Government starting new year with a litany of headaches

Roger Partridge
NZ Herald
15 December, 2021

With the Auckland border coming down today, it is tempting to talk about Covid. There is certainly plenty still to say. The vexed question of MIQ. The coherence of the traffic light system. Iwi checkpoints. The list goes on and on.

But 2022 poses plenty of non-Covid challenges. While headline unemployment and economic growth forecasts look good, looks can be deceiving.

Before the pandemic knocked other problems out of the headlines, there were plenty of issues for the politicians to grapple with. Productivity was in the doldrums. House prices were out of control. The education system was in long term decline. The health system was struggling to meet demand. And the availability of mental health services was a national disgrace.

The Covid response has exacerbated some of these problems and created some more of its own – including inflation, fiscal deficits, supply chain issues and skills shortages. The Government’s reform agenda is creating yet more – including standoffs with the business community over (so-called) Fair Pay Agreements and with local councils and local electorates over three waters. And there is an uneasy sense of the nation becoming more-and-more divided. All told, the Government will start the new year with a litany of headaches.

The good news is prescriptions are available to resolve all of them.

New Zealand’s perennial wellbeing problem is productivity. To improve Kiwis’ overall standards of living the country must find a way of lifting the value of output per hour worked. This economic truth is accepted across the political divide. But apart from a bright spot in the 1990s, New Zealand’s productivity has languished for decades.

Many factors have been blamed for New Zealand’s poor productivity performance. In 2016 the Productivity Commission blamed the small size of the domestic economy and our geographic isolation from large offshore markets. These factors make it hard for local companies to gain scale efficiencies to compete in a global marketplace, consigning too many to operate in domestic cottage industries.

We can hardly tow the country closer to larger markets. But that means it is critical we get our policy settings right in those areas that matter to productivity that we can do something about.

At the top of the list is education. A well-educated workforce is a prerequisite for a productive economy. Yet our once envied state school system is now barely mediocre. An alarming proportion of students leave school functionally illiterate and innumerate. And in a recent international study of student attainment, Kiwi kids ranked last out of all English-speaking countries. The decline in performance has happened despite significant real increases in spending per child over the last two decades.

The country cannot aspire to being a highly productive, high wage economy that shares the benefits of growth widely, when a substantial proportion of school leavers – especially from low socio-economic groups – lack functional literacy and numeracy. Some schools serving low decile communities produce outstanding results. But many others do not. Education research – including by my colleagues at The New Zealand Initiative – reveals where our school system is going wrong. The Minister of Education should act on it. Fixing our failing school system should be the Government’s top priority.

And then there is our catastrophic housing problem. The housing affordability crisis constrains productivity growth by locking workers out of New Zealand’s largest labour market: Auckland. Worse, it contributes to poverty, over-crowding and poor health outcomes. Like 2016’s new Auckland Unitary Plan, the Labour-National housing accord will ease planning-related housing constraints. But the Government must also change the way local governments are financed. Councils must be incentivised through funding to provide the infrastructure needed to support new housing development. This is the lesson from countries like Switzerland, with high population growth but comparatively stable house prices.

The Government must also reassess its proposed Resource Management Act reforms. The RMA has constrained house-building and other productivity-enhancing investment. It needs to be overhauled. But the Government’s proposed Natural and Built Environment Bill and companion legislation will deliver more-of-the-same but worse. New planning legislation must recognise the role of property rights and support a presumption in favour of development.

A mix of poorly directed Government spending and expansionary monetary and fiscal policy over the last two years has contributed to spiralling inflation, growing fiscal deficits and soaring public debt. The Reserve Bank was one of the first in the world to halt quantitative easing in August. Unfortunately, the damage had already have been done. Record low interest rates and the massive money printing experiment have fuelled asset-price inflation and then wider inflationary expectations. At the same time, Minister of Finance Grant Robertson’s lack of fiscal prudence before the onset of the pandemic has seen New Zealand tumble down the OECD rankings for underlying fiscal balances relative to GDP. The Reserve Bank and the Minister of Finance face some stark choices in 2022 if inflation is to be brought under control without crashing either the economy, or the housing market, or both.

Part of the solution lies in strengthening public sector decision-making frameworks to achieve two things. First, to reduce wasteful spending by Government. Second, to avoid imposing unnecessary costs on the productive sector. At the top of the list in the latter category are the Government’s ill-conceived Fair Pay Agreement proposals. But the Government should also liberalise restrictions on foreign direct investment to enable firms to access the capital they need to lift productivity.

The Government’s unusual decision to go ahead with a once-in-a-generation structural reform of the health sector during a pandemic may yet be a case study in a future Royal Commission. The risks – including of losing critical health-sector personnel – might have been worthwhile if there were reasons to believe the reforms would lead to better health outcomes. But there are scant grounds for expecting this. Reassessing the wisdom of proceeding with the reforms – including their controversial race-based divide in creating a separate Māori Health Authority – should also be a priority in 2022. At the same time, a coherent plan for dealing with the country’s critical mental health must be developed. And it must be implemented.

Increasing political polarisation should also be raising alarm bells in the Beehive. A good deal of this can be blamed on unpopular but unavoidable pandemic policies. But the Government would be unwise to dismiss the problem too quickly. The Ardern Government’s increasingly race-based policies – including in health, education and the RMA – strike at the heart of New Zealand’s identity. Rather than uniting the country around the Government’s vision of “partnership,” the Government’s policies may end up dividing it. Before continuing with its agenda, the Government should seek a mandate from the electorate. At the very least, it must engage the rest of New Zealand in the He Puapua consultations it currently has under way with iwi.

There is one big issue the Government should not have to worry about in 2022: climate change. Not because climate change is not a problem. It is. But, thanks to Climate Change Minister James Shaw, New Zealand now has one of the world’s best emissions trading schemes. The ETS caps the country’s net emissions and sets a pathway to achieving net zero by 2050. Agriculture aside, the big job has been done. Combining the ETS with policies like the feebate scheme or other biofuel regulations is simply costly gold-plating. In 2022 the Government must shift its focus to policy areas where reform can make a difference.

During the last two years, pandemic policies have eclipsed all else. To date, the Government has used the trump card of New Zealand’s geographic isolation effectively. With Kiwis set to re-join the rest of the world, solving 2022’s other challenges will need some new tricks.


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