How New Zealand can get its mojo back — Steven Joyce

Our economic hangover from the Covid 19 pandemic rolls on. Photo / NZME

OPINION

It’s official. Our economic hangover from the Covid-19 pandemic has been worse than in most countries. Inflation has been more persistent, our government accounts have deteriorated more quickly, and our growth has been more anaemic.

Figures out this week show our economy on a per person basis shrank nearly three per cent in the past year. No wonder retail is doing a freeze.

Look slightly deeper into the numbers, and another aspect of the problem is clearly illustrated. Many of the productive areas of the economy shrank significantly last year, including manufacturing, transport, and wholesale and retail trade.

The largest growth area, at a whopping 7 per cent, was the government administration category. In short, the massive growth in public spending masked a deeper recession for households and businesses, and we all now realise that level of spending can’t continue. Our government debt has been growing at the second fastest rate in the OECD.

The clear risk is that as the Government necessarily pulls back, the private sector doesn’t step up fast enough to fill the gap, and we end up in a deeper trough before things get better again. That risk should be fully occupying ministers as the belt-tightening Budget gets close to being locked away for delivery in May.

It is likely the urgency the Government is showing to create a broader fast-track process through our thicket of “planning and permission” laws is at least in part an acknowledgement of the need to get more new private-sector activity happening. News reports suggest there has been a huge rush of projects to the Government’s door seeking the fast-track process and that’s encouraging.

Ministers will have to be careful that their process isn’t so fast that it gets tied up in the courts and that slows things down again. There are risks for the other side of politics as well. Labour and the Greens and their like-minded NGOs will have to assess how popular their pre-disposition to oppose fast-tracking will be with a public thirsty for economic activity in the second half of this year.

Of course, permission to build something doesn’t mean it will happen. The other big variable is interest rates, and in particular, what’s known as a hurdle rate, over which projects must jump before their return justifies the investment. That is where the Reserve Bank comes in.

Regular readers will know I have been somewhat of a hawk on interest rates over the past three years, ever since the world went mad and poked the inflationary bear too hard. Now though, in New Zealand at least, I think the risk is very much the other way.

Back when I was Minister of Economic Development and Bill English’s associate in finance, Bill used to invite me into his regular discussions with then Governor Graeme Wheeler. That was because the Wellington-based bank’s data-based view could be a bit backward-looking and was often at odds with what I was seeing in my almost weekly travels around regional New Zealand. I wasn’t the only one. Then ANZ Bank Chief Economist Cameron Bagrie used to say he learnt a lot about what was actually happening economically by travelling the regions and keeping his ear to the ground.

I fear the same dichotomy is emerging now. From my recent travels around the country, the economy feels much worse than the view the central bankers are currently seeing, and the danger is the Reserve Bank will be too late in starting to lower interest rates. The hikes were so precipitous so quickly that their deflationary effect is still working through the system, and if the politicians turn out in this instance to be true to their word of shrinking the public sector, the Reserve Bank may be taken by surprise as to how sharp the slowdown is. It’s a finely judged call but it’s clear the economy won’t truly turn up again until interest rates start to fall.

Fortunately, there are plenty of other things politicians can be getting on with in the meantime to release the animal spirits of entrepreneurs and get us growing out of this economic hole.

A big lever is encouraging international capital to invest here. Our negative attitude to international investment over the past six years has severely damaged our reputation with overseas-based investors who might otherwise fund new economic activity. We are going to have to do something more than simply say “we are open for business” to attract them back. To that end, it is encouraging to hear Winston Peters, not normally a fan of international investment, talk approvingly of Ireland’s economic miracle, built off the back of more competitive tax settings.

We also, however, need to address our broader suspicion of foreign investors “stealing our stuff”. As a country we rightly invest a lot overseas to spread our risk, including through the Super Fund and KiwiSaver. To balance that we need foreign investors to be excited about investing here. With so many options to invest capital around the world, we should welcome those prepared to take a punt on our country, not demonise them.

Too much regulation is also a big burden and it has a greater impact in a small country. Take one example, banking. A report out from the Commerce Commission this week described competition in the banking sector as “sporadic”, profitability among the big four as “high” and innovation levels as “weak”. That’s not surprising, as the high levels of regulation in the sector clearly help maintain the cosy club of big banks.

At the recent Waikato University Economic Forum in Hamilton, I sat in on a Fintech innovation session with the founders of Dosh and Sharesies, and Karen Silk from the Reserve Bank. The debate was over the need for regulatory changes to make room for new entrants and more competition in the banking and financial sector. Silk agreed, but it was clear to everyone in the room that the Reserve Bank’s idea of rapid change and innovation was on a different planet from the entrepreneurs.

This may all seem a bit academic, but we wouldn’t have Rocket Lab and the New Zealand Space Industry and all their high-value jobs today, if we hadn’t made rapid changes to the regulatory settings in 2016 so that Peter Beck could launch rockets from here. Think of 10 industries that could do with shaking up a bit, or a bunch of potential new industries, and think of the possibilities.

It all adds up to the need to rediscover our can-do attitude, which I think was drummed out of us during the pandemic years. The rest of the world is accelerating away from us economically. We need to get out there and use our Kiwi initiative again, and start catching up.

Steven Joyce is a former National Party Minister of Finance and Minister of Transport. He is director at Joyce Advisory, and the author of the recently published book on his time in office, On the Record.