Alasdair Thompson: Sea change needed for new decade of low growth

Finance Minister Bill English must reduce operational spending wherever possible. Photo / Mark Mitchell

Growth in developed countries, including New Zealand, will be a lot lower next decade compared with the decade prior to 2008, but the same can't be said for developing countries.

Their share of the world's production and sale of goods and services is expanding rapidly, whereas for the developed countries it is shrinking. Twenty years ago, the developed world accounted for nearly 70 per cent of the value of all global goods and services; now it's 50 per cent and falling as emerging economies loom larger.

Even before the recession, underlying growth for G7 countries averaged just 2.1 per cent in the decade to 2008; according to one study, G7 growth will drop in the next decade to 1.45 per cent, with New Zealand's per capita GDP growth 20 per cent less than the OECD average.

We are still coming to terms with this reality. Households and businesses have cut spending and focused on debt reduction and saving, with the Government making this easier by running a deficit, cutting income taxes and increasing tax on consumption.

But emerging economies are going gangbusters at nearly 10 per cent growth a year by investing their phenomenal savings from low-cost exports, made cheaper in China's case by keeping the value of the yuan low. Emerging countries such as Brazil, China, India and other Asian economies can grow even faster yet as they are still saving more than investing - and they can even encourage their people to consume more to raise demand and sales.

Developed countries have high debt levels in both their public and private sectors but that hasn't stopped them adopting the Keynesian approach of boosting investment in infrastructure funded by borrowing. In New Zealand's case it was easier to do since government debt was low.

Governments worldwide have increased their deficits as households and firms switched dramatically to running surpluses.

New Zealand's government debt is growing at an annualised rate of $13 billion a year. Our private debt to foreigners at 116 per cent of GDP is massive but we are responding by saving more and paying off the loans. In 2007, households withdrew $7 billion in equity mainly from house mortgages but last year added back $5 billion.

The upside from greater private sector saving and debt reduction should allow the Reserve Bank to maintain lower interest rates, which benefits all borrowers and encourages business to borrow to invest in raising productivity and growth.

Our Government has also set about reducing its operational spending wherever possible; cutting government expenditure is better than cutting investment but it will have to cut expenditure by much more yet. These cuts will be unpopular, as is the cutting of public sector wages in Greece.

The areas that cannot escape are welfare, health, student loans and KiwiSaver subsidies.

The demand for welfare and health is increasing as our population ages. The best place to start on this challenge is to lower the liability for National Super by progressively raising the age for its universal eligibility. That would encourage people who are living longer and healthier lives to remain working productively.

The Government is set against doing this under its current leadership. The belief is that National Super will somehow remain affordable but, funnily enough, many people already accept that getting Super later is inevitable.

On health, the demand for elective procedures will grow as our population ages but private healthcare can meet the demand. To encourage it, the Government could remove the fringe benefit tax on employer-funded health insurance and make premiums tax deductible for retirees on National Super.

Student loans must be capped and an interest rate needs to apply once students enter the workforce. Faster repayment of these loans has to be faced.

The generous taxpayer-funded subsidies to KiwiSaver should now be reduced. It makes sense to keep the $1000 taxpayer-funded opening contribution as an incentive but drop the annual government contribution of $1046 to those who save that amount at minimum.

Skills training for the unemployed and those on the domestic purposes benefit is an obvious focus for public policy development.

Overall, the challenges for New Zealand are:

Reducing high debt levels while maintaining demand. The keys to this are by exporting more and maintaining investment in infrastructure.

Our ageing population will put more demand on National Super and healthcare while reducing the number of people at work.

Encouraging people to retire later.

The cost of student loans.

Attracting skilled young immigrants.

Outside Asia, our trading partners - Australia, the United States, Europe, Japan - all have ageing populations and low growth, making it hard to expand exports.

Expanding faster into Asia's growing markets.

Raising our productivity through increasing skills, investment and innovation. Demand in markets is needed to drive growth and demand grows when people have productive work. Productivity is driven by the supply of workers and their skills, their type of employment, the rate of capital investment and innovation.

Giving business confidence to invest by reducing the company tax rate and compliance costs, maintaining flexible labour laws, increasing research and development, targeted immigration, foreign investment and tipping the balance of public policy to favour exporters.

The Government has done reasonably well by rebalancing our tax system but has to do more with structural reforms. And it owes us Kiwis an explanation of why these are necessary as we go forward into a low-growth environment.

Alasdair Thompson is the chief executive of the Employers and Manufacturers Association.