Dialogue: Clearing the path for sustained growth

By ROGER KERR*

This year, it seems likely that the focus of all the main business organisations will be on economic growth, and Government and opposition parties' plans for promoting it.

Increases in national income, underpinned by increases in productivity, are ultimately the only means of achieving higher living standards for the community at large and funding essential Government services.

Projections suggest the economy may grow by around 2 per cent this year - more than many other countries given the international slowdown but only two-thirds of Australia's projected growth of around 3 per cent.

The relatively good performance of Australia and New Zealand owes much to the sometimes painful economic reforms implemented in both countries over the past 15 years. Policy changes take many years to produce their full effects.

However, the Government's December 2001 Economic and Fiscal Update (DEFU) suggests that over this parliamentary term total economic growth in New Zealand will only match that of other OECD countries. This contrasts with the 10 years to 2000 when New Zealand's average growth rate of 3.1 per cent was slightly above the OECD average and the five years to 1996 when New Zealand averaged 4 per cent annual growth.

In other words, New Zealand is only keeping pace with other OECD countries, after a period of catch-up. We are not making progress towards the Government's goal of restoring New Zealand to the top half of the OECD income rankings.

Modern economic research clearly indicates that the differences in countries' long-term economic performance are primarily due to the quality of their policies and institutions, such as their laws and systems of Government.

New Zealand has altered its economic framework in a more liberal direction, but it does not stand out from OECD norms. To catch up, it needs superior policies and institutions.

For example, the share of Government spending in national income is around 40 per cent higher than the OECD average. New Zealanders spend two days in every week working for the Government. This blunts incentives for growth.

No country has achieved sustained per capita income growth of 4 per cent - as targeted by the Government - with Government spending at 40 per cent of GDP. A key test of the credibility of all parties' plans to achieve faster growth will be their commitment to reduce this ratio.

Pro-growth Government policies include its moves to deregulate producer boards and the pharmacy industry and to pursue a free trade agreement with the United States. But its moves in areas such as employment law, ACC, taxation and industry regulation have been negative for growth.

Planned moves this year that many business organisations view with concern include:

* Ratification of the Kyoto Protocol on climate change before our trading partners.

* Local government initiatives which would give councils expanded roles and subject them to weaker financial disciplines.

* Further employment law changes covering health and safety, redundancy provisions and parental leave.

* Tertiary education policies, which are set to become more centralised, with less autonomy for individual institutions.

In addition, little progress is apparent on the McLeod review of taxation, the Resource Management Act and business compliance costs, and Government spending limits are under pressure with health board deficits and the ill-conceived superannuation fund.

Despite favourable external conditions, farm incomes at 30-year highs and a low dollar - a sign of economic weakness rather than strength - New Zealand's balance of payments deficit is still more than 3 per cent of GDP at a time of modest growth, and the DEFU projections for future rates of growth in GDP (averaging between 2 per cent and 3 per cent a year) show no signs of improvement.

The Government has set store on delivering on its commitments. Arguably the most important commitment for which it should be held accountable at election time is to increase New Zealand's growth rate to restore average per capita incomes to the top half of the OECD range.

The economy's performance in this parliamentary term is largely the product of past policies and cyclical factors. Changes made by the Government will affect coming years. Future projections, including its own, will reflect whether the Government's policies are helping or hindering growth and putting the economy on track to achieve its target.

Other political parties have also set more ambitious goals for New Zealand. To date, most have not put forward programmes that would achieve them.

The economic debate at election time should focus on which parties have the most credible programmes to achieve feasible goals and avert the risks for New Zealand of Tasmanian-style economic backwardness.

* Roger Kerr is executive director of the New Zealand Business Roundtable