A roadmap out of the country’s predicament

Roger Partridge
NZ Herald
8 October, 2020

New Zealand looks to have won its second battle against Covid-19. The country should brace itself for another round of self-congratulatory backslapping.

Yet the triumphalism should be short-lived. Kiwis may have won the latest battle against the coronavirus, but the country is a long way from winning the peace.

Even before the onset of Covid-19, New Zealand faced deep-seated challenges. Growth was propped up by one of the highest rates of net migration in the OECD. House prices had spiralled out of control, contributing to both poverty and poor health outcomes for the most vulnerable. The country’s education system was in long-term decline and producing shamefully unequal student outcomes.

Kiwis now face the worst recession in nearly a century. This will bring yet more challenges. Independent forecasts by the OECD suggest unemployment will push up towards 10%. This will drag down thousands of families into hardship and poverty for the first time. Government debt will balloon to 50% of GDP. And the Reserve Bank is betting on its biggest monetary policy gamble.

Clear thinking and strong leadership are needed to solve New Zealand’s predicament.

The good news is that evidence-based solutions to the country’s economic ailments are available. All the country needs is political leadership willing to implement them.

Border pains

The next Government must loosen the border chokehold and develop operational procedures to safely restart tourism. It should connect first with Covid-free Australian states and countries like Taiwan that have stamped out Covid-19.

The Government must also scale up managed isolation and quarantine. Many of the world’s best and brightest are knocking at New Zealand’s door. And not just international students – though that $5 billion dollar export industry and the 50,000 jobs it supports are important enough. Critical foreign workers, researchers, film studios, multinational businesses and even sports teams are all keen to come here and willing to meet the costs of quarantine. New Zealand must find a way to let them in safely.

Beyond the border

This week The New Zealand Initiative will publish a research report on the economic policy responses needed from an incoming Government to restore and enhance the livelihoods of the nation’s “team of five million.”

Called A Roadmap for Recovery: Briefing to the Incoming Government, the report outlines priorities in productivity, fiscal management and employment to get the economy back on track.

Lifting productivity is the key to improving the prosperity of any nation’s citizens. Increased output per worker is the only sustainable route to higher real wages and living standards. Yet despite a period of acceleration in the 1990s, New Zealand’s productivity growth since 2000 has been like the dismal 1970s and 80s.

Solving the productivity puzzle requires either boosting workers’ skills, increasing capital intensity per worker, or innovation. Unfortunately, New Zealand’s policy settings are a handbrake on each.

To raise Kiwis’ skills and enhance their “human capital,” the Government should reintroduce the social investment approach to welfare spending pioneered by former Prime Minister Sir Bill English. This approach used data to measure whether social services were helping the most vulnerable and incentivised public sector agencies to modify their approach if not.

Beyond social welfare, education matters most for creating long-term prosperity. Yet a growing number of students leave school unable to do basic sums or read an instruction manual.

The Initiative’s 2018 report, Spoiled by Choice,explored howNCEA damages teaching, masks student decline and widens inequities. NCEA needs a fundamental overhaul. The Initiative’s forthcoming report, The Great Education Delusion– How bad ideas ruined a once world leading school system, sets out exactly how to do this. The next Government should act on the report’s recommendations.

New Zealand’s physical capital – especially infrastructure – has been hampered by poor regulatory settings. The Resource Management Act has constrained house-building and other productivity enhancing investment. It must be overhauled. But the Government must not fall into the trap of implementing the more-of-the-same-but-worse recommendations of the RMA reform panel chaired by former Court of Appeal judge Tony Randerson. Instead, new planning legislation must recognise the role of property rights and support a presumption in favour of development. Without this change, the next generation of Kiwis will remain locked out of the housing market.

The Government must also change the way Local Government is financed to ensure Local Councils are incentivised to promote more housing, productivity-enhancing planning decisions and upgraded transport infrastructure.

To support productivity growth, Kiwis must be able to access foreign capital and know-how. The next Government must repeal the Overseas Investment Act or limit it to blocking foreign investment raising genuine national security concerns.

To reduce regulatory uncertainty the Government must stop “double-dipping” on climate policy. The Emissions Trading Scheme sets a path to reach New Zealand’s carbon emissions goals. Additional regulations and subsidies are both redundant and likely to be less cost effective. This will hurt the least well-off and create uncertainty that will deter much-needed investment.

Spending on all types of infrastructure must go through rigorous cost-benefit analysis. “Job creation” is not a suitable metric for taxpayer-funded projects. If jobs were the sole criteria, the Government might as well replace workers’ shovels with spoons.

Rigorous cost-benefit analysis is also needed for all other spending priorities. To keep spending decisions under scrutiny, the Government should establish an independent Fiscal Council.

Public debt is already forecast to increase significantly due to Covid-19 and poor-quality spending decisions. To bring debt under control, the Government should reform retirement income policy by:

  • Abolishing KiwiSaver subsidies.
  • Amending superannuation indexation and progressively raising the age of eligibility by two years, with further changes benchmarked to health adjusted life expectancy;
  • Stop putting NZ Superannuation Fund contributions on the country’s credit card.

Together, these reforms alone would reduce net public debt from 48% of GDP in 2034 to 31%.

On top of these, the Government must also rein in the Reserve Bank. Monetary policy settings are already helping to inflate asset prices – most notably with housing. The RBNZ is also getting too political. The Government must narrow the Reserve Bank’s focus to price stability and ensure there is a credible timetable for it to reduce its balance sheet to pre-Covid-19 levels.

Finally, the Government must resist the temptation to tighten labour market settings. For three decades, labour markets have been performing well. New Zealand workers have enjoyed comparatively high levels of labour market participation and jobs growth, low levels of unemployment and real average wage growth in all wage deciles.

The current Coalition Government’s plans to reintroduce compulsory sector- or industry-wide collective bargaining (misleadingly dubbed ‘Fair Pay Agreements’) will harm productivity growth. FPAs will also harm the interests of workers, especially vulnerable groups like the young, low-skilled and Maori and Pasifika workers. However, if the next Government wants to lift employment, it should roll back the recent minimum wage increase and reintroduce lower youth minimum wage rates.

All these changes will require courage and persistence. But only evidence-based public policy will help New Zealand win the economic peace after its victory in the war against Covid-19.

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