Bernard Hickey: Here's what Bill English should do now

Leadership change is always the best time to reassess what a country or government should focus on. Next week, New Zealand will have a new leader with a different set of perspectives and priorities. Here are a few suggestions on what the new Cabinet should target.

GDP growth seems attractive on the face of it. What's not to love about increasing the total output of the country? There's also a theory, which Prime Minister John Key ascribed to in his resignation press conference, that a strong tide of overall economic growth will help lift everyone's boats.

Strong growth certainly helps fill the Government's coffers with GST revenues and income tax revenues. Our broad-based and low rate tax system is one of the best in the world at ensuring the Government's bottom line does much better when the economy grows.

This week's Budget figures showed just how much room that gives any government to direct extra funds to the poorest in society and to lift wellbeing through social spending and carefully targeted tax and benefit cuts.

But that's not the whole story and it ignores a fundamental driver in any economy: output per hour worked. This is what a Bill English-led Government should be focused on - relentlessly changing policies, investing and spending to boost productivity. It's the only thing that matters in the end, and here's why.

Increasing output per hour worked increases real hourly wages. It makes an economy properly richer, not just richer on paper or richer because more borrowed money chasing the same number of houses has increased a price.

Amid all the political and tectonic dramas of the past couple of weeks, a small grenade of an academic paper was rolled out into the political and economic debate, and it has yet to explode or at least stun the players in that debate.

The Productivity Commission set up by Bill English published an 86-page paper on achieving New Zealand's productivity potential.

It is a type of magnum opus that explains why New Zealand's economic performance has lagged so far behind our world peers over the past 30 years, and how very little is changing.

Actually, it's getting worse. Our hourly output has stagnated over the past three years and has been slowing for more than a decade. It has elsewhere, too, but our slowdown is worse than our key peers, and Australia in particular.

Our economy is growing faster in gross terms than Australia's and much of the rest of the developed world right now because we are adding people to our labour force through stunningly-high migration growth, an increased participation by older workers and by working more hours each week.

Essentially, more of us are working harder every day. We're not working smarter or with better machines that allow us to produce more.

We're not engaging much more with the rest of the world, the key way most countries spread the productivity growth through their economies.

Internationally exposed companies are the best at spreading the best machines and techniques through the economy, and they're most likely to benefit from the economies of scale from linking with bigger markets.

The major failure of the Key Government and its much-touted Business Growth Agenda was to increase the export share of the economy.

It just hasn't happened.

We are employing more baristas and real estate agents and not nearly enough exporters. The end result is hourly wage growth has been stagnant in recent years because ultimately real wages are a product of real output per hour worked.

A new Government should refocus on increasing that real output per hour worked, and on all the tweaks and reforms needed to grow productivity.

The Productivity Commission's paper has plenty of suggestions, including beefing up our competition laws.

But much more needs to be done around changing the incentives for investing, improving the skills of both workers and managers, and mostly by making New Zealand more connected to the rest of the world.

That's all about focusing on investing in companies that make things and code and services for the rest of the world. It's not about spending more on buying each other's houses and borrowing against those inflated values to buy an SUV and go on an overseas holiday.

Bill English lamented this export-weak and real estate-driven structure of our economy when in Opposition and in his early years as Finance Minister.

His boss, John Key, was less keen on diluting the value of people's homes with real changes, saying home-owning voters actually preferred higher house values.

Now is the time for the new boss to step up with a new target that actually changes the engine in the heart of the economy and society, rather than just a lick of paint and a new deck out the back.