That means less productive jobs, slower wage growth, and, in many cases, higher prices.
The gap is stark. Australia’s capital per hour is roughly 40% higher, accounting for nearly 39% of the labour productivity gap between the two countries.
The Netherlands – which tracked closely with us until the 1960s – has now surged to more than double our capital intensity.
Understanding why we fell behind matters because misdiagnosing the symptoms risks making the disease worse. The evidence shows decades of underinvestment.
Since the 1990s, capital-deepening in New Zealand has stagnated. While housing investment has boomed, non-residential business investment has lagged behind OECD norms.
Capital per worker has failed to keep up with population growth. Our national savings rate remains low, our reliance on foreign capital is high, and our infrastructure deficit is estimated at more than $200 billion.
Some of this reflects structural constraints – small market size, remoteness, and diseconomies of scale. But much of it results from poor policy: planning barriers, regulatory uncertainty, high compliance costs, and an aversion to scale.
We have made it hard to invest, harder still to expand, and politically risky to succeed.
The ailments did not begin with the current Government. But recent ministerial rhetoric suggests they risk making the disease worse.
In recent months, the Government has compiled an informal ‘target’ list of industries that it claims are failing New Zealand consumers.
Banks, supermarkets, electricity gentailers, and airports have been accused of excessive profits, market power, or underinvestment.
The Prime Minister has labelled some of them oligopolies. The Finance Minister has told others they are “on notice”. Public calls for forced divestment, structural break-ups, and price regulation are growing louder.
These interventions miss the real problem. They treat outcomes – high prices, limited entry, tight capacity – as evidence of weak competition. But in sector after sector, these outcomes reflect regulatory failure.
Policy settings that deter investment, delay projects, or block entry have done more to damage consumer outcomes than any firm ever could. Take electricity.
Last month, a report from independent experts to the Electricity Authority’s Energy Competition Taskforce found that last winter’s price spikes were not caused by market manipulation.
They were caused by constrained gas supply, low hydro lakes, and policy uncertainty. The reason long-term contract prices remained elevated was that the economics of new generation became too risky to finance.
Short-term uncertainty around gas supply and the possible closure of Tiwai were key factors. But longer-term policy decisions – including the 2018 offshore oil and gas ban and years of uncertainty around the Lake Onslow pumped hydro project sent a clear signal that deterred investment. These were political decisions. The market responded by pulling back.
If the Government wants more investment in generation, it needs to reduce the risk premium on capital – not pile more political pressure on firms that operate within the existing rules.
The banking sector provides a similar story. Last year, a Commerce Commission market study raised concerns that lending margins in a highly concentrated banking sector may reflect weak competitive pressure.
The Government responded by criticising the big four banks and talking up Kiwibank as a challenger. However, as the New Zealand Initiative argued in our submission to Parliament’s banking inquiry, the regulatory framework is the real problem with pricing in the banking sector.
The Reserve Bank’s capital requirements are among the most stringent in the world. Regulatory compliance burdens are also steep. Margins reflect these realities.
If ministers want more competitive pricing, they should begin by reviewing the cost structures they have created – not criticise firms for surviving them.
Auckland Airport provides another example. In March, the Commerce Commission released the final report of its multi-year pricing review. It made no mention of regulatory intervention.
Yet within weeks, the Ministry of Business, Innovation and Employment announced a new review of the entire airport pricing regime. Surprises like this send a chilling message to infrastructure investors.
If a regulated firm follows the prescribed process and satisfies the independent regulator but still faces a change in the regulatory regime, what confidence can investors have in policy certainty? Supermarkets round out the list.
As my colleague Dr Benno Blaschke wrote in these pages last week, the way to test whether consumers are being overcharged is to remove the planning barriers that deter entry – not to threaten businesses acting lawfully with forced divestment.
Across these sectors, the pattern is the same. The Government sees high prices or few competitors and assumes market failure.
But those outcomes are often produced by the rules themselves – by regulatory barriers, planning constraints, or political risk that deter entry and discourage investment.
Unless the Government recognises this, it risks compounding New Zealand’s long-standing undercapitalisation problem.
If New Zealand wants higher wages, better productivity, and more affordable living costs, it must invest more – and invest better.
That means creating a stable, rules-based system that rewards capital formation, supports efficient scale, and invites rather than repels long-term investment.
It also means moving past the rhetoric.
Profits are not proof of failure. In many cases, they are what makes investment possible.
The danger is not that firms are too successful. It is that others no longer see it as worth trying.
