Cameron Bagrie. Photo / Alex Burton
OPINION
The incoming Government has set out a major agenda to fix the economy. Get rid of inflation — no easy task — and the economy will move into upswing mode.
The bigger challenge is the trend in growth and raising living standards and where the thrust of policy must be directed.
We all know the old chestnuts of infrastructure, importance of research and development, trade, productivity, addressing the cost-of-living crisis, the need to digitise the economy and compliance. Those are known. I’m more interested in underappreciated areas we need to turn the dial on.
Top of the list is bringing the economy and society back together.
A divided society is economically unhealthy. We need an obsession with lifting education outcomes, a new strategy to navigate a divergent world, unlock natural endowments and shift our economic model away from selling more expensive houses to each other. These are dials we need to turn aggressively.
New Zealand has gone from being one of the most productive to one of the least productive in the OECD. Weak productivity means low wages. Our economic model has been reliant on immigration aka bums on seats, and rising terms of trade. We export food and import manufacturing goods and relative prices have favoured the former over the latter. If that turns, we are in serious trouble.
The election was a promise fest as opposed to discussion on the big issues including productivity, export performance, and limited discussion on geopolitical shifts around the globe which will materially impact trading nations.
The two mainstream political parties captured around 65 per cent of the vote, a sign the “centre” lacked vision and ideas.
The growth in the political periphery is a manifestation of a divided economy and society, and complicates the pending economic reset.
A host of economic and social variables signal we are out of our economic lane. They include inflation, a gargantuan current account deficit, unsustainable local government finances, difficult trade-offs returning the Crown accounts to surplus, poor infrastructure, real concerns over crime, law and order, and one in nine people of working age population on a benefit.
Division is rife. Young versus old. Homeowner versus those aspiring to be. Landlord versus renter. Rural versus urban. Māori versus non-Māori.
Any rest involves change, and we need to see a lot of it.
Economists talk about economic policies to raise living standards, along with the OECD, International Monetary Fund, various think tanks and Treasury, but unless you take society and the nation along for the ride, you are not doing much more than “Whistling Dixie”.
Out of this inflation mess there must be some basics we should be able to agree on across the political spectrum. Continued, or greater division will just see the reciprocal of Groundswell marches.
Policy will not “stick” if New Zealand remains divided and uncertainty from election to election will undermine investment.
A former Minister of Finance once told me the third or fourth best policy option was often the best. It might not be economically pure, but it will stand the test of time and deliver certainty.
Well-being obviously needs an economic base. We swung too far towards well-being at the expense of the economic base as ideology ruled and we are now paying the price. We cannot fly completely the other way “fixing the economy” and letting social challenges lag which is now a risk. No political party appears to get the balance right, but that balance is critical to forming unity. Tax relief but indexing benefits to consumer inflation will drive division.
We should surely be able to agree on the importance of kids and education across the political spectrum. Highlight kids and our economic future as starting point for consensus policy. Get all parties under a big tent on that one.
One of the most important things in life is time. Without your health, and the health system is in disarray, time is worth zero. I’d back fixing health over tax relief.
Equality of outcome is not the target. The target is equality of opportunity, then the race of life is on. Māori and Pasifika kids do not get the same opportunity education, housing or health-wise and require even more funding.
New Zealand cannot turn the dial on global emissions but is prepared to play its part as a global citizen. That include city-folk, not just farmers. Urbanites should look up what a farm management (environment) plan entails and consider what an urban equivalent could look like. Climate change is everyone’s responsibility not just the major emitters.
Education today will define the economy and society in 30 years. We are in trouble. Pisa (the Programme for International Student Assessment test scores, measuring 15-year-olds in reading, maths and science) scores have been declining for more than a decade.
Less than half of students regularly attended school regularly in term 2, 2023 (defined as 90 per cent attendance), but more disturbing was the tail in the data. One in nine attended less than 70 per cent of the time, and more than one-in-five Maori and Pasifika students were absent for more than 20 per cent of the time.
A quarter of our school leavers left without NCEA 2, considered the minimum level for work and, or study. That is an economic and social bomb set to explode.
The new Government has made education a priority. That needs to be upgraded to a top three priority and a clear message sent.
Start with a clean-out of the Ministry of Education. You are not going to address problems in education by structured literacy, charter schools or Teaching Basics Brilliantly alone. Poor education is a byproduct of other social failures. That comes back to getting that balance right between the economy and social ledger.
Set out a 20-year remuneration trajectory that recognises teachers’ value to entice more people into teaching, but money needs to be matched by assessment. Use data to drive decisions. We need ambition and a high bar, not a low one. The curriculum is critical. The Government has a plan, but it needs to be put on steroids.
Various trade deals, including India, are being mooted, which is encouraging. New Zealand’s export performance has been poor, declining at a share of gross domestic product and it receives insufficient attention.
The world is changing. Geopolitical and geo strategic forces are having a major impact. Power is replacing a rules-based system. Trade in security is now trumping the economics of trade. Just in time is being replaced by just-in-case as on-shoring, near-shoring and friend-shoring take place. More concerns are being expressed about China’s influence, a nation that takes around 27 per cent of our merchandise exports.
Climate is restraining traditional pastoral production, but New Zealand could also benefit, in a relative sense, from climate change in areas such as horticulture.
Amidst the global financial crisis, New Zealand pulled together for a talk and do-fest.
Now is the time for an export-focused one to define a new strategy but also how we manage risks associated with a divergent world, including energy security.
Any business tries to set a strategic plan around unique areas of advantage. It defines your ability to compete in areas.
New Zealand is blessed with a huge natural endowment, including productive land, water, renewable energy, a large economic exclusive zone, and many minerals.
We need to get more out of such comparative advantages. An example would be to turbo-charge water storage in Hawke’s Bay.
Better infrastructure forms the basis of our capital stock, and we face a huge uphill battle improving and financing it. We appear to be inching towards a better model, emphasis on the word “inching”.
An under-appreciated area is our economic model, which has been selling more expensive houses to each other for 30 years and a housing-centric balance sheet.
It is a flawed model that accentuates economic and social division. Fixing it means looking at the tax system, banking system (including bank profits, excluding retail banking) and regulatory settings (including risk weights on bank capital), and the pricing and taking of risk. But you cannot just discourage housing. Investing in the real productive economy needs to be attractive. New Zealand has an unattractive corporate tax rate and underdeveloped capital markets.
A major reset is starting.
The most important aspect will be taking the nation along for the ride for what could be a long and rewarding journey if we are bold, but sensible and fair.
· Cameron Bagrie heads Bagrie Economics, a premier boutique research firm dedicated to providing independent and authoritative analysis of the New Zealand economy. The firm prides itself on delivering straightforward, no-spin evaluations of economic trends and data.
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