Reflections on the New Zealand Economy. Sir Roderick Deane Presentation at the University of Auckland 18 April 2015

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1 Reflections on the New Zealand Economy Sir Roderick Deane Presentation at the University of Auckland 18 April 2015

2 Sir Roderick Deane KNZM, PhD, BCom (Hons), FCA, FCIS, FNZIM, Hon. LLD, is Chairman and Patron of the IHC Foundation and Chairman of the Pataka Foundation. He is also a Trustee of the Deane Endowment Trust. He was previously Chairman of Fletcher Building, ANZ NZ Bank, Telecom NZ, the NZ Seed Fund, TransPower NZ, PowerDesignBuild, Pacific Road Group in Sydney, Te Papa Tongarewa (the Museum of NZ), City Gallery Wellington Foundation, & a Director of the ANZ Banking Group in Melbourne and Woolworths Ltd in Sydney. At an earlier stage he was CEO of Telecom NZ, Electricity Corporation of NZ, Chairman of the State Services Commission, and Deputy Governor & Chief Economist of the Reserve Bank of NZ. He was also Professor of Economics and Management at Victoria University of Wellington, a Director of TransAlta Corporation in Canada, and Alternate Executive Director of the International Monetary Fund in Washington DC. Sir Roderick is very appreciative of the assistance he was given in preparing these charts by Susanna McLaren. Many of the data charts in this presentation were prepared by Susanna McLaren under the auspices of a Summer Scholarship at Victoria University of Wellington. They were updated and adapted from earlier versions used by Sir Roderick Deane in a number of speeches. Other charts were drawn from the NZ Treasury post election briefing document entitled Holding On and Letting Go The text charts were prepared by the author.

3 The Government s priorities In the Budget 2014 the Minister of Finance laid out four priorities: 1. Responsibly managing the Government s finances 2. Building a more productive and competitive economy 3. Delivering better public services 4. Supporting the rebuild of Christchurch Inter alia reduce net core Crown debt to under 20% Reduce core Crown expenses to below 30% of GDP If tax revenue exceeds forecast, it will be used to reduce debt R & D funding of $1.5 b in

6 A story of fluctuating rates of economic growth NZ GDP per capita 5 4 3 Annual percentage change (bars) Forecast percentage change (%) 2 1

4 6 A story of fluctuating rates of economic growth NZ GDP per capita Annual percentage change (bars) Forecast percentage change (%) Three year moving average (line) Source: Statistics NZ; Treasury

Large decline in NZ GDP per capita ranking 0 5 10 Rank 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

5 Large decline in NZ GDP per capita ranking Rank Source: OECD

6 GDP per capita below most other OECD Countries

7 NZ is No. 21 in OECD per capita rank GDP per capita ($US, current prices) Luxembourg Norway Switzerland United States Australia Austria Ireland Netherlands Sweden Denmark Germany Canada Belgium Finland Iceland OECD France United Kingdom Japan Italy New Zealand Spain Korea Israel Slovenia Czech Republic Slovak Republic Portugal Greece Estonia Poland Hungary Chile Mexico China Source: OECD Country

80,000.00 NZ has fallen a long way behind Australia in GDP per capita 70,000.00 Australia GSP per capita ($US, current prices) 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 New Zealand 10,000.

8 80, NZ has fallen a long way behind Australia in GDP per capita 70, Australia GSP per capita ($US, current prices) 60, , , , , New Zealand 10, Source: IMF

NZ gross disposable income per capita (NZD) is lower than every state in Australia Western Australia $55511 Northern Territory $58094 South Australia $44768 Queensland

9 NZ gross disposable income per capita (NZD) is lower than every state in Australia Western Australia $55511 Northern Territory $58094 South Australia $44768 Queensland $45769 Tasmania $40411 New South Wales $48657 Victoria $42916 Australian Capital Territory $88418 New Zealand $35225 Source: Statistics NZ; Australian Bureau of Statistics

10 Growth rate needed to catch up to Australia GDP per capita (USD) Australia's average growth has been approximately 6.01 since If this rate continues then New Zealand growth will need to be approximately 10.2% in order to catch up to Australia Source: IMF

11 10.00 NZ ranked No. 3 in the world based on the economic freedom index in Index Source: Frazer Institute 2014 Report on 152 countries, maximum score 10.00

12 NZ also ranked No. 3 on Heritage Foundation economic freedom index Heritage Foundation Index Heritage Foundation Economic Freedom Index (LHS) Frazer Institute Economic Freedom Index (RHS) Frazer Institute Index Source: Frazer Institute; The Heritage Foundation (maximum score for latter is 100)

0.950 NZ No. 7 on the Human Development Index 2013 0.940 0.930 0.920 0.

13 0.950 NZ No. 7 on the Human Development Index Index Source: United Nations Country

90 NZ rates highly on the Social Progress Index 2014 88 86

14 90 NZ rates highly on the Social Progress Index Index Source: Social Progress Imperative Country

15 NZ No. 12 in happiness (or least misery) on the Bloomberg index

16 But NZ is historically a poor growth performer In terms of GDP per head: In the 1950 s NZ was in the top 5 countries In the 1970 s we were in the top 10 Now we are No. 21 in the OECD IMF ranks us no. 32 across all countries (GDP PPP basis) We are a long way behind Australia And we are below Singapore, Hong Kong, Taiwan, Sth Korea Many developing countries are growing much faster than us Nonetheless we rank well on economic freedom And on human development, social progress and happiness

10 Like other countries, inflation has been tamed CPI Quarterly Percentage Change 8 6 Quarterly % change 4 2 Forecast 0-2 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1

17 10 Like other countries, inflation has been tamed CPI Quarterly Percentage Change 8 6 Quarterly % change 4 2 Forecast Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 (f) 2016Q1 (f) 2017Q1 (f) Source: Statistics NZ; ANZ

The unemployment rate is better than many other countries but higher than it should be 12.0 10.

0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

18 The unemployment rate is better than many other countries but higher than it should be Umeployment rate (%) Forecast (f) 2016 (f) Source: RBNZ; ANZ

19 NZ has to live with fluctuating world prices World Price Index Index Jan 86 Jan 87 Jan 88 Jan 89 Jan 90 Jan 91 Jan 92 Jan 93 Jan 94 Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Source: ANZ

20 Non-tradables have risen much faster than tradables

prices) Forecast 1400 1300 1200 1100 Index 1000 900

21 1500 NZ has benefitted from rising terms of trade for the past decade (the ratio of export to import prices) Forecast Index Source: Statistics NZ; ANZ

22 The terms of trade and policy settings matter greatly Post reform monetary policy a great success story Fiscal policy also greatly improved in 1990 s and early 2000 s Inflation was thus brought under control Unemployment rate lower than many other countries Terms of trade increased strongly 2002 to 2014 This greatly helped economic and employment growth But growth was more in non-tradables than tradables Regulation became pervasive again as 2000 s progressed And fiscal policy deteriorated, only recovering more recently So this impacted economic growth & productivity growth

23 NZ works harder but produces less than OECD average

24 Multi-factor productivity growth: the reforms mattered Reform Retreat Index Pre-reform Period Post-reform Period Source: Statistics NZ

6 Slowing growth rate for multi-factor productivity 5 4 3 2 Annual percentage change

25 6 Slowing growth rate for multi-factor productivity Annual percentage change (bars) Three year moving average (line) % change Source: Statistics NZ

26 Average multifactor productivity growth (%) Labour and multifactor productivity by Industry Transport, Postal and Warehousing Agriculture, Forestry and Fishing 1 Financial and Insurance Services 0.5 Wholesale Trade Service industries Information and communication technology Manufacturing intensive industries Electricity, Gas, Water and Retail Trade Construction Waste Services Mining Accommodation and Food Services Primary industries Information Media and Telecommunication Source: Statistics NZ -2 Average labour productivity growth (%)

27 Then and Now Treasury s View

28 Productivity growth is the key Productivity growth is one of the most important domestic contributors to economic growth The major economic reforms took place 1984 to 1991 NZ recorded its strongest productivity growth in the post reform period 1992 to 2000 In the 2000 s we benefitted from strong terms of trade growth But productivity growth slowed as regulation re-emerged Example: telecommunications heavily re-regulated yet had recorded fastest productivity growth And the government sector generally got larger again So once again productivity growth is slow MBIE target now 2 % pa, up from 1 % pa, not a great target

25 NZ Investment Growth 20 15 10 Annual percentage change (bars) Three year moving average (line) %

29 25 NZ Investment Growth Annual percentage change (bars) Three year moving average (line) % change Source: OECD

Fluctuating NZ export values 60000 50 50000 40000 Annual percentage change (RHS) Annual Value (LHS) 40 30 Value ($m) 30000 20

30 Fluctuating NZ export values Annual percentage change (RHS) Annual Value (LHS) Value ($m) % change Source: Statistics NZ

16,000 Dairy dominates top 10 NZ export commodities 2014 14,000 12,000 10,000 NZ$ Millions 8,000 6,000 4,000 2,000 0 Milk powder, butter, and cheese Meat and edible offal Logs, wood, and

31 16,000 Dairy dominates top 10 NZ export commodities ,000 12,000 10,000 NZ$ Millions 8,000 6,000 4,000 2,000 0 Milk powder, butter, and cheese Meat and edible offal Logs, wood, and wood articles Source: NZ Trade and Enterprise Crude oil Machinery Beverages Fruits and nuts Commodity Fish Aluminoids, starches and glues Electrical machinery and equipment Cereal preparations

32 Principal export values for NZ over time 18,000,000 16,000,000 14,000,000 Milk Powder, Butter and Cheese Value ($NZ Thousands) 12,000,000 10,000,000 8,000,000 6,000,000 Total Meat and Edible Offal 4,000,000 Logs, Wood and Wood Articles 2,000,000 Machinery and Mechanical Appliances Source: Statistics NZ

33 Distance to markets by country: NZ small & distant

34 NZ exports low as % GDP v other small countries

35 Projected huge changes in the world economy

Overseas current account deficits are endemic for New Zealand 0-2000 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

36 Overseas current account deficits are endemic for New Zealand Current Account Balance ($NZ Millions) Source: Statistics NZ; Treasury Forecast

15 NZ ranks poorly with large overseas current account deficits v OECD nations 2013 10 Current Account Balance (% GDP) 5 0-5 Turkey United Kingdom Chile New Zealand Australia United States Mexico

37 15 NZ ranks poorly with large overseas current account deficits v OECD nations Current Account Balance (% GDP) Turkey United Kingdom Chile New Zealand Australia United States Mexico Belgium Poland Czech Republic France Estonia Finland Portugal Japan Spain Italy Greece Slovak Republic Israel Austria Hungary Iceland Korea Luxembourg Slovenia Ireland Sweden Denmark Germany Netherlands Norway Switzerland -10 Source: OECD Country

300,000 NZ has a large gross overseas debt 160.0 250,000 Total debt as % of GDP (RHS) 140.0 120.0 200,000 100.0 $NZ MIllion 150,000 80.0 % of GDP 100,000 Total debt value (LHS) 60.0 40.0 50,000 20.

38 300,000 NZ has a large gross overseas debt ,000 Total debt as % of GDP (RHS) , $NZ MIllion 150, % of GDP 100,000 Total debt value (LHS) , Source: RBNZ 0 Mar Sep Mar Sep Mar Sep Mar Sep Mar Mar Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec

39 -1 NZ has adverse external current account deficit projections % of GDP -4-5 Australia New Zealand United Kingdom United States Source: The World Bank

40 Overseas debt & deficits are ongoing risk factors Fluctuations in export receipts are a challenge Dairy and agricultural exports dominate Talk of diversification is just that talk NZ is small and distant from markets Exports as a % of GDP very low compared to other countries NZ s external deficits are large and very persistent over time Thus our overseas debt ratio is one of the highest in the OECD We rank too close for comfort to the basket cases Projections are for the deficit to get worse No one talks much about the risks around this

41 Total Crown operating balance improving substantially in NZ 9000 Forecast 8.0% 4000 Total crown operating balance (LHS) 6.0% 4.0% $NZ Million As % of GDP (RHS) 2.0% 0.0% % of GDP % -4.0% % % Source: Treasury

42 10.0 General Government financial balance also improving in NZ 5.0 % of nominal GDP New Zealand Australia United Kingdom United States Total OECD Source: OECD

100 Gross central government debt should reduce 80 90 80 Gross Central government debt as % of GDP(RHS) Forecast 70 60 70 Gross debt ($NZ billions) 60 50 40 Gross Governmen t debt ($b) (LHS) 50 40 30

43 100 Gross central government debt should reduce Gross Central government debt as % of GDP(RHS) Forecast Gross debt ($NZ billions) Gross Governmen t debt ($b) (LHS) Gross debt (% of GDP) Source: IMF

44 160 Total government debt ratios across countries % of GDP Australia Greece Ireland Italy New Zealand Portugal Spain Source: OECD

45 NZ net core Crown debt forecast to improve

46 Overseas debt v government debt by country

47 60 NZ Government total expenditure as % of GDP reducing again 50 expenditure (% of GDP) Forecast 10 0 Source: IMF

Public sector employees on the rise in NZ 400,000 350,000 300,000 number of employees 250,000 200,000

48 Public sector employees on the rise in NZ 400, , ,000 number of employees 250, , , ,000 50, Source: Statistics NZ

80,000 Core public servant numbers still too high 70,000 60,000 number of employees 50,000 40,000 30,000 20,000 10,000 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

49 80,000 Core public servant numbers still too high 70,000 60,000 number of employees 50,000 40,000 30,000 20,000 10, Source: State Service Commission

50 40 35 Public sector hourly earnings much higher than the private sector Public Sector 30 Average hourly wage Private Sector Source: Statistics NZ

51 Core Crown expenses dominated by social services, health & education Millions ($) Social security and welfare, GSF Health Education Core Government Services Defence Transport and communications Source: Treasury

52 Average tax on personal income: NZ v OECD Tax rate (%) Australia New Zealand OECD - Average Source: OECD

53 8 Average tax on corporate income: NZ v Australia v OECD 7 6 Tax rate (%) Australia New Zealand OECD - Average Source: OECD

54 NZ tax rates over time Highest marginal Income tax 40 Tax rate 30 Corporate Source: OECD, IRD

55 Fiscal policy and government spending Fiscal deficits were a huge problem pre the reform period Major improvements came through 1990 s to mid 2000 s That is, post 1991 reforms and pre the GFC The GFC and Christchurch quakes were major challenges Core public servant staff rose but now moderated Average public sector pay much higher than the private sector Nonetheless government expenditure to GDP ratio declining We are now again approaching fiscal balance And the public debt ratio is low by international standards Overall then, fiscal policy is in reasonable shape

56 Reforms that really or nearly deliver Monetary policy low inflation over a long period Labour market flexibility employment flexibility Exchange rate policy flexibility with minimal intervention Fiscal policy low Govt expenditure and Govt debt ratios Full and more recently partial privatizations Roading infrastructure rebuild Some health and welfare areas Some housing proposals but slow and painful Tax rates could do better but some reductions And no capital gains tax

Growth in hourly earnings: private v public 8 7 6 Private

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

57 Growth in hourly earnings: private v public Private Sector Public Sector 5 % change Source: Statistics NZ

58 Government expenditure 2014 Social security and welfare and superannuation Health Education Core Government Services Defence Transport and communications Other Expenses Source: Treasury

Rapid increases in local authority expenditure and debt 12000 Debt (RHS) 9000 8000 10000 7000 Expenditure ($millions) 8000 6000 4000 Expenditure (LHS)

59 Rapid increases in local authority expenditure and debt Debt (RHS) Expenditure ($millions) Expenditure (LHS) Term debt ($millions) Source: Statistics NZ

60 160 NZ has very low share market capitalization % GDP Australia New Zealand OECD members Source: The World Bank

61 250 And a low proportion of stocks traded % of GDP 100 Australia New Zealand OECD members Source: The World Bank

7 We enjoy consuming: annual change in private consumption in NZ 6 5 4 %

62 7 We enjoy consuming: annual change in private consumption in NZ % change Source: RBNZ

4,000 NZ has low household saving 8.0 3,000 2,000 1,000 Household saving value (LHS) 6.0 4.

63 4,000 NZ has low household saving 8.0 3,000 2,000 1,000 Household saving value (LHS) savings ($m) 0-1,000-2,000-3,000-4, Household saving rate (RHS) Houshold saving rate (%) ,000-6, ,000 Source: RBNZ -10.0

2000.00 The challenge of ever rising house prices 50.0 1800.00 1600.00 40.0 1400.00 1200.

64 The challenge of ever rising house prices Annual percentage change (RHS) House Prices (LHS) Index % change Source: RBNZ

65 180,000 Unemployment & sickness benefit trends 160, , ,000 number of people 100,000 80,000 Unemployment benefit 60,000 40,000 Sickness benefit 20, Source: Ministry of Social Development

66 0.8 Major increases in total inland transport infrastructure investment in NZ Investment (% of GDP) Source: OECD

67 Declining benefit-cost ratios for NZ highways

68 Impacts of changes to regulations on business

69 Reforms under query more work needed Regulation 200 regimes; 10,000 to 14,000 regulatory staff 90 % of businesses consider regulatory regimes contradictory 80 % of businesses say regulation forces higher costs on them 66 % of public sector CEO s say legislation is outdated or unfit RMA too time consuming, too costly, too wasteful Housing land inside Auckland urban boundary 9% higher cost than land outside boundary 4000 firms build 1 house pa, 5 firms build more than 100 Financial Market Act simplified to 597 clauses Prospectuses regulated so overnight placements the norm Takeovers regulated so off-market deals proliferate

70 Reforms under query continued Capital markets new legislation, poor market size remains Commerce Commission unnecessarily huge value impacts Tax policy was world class, now middle of the road Excessive and widespread industry assistance Since 2009, corporate welfare cost $1 to 1.4 billion If abolished, could reduce company tax rate from 28 to 22.5% Social policy cf. why have disability payments risen so fast? Education diversified remuneration but much to improve Social housing partial sell off planned, much to be done Numbers of public servants still higher than Christchurch rebuild controversy over centralized approach

71 Reforms under query continued Local authorities the uncontrolled sector, rates forever rise Auckland reforms were they really meant to create such large increases in debt and rates? Telecommunications combined profits of all companies now less than single smallest major bank, ASB. And government now spending nearly $2 billion on UFB network. No benefit/cost analysis. 10% take up rate so far. Commerce Commission investigations imposing huge unjustified costs e.g. Countdown, Spark & Chorus Takes typically longer to get RMA approval for major projects than it takes to construct them

72 Business adaptability has been severely eroded Regulatory Dilemmas Regulation begets regulation Regulation overrides commercial solutions Regulation and changes induce uncertainty It imposes high transactions costs Diverts energy into rent seeking behaviour And away from focussing on winning in the market Regulation always has unintended consequences It concentrates on past issues rather than future growth Success ironically attracts regulation Regulation reduces flexibility It ultimately impedes the competition it pretends to promote Reduces attractiveness of New Zealand for foreign direct investment 72

73 Some solutions More secure property rights Greater certainty in the application of the law Enforceability of contracts Reduce judicial activism Less intrusive regulation and fewer changes in the rules Insist on cost/benefit analysis for new & old regulations Ex post reviews of regulations Open and competitive markets Smaller government, reduce public service bureaucracy Move benefit system to needs based rather than universality Tighten up further on government expenditure Abolish corporate welfare Develop clearer price signals in public sector Lower taxes Ongoing stable monetary & fiscal policies 73

Charts on the NZ Economy 2014

Charts on the NZ Economy 2014 Charts on the NZ Economy 214 These charts were prepared by Susanna McLaren. They were updated and adapted from earlier versions used by Sir Roderick Deane in a number of speeches. Susanna benefitted from