Colin James: Treasury points up flaws

COMMENT

The "failed policies of the 1990s" didn't fail. The economy speeded up and the country is richer as a result.

But there were some gaps, most notably in skills development and capital accumulation. And some of the Government's changes since 1999 are working against future gains.

These are conclusions of a newly released Treasury research paper on growth and the policies behind it.

The paper says the economy grew faster than the OECD in the 10 years to 2002 after a lift in productivity as a result of the 1980s and 1990s.

That put GDP per capita about 85 per cent of the OECD mean in 2002 on a 1995 purchasing-power parity basis - twentieth in the OECD rankings.

But to get to the OECD average will require another lift in productivity, the paper says.

The economy would have to grow about 1 per cent faster than the OECD average over the next 20 years - which, on past performance, would require growth of a little over 3 per cent a year.

That is faster than New Zealand has achieved at any time since at least the 1960s - and a big step up from the 2.25 per cent average per capita growth in the 11 years to 2002, which itself was a huge leap from the 0.5 per cent in the 11 years to 1992.

The OECD average in the 11 years to 2002 was 1.75 per cent, so New Zealand was growing 0.5 per cent faster.

The belief some people - including National Party leader Don Brash - have that the economy was still slipping backwards in that period is due to the fact that Australia was also growing strongly.

And the transtasman difference comes down to labour productivity, the paper says.

Both countries' "multifactor" productivity growth (productivity of all inputs into production) were similar in the market sector (excluding Government administration and defence, local government services and house ownership).

But Australia's higher capital-labour ratio delivered faster labour productivity growth.

This is a point Finance Minister Michael Cullen has made and is at the heart of the tripartite workplace productivity group he has set up.

But Cullen is on the wrong side of what the paper says next.

It concludes that "institutions and economic policies are likely to have been important in determining relative growth performance".

"Institutional and policy reforms since the early 1980s are likely to have raised New Zealand's steady-state level of per capita GDP and the speed at which New Zealand converges to the steady state," the paper says, then adds tellingly: "The lags in this process mean that the full effects of these changes are likely to be still emerging."

This implies, first, that pronouncements such as the Government's "failed policies of the 1990s" are at the very least premature and, second, that Cullen's reversals of some of those policies may well take some time to show up as constraints on growth.

The Government has partly re-regulated the labour market, raised regulation in other areas, lifted taxes and Government charges and greatly increased aid to industry - all in the opposite direction from the 1980s-90s reforms, which were to cut regulation and taxes and minimise assistance to industry.

The Treasury papers warns of side-effects: "A policy that in itself is justified, perhaps by addressing a market failure, may lead to behaviour that has an adverse impact on economic growth, such as rent-seeking, which diverts resources from productive activities."

National's deputy finance spokesman, John Key, has seized on this as implied criticism of the Labour-led Government's interventions.

For instance, Cullen has talked a lot recently of the need to raise labour participation rates, especially of women, who are much less active in the economy than in Sweden.

If a higher proportion of the population works, the growth rate rises.

A significant part of the lift in the per capita growth rate in the 1990s came from higher participation as unemployment came down, in part because the Employment Contracts Act freed wages.

The Treasury argues that higher participation "can be achieved through altering the tax and benefit interface in order to encourage individuals to move from welfare to work or to increase their number of hours worked".

Cullen has been promising in recent speeches that he will do this in the Budget on May 27: "Widening the gap between earned income and benefits" is to be a central feature.

But the Treasury paper goes on to make Key's point: "Some recent and proposed changes to employment regulation may adversely impact on the gains in labour utilisation achieved since the early 1990s, notwithstanding other objectives that have motivated labour regulation changes."

And the paper worries about the impact tax has on capital accumulation - a major factor in labour productivity. Generally, the more capital investment behind each employee, the higher the employee's productivity. The research paper argues for more investigation on "the influence of taxes on capital accumulation and examining the composition of Government expenditure".

And, in a comment which will resonate with business, it adds: "It is also important to recognise the potential for regulations pertaining to other policy areas, such as the Resource Management Act, to impact on physical capital accumulation." Translated, that means: difficulties getting planning consents turn investors off.

Then there is the quality of labour. Business now faces chronic shortages of people able to perform the most basic tasks and it is becoming a severe constraint on expansion.

One mid-sized manufacturer could sell (mainly overseas) the output of a second shift but cannot staff it. The loss is not just the manufacturer's: there is a loss to the economy as a whole if, as in this case, the manufacturer is a multinational and simply creates the jobs in a country where labour is available.

This is not just a matter of low unemployment.

The Treasury paper says the "economic benefits associated with human capital accumulation (acquisition of skills) may occur with a long lag after the investment was made and can be quite long-lived.

"New Zealand appears to have failed to match increases in average education levels amongst other OECD countries and rates of basic educational achievement amongst younger New Zealand workers may now be slightly lower than the OECD average."

The paper also includes focus on the important role of research in lifting productivity, the need to foster attitudes favourable to research and the Government's role in improving trade access.

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