By Russell Palmer of RNZ
Prime Minister Christopher Luxon has talked up economic growth in his big scene-setting State of the Nation speech this year.
However, four economists – two on the left and two on the right – are critical of several aspects of the strategy so far.
They largely agree a tourism focus will not lead to long-term prosperity, and say the devil will be in the detail when it comes to science reforms. A new foreign investment agency might help, if done right – but the effect may be limited, and could risk making things worse.
On the other hand, even those on the left do not agree with Labour saying the government is late to the party.
‘A vibes shift’ – Eric Crampton
Of the four economists, the New Zealand Initiative’s chief economist Eric Crampton was the most supportive.
He said Luxon’s speech and announcements were about sending the signal that foreign investors would be “welcomed rather than treated as criminals” and the government would not shut down development because of local concerns.
“The shift in vibes signals a growth focus. It will need to be backed up by concrete moves,” he said.
He was concerned, however, about a lack of focus on the government’s structural deficit. While the government had been criticised for what some have called “austerity” cuts, the numbers painted a different picture.
“There hasn’t really been any austerity yet,” he said.
“Government spending is going to maintain … as a larger fraction of overall economic activity than it was – even under Ardern – for a very long time, and they are still spending far more than they take in in taxes.
“They were making claims about careful spending, well, really they’re just keeping to the forecasts from a few months ago and those forecasts were pretty poor.”
He also said it would be much better to reform the transport funding system, so it was based on a cost-benefit analysis rather than pushing ahead with the Roads of National Significance.
He supported changes to health and safety rules, saying scaffolding rules from 2015 had “no plausible cost-benefit case” and should be addressed.
While the finance minister had talked about powering up Kiwibank, he did not think that likely to have much effect.
‘This is the year’ – Shamubeel Eaqub
Leaning more on the left, NZIER principal economist Shamubeel Eaqub said the problem for the government was it had no way to quickly and sustainably boost growth.
“Their focus has been very much on delivering on the election promises: tax cuts to try and cut back on government spending. It really wasn’t focused on long-term economic policies … this is the year they really have to show whether or not they’ve got the wherewithal to implement long-term economic policies that will be sustained over multiple future governments.”
He said the biggest risk with last week’s announcements was they would be undone by the next government.
“It’s well and good for a government to announce policies when they’re in power, a true test of long term policies is whether they’ll last the distance.
“So one example I can think of that is going to be undone very quickly is, of course around mining – the last government banned exploration, this government wants to encourage mining, what do you think is going to happen when there is a future change in government?”
A business community speaking with one voice about what works well and a more conciliatory planning process within government could help with that, he said.
‘We’re looking at incremental changes’ – Michael Reddell
Right-leaning economic commentator Michael Reddell said last week’s announcements were mostly cosmetic.
“There’s nothing in those announcements that’s likely to – in the prime minister’s words – ‘turbocharge economic growth’.”
Luxon talked a big game on bringing New Zealand up to speed with the likes of Ireland and Singapore on foreign investment, but Reddell said the biggest barrier to that was New Zealand’s company tax rate.
He wanted national security to be the only real restriction on foreign investment, and for immigration – particularly low-wage immigration – to be scaled back.
He said he agreed with Luxon that stronger growth would help unlock better health systems and greater prosperity, and that New Zealand needed to be more open to mining critical minerals.
“We’ve had this sort of culture in New Zealand of saying we’re reluctant to exploit the minerals … those may be luxuries that make sense if you’re a really rich country, but we’re struggling, and a lot of our young people are leaving for Australia.”
He said the economic cycle should help revive the economy in time for the next election – but the government’s plan so far was unlikely to shift the dial beyond that.
“The big challenge for us isn’t cyclical upswings or cyclical downswings, it’s that trend growth – it’s how do we get productivity growth up from the half a percent a year that we’ve got at the moment to, say, 2% a year.
“The problem is that hardly any economist looking at the government’s programme so far to date or the announcements … would suggest that we’re on track for anything like that.
“We’re looking at incremental changes that have been made so far and incremental changes are likely to have incremental effects.”
‘Not optimistic’ – Ganesh Nana
Ganesh Nana was chair of the Productivity Commission before it was replaced with the Ministry for Regulation.
He said it was important to question why growth was needed.
“Most people would say it’s something about incomes in their back pockets, or at least good jobs and good pay – and underneath it all, if we’re after economic growth, we need people with skills and the appetite to stay here.”
He said the coalition’s first year in power was “way too short” to gauge its success on growth or productivity, “but the signals are not great in terms of the lack of investment in infrastructure and our people.
“Where is the growth going to come from? … if the government has set its stall out to say that it believes government has spent too much in the past, and so it’s reducing its spending, then the growth has to come from the private sector.
“Is the private sector stepping in? There’s no sign of that at the moment, and given what we’re doing to our workforce, I’m not optimistic.”
Tourism
Nana said tourism would provide growth – but not productivity.
“It will give you dollars, but does it actually give us good jobs, and does it actually give us good incomes?
“If we’re serious about productivity, we’ve got to be serious about not just the people in their skills, but the tools and equipment they work with – and we’re talking about infrastructure and investment and those sorts of things that we’ve neglected for so long and we continue to neglect as has been indicated and reflected in decisions over the past year, if not longer.”
Eaqub said the tourism industry needed to focus on getting more value from fewer tourists.
“If we’re going to grow tourism simply through volume, then it’ll be a mistake because we’ll have the same problems we had pre the pandemic, which is that resistance towards over-tourism: there’s just too many visitors, not enough local support, and we don’t want to go back to that.
“Tourism is unfortunately very much a services-based economy. It’s very much around accommodation, around hospitality – these are important parts of the economy but quite often those jobs are not very good quality and quite often are lowly paid.
“The work with the industry needs to be really focused on the unlocking of value rather than volume, which had always been the way that New Zealand had targeted tourism in the past, which has not worked.”
Crampton said tourism funding should be more focus on user charging – particularly in busy areas.
“So some of the trails get overrun, facilities get degraded, and nobody’s having to pay a charge. There’s an entry fee when tourists come into the country, but how that gets divvied up is a little unclear, and it doesn’t necessarily go to the places that are facing the greatest tourist demand.
“Shifting to more user charging and with a direct tie from the fees paid by users, particularly tourists, to improving local facilities could improve the experience for everyone and result in reasonable earnings.”
Tourism was not the best approach to be taking to growth in the long run, Reddell said.
“Tourism’s a good thing in its own right – people being able to see the world and see our country – it’s just not a way that a country like ours is going to, you know, catch up.
“It can absorb some people who may be unemployed if your economy is particularly weak, but those are cyclical stories. What we’ve got is a sort of, you know, 30 to 50-year challenge.
“You’re going to need high-tech skill-based, knowledge-based industries and to take strong advantage of the sort of natural resources that are here.”
Foreign investment
Reddell and Eaqub both said NZTE was already doing much of what the new Invest NZ agency had been tasked with tackling.
Crampton, however, said it resembles an NZ Initiative policy – and would bring a new service: meeting with investors and helping them navigate the New Zealand system.
“The facilitation aspect is useful and new. On paper NZTE perhaps should have been doing this, but it doesn’t appear that they have been,” Crampton said.
“My big hope really with the trade and investment bit, is that the bureaucracy itself will come to better understand the barriers that private investors face because they themselves will be the ones helping to try to get them around it.”
Eaqub said NZTE was never particularly effective at performing that role, because it had never been well supported.
“Having an explicit agency is helpful, but it’s not enough if it does not have the power and the backing of the government to be able to make changes inside of the business of government … whether they will have the powers and the ability to make it happen remains to be seen.
Reddell said the new agency may help at the margins, but the risk was it could turn into something that looks like corporate welfare.
“In Ireland for example, they give out grants and sort of R&D subsidies and that sort of thing to some of these foreign investors as well. If we went that way, it would be net negative.
“If it’s just about smoothing the path and showing people which office to get in contact with to clear their proposal, then it can’t do any harm and it may do some element of good.”
He said any good that came out of it would likely appear over the medium term – two to five years.
Nana argued the government should be careful about who it attracted, and how.
“If we’re looking for international investment, that is fine, but they need to be here for the long haul.
“They need to be here not for the tax breaks, they need to be here to build not just the innovation ecosystem and our business, but the workforce that goes alongside that.
“Unless we do, the whole package will continue to come out with the same results we’ve been doing for the past 20 to 30 years.”
Science
Crampton said boosting the science sector and working towards a knowledge-based economy “sounds great on paper, it will have to depend on how they wind up doing it”.
“How they approach the mergers is going to matter, how they focus it is going to matter. It’s potentially useful. We’ll have to see more detail as it comes through.”
Reddell said it may help, but it was not something he had looked at in depth.
“In the end, governments reorganising themselves, going from seven CRIs (Crown Research Institutes) to four of these new entities, it’s just unlikely to be game changing … it’s probably sensible. It’s probably a step in the right direction.”
Nana was heavily critical of focus of commercialisation in the government’s science reforms.
“It’s very hard to pick winners and expect it to deliver immediately. For every science dollar that we spend that might be commercialised, there might be quite a lot that don’t go anywhere but build the base, build the workforce and the skills.
“For all of the things that was invested in sending people to the moon, there was a lot that was not commercialised but in the end led us to, for example, computer technology and the internet and everything else that goes with it.”
He said New Zealand’s level of investment in science, research and development was pitiful, and cuts last year to science funding “absolutely” undercut Luxon’s message on science.
“Why would you as a scientist want to stay here? If you’re a young scientist … and you’re faced with ‘you’re only allowed to do science as long as it’s going to deliver me some profit at the end with a good business’.
“It’s not going to attract the international investors, not the ones that we want here for the long haul.
“Knowledge and innovation for that sake … out of that might come some good commercialisation – highly likely, if it’s exciting – but if you start off with the view for commercialisation, it’s going to turn everybody off.”
Competition
Eaqub said the focus on competition policy – in sectors like banking, supermarkets, construction and retail – was probably the most important plank of the government’s strategy.
“It’s encouraging to see the focus on competition as one of the key pillars of the economic strategy. How it’s done is going to be really important.”
Crampton said there were two ways the government could tackle the problem.
“If the government takes a focus on removing the regulatory barriers to entry and enabling entry to provide more competition and more effective competition, that would be wonderful.
“If instead they want to have the Commerce Commission taking a more activist role in policing what existing companies are doing and adding more regulations on to their behaviour with an aim of trying to encourage competition, they could wind up having the opposite effect and strongly discouraging entry because New Zealand will just be seen as too much of a mess to deal with.”
Nana took almost the opposite view.
“A beefed-up Commerce Commission with very strong regulatory powers and prepared to take the players to court, that’s the only way we can look at encouraging new entrants into that market, but there is no appetite for that.”
He said uncompetitive industries had big legal budgets to fight attempts to crack down on them through the courts.
“There are a lot of vested interests in those markets that will do a lot to maintain the status quo. They’ve got a lot of dollars invested in maintaining the status quo. We’ve got to break down that status quo.
“We can tinker at the edges by rewriting some rules and and threaten with a wet bus ticket that we might come one day to threaten you to take away your market but … unless there is belief that the government and all the regulatory powers will come down like a ton of bricks on you, the vested interests will just stay in the game.”
A Reserve Bank story
Crampton and Reddell both said the opposition was not right that the government had taken its eye off the ball on growth.
But the government should also not be taking credit for inflation coming down.
“Interest rates were very high because the Reserve Bank needed to correct its past errors. That led to a substantial downturn – which is almost guaranteed given the work that they were going to have to do to get inflation back under control,” Crampton said.
“That has nothing to do with what the current government is up to, and everything to do with Reserve Bank cycles correcting prior errors.”
Reddell said last year’s budget “barely changed the fiscal deficit at all … it’s a Reserve Bank story. It’s neither on Labour nor on National.
“Of course, Willis and Luxon don’t help themselves by constantly claiming credit for adjustments in interest rates.
“I mean, clearly they would have preferred not to have had that weak GDP growth last year, but it was seriously outside their control. The best reforms in the world couldn’t have prevented that because those decisions are being made by the Reserve Bank.
“What we’re going to see over the next 18 months is that as interest rates come down with a bit of a lag, the economy will pick up – and I presume the prime minister’s got a heavy focus on next October as the election time.
“We’ll see a cyclical upswing, I think there’s little doubt about that, depending on whatever’s going on in the rest of the world.”
Uncertainty remained over the effect a Donald Trump presidency would have on that calculation.
