Economists studying declining institutions sometimes use the framework of exit, loyalty and voice. When faced with life in a declining company, social club or South Pacific nation state, many people will simply exit, seeking better opportunities somewhere else. Others will stay and give voice to their unhappiness, attempting to arrest the decline. The choice between exit and voice is often mediated by loyalty to the institution.
For more than two years, New Zealanders have been signalling they are furious about the state of the nation’s economy, exercising their voice via the polls and 2023 election result, and the exit mechanism of leaving the country. Both Labour and National initially misinterpreted this rage as a desire for more government handouts, so Grant Robertson and Nicola Willis tossed out cost-of-living payments, childcare subsidies and tax-threshold adjustments like Dickensian villains scattering coins for a despised rabble.
Over the summer months, National finally intuited that the country is distressed by the cascading business failures, surging unemployment and stagnation of real wages. Like apes discovering the secret of fire by banging polling data and economic forecasts together, they have divined that their sustained unpopularity is linked to the sustained recession they’re presiding over, and that their campaign promise to get New Zealand back on track somehow gave the public the impression they were going to do something other than blame Labour for the dire state of the economy.
Where there’s a Willis
So this year is going to be the year of growth. Or, at least, the year of pro-growth policy. Or, at the very least, the year of rebranding their existing policy pipeline – mining, deregulation, road building, public service layoffs, increased foreign investment – as a growth agenda.
The economic development portfolio was previously held by Melissa Lee – not even a member of the cabinet, signifying the government’s hitherto lack of interest in the topic.
It has been repackaged as economic growth and allocated to Finance Minister Willis, who now has oversight of MBIE, the so-called superministry of business, immigration, innovation and employment created by Steven Joyce under the Key-English government. It grew the economy via high levels of migration, which boosted headline GDP but deepened our infrastructure deficit because the schools, hospitals, housing and water infrastructure to accommodate the larger population were not built.
The Ardern government optimised for wellbeing rather than economic growth, expanding the size of government without any plan to pay for it other than printing money and taking on more debt.
The limitations of GDP as a metric are well known. It was popularised by Keynes, who pointed out it could never function as the sole measure of a society’s wellbeing. But he also noted that growth compounded, massively increasing the wealth available to maximise wellbeing if the political will was there.
The mistakes of the previous administrations highlight those perils: if growth is the only thing you’re targeting, you can make things worse; if you don’t worry about it at all, you can’t afford the things you do care about. The coalition’s predecessors have trapped it in the horrible position of having to deliver genuine growth rather than opening the immigration floodgates, juicing the housing market or simply throwing money at voters.
Nearly everyone is in favour of growth in the abstract, but delivering it usually involves difficult trade-offs, many of which will clash with the interests of the coalition’s core constituents and donors.
There’s a strong correlation between energy abundance and economic growth: New Zealand’s electricity generation measured in kilowatt hours per capita declined by 2.2% between 1985 and 2023, while Australia’s increased by 33%. Our energy-sector is dominated by the gentailers, who have a strong incentive to restrict supply to increase price and maximise profits. The power crisis of 2023 caused an estimated $300 million in damage to the economy in lost exports alone.
So breaking them up to introduce competition to the sector seems like an obvious growth policy – but that would reduce the market value of some of the largest and most profitable companies on the NZX.
Then there’s the tax system: Our corporate tax rate is high by OECD standards and, notoriously, we do not tax capital gains. A pro-growth government might tax secondary properties while lowering the corporate tax rate, incentivising capital into the productive sector. But yet again, there’s a trade-off: property magnates – such as the Prime Minister – relish the ability to flip houses and pay no tax on their returns. You could also drive productivity by scaling back the nation’s lavish corporate welfare system, which pours billions of dollars into businesses with persuasive lobbyists or friends in the Beehive.
Coalition collision
Desperate times call for desperate remedies – but even if National is ready to contemplate such radical measures, its coalition partners are not. Act supports growth and free markets in theory but will safeguard the monopoly profits of energy sector shareholders in practice. New Zealand First will ferociously defend the capital gains loophole and the torrents of money flowing from taxpayers into the private sector via the Regional Infrastructure Fund. The coalition’s minor parties have been conspicuously absent from National’s initial growth announcements.
Delivering sustained economic growth – boosting productivity, innovation, exports, per capita wealth – is fiendishly difficult because the low-growth status quo inevitably benefits some vested interests, and they tend to drown out the voices of unhappy voters and distract politicians from the growing numbers of high-skilled workers exiting the country.
A genuine growth agenda will compel the government to contemplate its own loyalties as it navigates this dilemma.
