It’s the sort of thing prime minister of any stripe would say: New Zealand’s economic performance is vitally important and the Government “is focused squarely on improving New Zealand’s economic performance”. But the business-breakfast audience didn’t grumble when John Key dished it up to them in mid-July, and he did give an outline of the policy programme his Government is implementing. He also brandished some bothersome facts of economic life.
For example, growth in our GDP has been driven by more people joining the workforce and working longer, rather than through an increase in the value of what we produce. And our growth has been very unbalanced – built on an increase in consumption, debt-fuelled housing boom, and large increases in government spending, rather than on the more solid foundations of growth and investment in the internationally competitive sectors of the economy.
Our tradeable sector has effectively been in recession for the past five years: it has shrunk by around 10 percent, while the non-tradeable sector of the economy has grown by 15 percent. In short, we have had highly unbalanced growth. Because of our poor export growth, and our reliance on foreign savers to fund much of the investment in New Zealand, our current account deficit has burgeoned to unsustainable levels (and New Zealanders have built up liabilities to foreigners of $177 billion).
Key proceeded to set out his Government’s longer-term economic objectives. Top of the list was increasing New Zealand’s productivity growth – lifting our game when it comes to producing goods and services the world wants, and getting paid more for them. He also outlined the Government’s work on six main policy drivers – regulatory reform, investment in infrastructure, education and skills, innovation and business assistance, “a world-class tax system”, and better public services.
Treasury secretary John Whitehead, at the same time, was bucking up the state sector. Among the challenges he identified: New Zealand has to adjust to the first budget deficits in 15 years (a hefty $7.7 billion this year rising to $9 billion in 2010/11 and, on current policies, forecast to last for the following seven years). These deficits mean mounting debt (the forecasts show net public debt reaching nearly $40 billion in 2011, $52 billion in 2012 and around $63 billion in 2013).
Without firm focus on growing the economy and controlling government spending, we would be looking at more public debt, more money on interest payments, less room for government to move, and higher taxes. That’s no way to increase productivity and prosperity.
Whitehead called for the quality of public spending to be improved to ensure the lion’s share of increased national resources goes to the private sector. “Every dollar that is spent by the public sector is dollar that is not spent on business investment, or left in taxpayers’ pockets, or saved.”
Core Crown expenses amounted to 35 percent of GDP; central and local government spending is equivalent to about 45 percent of GDP. Hence the public sector must raise its productivity – provide more for each dollar spent – and grow more slowly than the private and export sectors to rebalance the economy.
“Delivering top quality services and regulatory settings is the way the public sector contributes to private sector productivity.”
In the private sector, Business NZ launched set of proposals for tackling the productivity challenge. Chief executive Phil O’Reilly linked the wealth gap between New Zealand and Australia with productivity growth (around two percent year in Australia but below one percent here). The Government shares O’Reilly’s concern: it has appointed former Reserve Bank governor and ex-National Party leader Don Brash to chair taskforce to work on ways to close the productivity gap between New Zealand and Australia.
But the danger in rebalancing the economy is that the Government will repeat mistakes made during the 1989/90 recession, when the Bolger government mounted slash-and-burn assault on the public sector. Lifting “productivity” raises ticklish issues. key one is how to measure it.
With the production of goods, output per employee or per hour worked or per dollar invested can be measured. When talking about services – whether state services or private sector ones – the measuring becomes more primitive. Example: how do we treat Treasury secretary’s Budget preparation or policy advice?
The word “productivity” trips nicely off the tongue and sounds great in economic speeches. Economists will always press for more of it (as they have been doing for decades). But if they were reasonably honest, they would say they have difficulty measuring it – and if they were thoroughly candid, they would say they have only rudimentary ideas.
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
