Let’s cut to the chase: New Zealand’s economy is in a perilous state. The covid-19 crisis is a one-in-100-year shock. All at once, it has decimated important industries, stretched the Crown’s balance sheet, opened the Reserve Bank’s floodgates and shaken business confidence.
We are at a crossroads as a nation. Your actions as minister will decide whether New Zealand will remain one of the world’s developed countries or suffer a fall from grace. At worst, if you get the crisis response and recovery plans wrong, New Zealand may end up as a failed state.
When the Treasury last briefed an incoming minister after the 2017 election, it made a mistake by focusing on side shows.
Would you believe that in the 2017 briefings for the incoming minister nine out of 31 pages featured pictures and short biographies of the Treasury Secretary and his team? Among these 31 pages, the word “productivity” appeared only three times – when referring to the Productivity Commission and job title of a 'Manager Economic Strategy & Productivity'.
This last briefing was simply not good enough. Sorry.
The Treasury should have highlighted to the incoming minister in 2017 that New Zealand has a decades-old productivity problem. In 1970, our GDP per capita was 84.5 percent of Australia’s. Last year, it was only 78.2 percent – and Australia is hardly a productivity miracle.
It is almost embarrassing to report that with a per capita GDP of US$43,775, Kiwis are now almost level with the Czech Republic and only narrowly ahead of Slovenia, Estonia and Lithuania. All those economies had to rebuild after the end of communism in 1989/90.
New Zealand cannot go on like this. Even without a pandemic, that path would have been impossible.
This country’s prior business model was built on three factors: rising house prices, population growth and working longer hours:
- Rising house prices made lucky homeowners feel wealthy. But those high prices only demonstrate the abject failure to build more dwellings for New Zealand families;
- Population growth is not a negative, but its contribution to GDP masked our failure to lift per-capita GDP;
- In the same way, New Zealanders’ long working hours increased over the past decades to compensate for poor productivity performance but fell in most other developed economies.
No matter how many hours Kiwis work in marginal jobs, a nation cannot prosper by growing the population in an undersupplied housing market.
And then covid-19 came along and made everything worse.
Since the global financial crisis dented productivity for years, covid-19 will likely depress New Zealand’s already poor productivity levels even lower.
Paul Krugman, the economics Nobel laureate, coined the memorable phrase: “Productivity isn't everything, but, in the long run, it is almost everything.” He said a country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
As the government’s economic adviser, it is the Treasury’s role to highlight why productivity is crucial. It was nice to talk about the Wellbeing Budget, the Living Standards Framework and the new Diversity Strategy (which even won the Treasury an award for not hiring any economists in one year).
But now is the time to go back to the basics of sound economic management. And that means making New Zealand a dynamic, productive and prosperous country for the benefit of everyone.
Minister, without a firm focus on productivity, you can forget all the nice-to-have’s. You need to get productivity right first. After all, you need to generate the proceeds of growth before you can share them.
The Treasury looks forward to helping develop a comprehensive strategy to lift New Zealand’s game. For a start, here are three of the most urgent issues you need to address:
- Housing and urban development: It is time to move on from the Resource Management Act, which has been a handbrake on development for decades. But it is not enough to replace one restrictive act with another. Instead, provide councils with better incentives to allow and promote local development;
- Foreign direct investment: Rebuilding New Zealand’s economy will need a lot of money. That’s why adding new bureaucratic hurdles for foreign investors is absurd. The Treasury has long advised that the Overseas Investment Act is too onerous. After covid-19, it is time to abolish the act;
- Cost-benefit analysis: The Living Standards Framework was an ambitious project. However, it has distracted the Treasury and bound its analytical resources. Let the Treasury perform solid cost-benefit analyses for all major spending initiatives. If it forgets to deliver, you should demand to see them.
New Zealand is facing an historic crisis. Still, the principles of good policymaking have not changed, and neither has the importance of sound economic analysis.
This country can once again become prosperous and productive. But only if this is a shared ambition. As the government’s lead economic adviser, it is the Treasury’s ambition to see this through. And as Minister of Finance, it should be yours too.
Working with you will be a pleasure.