Rebuilding Better: The big economic and social questions New Zealand faces

As we emerge from the shadow of the pandemic we’ve got some talking to do, as a country.

Where do we need to focus to ensure we build back a better nation?

Covid has been a distraction from many of the plans we were making to develop the economy and build a wealthier and more equitable New Zealand.

But does it also present some opportunity to reset and do things differently?

Does our response to Covid offer a blueprint for tackling other big challenges we face? Or does it require a different approach?

Covid, and our response to it, have been divisive.

But where there is consensus it is, surely, that we do need to focus now. We need to act to put the policies in place to achieve our long-term, strategic goals.

Right now our economy is beset by high inflation and a cost of living crisis.

At an annual rate of 7.2 per cent, it is the highest in 40 years and threatens to drown out consideration of much bigger structural issues facing the economy.

Conversely, unemployment sits near a record low of just 3.3 per cent - but rather than being viewed as an economic success this is considered by many to reflect the challenge New Zealand faces around labour supply.

That challenge isn't going anywhere.

Even with borders fully open post-Covid, the country faces ongoing demographic pressure as the population ages in the next two decades.

As part of The New New Zeland: Rebuilding Better, a new series exploring the big issues we face, the Herald has talked to a range of economists about where they see the long-term priorities and how we find the political will to confront them.

They include the demographic challenge of the ageing population.

There are questions about where we should invest, what we should build and what we'll need to be doing to earn the revenue to fund our future.

Talking to economists about the biggest priority for building a better future, one theme stands out: education.

The kids in our schools now are the future economy, Cameron Bagrie says.

Cameron Bagrie. Photo / Alex Burton

"The best barometer for the economy in 20 years is what's happening in the education system today," he says.

Other issues looming large are infrastructure and improving productivity.

But beyond the specifics - and the ever-present need to address climate change - there are some underlying themes that we need to embrace to ensure a better economy.

A joined-up plan

“It all comes back to planning,” Infometrics principal economist Brad Olsen says.

“I’d love to see a national skills plan that sets outlines and asks: what sort of skills and qualifications we need, so we can target them, but also so we can see what the short-term parameters might be.

"What might they be? Is it 8000 nurses, 80,000 nurses or is it 800 nurses?"

New Zealand needs to plan ahead so we know how many nurses we need, for example, Brad Olsen says. Photo / Dean Purcell

That way, when we do open the borders, our policy choices on immigration won't be driven by short-term political campaigning, he says.

That would then give us a much clearer outlook on what our infrastructure needs will be.

"We don't actually have that long-term setting for housing and infrastructure," Olsen says.

While he acknowledges some good work being done by the Infrastructure Commission, he believes we are still being hampered by a lack of strategic overview.

"Where is the integrated planning? It is all happening within different departments," he says.

That means we gear up our resources and workforce for big projects, like Dunedin Hospital, but then lose momentum when the project is completed, he argues.

"Where does that workforce go?

It effectively has to disappear until we have another big project, he says.

"So the sequencing and planning of infrastructure is a big inhibitor. It hinders productivity."

Infometrics principal economist Brad Olsen. Photo / Jess Wong

If we’re really serious about productivity we have got to “lift our gaze to the long term”, Productivity Commission chief Ganesh Nana says.

"And that means we've got to invest in a range of different things in our economy for the long-term returns rather than looking for the quick wins.

That goes for the Government, business and the wider community, he says.

“It’s a mindset attitude.

"We have tried and tried to solve many of these challenges but often with sticking plasters, looking for short-term wins without recognising that these are considerable challenges that require a long-term sustained effort."

“We’d be fooling ourselves to think we could solve them, even within that three-to-five-year horizon that seems to be the focus for many of our organisations.”

An example of where New Zealand has struggled is with investment in research and development, Nana says.

“Our R&D investment numbers are pretty average by historical standards, not to mention by OECD investment standards.”

Investing in R&D needs to come with the understanding that some of those investments are not going to succeed, Nana says.

“So have we got a mature conversation and attitude to that failure or do we go down the road of pointing fingers and blame?

“We need to identify focus areas because we have spread our Marmite thin in terms of our investment into R&D. So yes, more and in a more targeted way.”

But it shouldn’t be about the Government picking winners, he says.

"It's got to be a combination of Government, industry, Māori and workers."

Those "winners" would come from within our traditional areas of economic strength - like food and fibre.

"But also in our tech, health tech, those sorts of new innovative areas of the economy."

New Zealand needs to target R&D much better, Productivity Commission chief Ganesh Nana says. Photo / Getty Images

We need to look at things across sectors because the economy in the next 20, 30, 40 years is going to look a lot different to the past.”

Our future economy might involve a shift to very different land uses or might even involve genetic modification, he says.

"We've got to think about climate change, we've got to look at the use of land and water. They will be used differently, we're not sure how because we haven't yet done the investment in the science to look at what options there are."

The Government will have to play an essential role in guiding the process, Nana says, “because the time for transition is possibly running out”.

“Climate change, innovation and productivity,” NZIER principal economist Christina Leung says, reeling off the big challenges for the future.

A focus on inequality, income distribution and inclusive growth was also going to be important, she said.

“And addressing the ageing population.

"That's from various dimensions, labour force participation, how we fund superannuation, and health spending down the track."

Building public support

Identifying the issues is not so difficult, Leung says.

But creating enough public interest and political will to solve them is not so easy.

"I think at the crux of it, why we still have disagreements and why we're still discussing these issues after so long is that there is a mismatch between who bears the cost and who the benefits accrue to," she says.

"Particularly you see that with climate change - we're asking certain parts of society, the producers, to make changes that are costly.

"But the effects of climate change are more intergenerational - and much further down the track.

Our children will pay the price of climate change but the costs of stopping it are felt now. Photo / Dean Purcell

There are also a lot of gains to be made by continuing to address issues of wealth distribution, she says.

"The benefits of more inclusive growth do benefit us all. We saw when there were [Covid] outbreaks in certain parts of society - especially more deprived areas. We ended up having lockdowns to contain and manage outbreaks. It highlighted that inequalities have externalities that affect all of us."

"We can choose to ignore them until something like Covid comes along, then we have to confront them."

Covid highlighted that things can change very quickly, Leung says.

"While it is difficult to pick winners and where to pinpoint spending, what is important is creating an environment where business can pivot to new opportunities."

“We need to put in place funding mechanisms to align more and [avoid] this mismatch ... sustainable financing.”

The Covid experience has created opportunities, Leung says.

One obvious example is the way it encouraged the embrace of technology and accelerated digitisation.

"No doubt the closure of international borders exacerbated labour shortages and now we see an increase in costs for many businesses which flows through to high inflation," she says.

“But what that has done is forced businesses to think about ways of doing things. We see labour-saving technologies. I’ve been to quite a few restaurants lately that have robot waiters!”

The transition is happening and it will be very uncomfortable for many, Leung says.

"But it does make us think about how to do things better."

It also ties in with the ageing labour population and with New Zealand's declining labour force participation.

"While it might seem like it doesn't make financial sense now, having that sharp rise in labour costs does start to tip that point over for businesses to think [technology] is something worth investing in."

Independent economist Cameron Bagrie also believes we need to incentivise business investment.

He'd like to see the Government do more to create an environment that's more conducive to supporting the economic basis - or what is sometimes called potential growth.

"Potential growth is the rate of growth that an economy can sustain over the medium term without generating excess inflation," he says.

“Potential growth has declined in the advanced economies in recent decades because of lower growth in the labour force, capital stock and productivity.”

We need policies to enhance that, he says.

“Wellbeing needs an economic base and one of the reasons we’ve got more inflation in the system is that we’ve underestimated the damage and destruction to that economic base.”

The big one at the moment is the labour market, he says.

"The debacle in regards to the immigration reset - heads need to roll - it's literally choking New Zealand."

"If you have a look at the RBNZ's latest forecasts, the productive capacity of New Zealand is barely above where it was pre-Covid."

Our productivity levels are back where they were before Covid, economist Cameron Bagrie says. Photo / Michael Craig

The supply-side capacity of the economy is going to define the ability to deliver policy that improves social outcomes over the next five years, he says.

That includes tax settings, although tax reform doesn’t make the top of his priority list.

The leaders of tomorrow

Top of the priority list is education reform, Bagrie says.

“I challenge anyone to pick a better economic indicator than education; that’s going to determine where New Zealand is in 20 years.

“And if you look at attainment and achievement across the education system today you’re going to have a lot of concerns about where we going to be in 20 years.

"The leaders of tomorrow are the school kids of today."

Covid has added another layer of complexity, but it is clear that schooling outcomes today are inferior to a decade ago, he says.

“So we’re sitting on a bomb ... that’s going to go off over the next 20 years.”

At think-tank The NZ Initiative, chief executive Oliver Hartwich has similar concerns.

“If we don’t get our education system in order we can forget about future prosperity because people won’t be qualified enough to play a role in the future economy.”

It's not just an economic argument, he says.

"You cannot have a functioning society if people aren't educated."

"Sometimes there is a case to be made for incrementalism but when it comes to education the situation is so bad we need radical reform."

The other big concern for Hartwich is what he sees as the increasing size and decreasing quality of the bureaucracy.

“We need a radical shake-up of our public service,” he says.

In order to build a better economy we need to be much more rigorous about measuring where we are at and how we are progressing, he argues.

"It is basically running itself and it's running the show politically as well."

"That matters because when it comes to designing projects, and calculating cost and benefit, we need that expertise," he says.

"You can see it in nearly every single area of policy, that we are not getting bang for our buck."

Hartwich's concern highlights the core political tension that clouds debate about the economy.

More government ... or less?

Should we be centralising or decentralising, regulating or deregulating?

One view - animating the left right now - holds that collective response to minimise Covid harm provides a model for the next big challenges around inequality and climate change.

Notions of a post-Covid reset are probably fading, says Nana.

"But two huge pluses we can take from it are the value of community and the value of being included. It did see us through. We in the business sector would be silly not to realise just how important that is," he says.

“If we can embrace that sort of response, that high trust model, if we can tap into those lessons, not just in terms of social service delivery, workforce development, entrepreneurship and adopting new ways of doing things, then I am optimistic in terms of what lies ahead of us.”

But the Initiative’s Hartwich argues the opposite.

Even if we accept that New Zealand and the Labour Government did well in its initial pandemic response (which Hartwich says he does), it doesn’t follow that this is a blueprint for the future, he says.

He draws an analogy to post-war Europe in 1945.

Britain, having won the war, had great faith in the power of the State.

They embarked on a programme to expand the welfare state and nationalise industries.

That kind of central control is totally appropriate when you are fighting a war, Hartwich says.

“But it is the wrong prescription in peace-time.”

“So you look at the counter-example in Germany. There, they were defeated. The State was thoroughly discredited ... the infrastructure was destroyed,” he says.

"There was no faith in the State to build a better future."

“So Germany freed up markets, strengthened property rights, basically put in place a classical liberal prescription. Twenty years later, Germany had overtaken Britain in GDP per capita terms. For the first time in history.”

Hopefully, given the political reality in New Zealand, there is a middle path.

Perhaps the major political parties can find more common ground for bipartisan policymaking - as they seem to have with property zoning reforms.

“What we should we take from Covid is what we’ve learned from it about how we respond to external shocks,” Infometrics’ Olsen says.

"The ability for fiscal policy to be more proactive has created an opportunity to think about how we use fiscal and monetary policy together."

We do have to change the way we talk about tax at some point, he says.

"We often talk about in terms of how much to give rather than what do I get."

"At the end of the day there are priorities and there is only a limited pot of money."

Olsen cites the failure to implement a capital gains tax as an example of a "political poison pill" - a policy that is good for us but that neither major party will touch.

"I feel like there are a lot of poison pills that are building up, in terms of tax reform, superannuation age and in terms of climate change."

To plan for the future perhaps we should look at the past, he says.

“My worry is what happened in 1980s New Zealand, when the sequencing and timing didn’t work properly and it left some incredibly challenging transition costs for everyday people.”

“Either we do heed that warning and think about planning and sequencing or we’ll hit the same point - where things must immediately, drastically change to ensure the economy’s long-term survival,” he says.

“And that challenge and disruption will cause untold pain for the average Kiwi.”