Brian Fallow: Growth's daunting arithmetic

Achieving the required population and productivity to reach our economic goals will be far from easy.

We hear a lot from politicians and pundits these days about the need for economic transformation, lifting New Zealand's growth trajectory, raising the sustainable growth rate, lengthening our economic stride.

Finance Minister Michael Cullen, for example, has said we could lift the sustainable long-term growth rate to 4 per cent within five years. Twenty years of growth at that pace would get us back into the top half of the OECD.

Few would quarrel with this as an aspiration, but the arithmetic is daunting.

A 4 per cent growth rate would require us to double the rate at which the workforce has expanded over the past 20 years, in defiance of the demographic trends. It would require a revolutionary doubling of productivity growth for two decades.

OECD figures show that over the 1980s and 1990s, growth in the labour input (hours worked) explained 46 per cent of economic growth over that period, while growth in labour productivity (output per hour worked) contributed 54 per cent.

The average annual growth rates were 1.1 per cent for productivity and 1 per cent for the labour force.

Both would need to double to get sustainable 4 per cent growth.

Even more troubling is that over the past 10 years, two-thirds of the growth has come from an increase in hours worked, rather than productivity gains. The problem with this is that the statisticians expect growth in the workforce to fall away sharply over the next 20 years, to the point where it would be shrinking by 2021 as the baby-boomers retire.

If we were looking for workforce growth to contribute half of the desired 4 per cent trend growth, the workforce would have to be growing by 2 per cent, or around 40,000 people, a year.

So where are those 40,000 people to come from?

Some, hopefully, from among the ranks of the unemployed - 104,000 at yesterday's tally.

But the big and easy gains from reducing unemployment have already been made. The unemployment rate has halved since 1991, when the casualties of structural reform pushed it to over 11 per cent.

Further reductions in unemployment will have to overcome greater difficulties in the areas of skills and attitudes, and all the vexed issues of the interface between the welfare system and the labour market.

What about lifting the participation rate, the proportion of the working-age population (everyone over 15) who are either employed or actively seeking work?

New Zealand's participation rate is already higher than average for developed countries.

OECD figures show that 78 per cent of male New Zealanders of working age are employed, compared with 76 per cent for the OECD as a whole, and 64 per cent of women, against 60 per cent for the OECD.

New Zealand's participation rates are lower than in the United States, Switzerland or the Scandinavian countries, so there may be some growth potential.

But Statistics New Zealand projects the participation rate to fall over the next 50 years as the population ages, dropping to 63 per cent for men and 54 per cent for women.

An eligibility age of 65 for New Zealand Superannuation is embedded in legislation which both major parties support.

However, the Human Rights Act makes it unlawful to deprive people of their jobs just because they attain a certain age.

It is possible that social attitudes towards retirement may change.

People are not just living longer, they are healthy for longer. Retirement may come to be seen as a kind of internal brain drain.

But that does not seem to be the prevailing attitude now, to judge by the furore which greeted reports of a passing reference in a Treasury working paper to the obvious fact that one way of reducing the fiscal cost of an ageing population would be to raise the retirement age.

It would seem, then, that neither unemployment nor workforce participation offers more than a partial answer to our 40,000-a-year problem.

That leaves immigration.

The Statistics New Zealand projection that has workforce growth dwindling to zero over the next 20 years assumes that the net migration gain will be 5000 people a year, which has been its long-term trend.

Right now, of course, net immigration is much stronger than that. It contributed 20,000 of the 42,000 increase in the working-age population over the past year.

Statistics New Zealand's projections for labour force growth, assuming a net migration gain of 20,000, predict growth by about 400,000 over the next 20 years.

But that is still only half of what would be needed for it to contribute half of a 4 per cent target for trend GDP growth.

Also, the name of the game is not economic growth per se, but economic growth per capita.

The question is whether immigration would boost the productivity and incomes of those already here.

A Treasury economist, Dr Frederic Sautet, argues for a policy goal of doubling the population over the next 20 years, as a way of addressing the problems New Zealand firms have in achieving the gains available in larger markets from economies of scale or from specialisation.

Hong Kong and Singapore, whose people are now considerably richer per capita than we are, have doubled their populations over the past 35 and 30 years respectively.

New Zealand's population, on the other hand, has increased by only 35 per cent in the past 30 years, after increasing by 75 per cent between 1940 and 1970.

It is significant that New Zealand's growth performance, in real income per capita relative to other developed countries, began its decline about 1970 too.

But a target of doubling the population over the next 20 years would mean a population expanding by 3.5 per cent a year, five times the current rate.

Is that degree of immigration socially and politically acceptable?

Populist politicians - Winston Peters in the mid-1990s and Richard Prebble now - clearly think not.