Does the long-dormant New Zealand Treasury stir?

Dr Bryce Wilkinson
NZ Herald
6 July, 2022

When expectations are low it is easy to be pleasantly surprised. 

Back in the 1980s, a school teacher once told me of a spontaneous surge of gratitude he had experienced towards a wayward pupil that morning. The boy had astonished him by actually doing his homework.

Reading the Treasury Secretary's speech last week to the New Zealand Association of Economists brought back that memory.

Caralee McLiesh spoke primarily about productivity. This was a pleasant surprise.

From 2008 to 2010, Treasury published eight working papers on New Zealand’s low productivity problem. Its interest then lapsed. She might be reawakening it.

Productivity is about getting more income from the same effort. That makes things more affordable.

In Treasury’s own words, “productivity is the biggest long-run determinant of wages and living standards”.

Productivity provides the best remedy for all those who daily clamour for more money from government. Government can only satisfy their needs by making someone else worse off.  

Productivity is commonly measured by economy-wide production per hour worked. Low productivity leads to low national income per capita.

New Zealand’s net national income per capita in 2020 was only 83% of Australia’s according to the OECD. Sixteen of 34 OECD member countries were ahead of New Zealand on this measure.

McLiesh found some comfort in New Zealand’s better ranking on the OECD’s “Better Life Index”. Unfortunately, Australia is also ahead on that measure.

McLiesh’s immediate predecessor had no deep interest in productivity. He frequently cited Robert Kennedy’s ludicrous assertion that gross domestic product measures nothing useful.

Currently, 98% of GDP measures national income. Who thinks national income is not useful? Interest groups clamour daily for government to channel more of national income their way.

The same predecessor repeatedly recycled a savage Tom Scott cartoon slamming Treasury economists as pathetically unemployable. No expert himself, the predecessor degraded Treasury’s economic capability.

Gallingly, Treasury‘s vision then was to be “a world-leading Treasury working to higher living standards for all New Zealanders”. Productivity growth has to be central to that quest.

Since 2011 Treasury has distracted itself from the productivity question with its much-vaunted Living Standards Framework. All aspects of New Zealanders’ wellbeing were of interest to the Treasury. Study of what government could usefully do was always a next step.

Today, it is clear that Treasury’s Living Standards Framework has no framework for action or decision-making. It has collapsed to a collection of different indicators of wellbeing. Trade-offs are arbitrary.

The so-called framework is at too high level to get to the things that really matter - such as economic freedom through choice, competition, clarity of property rights, low taxes and less regulatory red tape.

No insights from Treasury’s Living Standards Framework appeared to inform McLeish’s assessment of what could be done about low productivity.

Treasury’s latest newsletter update reinforced the low expectations about its focus. It featured something called Treasury’s “Pacific Strategy” and something else enigmatically called a He Ara Waiora framework. It genuflected to overall climate change. It extolled Treasury’s focus on reducing its own emissions. It also marked Matariki and the international day on homophobia. All worthy initiatives, no doubt, but a far cry from what a good Treasury should focus on.

I was a member of the government’s 2025 Taskforce in 2009 and 2010. Its task was to identify what policies might best close the income gap with Australia by 2025. Productivity growth was its central consideration. It produced two substantial reports.

Treasury provided the secretariat, but interest and support from the then Secretary to the Treasury was invisible, to me at least.

The John Key-led government of the day found it too hard. It let the ACT-initiated taskforce lapse.

If Treasury really is the government’s lead economic adviser it should have a well-grounded view about the most important things government can do to lift productivity growth. So where is it?

It could start with government itself.  If it does not who else can?

New Zealand is facing serious productivity problems in many government-dominated sectors and activities. 

In education it is literacy and truancy.  Insufficient choice, limited accountability and too much red tape are issues.

Public hospitals are in serious disarray and the restructuring is unpromising.

Working age welfare has risen and child abuse, emergency housing and homeless issues all point to deep problems.

Justice delayed is justice denied, and this is our court system.

Proposed changes to “Three Waters” are worse than unconvincing.

Signalled RMA reform looks likely to weaken productivity growth further.

Crime and immigration policy and administration are a problem for many businesses. 

Government deficit spending has skyrocketed, and monetary policy has destabilised inflation and house prices.

More positively, her speech usefully stressed the importance of economic flexibility and resilience. Better regulatory policy was a “critical level” for lifting productivity.

She pointed to the need to amend 110 regulations to allow a more flexible response to Covid.

She correctly identified the productivity-reducing effects of regulation of genetic modification.  But so did the 2025 Taskforce, and it was not the first to do so.

She could have also pointed to New Zealand’s undue restrictions on direct foreign investment. Foreign investment can lift wages by raising capital per worker and improving access to overseas markets, know-how and technology.

McLiesh’s speech hopes that the public sector can be more proactive at keeping regulations fit for purpose.

Few of those being regulated may share that hope. Regulators would already be doing that if they got rewarded for doing so.

The public sector seems more preoccupied about gender, culture, race, climate change, and Treaty obligations.

A more structured approach to raising regulatory quality is needed. The well-developed Regulatory Standards Bill is one option. ACT got it fleetingly considered by Parliament in 2021. It provides a set of foundational legal tests for the quality of a law of regulation.

In rejecting the Bill, one of the government’s speakers proudly declared that her government stood instead for redistribution.

Well, if government does not care about productivity, can the public service afford to care?

And that is why McLiesh’s speech merits appreciation, even gratitude. Hopefully, she is stirring Treasury into renewed action on productivity.

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