvious why in New Zealand we should let immigration policy up-end that otherwise natural outcome.

Savings rates in international context

In putting together yesterday’s post, I stumbled on something I hadn’t noticed previously.  In yesterday’s post I showed only New Zealand saving rates –  in particular, net national savings (ie savings of New Zealand resident entities, after allowing for depreciation) as a share of net national income.  The net national savings rate has picked up quite a bit in the last few years, although not to historically exceptional levels.

But here are the New Zealand and Australian net national savings rates plotted on the same chart.

net nat savings nz and aus

For the last couple of years, the net savings rate of New Zealanders has been higher than that of Australians.  I wouldn’t want to make very much of a couple of years data, and over, say, the last 25 years, the average savings rate of New Zealanders has still been a little lower than that of Australians.  But even that average gap has been much smaller over that period than over, say, the previous 20 years.

It isn’t a story you would typically hear from those who argue that savings behaviour is at the heart of New Zealand’s economic challenges.   Some will point to the compulsory private savings system now in place in Australia (phased in from 1992).  There is no easy way of assessing the counterfactual –  what if the system had never been introduced? –  but there is no obvious sign that the system has led to a lift in national savings rates in Australia, whether absolutely or relative to New Zealand.  Others will (rightly) highlight the big tax changes implemented here in the late 1980s which materially increased the tax burden on income earned by savers (in a way pretty inconsistent with the recommendations of a lot of economic theory).  I don’t think those changes were appropriate, or even fair, and would favour a less onerous regime.  But in the decades since the changes were made, our savings rates have been closer to those in Australia (where a less onerous tax regime applies as well) than they were in the earlier decades.

One policy change that may have made a difference is overall fiscal policy: the improvement in New Zealand’s overall fiscal position (reduction in general government debt) has been larger than that in Australia (largely reflecting the fact that we were in a bigger fiscal hole 25 or 30 years ago).   Higher average rates of public saving may have lifted average national savings rates to some extent.

What about other countries.  In a paper I wrote some years ago for a Reserve Bank/Treasury conference, I illustrated that over time New Zealand’s savings rate hadn’t been much different from that of some other Anglo countries.  Here is a more recent version of that sort of chart.

net nat savings anglo

New Zealand’s national savings rates have typically been below those in the OECD group of advanced countries as a whole (and perhaps particularly some of the more economically successful of those countries –  whether by chance, cause, or effect).   But even on that score the last few years look a little different.   This chart compares New Zealand against the median of the 22 OECD countries for which there is consistent data over the full period.

net national savings oecd

It is quite a striking change, and the reasons aren’t at all clear (see yesterday’s post on the puzzles around the New Zealand data).  Perhaps in time some of the rise in the New Zealand savings rate will end up being revised away.  Perhaps the lift will prove real, but temporary (as, say, happened for a few years around 2000). But if not, the apparent change in the relationship between our savings rate and those in other advanced countries should help keep our real interest rates –  and our real exchange rate –  a bit lower than otherwise.  If sustained, that would be expected to lift our economic prospects a bit, all else equal.

But it is worth remembering that, all else equal, a country with materially faster population growth than its peers should typically expect to have a higher national savings rate over time than its peers.   All else is never equal of course, but New Zealand continues to have a population growth rate well above that of the median advanced country.



A very strong economy driven by the strong economic plan?

The latest quarterly GDP data came out just before Christmas, and they included substantial revisions to the data for the last few years, flowing on from the annual national accounts data released in November.

The actual level of GDP is now a bit higher than had previously been reported, but what caught my eye was the reported claim from the former Minister of Finance, Steven Joyce, that the new data suggested that there was no productivity growth problem after all.   You’ll recall that for some time I –  and others –  have been highlighting data suggesting that there had been basically no productivity growth at all in New Zealand for the last five years.

Here was Steven Joyce’s specific claim

Mr Joyce says the figures released today finally put to bed the fallacy that New Zealand was having a ‘productivity recession’.

and he went on to claim that

“These figures provide clear confirmation that the new Government has inherited a very strong economy driven by the strong economic plan of the previous Government.

So what do the productivity numbers look like on the revised GDP data?  You may recall that I’ve been calculating nine different measures of real GDP per hour worked (using the two quarterly measures of GDP, and the HLFS and QES hours data, and an average measure).    Since GDP for the last few years had been revised upwards and the hours numbers weren’t touched, productivity growth was inevitably going to be a bit stronger than previous estimates had suggested  (which was a relief, because the previous estimates had, if anything, suggested a modest fall in the level of productivity and that didn’t really ring very true).

Here is how the average measure of real GDP per hour worked has behaved over the almost 10 years since 2007 q4 (just prior to the 08/09 recession).

GDP phw worked NZ Jan18

Over the last 10 years (less one quarter), total labour productivity growth has been 6 per cent.    Over the last five years, New Zealand’s total productivity growth has been 1 per cent (ie about 0.2 per cent per annum).   It is a little better than the previous iteration of data has suggested, but……it isn’t much to boast about.

Using the same average measure, I calculated the average annual rate of productivity growth for a few historical periods:

  • Under the National-led governments in the 1990s,  average annual productivity growth was 1.2 per cent (quite dismal enough, given how far behind we had slipped),
  • Under the Labour-led governments of 1999 to 2008, average annual productivity growth was 1.0 per cent,
  • Under the National-led governments of 2008 to 2017, average annual productivity growth was 0.8 per cent, and
  • (as already noted), over the last five years, average annual productivity growth was 0.2 per cent per annum.

And here is the comparison with Australia, on the newly-updated New Zealand data.

AUs and NZ reaL gdp PHW

Australia’s numbers seems to have been flat for the last couple of years, but even over that short period we’ve done a bit worse than they have.

If these results are what Steven Joyce had in mind in talking of a “very strong economy driven by the strong economic plan” one can only really shake one’s head in despair.   If there was a plan to lift overall productivity performance, it clearly didn’t work.  Economic policy was simply misguided, and seems to have paid no attention to the severe limitations of our location.   Perhaps more depressing –  given that Joyce and his colleagues are in Opposition –  is that there is little sign that the new government has any more convincing a strategy  (and where is the deeply-grounded persuasive advice of MBIE and Treasury?).   One hopes –  but is that just against hope –  that they care.

On more mundane matters, I had cause to wonder about even the cyclical strength of demand when, over the holidays, one evening my wife and I walked from Epsom to Parnell and back, and were staggered by just how many empty shops there were in both Newmarket and Parnell.    Any reader insights into just what is going on (or not) in those up-market shopping districts would be of interest.