New Zealand needs to strengthen global linkages and tackle government spending and regulatory issues that diminish productivity and competitiveness if it is to lift its economic performance, Reserve Bank Governor Graeme Wheeler says.
In a speech to the Canterbury Employers Chamber of Commerce yesterday, he said that since 1990 New Zealand's real per capita GDP growth has averaged 1.25 per cent, when the OECD median is about 1.75 per cent.
Being small and remote might account for about three-quarters of that gap, the OECD and International Monetary Fund believe.
But Wheeler points out that in other respects New Zealand's geography is a plus.
The country is blessed with a lot of natural capital: "According to the World Bank the highest per capita endowment of renewable resources in the world."
He also notes the world's increasing willingness to pay more for what we produce, with the terms of trade (the ratio of export to import prices) on a rising trend since the turn of the millennium.
Where New Zealand is a conspicuous laggard, however, is in the other main way of improving prosperity in the longer run - labour productivity growth. And that, Wheeler argues, is driven by factors which are within our control.
First on his list is the need to lift savings rates.
Over the past 25 years net household savings rates, as a percentage of after-tax incomes, have averaged minus 2.25 per cent, the worst in the OECD and 10 percentage points below the OECD median. Instead we have relied on importing the savings of foreigners, resulting in a level of overseas debt which makes the economy vulnerable and results in higher interest rates.
The quality of investment is also an issue, with much of it going into housing rather than productivity-promoting investment.
The capital-to-labour ratio within New Zealand businesses is lowby international standards.
Wheeler concludes that New Zealand needs to be more welcoming to foreign investment, and should "re-examine the factors, including tax and regulation, that diminish and distort the incentives to both save and invest".
Second on his priority list is for the Government to return its books to surplus.
"Increasing fiscal deficits mean that monetary policy has to be tighter and interest rates higher than otherwise, and this adds to the exchange rate pressures on the export and import substitution industries.
"This constrains output and employment in sectors facing international competition - sectors where productivity growth potential is usually higher. Instead, resources often find more attractive returns in the non-traded or sheltered sectors.
"This is one reason why it is critical to cut back ineffective government spending, and ensure that our welfare spending is targeted better at those in need."
Finally Wheeler calls for a focus on the fat tail of underperformance in the education system.
"In the mid-2000s we had greater income inequality than most OECD economies, and this is unlikely to have changed.
"The bottom income deciles are populated by those with lesser skills, and those who experience prolonged and recurrent spells of unemployment.
"Addressing these groups would both promote productivity and reduce inequality."