Reflections on the New Zealand Economy Sir Roderick Deane Presentation at the University of Auckland 18 April 2015
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 2014-15 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 2014. The text charts were prepared by the author.
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 $1.5 b in 2015-16
6 A story of fluctuating rates of economic growth NZ GDP per capita 5 4 3 Annual percentage change (bars) Forecast percentage change (%) 2 1 0-1 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Three year moving average (line) -2-3 -4 Source: Statistics NZ; Treasury
Large decline in NZ GDP per capita ranking 0 5 10 Rank 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 15 20 25 Source: OECD
GDP per capita below most other OECD Countries
100 000 NZ is No. 21 in OECD per capita rank 2012 90 000 GDP per capita ($US, current prices) 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 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 10,000.00 0.00 Source: IMF 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
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
140000 Growth rate needed to catch up to Australia GDP per capita (USD) 120000 100000 80000 60000 Australia's average growth has been approximately 6.01 since 1980. If this rate continues then New Zealand growth will need to be approximately 10.2% in order to catch up to Australia. 40000 20000 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: IMF
10.00 NZ ranked No. 3 in the world based on the economic freedom index in 2012 9.00 8.00 Index 7.00 6.00 5.00 1980 2000 2004 2008 2012 Source: Frazer Institute 2014 Report on 152 countries, maximum score 10.00
NZ also ranked No. 3 on Heritage Foundation economic freedom index 83 8.80 82 8.60 8.40 Heritage Foundation Index 81 80 79 Heritage Foundation Economic Freedom Index (LHS) Frazer Institute Economic Freedom Index (RHS) 8.20 8.00 7.80 7.60 Frazer Institute Index 78 7.40 77 7.20 76 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7.00 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 0.910 Index 0.900 0.890 0.880 0.870 0.860 0.850 Source: United Nations Country
90 NZ rates highly on the Social Progress Index 2014 88 86 84 Index 82 80 78 76 Source: Social Progress Imperative Country
NZ No. 12 in happiness (or least misery) on the Bloomberg index
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 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 Umeployment rate (%) 8.0 6.0 4.0 Forecast 2.0 0.0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (f) 2016 (f) Source: RBNZ; ANZ
NZ has to live with fluctuating world prices World Price Index 350.0 300.0 250.0 200.0 Index 150.0 100.0 50.0 0.0 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
Non-tradables have risen much faster than tradables
1500 NZ has benefitted from rising terms of trade for the past decade (the ratio of export to import prices) Forecast 1400 1300 1200 1100 Index 1000 900 800 700 600 1970 1980 1990 2000 2010 Source: Statistics NZ; ANZ
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
NZ works harder but produces less than OECD average
1450 1400 Multi-factor productivity growth: the reforms mattered Reform Retreat 1350 1300 1250 Index 1200 1150 1100 Pre-reform Period Post-reform Period 1050 1000 950 900 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Statistics NZ
6 Slowing growth rate for multi-factor productivity 5 4 3 2 Annual percentage change (bars) Three year moving average (line) % change 1 0-1 -2-3 -4 Source: Statistics NZ
Average multifactor productivity growth (%) 1978-2012 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 0-2 -1 0 1 2 Mining3 4 5 6 Accommodation and Food Services 3.5 3 2.5 2 1.5-0.5-1 -1.5 Primary industries Information Media and Telecommunication Source: Statistics NZ -2 Average labour productivity growth (%) 1978-2012
Then and Now Treasury s View
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) % change 5 0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013-5 -10-15 -20 Source: OECD
Fluctuating NZ export values 60000 50 50000 40000 Annual percentage change (RHS) Annual Value (LHS) 40 30 Value ($m) 30000 20 10 % change 20000 0 10000-10 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012-20 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 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
Principal export values for NZ over time 18,000,000 16,000,000 14,000,000 Milk Powder, Butter and Cheese Value ($NZ Thousands) 12,000,000 10,000,000 8,000,000 6,000,000 Total Meat and Edible Offal 4,000,000 Logs, Wood and Wood Articles 2,000,000 Machinery and Mechanical Appliances 0 1990 2000 2010 Source: Statistics NZ
Distance to markets by country: NZ small & distant
NZ exports low as % GDP v other small countries
Projected huge changes in the world economy
Overseas current account deficits are endemic for New Zealand 0-2000 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Current Account Balance ($NZ Millions) -4000-6000 -8000-10000 -12000-14000 -16000-18000 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 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 20.0 Source: RBNZ 0 Mar. 1993 Sep. 1993 Mar. 1994 Sep. 1994 Mar. 1995 Sep. 1995 Mar. 1996 Sep. 1996 Mar. 1997 Mar. 1999 Jun. 2000 Dec. 2000 Jun. 2001 Dec. 2001 Jun. 2002 Dec. 2002 Jun. 2003 Dec. 2003 Jun. 2004 Dec. 2004 Jun. 2005 Dec. 2005 Jun. 2006 Dec. 2006 Jun. 2007 Dec. 2007 Jun. 2008 Dec. 2008 Jun. 2009 Dec. 2009 Jun. 2010 Dec. 2010 Jun. 2011 Dec. 2011 Jun. 2012 Dec. 2012 0.0
-1 NZ has adverse external current account deficit projections 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042-2 -3 % of GDP -4-5 Australia New Zealand United Kingdom United States -6-7 -8-9 Source: The World Bank
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
Total Crown operating balance improving substantially in NZ 9000 Forecast 8.0% 4000 Total crown operating balance (LHS) 6.0% 4.0% $NZ Million -1000 As % of GDP (RHS) 2.0% 0.0% % of GDP -6000-2.0% -4.0% -11000-6.0% -16000-8.0% Source: Treasury
10.0 General Government financial balance also improving in NZ 5.0 % of nominal GDP 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-5.0 New Zealand Australia United Kingdom United States Total OECD -10.0-15.0 Source: OECD
100 Gross central government debt should reduce 80 90 80 Gross Central government debt as % of GDP(RHS) Forecast 70 60 70 Gross debt ($NZ billions) 60 50 40 Gross Governmen t debt ($b) (LHS) 50 40 30 Gross debt (% of GDP) 30 20 20 10 10 0 Source: IMF 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0
160 Total government debt ratios across countries 140 120 % of GDP 100 80 60 Australia Greece Ireland Italy New Zealand Portugal Spain 40 20 Source: OECD 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
NZ net core Crown debt forecast to improve
Overseas debt v government debt by country
60 NZ Government total expenditure as % of GDP reducing again 50 expenditure (% of GDP) 40 30 20 Forecast 10 0 Source: IMF
Public sector employees on the rise in NZ 400,000 350,000 300,000 number of employees 250,000 200,000 150,000 100,000 50,000 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Statistics NZ
80,000 Core public servant numbers still too high 70,000 60,000 number of employees 50,000 40,000 30,000 20,000 10,000 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: State Service Commission
40 35 Public sector hourly earnings much higher than the private sector Public Sector 30 Average hourly wage 25 20 15 Private Sector 10 5 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: Statistics NZ
Core Crown expenses dominated by social services, health & education 25000 20000 Millions ($) 15000 10000 Social security and welfare, GSF Health Education Core Government Services Defence Transport and communications 5000 0 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: Treasury
Average tax on personal income: NZ v OECD 25 20 Tax rate (%) 15 10 Australia New Zealand OECD - Average 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: OECD
8 Average tax on corporate income: NZ v Australia v OECD 7 6 Tax rate (%) 5 4 3 Australia New Zealand OECD - Average 2 1 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: OECD
NZ tax rates over time 70 60 50 Highest marginal Income tax 40 Tax rate 30 Corporate 20 10 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: OECD, IRD
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 2007-08 The GFC and Christchurch quakes were major challenges Core public servant staff rose 2000-09 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
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 Sector Public Sector 5 % change 4 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Statistics NZ
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 ($millions) 8000 6000 4000 Expenditure (LHS) 6000 5000 4000 3000 Term debt ($millions) 2000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Source: Statistics NZ
160 NZ has very low share market capitalization 140 120 100 % GDP 80 60 Australia New Zealand OECD members 40 20 0 Source: The World Bank
250 And a low proportion of stocks traded 200 150 % of GDP 100 Australia New Zealand OECD members 50 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: The World Bank
7 We enjoy consuming: annual change in private consumption in NZ 6 5 4 % change 3 2 1 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-1 -2 Source: RBNZ
4,000 NZ has low household saving 8.0 3,000 2,000 1,000 Household saving value (LHS) 6.0 4.0 savings ($m) 0-1,000-2,000-3,000-4,000 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Household saving rate (RHS) 2013 2.0 0.0-2.0-4.0 Houshold saving rate (%) -6.0-5,000-6,000-8.0-7,000 Source: RBNZ -10.0
2000.00 The challenge of ever rising house prices 50.0 1800.00 1600.00 40.0 1400.00 1200.00 Annual percentage change (RHS) House Prices (LHS) 30.0 20.0 Index 1000.00 800.00 10.0 % change 600.00 0.0 400.00-10.0 200.00 0.00-20.0 Source: RBNZ
180,000 Unemployment & sickness benefit trends 160,000 140,000 120,000 number of people 100,000 80,000 Unemployment benefit 60,000 40,000 Sickness benefit 20,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Ministry of Social Development
0.8 Major increases in total inland transport infrastructure investment in NZ 0.7 0.6 Investment (% of GDP) 0.5 0.4 0.3 0.2 0.1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: OECD
Declining benefit-cost ratios for NZ highways
Impacts of changes to regulations on business
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
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 1993-2006 Christchurch rebuild controversy over centralized approach
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
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
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