Falling short in the long run

Dr Eric Crampton
Insights Newsletter
21 May, 2021

As economics Nobel laureate Paul Krugman once put it, “Productivity isn’t everything, but, in the long run, it is almost everything.”

Which makes you wonder what Krugman would think of yesterday’s Budget.

Hidden behind headlines of benefit increases, spending initiatives and a new unemployment insurance scheme lies a worrying small detail. Buried in Treasury’s assumptions are expectations of lower future productivity growth.

According to the Budget, labour productivity growth will be 1% rather than 1.2%. And even that may be optimistic, judging by our past performance.

You may think that such a small difference would not matter much. But that would be mistaken. Such small differences, if maintained over long periods of time, amount to the differences between two completely different futures.

To illustrate this, economist Eli Dourado recently presented a good example. Had America had maintained its pre-1973 trend in productivity growth, living standards there today would be about 80 percent (!) higher.

Benefit increases have taken much of the headlines. However, setting New Zealand on a path to higher productivity is much more important for longer term wellbeing. Just as Paul Krugman said.

In the public sector, that requires a commitment to getting a bigger bang for our spending buck.

It requires checking whether spending programmes are delivering value for money. But when I asked whether any of the billions of dollars of shovel-ready spending might be reconsidered, given that the unemployment forecasts that drove that spending commitment last year have changed, the answer was no.

Over three hundred million dollars spent strengthening Managed Isolation and Quarantine at the border will help keep Covid out but will not enable any additional travel. Business connections that fuel productivity will continue to wither; skilled workers unable to reunite with families abroad will leave. Increasing capacity at the border would have helped, especially with a slow and uncertain vaccine roll-out.

Billions more were allocated to infrastructure spending. Some of it makes sense. Infrastructure to enable more housing development will be crucial in alleviating the housing shortage, which would both substantially reduce hardship and boost productivity.

But really unlocking housing affordability requires providing councils with strong incentives to welcome new housing development. And it requires sustainable funding mechanisms for critical infrastructure beyond the current spending surge. Neither made an appearance in the budget.

Budget 2021 did provide a few nods in the general direction of productivity. But without sustained productivity growth, future budgets will have a harder time covering the costs of this year’s budget.

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