Finance Minister Bill English made a habit of brandishing one chart in his first few years in the job. It showed how the "good" tradeable sector, which includes productive sectors that export and compete with imports, had languished through the mid to late 2000s under Labour at the benefit of the "bad" non-tradeable sector, which includes government, financial services and real estate.

It was a useful tool to help him argue for a re-balancing of the economy. It powered the "big tax switch" of 2010 that encouraged saving by increasing GST and reduced incentives for residential property investing by changing the tax rules on property depreciation.

The theory was great. New Zealanders would save more, reducing the need for foreign capital. We would also invest less in rental property and more in "productive" assets that generated export returns or competed with imports, improving our trade surplus and our ability to pay our way in the world, which we haven't done for a while.

Nice theory. Except it hasn't worked. The chart was noticeable by its absence in the minister's Budget presentation last week. Dig it out though and it shows the "tradeable" portion of the economy has kept declining since the National Government was elected in 2008 and is now back to levels last seen in 2002.


Since the election, the dollar has averaged around US75c. Businesses have struggled to expand exports, particularly of manufactured exports. Instead, the same old things have been happening. The Government has continued to expand, in part because of the Christchurch earthquake rebuild, and also because of a rise in unemployment and pension payments. Also, the real estate sector has started to warm up again over the past 18 months.

One obvious measure of this is lending growth.

Last week, our banks approved mortgages worth $1.22 billion, the highest since mid-2007. figures show asking prices jumping last month to record highs. An ASB survey of investor sentiment shows rental property is again the most popular investment for most New Zealanders.

All this is happening as the Government forecast in its Budget that New Zealand's current account deficit will widen to 6.7 per cent of GDP in 2015/16 from a forecast 4.2 per cent of GDP this year as our demand for capital to go on spending outpaces our ability to pay for it.

The rebalancing has not happened. If anything, it's got worse.

When will the Finance Minister and the Prime Minister change their strategy to discourage yet more rental property investment and encourage more investment in exporting? And when will they realise that the exchange rate does matter?