We all know that, and we all seem to agree that it should be a priority.
But reeling off the obvious solutions – improved infrastructure, better education, deeper pools of capital and more investment in high-value industries like technology – has become a highly predictable response to tough questions about how politicians plan to head off New Zealand’s impending fiscal woes.
It has effectively become the get-out-of-jail card that allows politicians to campaign on policies that little or bear no relation to the dire warnings and advice they are getting from their most senior economic advisers.
Two very good columns in the past week have highlighted the incredible disconnect between the fiscal policies recommended by government economists and politicians of all stripes.
Inland Revenue (IRD) published a three-yearly Long-Term Insights Briefing last week, highlighting the need to generate more tax revenue. It suggests broadening the tax base by expanding capital gains taxes (CGT) and lifting the GST rate.
Wellington Business Editor Jenée Tibshraeny notes that this builds on the work of the Treasury, which has been more or less shouting from the rooftops about the fiscal crunch coming in the next couple of decades if we don’t lift taxes or dramatically cut spending.
With a palpable sense of frustration, she describes “politicians and the country’s economic stewards … operating in parallel universes when it comes to the sustainability of the Government’s tax-and-spend policies”.
Herald Business columnist Matthew Hooton pointed out that the IRD “has now joined the Treasury, Taxpayers’ Union, New Zealand Initiative, all major bank economists and even, with different emphases, the Council of Trade Unions and Tax Justice Aotearoa in warning that New Zealand cannot go on much longer without serious spending cuts, big tax rises or both”.
Yet here we are, heading into an election campaign with neither major party prepared to directly confront the fiscal challenge that we are hurtling towards.
Labour supporters might have been able to point to the party’s proposed CGT policy – had any extra revenue it generates not been immediately spent on the policy to provide free GP visits to everyone (including people like me who can already afford to pay for them).
National, to be fair, would like to deal with the mounting burden of superannuation costs by lifting the retirement age to 67, but it has no chance while it remains dependent on New Zealand First to stay in power.
So how on earth can the disconnect between the top government economists and our politicians be so wide? How do politicians get away with ignoring the stark reality of the Treasury’s maths?
“If policies are left unchanged, the ageing population and other spending pressures would cause core Crown expenditure to increase from current levels of around 33% of GDP [gross domestic product] to nearly 45% of GDP by 2065,” Treasury chief strategist Struan Little warned in a sobering speech late last year.
“If tax revenue did not increase in response, net core Crown debt would quadruple to 200% of GDP by 2065.
I wanted to keep the theme going (while we wait for more clarity on the Iran conflict) because the productivity stats are the third piece of the fiscal puzzle.
A government that needs to deal with a structural deficit and burgeoning debt has three options.
It can cut spending, it can increase taxes, or it can unleash amazing policy changes that drive increased productivity, creating more corporate profit and higher wages, generating more tax revenue from the same tax base.
Modern politicians the world over prefer the third option because options one and two aren’t popular with voters.
In theory, there is good logic to the idea that New Zealand could grow its way out of its fiscal hole with constant economic improvement.
But that also requires bold action, which too few politicians in the MMP environment have been willing or able to take.
The productivity challenge
New Zealand famously underperforms on most productivity measures when compared to our OECD peers.
The Stats NZ Productivity Statistics date back to 1975.
Measuring productivity is typically about counting the output per unit of input.
Easy enough if you’re looking at a single factory, but quite complex across an economy.
So Stats NZ focuses on market industries where output can be measured independently from input (the “measured sector” – roughly three-quarters of NZ’s GDP).
That excludes public administration, education, health, and arts and recreation.
The update two years ago showed that the three major productivity measures fell in the year ended March 2023.
Labour productivity was down 0.9%, capital productivity was down 3.8%, and multifactor productivity (the combination of labour and capital inputs) was down 2.2%.
Labour inputs grew 3.4% while output rose only 2.5%.
In other words, we hired more people (unemployment was relatively low), but we didn’t get a proportional return in output.
Capital inputs surged 6.6%, far outpacing the 2.5% output gain. In other words, more capital was deployed, but less output was generated.
These stats represent a fairly damning indictment of the last Government’s efforts to boost productivity.
(To be fair to Labour, I have a hunch that capital investment in residential property doesn’t result in productivity gains. We built more houses in this period, and that wasn’t a bad thing.)
Next week’s data will represent the first scorecard for the next Government.
I’m sure the coalition will argue that we haven’t had time to see the results of its policy changes.
I’m sure the last Government would argue the same about its efforts. The next one probably will too.
That’s the problem with relying on a political system that runs on increasingly short-term populism to deal with long-term structural challenges.
Of course, it’s easy to bag politicians for not being bold.
Let’s face it, in the fast-paced modern world of poll-driven policy and instant media judgment and social-media division, it’s we, the public, who make change so difficult.
What will overcome that? Well, if we wait long enough, a serious domestic financial crisis of the scale we faced in 1984 might do the trick.
Until then, the best we can hope for is braver politicians with the charisma to sell unpopular policy. Good luck.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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